DP10880 Virtuous Circles and the Case for Aid

Author(s): Patrick Carter, Jonathan Temple
Publication Date: October 2015
Keyword(s): Amplification effects, Foreign Aid, Vicious circles, Virtuous circles
JEL(s): F35, O40
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10880

It is sometimes argued that foreign aid leads to a virtuous circle in which growth becomes self-reinforcing. We study two versions of this argument, using a modified neoclassical growth model in which the effects of parameter changes and capital accumulation are amplified. Simulations are used to quantify the welfare benefits from aid transfers. We find that, contrary to expectations, amplification makes only a modest difference to the welfare benefits from aid. This is true even when aid allows a faster exit from a vicious circle or poverty trap.