Aid Flows and the International Transfer Problem in a Structuralist North-South Model

This paper analyzes the impact of increased aid flows from industrial to developing countries on growth in transferr ing and recipient countries. One key variable in the analysis is the ter ms of trade which links the analysis to the classic transfer debate. Th e analysis is centered around policy simulations with a small, structuralist general equilibrium model of North-South interactions. Simulation exercises for a doubling of official development assistan ce up to the DAC target of 0.7 percent of the GNP of the industrialized countries show the great sensitivity of the global adjustment proces ses to the way in which these transfers are financed. The model results suggest that deficit financing under monetary constraints may trigge r a global recession and a secondary burden falls on the recipient countries in the form of a strong decline in their terms of trade. Tax-financing or financing of the aid transfer through budget cuts can help to avoid the global recessionary effects and recipients may gai n from the aid transfer. Evidently, the global economic environment an d macroeconomic policies in the industrialized countries are an import ant component in determining the effectiveness of aid to developing countries. Copyright 1993 by Royal Economic Society.