On the Growth Implications of Foreign Aid for Public Investment Co-Financing

18 Pages Posted: 31 Mar 2008

See all articles by Pantelis Kalaitzidakis

Pantelis Kalaitzidakis

University of Crete - Department of Economics

Sarantis C. Kalyvitis

Athens University of Economics and Business - Department of International and European Economic Studies

Abstract

In this paper we present an endogenous growth model with foreign transfers for public capital formation in order to analyze the implications for growth maximization when the public sector in recipient countries co-finances investment projects. Our main innovation is to show that, first, there is a unique growth-maximizing absorption rate of funds that decreases with the co-financing ratio and, second, that high amounts of assistance may be an impediment to growth due to the excess domestic taxation required to co-finance investment projects. We then derive a policy rule for designing the growth-maximizing co-financing share under a given level of assistance. Finally, we also highlight some implications for EU regional policies, which aim at fostering growth in poorer EU countries by co-financing public capital formation.

Suggested Citation

Kalaitzidakis, Pantelis and Kalyvitis, Sarantis C., On the Growth Implications of Foreign Aid for Public Investment Co-Financing. Review of Development Economics, Vol. 12, No. 2, pp. 354-371, May 2008, Available at SSRN: https://ssrn.com/abstract=1113941 or http://dx.doi.org/10.1111/j.1467-9361.2007.00385.x

Pantelis Kalaitzidakis

University of Crete - Department of Economics ( email )

GR-74100 Rethymnon, GR-74100
Greece

Sarantis C. Kalyvitis

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

Patission Str 76
GR-10434 Athens
Greece

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