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Effects of development aid (grants and loans) on the economic dynamics of the recipient country

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  • Cuong Le Van

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique, Thang Long University)

  • Ngoc-Sang Pham

    (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie)

  • Thi Kim Cuong Pham

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper investigates the nexus between foreign aid (in both forms: grant and loan), poverty trap, and economic development in a recipient country by using a Solow model with two new ingredients: a development loan and a fixed cost in the production process. The presence of this fixed cost generates a poverty trap. We show that foreign aid may help the country to escape from the poverty trap and converge to a stable steady state in the long run, but only if (i) the country's characteristics, such as saving rate, initial capital, governance quality, and productivity are good enough, (ii) the fixed cost is relatively low, and (iii) the loan rule is generous enough. We also show that our model with foreign aid has room for endogenous cycles, unlike the standard Solow model.

Suggested Citation

  • Cuong Le Van & Ngoc-Sang Pham & Thi Kim Cuong Pham, 2023. "Effects of development aid (grants and loans) on the economic dynamics of the recipient country," Post-Print hal-04240269, HAL.
    • Handle: RePEc:hal:journl:hal-04240269
    DOI: 10.1016/j.mathsocsci.2023.06.003
    Note: View the original document on HAL open archive server: https://hal.science/hal-04240269
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    References listed on IDEAS

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    1. Ngoc-Sang Pham, 2023. "Some Lectures on Macroeconomics," Working Papers hal-04366349, HAL.

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    More about this item

    Keywords

    Economic dynamics; economic growth; foreign aid; development loan; grant; poverty trap; endogenous cycle;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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