IDEAS home Printed from https://ideas.repec.org/p/drm/wpaper/2023-2.html
   My bibliography  Save this paper

Effects of development aid (grants and loans) on the economic dynamics of the recipient country

Author

Listed:
  • Cuong LE-VAN
  • Ngoc Sang Pham
  • Thi Kim Cuong Pham

Abstract

This paper investigates the nexus between foreign aid (in both forms: grant andloan), poverty trap, and economic development in a recipient country by using a Solowmodel with two new ingredients: a development loan and a fixed cost in the production process. The presence of this fixed cost generates a poverty trap. We show thatforeign aid may help the country to escape from the poverty trap and converge to astable steady-state in the long run, but only if (i) the country’s characteristics, such assaving rate, initial capital, governance quality, and productivity are good enough, (ii)the fixed cost is relatively low, and (iii) loan rule is generous enough. We also showthat our model with foreign aid has room for endogenous cycles, unlike the standardSolow model.

Suggested Citation

  • Cuong LE-VAN & Ngoc Sang Pham & Thi Kim Cuong Pham, 2023. "Effects of development aid (grants and loans) on the economic dynamics of the recipient country," EconomiX Working Papers 2023-2, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2023-2
    as

    Download full text from publisher

    File URL: https://economix.fr/pdf/dt/2023/WP_EcoX_2023-2.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kraay, Aart & Raddatz, Claudio, 2007. "Poverty traps, aid, and growth," Journal of Development Economics, Elsevier, vol. 82(2), pages 315-347, March.
    2. Cuong Le Van & Tu-Anh Nguyen & Manh-Hung Nguyen & Thai Luong, 2010. "New Technology, Human Capital, and Growth in a Developing Country," Mathematical Population Studies, Taylor & Francis Journals, vol. 17(4), pages 215-241.
    3. repec:dau:papers:123456789/13605 is not listed on IDEAS
    4. Pham, Ngoc-Sang & Pham, Thi Kim Cuong, 2020. "Effects of foreign aid on the recipient country’s economic growth," Journal of Mathematical Economics, Elsevier, vol. 86(C), pages 52-68.
    5. Patrick Guillaumont & Mark Mcgillivray & Thi Kim Cuong Pham, 2017. "Reforming Performance-Based Aid Allocation Practice," Post-Print hal-02166678, HAL.
    6. Carter, Patrick & Postel-Vinay, Fabien & Temple, Jonathan, 2015. "Dynamic aid allocation," Journal of International Economics, Elsevier, vol. 95(2), pages 291-304.
    7. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 66-92.
    8. Almuth Scholl, 2009. "Aid Effectiveness and Limited Enforceable Conditionality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 377-391, April.
    9. Cuong Le Van & Çağrı Sağlam & Agah Turan, 2016. "Optimal Growth Strategy under Dynamic Threshold," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(6), pages 979-991, December.
    10. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
    11. Akao, Ken-Ichi & Kamihigashi, Takashi & Nishimura, Kazuo, 2011. "Monotonicity and continuity of the critical capital stock in the Dechert–Nishimura model," Journal of Mathematical Economics, Elsevier, vol. 47(6), pages 677-682.
    12. Le Van, Cuong & Luong, Thai Bao & Nguyen, Manh-Hung & Nguyen, Tu-Anh, 2010. "New Technology, Human Capital and Growth for a Developing Country," LERNA Working Papers 10.22.328, LERNA, University of Toulouse.
    13. Bazoumana Ouattara, 2006. "Aid, debt and fiscal policies in Senegal," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(8), pages 1105-1122.
    14. Cuong Le Van & Rose-Anne Dana, 2003. "Dynamic Programming in Economics," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00119098, HAL.
    15. repec:dau:papers:123456789/416 is not listed on IDEAS
    16. Carter, Patrick, 2014. "Aid allocation rules," European Economic Review, Elsevier, vol. 71(C), pages 132-151.
    17. Dalgaard, Carl-Johan, 2008. "Donor policy rules and aid effectiveness," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1895-1920, June.
    18. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
    19. Patrick Guillaumont & Laurent Wagner, 2014. "Aid Effectiveness for Poverty Reduction: Lessons from Cross‑country Analyses, with a Special Focus on Vulnerable Countries," Revue d’économie du développement, De Boeck Université, vol. 22(HS01), pages 217-261.
    20. Khan, Haider Ali & Hoshino, Eiichi, 1992. "Impact of foreign aid on the fiscal behavior of LDC governments," World Development, Elsevier, vol. 20(10), pages 1481-1488, October.
    21. Simon Feeny & Mark McGillivray, 2002. "Aid, Public Sector Fiscal Behaviour and Developing Country Debt," WIDER Working Paper Series DP2002-40, World Institute for Development Economic Research (UNU-WIDER).
    22. Collier, Paul & Dollar, David, 2001. "Can the World Cut Poverty in Half? How Policy Reform and Effective Aid Can Meet International Development Goals," World Development, Elsevier, vol. 29(11), pages 1787-1802, November.
    23. Clare Balboni & Oriana Bandiera & Robin Burgess & Maitreesh Ghatak & Anton Heil, 2023. "Why Do People Stay Poor?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(2), pages 785-844.
    24. Ngoc-Sang Pham & Thi Kim Cuong Pham, 2019. "Foreign aid, recipient government's fiscal behavior, and economic growth," Economics Bulletin, AccessEcon, vol. 39(4), pages 2457-2466.
    25. Kraay, Aart & McKenzie, David, 2014. "Do poverty traps exist ?," Policy Research Working Paper Series 6835, The World Bank.
    26. Collier, Paul & Dollar, David, 2002. "Aid allocation and poverty reduction," European Economic Review, Elsevier, vol. 46(8), pages 1475-1500, September.
    27. Chatterjee, Santanu & Sakoulis, Georgios & Turnovsky, Stephen J., 2003. "Unilateral capital transfers, public investment, and economic growth," European Economic Review, Elsevier, vol. 47(6), pages 1077-1103, December.
    28. McGillivray, Mark & Pham, Thi Kim Cuong, 2017. "Reforming Performance-Based Aid Allocation Practice," World Development, Elsevier, vol. 90(C), pages 1-5.
    29. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
    30. Maruta, Admasu Asfaw & Banerjee, Rajabrata & Cavoli, Tony, 2020. "Foreign aid, institutional quality and economic growth: Evidence from the developing world," Economic Modelling, Elsevier, vol. 89(C), pages 444-463.
    31. repec:hal:spmain:info:hdl:2441/22vv42pfks8jbb5qstg53r5mfl is not listed on IDEAS
    32. Aart Kraay & David McKenzie, 2014. "Do Poverty Traps Exist? Assessing the Evidence," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 127-148, Summer.
    33. Ngoc Sang Pham & Thi Kim Cuong Pham, 2020. "Effects of foreign aid on the recipient country's economic growth," Post-Print hal-03159190, HAL.
    34. Carter, Patrick & Postel-Vinay, Fabien & Temple, Jonathan, 2015. "Dynamic aid allocation," Journal of International Economics, Elsevier, vol. 95(2), pages 291-304.
    35. Feeny, Simon & McGillivray, Mark, 2010. "Aid and public sector fiscal behaviour in failing states," Economic Modelling, Elsevier, vol. 27(5), pages 1006-1016, September.
    36. Clare Balboni & Oriana Bandiera & Robin Burgess & Maitreesh Ghatak & Anton Heil, 2022. "Why Do People Stay Poor? [“Exploring Poverty Traps and Social Exclusion in South Africa Using Qualitative and Quantitative Data,”]," The Quarterly Journal of Economics, Oxford University Press, vol. 137(2), pages 785-844.
    37. Muhammed Islam, 2005. "Regime changes, economic policies and the effect of aid on growth," Journal of Development Studies, Taylor & Francis Journals, vol. 41(8), pages 1467-1492.
    38. Gaibulloev, Khusrav & Younas, Javed, 2018. "Untying the motives of giving grants vs. loans," European Journal of Political Economy, Elsevier, vol. 51(C), pages 1-14.
    39. Yisheng Bu, 2006. "Fixed capital stock depreciation in developing countries: Some evidence from firm level data," Journal of Development Studies, Taylor & Francis Journals, vol. 42(5), pages 881-901.
    40. repec:hal:pseose:hal-01302538 is not listed on IDEAS
    41. Daniel Gurara & Mr. Vladimir Klyuev & Miss Nkunde Mwase & Mr. Andrea F Presbitero & Ms. Xin Cindy Xu & Mr. Geoffrey J Bannister, 2017. "Trends and Challenges in Infrastructure Investment in Low-Income Developing Countries," IMF Working Papers 2017/233, International Monetary Fund.
    42. Cuong Le Van & Rose-Anne Dana, 2003. "Dynamic Programming in Economics," Post-Print halshs-00119098, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pham, Ngoc-Sang, 2023. "Some Lectures on Macroeconomics," MPRA Paper 119643, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cuong Le Van & Ngoc-Sang Pham & Thi Kim Cuong Pham, 2021. "Development loans, poverty trap, and economic dynamics," Working Papers halshs-03456281, HAL.
    2. Pham, Ngoc-Sang & Pham, Thi Kim Cuong, 2020. "Effects of foreign aid on the recipient country’s economic growth," Journal of Mathematical Economics, Elsevier, vol. 86(C), pages 52-68.
    3. Thi Kim Cuong PHAM & Ngoc-Sang PHAM, 2017. "Economic growth and escaping the poverty trap: how does development aid work?," Working Papers P197, FERDI.
    4. Ngoc-Sang Pham & Thi Kim Cuong Pham, 2019. "Foreign aid, recipient government's fiscal behavior, and economic growth," Economics Bulletin, AccessEcon, vol. 39(4), pages 2457-2466.
    5. Patrick Guillaumont & Phu Nguyen‐Van & Thi Kim Cuong Pham & Laurent Wagner, 2023. "Equal opportunity and poverty reduction: How should aid be allocated?," Review of Development Economics, Wiley Blackwell, vol. 27(1), pages 550-607, February.
    6. Temple, Jonathan R.W., 2010. "Aid and Conditionality," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4415-4523, Elsevier.
    7. Patrick GUILLAUMONT & Phu NGUYEN-VAN & Thi Kim Cuong PHAM & Laurent WAGNER, 2018. "Equal opportunity and poverty reduction: how aid should be allocated?," Working Papers P239, FERDI.
    8. Almuth Scholl, 2018. "Debt Relief for Poor Countries: Conditionality and Effectiveness," Economica, London School of Economics and Political Science, vol. 85(339), pages 626-648, July.
    9. Patrick GUILLAUMONT & Phu NGUYEN-VAN & Thi Kim Cuong PHAM & Laurent WAGNER, 2018. "Equal opportunity and poverty reduction: how aid should be allocated?," Working Papers P239, FERDI.
    10. Patrick Guillaumont & Phu Nguyen-Van & Thi Kim Cuong Pham & Laurent Wagner, 2015. "Efficient and fair allocation of aid," Working Papers of BETA 2015-10, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    11. Almuth Scholl, 2009. "Aid Effectiveness and Limited Enforceable Conditionality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 377-391, April.
    12. repec:hum:wpaper:sfb649dp2005-054 is not listed on IDEAS
    13. Patrick Carter & Jonathan R. W. Temple, 2017. "Virtuous Circles and the Case for Aid," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(2), pages 397-425, June.
    14. Patrick GUILLAUMONT, 2008. "Adapting Aid Allocation Criteria to Development Goals," Working Papers P01, FERDI.
    15. Mark McGillivray, 2006. "Aid Allocation and Fragile States," WIDER Working Paper Series DP2006-01, World Institute for Development Economic Research (UNU-WIDER).
    16. Kyriakos C. Neanidis & Dimitrios Varvarigos, 2005. "The Impact of Foreign Aid on Economic Growth: Volatility of Disbursements and Distribution of Receipts," Economics Discussion Paper Series 0533, Economics, The University of Manchester.
    17. Patrick GUILLAUMONT, 2009. "Aid effectiveness for poverty reduction: macroeconomic overview and emerging issues," Working Papers P05, FERDI.
    18. Kyriakos C. Neanidis & Dimitrios Varvarigos, 2007. "The Allocation of volatile aid and economic growth: Evidence and a suggestive theory," Discussion Paper Series 2007_07, Department of Economics, Loughborough University, revised Mar 2007.
    19. Lessmann, Christian & Markwardt, Gunther, 2012. "Aid, Growth and Devolution," World Development, Elsevier, vol. 40(9), pages 1723-1749.
    20. Minoiu, Camelia & Reddy, Sanjay G., 2010. "Development aid and economic growth: A positive long-run relation," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 27-39, February.
    21. Ieva Skarda, 2016. "The Political Economy of Foreign Aid Effectiveness," Discussion Papers 16/12, Department of Economics, University of York.

    More about this item

    Keywords

    Development loan; economic dynamics; economic growth; foreign aid; grant; poverty trap;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:drm:wpaper:2023-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Valerie Mignon (email available below). General contact details of provider: https://edirc.repec.org/data/modemfr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.