Foreign Aid Policy and Sources of Poverty: A Quantitative Framework

32 Pages Posted: 3 Mar 2006

See all articles by Alexandros Mourmouras

Alexandros Mourmouras

International Monetary Fund (IMF) - Policy Development and Review Department

Peter Rangazas

Indiana University Purdue University Indianapolis (IUPUI) - Department of Economics

Date Written: January 2006

Abstract

The econometric literature has been unable to establish a robust association between foreign aid and growth and poverty reduction. In this paper we argue that aid effectiveness must be assessed using methods that go beyond cross-country regressions. We calibrate a dynamic general equilibrium model that is capable of generating large income gaps between rich and poor countries. The model quantifies three sources of poverty: (i) lack of access to international capital, (ii) low schooling and high fertility (a poverty trap), and (iii) antigrowth domestic fiscal policy. We analyze policies designed to address each source of poverty and estimate and compare the aid cost of implementing the different policies. The policies differ dramatically in the extent and timing of their growth effects, and in the aid cost of their implementation.

Keywords: foreign aid policy, growth, poverty, schooling, fertility, capital mobility

JEL Classification: E61, F33, F34

Suggested Citation

Mourmouras, Alexandros and Rangazas, Peter Coia, Foreign Aid Policy and Sources of Poverty: A Quantitative Framework (January 2006). IMF Working Paper No. 06/14, Available at SSRN: https://ssrn.com/abstract=888159

Alexandros Mourmouras (Contact Author)

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

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Room 5-311
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Peter Coia Rangazas

Indiana University Purdue University Indianapolis (IUPUI) - Department of Economics ( email )

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Indianapolis, IN 46202-5140
Germany
(317) 529-2837 (Phone)

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