Tied to capital or untied foreign aid?
A two-country trade model of foreign aid is developed. The aid-receiving country suffers from Harris-Todaro type unemployment. Aid is either untied, tied to sector-specific capital, or tied to intersectorally mobile capital. These types of aid are compared by examining their terms-of-trade and welfare effects to show that (i) welfare paradoxes are possible, (ii) the world as a whole may gain from aid, (iii) a conflict of interest concerning the type of aid may arise between donor and recipient, and (iv) under plausible conditions untied aid is better for the recipient and the world.
|Keywords||capital flows, economic assistance, foreign aid|
Michael, M.S., & van Marrewijk, J.G.M.. (1998). Tied to capital or untied foreign aid?. Review of Development Economics: an essential resource for any development economist, 61–75. Retrieved from http://hdl.handle.net/1765/13045