Aid, foreign direct investment and economic development
(2011)
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- Authors
- Supervisors
- Boucekkine, Raouf
- Abstract
- (en) This thesis is intended to contribute to the development economic literature in two ways. Firstly, it introduces a new methodology to deal with the foreign aid problem and its host-country macroeconomic consequences. We claim that that two-sector growth models à la Benhabib and Farmer (1996) involving foreign aid as an input in the production functions are the natural frameworks to tackle this concern. Contrary to the popular claim saying that aid´s effectiveness on economic growth has been almost nil because it is mostly channeled into consumption and not investment, we clearly show that optimal allocation of aid does call for some significant allocation of aid directly into production of consumption goods. Besides, we demonstrate that, under perfect foresight scenarios, the higher is the relative price of the economy the slower is the impact of foreign aid on economic growth and more aid is needed to achieve rapid growth. Finally, under the assumption that aid may be viewed as a means of giving happiness to people, it would not be optimal that the endogeneity of labor-leisure choice play a crucial long run role in the propagation of foreign aid shocks in terms of affecting resource allocation decisions -as it is claimed by other authors. On the other hand, we explore in this thesis the host-economy’s distributive consequences of foreign direct investment (FDI) on rising wage inequality in developing countries. By adopting a simple two-sector optimal growth model where a pro-gradual liberalization scenario is assumed à la Desmet and Rojas (2008), we show that transitory external shocks promoting FDI inflows (a diminishing in the world interest rate, for instance) induce some improvements in the economy, particularly by reducing the technological gap. However, the level of wage inequality is increased and most importantly, serious short run consequences for the economy in terms of social welfare maximization appear in the very short run under constrained regimes. Better endowed economies (in terms of the number of skilled labor) may contribute to reduce this negative impact.
- Affiliations
Citations
Fuentes Zepeda, R. A. (2011). Aid, foreign direct investment and economic development. https://hdl.handle.net/2078.5/208787