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On the Potential of Foreign Aid as Insurance

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  • Stéphane Pallage
  • Michel A. Robe
  • Catherine Bérubé

Abstract

In this paper, we argue that it would be fruitful to revisit foreign aid's potential as an insurance mechanism against macroeconomic shocks. In a simple model of aid flows between two endowment economies, we show that at least three fourths of the large welfare costs of macroeconomic fluctuations in poor countries could be alleviated by a simple reallocation of aid flows across time.

Suggested Citation

  • Stéphane Pallage & Michel A. Robe & Catherine Bérubé, 2004. "On the Potential of Foreign Aid as Insurance," Cahiers de recherche 0404, CIRPEE.
  • Handle: RePEc:lvl:lacicr:0404
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    References listed on IDEAS

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    Cited by:

    1. Arellano, Cristina & Bulír, Ales & Lane, Timothy & Lipschitz, Leslie, 2009. "The dynamic implications of foreign aid and its variability," Journal of Development Economics, Elsevier, vol. 88(1), pages 87-102, January.
    2. Carter, Patrick, 2014. "Aid allocation rules," European Economic Review, Elsevier, vol. 71(C), pages 132-151.
    3. Bulír, Ales & Hamann, A. Javier, 2008. "Volatility of Development Aid: From the Frying Pan into the Fire?," World Development, Elsevier, vol. 36(10), pages 2048-2066, October.
    4. Julia Cage, 2009. "Asymmetric information, rent extraction and aid efficiency," Working Papers halshs-00575055, HAL.
    5. S. Guillaumont Jeanneney & S. J‐A. Tapsoba, 2012. "Aid and Income Stabilization," Review of Development Economics, Wiley Blackwell, vol. 16(2), pages 216-229, May.
    6. Kletzer, Kenneth, 2005. "Aid and Sanctions," Santa Cruz Department of Economics, Working Paper Series qt5hq5d9gp, Department of Economics, UC Santa Cruz.
    7. Boateng, Elliot & Agbola, Frank W. & Mahmood, Amir, 2021. "Foreign aid volatility and economic growth in Sub-Saharan Africa: Does institutional quality matter?," Economic Modelling, Elsevier, vol. 96(C), pages 111-127.
    8. Ernest Ouédraogo & Ibrahim Ouédraogo & Emmanuel Lompo, 2020. "Political Instability and Firm Performance: A Microeconomic Evidence from Ivory Coast," American Journal of Economics and Business Administration, Science Publications, vol. 12(1), pages 49-55, October.
    9. Agénor, Pierre-Richard & Aizenman, Joshua, 2010. "Aid volatility and poverty traps," Journal of Development Economics, Elsevier, vol. 91(1), pages 1-7, January.
    10. Michal Chervin & Sweder van Wijnbergen, 2010. "Economic Growth and the Volatility of Foreign Aid," Tinbergen Institute Discussion Papers 10-002/2, Tinbergen Institute.
    11. Dabla-Norris, Era & Minoiu, Camelia & Zanna, Luis-Felipe, 2015. "Business Cycle Fluctuations, Large Macroeconomic Shocks, and Development Aid," World Development, Elsevier, vol. 69(C), pages 44-61.
    12. Temple, Jonathan R.W., 2010. "Aid and Conditionality," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4415-4523, Elsevier.
    13. Kodama, Masahiro, 2012. "Aid Unpredictability and Economic Growth," World Development, Elsevier, vol. 40(2), pages 266-272.
    14. Garriga, Ana Carolina & Phillips, Brian John, 2014. "Foreign Aid as a Signal to Investors: Predicting FDI in Post-Conflict Countries," MPRA Paper 88643, University Library of Munich, Germany.
    15. S. Guillaumont Jeanneney & S. J‐A. Tapsoba, 2012. "Aid and Income Stabilization," Review of Development Economics, Wiley Blackwell, vol. 16(2), pages 216-229, May.
    16. Alma Romero-Barrutieta & Jose Daniel Rodríguez-Delgado & Mr. Ales Bulir, 2011. "The Dynamic Implications of Debt Relief for Low-Income Countries," IMF Working Papers 2011/157, International Monetary Fund.
    17. Anubha DHASMANA, 2010. "Welfare Gains Of Aid Indexation In Small Open Economies," The Developing Economies, Institute of Developing Economies, vol. 48(2), pages 247-276, June.

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    More about this item

    Keywords

    Foreign aid; Consumption smoothing; Macroeconomic fluctuations; Welfare;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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