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Should Easier Access to International Credit Replace Foreign Aid?

Subhayu Bandyopadhyay (), Sajal Lahiri and Javed Younas ()

No 6024, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We examine the interaction between foreign aid and binding borrowing constraint for a recipient country. We also analyze how these two instruments affect economic growth via non-linear relationships. First of all, we develop a two-country, two-period trade-theoretic model to develop testable hypotheses and then we use dynamic panel analysis to test those hypotheses empirically. Our main findings are that: (i) better access to international credit for a recipient country reduces the amount of foreign aid it receives, and (ii) there is a critical level of international financial transfer, and the marginal effect of foreign aid is larger than that of loans if and only if the transfer (loans or foreign aid) is below this critical level.

Keywords: foreign aid; foreign loans; borrowing constraint; economic growth; fungibility; public input (search for similar items in EconPapers)
JEL-codes: F34 F35 O11 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-fdg and nep-opm
Date: 2011-10
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