Which Country Gets the Most Out of International Commerce

In this article, the author discusses the idea of international trade and if China’s track record really is all that it has been cracked up to be. I thought this would be a worthy article to share considering we had discussed China’s trading habits and whether or not their trading poses a threat to the U.S. a few classes ago.

At first the author compares China trade to their GDP; China’s exports and imports equaled nearly 53% of their GDP. Seems like a pretty large margin, however, this is still below the world average. The global trade to world GDP ratio was over 63%. Although China’s ratio falls below the world average, China still smoke’s the U.S. ratio of 30% and Brazil’s 26%. Therefore, we must find a measure that can better analyze the sophistication of what countries are trading and how that compares to rivaling nations.

Another method to evaluate a country’s trading is to calculate the amount of “value added” to create the exports. China adds about 67% of the value to the imports used to create exports. America, on the other hand, adds 89%. One could argue that China does not do very much to create the products it exports but instead imports valuable components. This theory also has its flaws in that it does not measure a country’s integration with the rest of the world but rather how a country adds value to its economy through the allocation of parts.

When analyzing trade in the global economy the goal should be to understand how trade impacts the rest of the world. We do this not by examining a country’s exports, but by examining a county’s imports. “Countries export what they must so they can import what they want.” America is the biggest importer but Hong Kong is the biggest importer per person. Alternatively, Norway is the country that gets the “most bang for its import buck.” Because Norway’s currency, krone, is so overvalued they are able to buy international goods at a better rate than buying goods domestically. Therefore, China may produce the most for international trade but this does not mean that their trade is necessarily the most beneficial to the global economy.

Ukraine Conflict Effect on Russian Foreign Trade

If you have been keeping up with the global issues at all it would be hard not to know about the conflict between Russia and Ukraine. The conflict has been ongoing for sometime now and has been a problem ever since Ukraine has been separate from Russia. I don't want to go on about this because its not the focus of the post but a short summary of the conflict would be that Ukraine was set to join the UN a while back and then took a bailout from Russia. Now Russia has occupied Ukraine and there have been a number of protests and many members of United Nations feel that this conflict could be a threat to world order.
So how does this have an effect on Russia's foreign trade? Well ever since the end of the Soviet Union it has been a struggle to involve Russia in world trade. Russia was able to succeed though eventually and was able to establish a fairly strong amount of foreign trade. Trading to the outside world was very important to Russia and the rest of the world because they have many resources worth trading for. Also Russia's economy was helped along by the Foreign Trade they established. Things were on the up for Russia
Then the conflict with Ukraine started getting a little out of hand and started to worry other counties, especially members of United Nations. This caused a reduced demand for trade with Russia. Russia's foreign trade dropped by 11.4%. Exports dropped by 12.7% while imports dropped by 9.4%. This reflects how Russia's terms of trade have dropped. Trade with Russia is less desirable so the prices of their exports drop while prices for their imports rise. This also can have an effect on terms of trade for the rest of the world because other countries are against Russian imports so the have to import from elsewhere for higher prices also they are not getting exports from Russia so they might have to sell to other counties for less.
Overall for Russian foreign trade and their economy to rebound the crisis in Russia would need to be resolved and hopefully trade with Russia would continue to grow. You can read more on this subject in the article linked to the title.

Trade barrier:tariffs and quotas

Nowadays,in the international trade market,countries use all kinds of methods to protect their domestic producer from the influence of trading.Tariffs and quotas are common in a country's policy toward international trade.They both serve the purpose of controlling the number of foreign products that can enter the domestic market. 
Tariffs are taxes imposed on imported goods; they will increase the price of the good in the domestic market. Domestic producers benefit because they receive higher prices. The government benefits by collecting tax revenues.On the other hand,quotas are numerical limits imposed on imported goods. In general,consumers are harmed by quotas, while domestic and foreign producers benefit by receiving higher prices,but the situation can be different in some circumstances.Here is a exception.
Recently,China plans to cut cotton import quotas in order to boost demand for domestic fiber.As a world biggest consumer of cotton,China's policy driving future prices in both China and the United States lower.Besides that,non-quota imports are subject to a 40 percent tariff, so the restricted availability of import quotas will inevitably dampen Chinese demand for foreign cotton.In this case,the change in quota policy will hurt major exporters such as the United States(Beijing cotton plans dash U.S. farmers' hopes of price recovery)
 where Chinese demand has played a key role in influencing fiber prices.Meanwhile, the Chinese government said that they will end the stockpiling that had pushed the price of domestic cotton well above market prices and instead offer subsidies to farmers.
As we can see from the new above,quota issue by China is causing both domestic and foreign prices to drop,hurting both domestic and foreign producers.In order to solve this problem, the government offer subsidies to domestic farmer to cover up their losses.Overall,the policy is to protect the domestic producers.

Explaining Trade Policy Regimes with the Ricardian Model

The linked working paper was written by three leading economists from the Center for International Development at Harvard University.  There is material written as to why an existing trade regimes may exist, but they tend to lack the evolution of it and the connection it has to the division of labor.  The purpose of the paper is to study the effects of division of labor based on individuals' production and trade decisions, and to examine the equilibrium implication of the inter-dependence between the level of division of labor and the degree of trade liberalization.

Before I go into the summary and commentary on this paper, I must layout some groundwork as to how this paper came about.  It follows the typical Ricardian idea that free trade benefits both countries in question.  However, it brings up the question of why countries may stray from free trade policies.  The paper uses a Ricardian model with transaction costs and endogenous comparative advantage somewhat similar to the model we studied in class.  Also governments play a role in this model so that it may show the effects of tariffs, and the importance of trade negotiations.

Two of the four sections of the paper use mathematical representations of the Ricardian Model to explain how cost and level of division of labor are related, and the effects on welfare and terms of trade based on choice of tariffs.  In section 2, we find out that as transaction conditions improve in both countries, the equilibrium moves to complete international division of labor.  This means that productivity is maximized, and the countries now produce on their corresponding PPF.  The result that I found most interesting is that even if a country's TOT go down, it can receive gains in trade to offset this.  In section 3, countries impose tariffs to benefit their TOT which could result in a tariff war.  If this is the case, tariffs can go so high as to offset these gains as a whole.  This suggests that as trade negotiations move toward free trade, that division of labor will move directly with it.

Overall, I found this paper to be intriguing even though it was difficult to understand the mathematics behind it.  However, it does make sense that as tariffs are lifted, international division of labor occurs in unison due to the specialization that can happen since the countries are more liberalized.  Lastly, it surprises me that even though a country's terms of trade may be worse off, the gains from trade can offset it, actually increasing the economic welfare of the country.

Oil Prices and Interstate Conflict Behavior

The linked working paper is authored by Cullen S, Hendrix, a nonresident senior fellow at the Peterson Institute for International Economics. In the realm of international economic studies there exists this conjecture that anecdotal evidence suggests high oil prices embolden leaders in oil-rich states to pursue more aggressive foreign policies. This paper seeks to test this theory by using a sample of 153 countries from 1947-2001. 

Where we are used to analyzing the effects of war in oil exporting regions on the prices of natural resources, this paper chooses to focus on how the movements in the price of oil can lead to aggressive foreign policies from oil exporters which can in turn spawn those acts of aggression. While the paper utilizes sample data that dates back to the mid-20th century, we only have to look back to the past half-decade to assess the validity of Thomas Friedman's First Law of Petropolitics( the basis of Hendrix's analysis): that high oil prices embolden producers to adopt more confrontational foreign policies (2006). For example, in August of 2008 Russia invaded neighboring Georgia-presumably in response to Georgian aggression against the breakaway of South Ossetia-just one month after crude oil prices secured record high marks since 1980. Just this year Russia has annexed the Crimean Peninsula and upon doing so its state owned Gazprom-the world's leader in extracting natural gas- has doubled the price it charges the Ukraine for natural gas.

 The paper concludes by asserting that Friedman's First Law of Petropoltics is consistent with its pooled data and that democracy and oil wealth are inversely related and as the price of oil rises, democracy in oil-producing states wanes. Personally, I do not quite understands the correlation between "democracy” and rises in prices of oil as I do acts of aggression in response to rising prices of oil in exporting zones. If the paper is suggesting that democracy is equivalent to peacefulness, then it would be an absurdity. Moreover, in terms of its arguments on the effects of oil prices and interstate conflict behavior, I tend to agree that high prices of oil in exporting countries lead to more aggressive foreign policy. 

Announcement (Comments don't count for grade)

I figure this is an easier announcement forum than the webpage.
The solutions to HW 1 are posted here.

Turkey's economy serves as a model for developing countries

There are many questions up in the air for Turkey, who is looking to grow and develop. Turkey looks to achieve this growth and development through their 10th five-year development plan that encapsulates a growth model, which is based on technological efficiency and prioritizes an open economy as required. Turkey is becoming an example for other developing countries as to what development model to adopt under conditions of open economy. Turkey's economic plans, which were put into effect three years after the 1960 military coup, were based on saving-investment equality from the traditional Keynesian growth theory. They established mechanical relationships among production factors that cannot be maintained theoretically even in national and closed economies. As they were composed of statist applications that were developed after the 1929 crisis, these models cannot be implemented in dynamic and outward-oriented economies. There actually was never a consistent growth and development model constructed for developing countries in the whole of the 20th century, which was dominated by inward-looking nation- states that had high barriers to entry. The case is the same today as it was back then even though these economies are now open to the outside world. Now the question is how will sustainable growth be provided without full employment.

There are three main models/studies being taken into consideration for Turkey. The first idea being that of Paul Romer and his 1986 article "Increasing Returns and Long Run Growth". Here, Romer was using a model that was founded on increasing yields, instead of a neoclassical production function. Rather than the material product, Romer used manufacturing knowledge as the baseline. Piero Sraffa in his study called "Production of Commodities by Means of Commodities" challenges Romer's article and raises the question of what would be the basic foundations of Romer's new growth strategies, which were based on human capital and supported by active policies? The answer was that developing countries should disturb the Malthusian equilibrium and develop dynamic economies of scope, instead of gaining a comparative advantage as suggested by the Ricardian model.

Another simple model is that was modeled by Young 1991. There are two countries symbolized as A and B; A specialized in producing technology-intensive goods and B specialized in traditional goods and they apply Ricardian trade. Here, A achieves geometrical growth, while B recedes, as Young suggests that there is learning potential in hitech goods. Thus, as Malthus asserts, country A, which continues with technology-intensive goods, will achieve a geometrical growth with a high degree of efficiency, although its population and requirements increase geometrically. However, while the population and requirements of country B geometrically increase, its income (productive growth) will increase arithmetically. In order to have Malthusian equilibrium, country B has to choose poverty by adopting an oppressive model. That is what Turkey is going through now. Turkey will serve as a model for other countries on how to do it right, or what not to do after they implement their tenth five-year development plan that will be applied between 2014 and 2018.

http://www.dailysabah.com/columns/taha-meli-arvas/2014/08/27/turkeys-economy-serves-as-a-model-for-developing-countries

Trade measure, the impact to China’s international trade

Tradingup; Picking the world champion of trade is a latest journal from The Economist, focusing on the different measures of international trade provided a diversified and intriguing prospective to reflect on China’s champion crown on international trade, which raised critical argument around the world, but mentioned by Chinese press constantly.

International trade, depending on numerous components involved, including population, territory, currency purchasing power, composition and trade in services, lead it to a sophisticated calculation and discussion. According to the journal, China is oriented to export physical commodities instead of service, like culture spread and technological innovation that U.S. has undergone during the past half century. As a Chinese, in terms of my personal experience, currently China is speed up and focus on service export rather than ten years ago, based on China’s mounting comprehensive power that connects to national soft power. Whereas, there are sceptics and opponents existing who are arguable about the so-called threat from China.

Refer to the journal, the author mentioned the China’s enormous economy, leading to the trade below to the world average relative to small economies. China used to concentrate on export and has maintained this policy for more than 30 years since the reform and open policy released, however, after the strike of worldwide economic recession from 2008, China is beginning to initiate a set of reforms covering several economic field instead of focalizing single segment or physical goods export only, that will be a marked impact to China’s development in next phrase. Therefore, to my view, nonetheless, international trade is still driving China’s growth, China is supposed to concern on internal trade more than before. Refer to It's a continent, actually; Internal trade, reported China’s “Go West” campaign.

The author also talked about that trade reveals the integration with the rest of the world lying on import rather than export. To my overview, the measure of international trade is compounded with different parts of concern. To big countries, it is complicated and arguable but adjustable, and by the same token, to small countries, it is relatively simple but there is potential dangers leave behind, refer to Bigproblems for little countries.

Scottish Independence. How would this affect their national trade situation? How would it affect the U.K.’s

As the vote for Scottish Independence comes to an end Friday, there are several reasons for both sides to be extremely passionate about their stance. There are many different reasons why the Scots want their independence, but I want to examine mostly the change in trade terms that will occur with a breaking of the Union through some of the material we discussed in class. 

Firstly, Scotland has one extremely valuable export: oil. Without the hinderance of sharing the revenue from oil with the U.K., Scotland could see more money coming in from what they are exporting. This isn’t to say that they would be exporting more goods, but they would receive 100% of the revenue from what they are exporting, and therefore income would rise with the PPF curve shifting outwards on the X axis, where the exports are shown. With more income for the Scottish people, they have a higher propensity to buy otherwise too pricey imports, helping their terms of trade. 

Secondly, if Scotland became independent, they would very likely try to become a member of the European Union. If this were to happen, they would become instantly much stronger trade partners with the rest of Europe. Using the same currency as other European Union members, they would be able to avoid any trade mispricing that occurs with different currencies. This too helps their terms of trade.

However, there is much to consider in that Scotland would in turn be losing the benefits that it received from other U.K. exports that Scotland had nothing to do with. In that regard, they may see their PPF shrink in the way of exports, causing income to most likely fall, which would then cause imports to become too pricey and unattainable, causing that region of their PPF to shrink as well. 

The real key in figuring out what change would occur with Scotland and their terms of trade is all about balance. If they can offset the exports they are losing from the rest of the U.K. by gaining more revenue from their own oil, it would have a positive effect of their terms of trade. If they cannot, it would hurt them in the end. While the vote involves many different topics that weren’t discussed, this is one big example of what could happen if the union between Scotland and the UK were to end. 

some sources… http://www.thewire.com/global/2014/09/yes-or-no-a-voters-guide-to-scottish-independence/380379/

http://www.theweek.co.uk/uk-news/scottish-independence/55716/scotland-rejects-independence-what-happens-next 

China: International Trade and WTO Accession

   China: International Trade and WTO Accession was an policy paper written by Thomas Rumbaugh and Nicolas Blancher. The paper explored two areas of study in regards to China's world trade: how China’s integration with the global economy has contributed to sustained growth in international trade and how China’s accession to the World Trade Organization (WTO) has been crucial in promoting its' integration with the global trading system.

   Throughout the years China has had an increasing role on world trade. Both its exports and imports have grown faster than world trade for more than twenty years. China has looked into it's regional trade patterns by increasing trade with the Asian countries, European countries, and the United States; which caused a significant change in bilateral trade balances. Imports from Europe and the U.S. have increased by 31 and 24 percent. China has also become more diversified, getting away from textiles and light manufacturing which used to account for around 40% of China's exports. This diversification caused China to become more important than ever in the Asian regional economy as it's increasing imports as well as becoming one of the most important export areas for other Asian countries.

   China joining the WTO has led to several changes in regards to trade with China including substantial tariff reductions and the dismantling of most nontariff barriers. Several reforms introduced led to import tariff exemptions for processing trade and foreign investment, As a result most traded goods had largely converged with international prices by the mid-1990s. Also a majority of China’s imports were in effect not subject to any tariffs in 2000. Joining the WTO allowed for market access of goods, services, and the discriminatory safeguard rule. China has also been very good in the early stages at upholding its' commitments to the WTO and is seen as a great asset to finally have on board.

   In the end, the paper simply lays out the idea that: China’s increased role in world trade will substantially benefit them and be a crucial process in promoting themselves on the world trade market. Which I agree with because the stats have already shown they've significantly increased there terms of trade through increasing imports and exports. Both have likely risen partially due to the fact they joined the WTO and have made leaps and bounds by several economic reforms.

How do US sanctions affect EU trade with target countries?

In class we discussed whether sanctions work or not. This article written by Jiawen Yang, Hossein Askari, John Forrer, and Lili Zhu looks at how US economic sanctions affect the European Union’s trade with targeted countries. They start by stating the assumption that when US sanctions are imposed, target countries switch their trade form the United States to other countries. This is what is known as the third-country effect. Since the European Union is the largest economic entity other than the United States they would be an attractive option to countries under US sanctions. The article argues that even though these third-country trade promotions are normally assumed, US economic sanctions may hurt trade between EU and target countries due to network effects.

The paper references data provided by Hufbauer that found that more severe US-inspired sanctions encourage target countries not only to redirect their trade away from the United States and toward third countries but also to enlarge their commerce with the world at large. The paper then references studies done by Caruso which find that unilateral extensive sanctions had a large negative impact on other G-7 countries (France, Germany, Italy, Japan, the U.S., the U.K., and Canada). The study also found that limited or moderate sanctions induced a slight positive effect on other G-7 countries. Caruso concludes that the first finding confirmed the hypothesis of negative network effects.

The study in this paper finds that in their sample year of 2003 total gains of EU trade due to US-inspired unilateral sanctions are estimated to be approximately $25.1 billion. They find that unilateral sanctions imposed by the US appear to have a positive impact on EU trade with target countries in 2003. Their reasoning behind this finding is that most unilateral sanctions in effect in 2003 were moderate/limited in nature and had been in effect for a while which follows the second finding of the Caruso study.  

I agree with the assertion of this paper where they say severe sanctions effect third countries negatively while limited or moderate sanction effect third countries positively. The more severe sanctions would put more of a burden on the target country’s economy which would have a negative impact on that country’s trade as a whole leading to that country trading less with third countries. Whereas the limited/moderate sanction put less of a burden on the economy of the target country, this makes it easier for them to simply switch to a third country for their trade. 

 http://search.ebscohost.com.proxy.sau.edu/login.aspx?direct=true&AuthType=ip&db=bth&AN=43261928&site=ehost-live

Economic Sanctions

Economic Sanctions

Recently, Ukraine’s crisis is a hot topic in the world; especially after the EU and U.S. put some economic sanctions to Russia. The sanctions mostly focus on oil industry, defense industry and financial companies like Russian banks. In details, major Russian banks have the assets in EU and U.S. like Sberbank will meet restrictions on debt maturities. They also blocked some assets for defense technology firms. Under U.S. sanctions, Russia will have difficulties in oil exploration and production of Arctic offshore. Moving to East side of Russia, China does not put any sanctions and say that the problem should be solved in politically. Therefore, China will keep a “friendly cooperation” with Russia and Ukraine. Will these sanctions work? In my opinion, they will. These sanctions make a lot of effects into Russian economic and put Putin in a difficult position. Now he has to face with sanctions from EU and U.S. and also Russian citizens since there are too many soldiers have died in battle. However, these sanctions are like double edged swords. U.S. and EU making bans for Russia also mean that they are cutting investing and trading with Russia. An example is the delay of exporting oil from Russia to countries in Europe. It will strongly affect the U.S. and European investors having assets in Russia companies. Since Russia is a big country, it will make a lot of effects into world’s trade. For example, the price of oil will be increase if the trading is ban and the consumption remains the same. Putin will not let it happens. First, although Russia still has other markets, U.S. and EU are ones of the biggest markets with high potential. Second, Russia is much bigger than North Korea in terms of either trade or land, so autarky is impossible for Russia. In conclusion, all these sanctions are made to against Russia’s aggression, and Russia should really pay attention if they do not want to lose both human and economy.

  References:

http://www.reuters.com/article/2014/09/12/us-ukraine-crisis-usa-sanctions-idUSKBN0H71N320140912

http://www.reuters.com/article/2014/09/12/us-ukraine-crisis-ceasefire-insight-idUSKBN0H70AK20140912

http://www.reuters.com/article/2014/09/12/us-ukraine-crisis-china-idUSKBN0H704Y20140912              

http://europa.eu/newsroom/highlights/special-coverage/eu_sanctions/index_en.htm

Economic Geography and Economic Inequality

The linked working paper comes from the London School of Economics and explores the effects of geography on a country’s ability to trade internationally.  It seeks to show mathematically that geographical location has a significant effect on the per-capita income of nations and may also explain why companies often choose not to move their production to countries where they could hire cheaper labor.  

The two main geographical characteristics that can help or hinder a country’s trading ability are distance from its trading partner and access to a coast.  What has been found is that the median land-locked country’s shipping costs are more than 50% higher than those of the median coastal country’s shipping costs and a coastal country can expect higher income per-capita of roughly 60% than a land-locked country.  However, geographical distance from a trading partner affects a country’s ability to trade only so far as it affects a country’s access to a market or supplier.  Basically the actual distance between two countries is not as important as what is in-between them.  This is not to say that distance does not factor in though, just that it is not as consequential.    

The paper ends by essentially saying that while their models show that geographic location is working against developing countries’ ability to improve, their models are centered on current locations of manufacturing and spending and as new markets and areas of production appear a country with a poor geographic location for trading may find itself in an advantageous geographic location for trading.  I think that although I cannot attest to the actual effectiveness of their models, the publishers of this working paper are still correct in their conclusions.  Throughout history the countries with the most access to other parts of the world have thrived the most.  From Rome to England, the empires with the largest reach were also usually the most economically sound and wealthy.  It makes sense then that geographic location would have a large effect on modern nations’ per-capita income and general economic well-being.  

An Autarky Economy, and Why It Fails

As we have learned in class, a country that has an autarky economy is a country that is entirely self-sufficient and has no reliance on the outside world.  An autarky has a completely closed economy that does not export their resources either.  It is unheard of to have an autarky in today's world of free-trade, however North Korea could be considered to closest country that we have seen to an autarky in decades.  In the link below, I read that North Korea has hurt themselves incredibly by their near autarky economy.  It mentions that North Korea only currently has a GDP of about 12 billion dollars, which may seem significant until you compare it to the United States GDP which currently exceeds 16 trillion dollars.  The significance of this is that North Korea citizens have suffered from oppression and poverty due to the close similarities between autarky and the North Korean economy.
In the link below there are a couple reasons mentioned why this form of economy is inferior to the more popular and realistic current global model of free trade.  The main idea introduced is the idea of a Production Possibility Frontier, or PPF.

  

The PPF chart above shows a country that produces only guns and butter.  In an autarky, if there are only guns and butter produced and there is no trade, then the country will be forced to use its resources and labor to produce guns, butter, or a mix of the two.  This will essentially lead to an insufficient allocation of resources because they can't produce at 100% efficiency, because they cannot trade their surplus of guns and butter.  In a free-trade economy we know that a country can allocate its labor and resources properly to maximize the GDP.  Then a country would simply trade surplus for what they need.  Obviously I want to stress that this is a VERY simplified model, but it gives you an idea of the challenges that an autarky would face,  In the end, it really comes down to efficiency, and the fact that some countries are more efficient at producing certain goods than others.  It explains why no one currently has an autarky, and why free-trade reigns supreme in our world today.

http://sites.psu.edu/ackermanciblog/2014/03/19/autarky-economy/

The Impact of Foreign Aid

As discussed in a recent article in the Economist by Ryan Avent (Free Exchange), aid (international transfers) can potentially impact a country through several channels. First, and most directly, it is a "free" gift that increases the income of the recipient (and correspondingly decreases the donor's income). However, there are other potential channels through which the benefits of aid could possibly be magnified, diminished, or even turned negative. 

As we will discuss in class, aid can impact the countries' terms of trade. The argument, so said Keynes, was that when a country (like Germany) chose (or was forced) to make payments to another (like France), then world demand for each country's exports and imports, and hence the relative prices of the countries' exports to imports (terms of trade), would change. Keynes' fear was that Germany's payments (reparations) to France would be a "double whammy" against Germany and immiserize their economy beyond the dollar value of the reparations, sinking them deeper into recession and give rise to political extremism, which it ultimately did. However, the same effect could have been reversed: Germany's terms of trade could have improved, and even could have improved by such a margin that their economy delivered a higher welfare than it did without the transfer. While it is possible that terms of trade might mitigate the effects of a transfer, it is unlikely that the terms of trade effects will overwhelm the primary impact - the "gift" of income" - from the donor to the recipient. 

However, there is also potential for aid to increase rent-seeking among political elites and may lead to conflict. However, while aid may potentially prop up corrupt regimes, there is not much evidence that aid increases the risk of conflict, and may even reduce the chances of conflict, while also increasing the chances of an existing conflict being resolved. 

Others point to the chances that countries "cherry pick" aid recipients. These critics of aid point out that, even if growth is higher on average for aid recipients, this may be because donors selectively choose countries that would have grown anyway. Avent cites a new World Bank study that seeks to debunk this notion using an empirical technique known as "instrumental variables." This study finds that countries that stop receiving aid once they reach a certain income threshold grow significantly more slowly than those just below that threshold. Avent adds citations to Markus Bruckner (2013) and Osbourne (2014) that support a similar conclusion.

So, in the end, it appears that, despite all of the potential pitfalls and moral hazards, aid improves welfare. What's puzzling though is why countries resort fairly willingly to foreign aid when more efficient (and potentially Pareto-improving) mechanisms are staring them in the face. For example, whereas aid costs natives through higher taxes, immigration has been estimated to improve welfare for natives by 1.0 and 1.25 percentage points for low- and high-skill natives, respectively.