Helping the Poor with Selfish Intentions: Trade, Foreign Aid and Growth
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چکیده
Departing from explanations that involve either altruistic or political motivations of donors, we link a donor’s willingness to give aid to economic incentives and returns. Since targeted aid might increase the returns from trade and FDI linkages for donors, there exists a non-altruistic basis for helping poor countries. We explore this idea by developing a two-country dynamic strategic interaction model of foreign aid and trade. We endogenize aid-tying process by incorporating it into the donor’s optimization problem. We analyze the dynamics of aid composition and show how different components of foreign aid, such as education, investment, commodity and general budget support are optimally supplied over time. We show even under donor-ideal conditions aid might fail to generate growth for the recipient. JEL classification: F35, O11, P16, C61, F12, O41
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