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A NOTE ON FOREIGN AID, HUMAN CAPITAL, AND WELFARE

Published online by Cambridge University Press:  10 June 2016

Hafedh Bouakez and
Fabienne E. Gouba
Hafedh Bouakez*
Affiliation:
HEC Montréal and CIRPÉE
Fabienne E. Gouba
Affiliation:
HEC Montréal
*
Address correspondence to: Hafedh Bouakez, 3000 Côte-Sainte-Catherine, Montréal, QC H3T 2A7, Canada; e-mail: hafedh.bouakez@hec.ca.
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Abstract

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Should foreign aid be tied or untied? We study this question in the context of a dynamic growth model in which agents can accumulate human capital through education. We compare the growth and welfare implications of three polar scenarios in which foreign aid is either (i) completely untied, (ii) tied to public investment in infrastructure, or (iii) tied to public spending on education. Our results indicate that tying aid to education is more beneficial from a long-run welfare perspective than the two alternative scenarios. We also compute the optimal allocation of foreign aid and find that the largest fraction of aid flows ought to be tied to public spending on education. Finally, we study the transitional dynamics of the recipient economy following an aid inflow and find that aid programs that are tied (entirely or partially) to public spending on education generally entail some welfare losses in the short run.

Keywords

Foreign AidGrowthHuman CapitalWelfare

Information

Type
Notes
Information
Macroeconomic Dynamics , Volume 21 , Issue 6 , September 2017, pp. 1484 - 1507
Copyright
Copyright © Cambridge University Press 2016 

Footnotes

We thank Paul Maarek, Césaire Meh, and seminar participants at the annual meeting of the Société Canadienne de Sciences Économiques, the T2M annual conference, and HEC Montréal for helpful comments and suggestions. We are also grateful to Manoj Atolia for his assistance with the reverse-shooting algorithm.

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