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THE EFFECTS OF FOREIGN AID ON THE CREATION AND DISTRIBUTION OF WEALTH Wenli Cheng, Dingsheng Zhang and Heng-Fu Zou

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  • Wenli Cheng
  • Dingsheng Zhang
  • Heng-Fu Zou

Abstract

This paper develops a model to study the effects of foreign aid on the creation and distribution of wealth in the recipient country. It considers three types of foreign aid: permanent grants to all individuals, temporary grants to uneducated workers, and foreign aid in the form of low interest rate loans to individuals who invest in education. The model shows that the economy may have two long-run equilibria, a rich equilibrium and a poor one. All types of foreign aid can increase the proportion of individuals investing in education, which means more people converging to the rich equilibrium and higher average wealth in the economy. In addition, if permanent or temporary grants are sufficient large, it is possible that the whole economy may converge to the rich equilibrium.

Suggested Citation

  • Wenli Cheng & Dingsheng Zhang & Heng-Fu Zou, 2006. "THE EFFECTS OF FOREIGN AID ON THE CREATION AND DISTRIBUTION OF WEALTH Wenli Cheng, Dingsheng Zhang and Heng-Fu Zou," Monash Economics Working Papers 10/06, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2006-10
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2006/1006foreignaidandincomedistribution.pdf
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    References listed on IDEAS

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    1. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-641, September.
    2. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1001-1026.
    3. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398, April.
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    5. Santanu Chatterjee & Stephen J. Turnovsky, 2005. "Financing Public Investment through Foreign Aid: Consequences for Economic Growth and Welfare," Review of International Economics, Wiley Blackwell, vol. 13(1), pages 20-44, February.
    6. Gary S. Becker & Nigel Tomes, 1994. "Human Capital and the Rise and Fall of Families," NBER Chapters,in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 257-298 National Bureau of Economic Research, Inc.
    7. Liutang Gong & Heng-fu Zou, 2001. "Foreign Aid Reduces Labor Supply and Capital Accumulation," Review of Development Economics, Wiley Blackwell, vol. 5(1), pages 105-118, February.
    8. Liutang Gong & Heng-fu Zou, 2000. "Foreign Aid Reduces Domestic Capital Accumulation and Increases Foreign Borrowing: A Theoretical Analysis," Annals of Economics and Finance, Society for AEF, vol. 1(1), pages 147-163, May.
    9. Galor, Oded & Tsiddon, Daniel, 1997. "The Distribution of Human Capital and Economic Growth," Journal of Economic Growth, Springer, vol. 2(1), pages 93-124, March.
    10. Michael Benarroch & James D. Gaisford, 2004. "Foreign Aid, Innovation, and Technology Transfer in a North-South Model with Learning-by-Doing," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 361-378, August.
    11. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
    12. Djajic, Slobodan & Lahiri, Sajal & Raimondos-Moller, Pascalis, 1999. "Foreign Aid, Domestic Investment and Welfare," Economic Journal, Royal Economic Society, vol. 109(458), pages 698-707, October.
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    More about this item

    Keywords

    foreign aid; overlapping-generations model; investment in education;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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