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

Cuong Le Van (), Ngoc-Sang Pham and Thi Kim Cuong Pham
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Cuong Le Van: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique, Thang Long University
Thi Kim Cuong Pham: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper investigates the nexus between foreign aid (in both forms: grant and loan), poverty trap, and economic development in a recipient country by using a Solow model 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 that foreign aid may help the country to escape from the poverty trap and converge to a stable steady state in the long run, but only if (i) the country's characteristics, such as saving rate, initial capital, governance quality, and productivity are good enough, (ii) the fixed cost is relatively low, and (iii) the loan rule is generous enough. We also show that our model with foreign aid has room for endogenous cycles, unlike the standard Solow model.

Keywords: Economic dynamics; economic growth; foreign aid; development loan; grant; poverty trap; endogenous cycle (search for similar items in EconPapers)
Date: 2023-09
Note: View the original document on HAL open archive server: https://hal.science/hal-04240269v1
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Published in Mathematical Social Sciences, 2023, 125, pp.101-112. ⟨10.1016/j.mathsocsci.2023.06.003⟩

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Related works:
Journal Article: Effects of development aid (grants and loans) on the economic dynamics of the recipient country (2023)
Working Paper: Effects of development aid (grants and loans) on the economic dynamics of the recipient country (2023)
Working Paper: Effects of development aid (grants and loans) on the economic dynamics of the recipient country (2023)
Working Paper: Effects of development aid (grants and loans) on the economic dynamics of the recipient country (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:hal-04240269

DOI: 10.1016/j.mathsocsci.2023.06.003

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