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Tied to Capital or Untied Foreign Aid?

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  • Michael S. Michael
  • Charles Van Marrewijk

Abstract

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.

Suggested Citation

  • Michael S. Michael & Charles Van Marrewijk, 1998. "Tied to Capital or Untied Foreign Aid?," Review of Development Economics, Wiley Blackwell, vol. 2(1), pages 61-75, February.
    • Handle: RePEc:bla:rdevec:v:2:y:1998:i:1:p:61-75
    DOI: 10.1111/1467-9361.00028
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    Cited by:

    1. repec:ebl:ecbull:v:6:y:2007:i:5:p:1-8 is not listed on IDEAS
    2. Chao, Chi-Chur & Yu, Eden S. H., 1999. "Shadow prices and trade restrictions in a monetary economy," Journal of Macroeconomics, Elsevier, vol. 21(4), pages 755-764.
    3. Steven Brakman & Harry Garretsen & Charles van Marrewijk & Charles van Marrewijk, 2006. "Agglomeration and Aid," CESifo Working Paper Series 1750, CESifo.
    4. Muneyuki Saito & Yasuyuki Sugiyama, 2007. "Transfer of Pollution Abatement Technology and Unemployment," Economics Bulletin, AccessEcon, vol. 6(5), pages 1-8.

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