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.
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ReplyDeleteBased on some articles I read before, counties, like Cuba, has received economic sanction by U.S. and allies for a half of century, growing even more quickly and stably than some countries from South Africa which have been the recipient for a long time. In my personal opinion, aid may probably lead to corruption and indolence even though in face of more development opportunities, that has evolved a general situation in some African countries as I know.
ReplyDeleteHaiti is an example where foreign aid didn't accomplish it's goals after the earthquake. It's said that only 10 percent of all the aid actually reached civilians. There were aid stations everywhere without the funding to get resources even though the government had millions of aid money. According to the world bank, the Haitian immigrants in the US sends roughly $1.5 billion in remittances every year accounting for about 20% of their GDP. This shows how individual consumption grows the economy more than foreign aid can.
ReplyDeleteAlso as we said in class, it's common for foreign aid donors to be the primary importer for the foreign aid recipients. This is true in the case of Haiti and US relations.