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Tied to Capital or Untied Foreign Aid?
Author(s) -
Michael Michael S.,
Van Marrewijk Charles
Publication year - 1998
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/1467-9361.00028
Subject(s) - economics , welfare , unemployment , capital (architecture) , production (economics) , international economics , monetary economics , labour economics , macroeconomics , market economy , archaeology , history
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.