Agglomeration and Aid

Steven Brakman (), Harry Garretsen, Charles van Marrewijk and Charles van Marrewijk
Authors registered in the RePEc Author Service: Charles van Marrewijk

No 1750, CESifo Working Paper Series from CESifo

Abstract: A key issue in development economics is the explanation of core-periphery patterns around the world. Combining this issue with that of analyzing unilateral transfers (e.g. foreign aid) points in the direction of the use of New Economic Geography (NEG) models which, so far, has not been done explicitly. This paper tries to fill this gap in the literature by studying the (possibly ‘catastrophic’) effects of aid around the so-called break-points and sustain-points in a NEG model. We also analyze the effects of a “bystander”, that is a country which is not directly involved in the transfer. In the traditional transfer literature a bystander is known to potentially cause transfer paradoxes. Our findings in this NEG setting are as follows. First, direct transfer paradoxes are not possible in a symmetric setting even if a bystander is present. Second, the effects of foreign aid depend on the level of economic integration between donor and recipient. Third, if the equilibrium from which aid is given is stable, aid only has a temporary effect (even if there is a bystander present). Fourth, if the donor is relatively large, not only the recipient but also the bystander benefits from foreign aid.

Date: 2006
New Economics Papers: this item is included in nep-afr and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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