Working Paper: CEPR ID: DP10880
Authors: Patrick Carter; Jonathan Temple
Abstract: It is sometimes argued that foreign aid leads to a virtuous circle in which growth becomes self-reinforcing. We study two versions of this argument, using a modified neoclassical growth model in which the effects of parameter changes and capital accumulation are amplified. Simulations are used to quantify the welfare benefits from aid transfers. We find that, contrary to expectations, amplification makes only a modest difference to the welfare benefits from aid. This is true even when aid allows a faster exit from a vicious circle or poverty trap.
Keywords: Amplification effects; Foreign aid; Vicious circles; Virtuous circles
JEL Codes: F35; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign aid (F35) | economic growth (O49) |
| foreign aid (F35) | virtuous circle of growth (O00) |
| amplification effects of aid (F35) | welfare benefits (I38) |
| foreign aid allows faster exit from poverty trap (F35) | welfare effects (D69) |
| good consumption prospects in absence of aid (F35) | perceived necessity for aid (F35) |
| aid generates welfare gains (H53) | total factor productivity differences (O49) |
| amplification effects (C92) | exit from vicious circle of low income and low investment (E10) |