The Effects of Foreign Aid on the Creation and Distribution of Wealth

Wenli Cheng, Dingsheng Zhang and Heng-Fu Zou ()

Annals of Economics and Finance, 2008, vol. 9, issue 2, 223-237

Abstract: This paper develops a model to study the effects of foreign aid on the creation and distribution of wealth in the recipient country. It considers three types of foreign aid: permanent grants to all individuals, temporary grants to uneducated workers, and foreign aid in the form of low interest rate loans to individuals who invest in education. The model shows that the economy may have two long-run equilibria, a rich equilibrium and a poor one. All types of foreign aid can increase the proportion of individuals investing in education, which means more people converging to the rich equilibrium and higher average wealth in the economy. In addition, if permanent or temporary grants are sufficient large, it is possible that the whole economy may converge to the rich equilibrium.

Keywords: Foreign aid; Overlapping-generations model; Investment in education (search for similar items in EconPapers)
JEL-codes: F35 O19 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2008:v:9:i:2:p:223-237

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