Working Paper BETA #2016-52

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Title : Can development aid help a country to escape the poverty trap?

Author(s) : Ngoc Sang Pham, Thi Kim Cuong Pham

Abstract : This paper fits in the debate on the relationship between development aid and economic growth. It aims to analyze the aid effectiveness for a small recipient country. This country uses capital tax and international aid to finance public investment, which may improve the capital productivity. For the case of a developing country, we analyze the effects of aid, taking account of the corruption in use of aid as well as its characteristics in terms of technology, fixed cost and efficiency of public investment. Given donor's rules, we determine conditions under which the foreign aid can generate good perspectives in the long run for the aid recipient. We also discuss the existence of the poverty trap and the conditions leading to an economic take-off as well as the existence of a middle-income trap and conditions for the economy to converge to this trap.

Key-words : Aid effectiveness, economic growth, fluctuation, poverty trap, public investment

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