North-South Aid and the North’s Income

Abstract

One of the central conclusions of chapter 6 is that growth of one region is beneficial to its trade partners’ ‘long-run’ growth rate of income. This result is obtained for the case of a closed balance of trade without international aid. This raises the question whether direct aid, being meant to induce growth in the receiving region, may also have positive effects on the donor region’s income. This question is not satisfactorily dealt with in the literature. The relevant literature, briefly surveyed in section 7.1, does analyse the’ short-run’ effects of aid flows (‘transfers’): the adjustment of trade flows, terms of trade, and income with given stocks of capital. These are usually dubbed the’ secondary’ effects, the ‘primary’ one being the immediate cost of the transfer proper; the combined primary and secondary effect on the donor’s income is usually thought to be negative. However, the literature does not analyse the consequences of the aid-induced accumulation in the receiving region for the donor’s income. This in spite of the fact that aid is meant precisely to facilitate the recipient’s development and accumulation. Therefore this chapter tackles these capital-accumulation (or ‘tertiary’) effects of aid. Here we no longer employ the main tool of preceding chapters: the analysis of steady-growth paths and their stability. As the need for aid is, hopefully, a transitional phenomenon it should be treated as such.