Tied to Capital or Untied Foreign Aid?
REVIEW OF DEVELOPMENT ECONOMICS
Posted: 3 Jun 1998
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: 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
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