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GTAP Resource #685

"Designing Aid Programs for Small Open Economies"
by Lau, Morten, Thomas Rutherford and Anders Sorensen

Using a growth model with entrepreneurial innovation and physical capital accumulation, we assess how the design of foreign aid programs may affect the economic transition in receiver countries. The results highlight the importance of transitional dynamics in analyses of economic policy. We find that foreign aid programs aimed at innovation are more efficient in the long run than subsidies to physical capital investment, provided the number of different products is below the optimal level chosen by the social planner. However, the adjustment speed to the new steady state is higher when the subsidy to physical capital investment is applied instead of the subsidy to innovation. The high adjustment speed has a positive impact on private consumption in the short to medium term, and the ranking of instruments in terms of welfare may therefore change.

Resource Details (Export Citation) GTAP Keywords
Category: 2001 Conference Paper
Status: Published
By/In: Presented at the 4th Annual Conference on Global Economic Analysis, Purdue University, USA
Date: 2001
Version: n.a.
Created: (5/31/2001)
Updated: Lau, M. (5/31/2001)
Visits: 2,770
No keywords have been specified.

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