Tied to Capital or Untied Foreign Aid?

REVIEW OF DEVELOPMENT ECONOMICS

Posted: 3 Jun 1998

See all articles by Michael S. Michael

Michael S. Michael

University of Cyprus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Charles van Marrewijk

Utrecht University - School of Economics

Abstract

We constract a two-country trade model of foreign aid. The aid receiving country suffers from Harris-Todaro type of unemployment. Aid is either untied, tied to sector-specific capital, or tied to intersectorally mobile capital. We compare these types of aid 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.

JEL Classification: F35, O1

Suggested Citation

Michael, Michael S. and van Marrewijk, Charles, Tied to Capital or Untied Foreign Aid?. REVIEW OF DEVELOPMENT ECONOMICS, Available at SSRN: https://ssrn.com/abstract=95108

Michael S. Michael (Contact Author)

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus
357-22892433 (Phone)
357-22892432 (Fax)

HOME PAGE: http://www.econ.ucy.ac.cy/staff/michael.htm

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Charles Van Marrewijk

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands
*31-(0)30-2539810 (Phone)

HOME PAGE: http://www.charlesvanmarrewijk.nl

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