Browsing by Subject "GDP growth"

Despite nearly six decades of foreign aid being directed to developing countries, there still is no consensus on to extent to which aid affects growth of the recipient economy. One of the ways that donors attempt to influence the effectiveness of aid, or the extent to which it increases the growth of the recipient country’s economy, is to tie aid to public infrastructure projects. In some cases this influences the recipient’s behaviour and attitude towards foreign aid. This thesis looks at aid effectiveness in a situation where aid is tied to public sector infrastructure projects in a developing country. We base the research on a model developed by Kalaitzidakis and Kalyvitis (2008), where part of the recipient country’s public infrastructure spending is financed by foreign aid. We then look at a situation where rent-seeking activities by economic agents affect the effectiveness of aid basing on the Economides, Kalyvitis and Philippopoulos (2008) model. We also summarise empirical work in the research area, and present the most common forms of development aid, and present theoretical approaches to defining aid effectiveness. The thesis is based on theoretical models, and the methodology applied is mathematical. First we examine a case where development aid is used to co-finance public sector infrastructure projects in a developing country. In some cases it is possible that an increase in the level of aid transfers the recipient country’s spending from public investment to consumption. In this case the size of projects partly funded by development aid decreases, and the effectiveness may be mitigated. Next we look at a case where part of the funds are taken away due to rent seeking activities. In this case the impact on the growth rate is mitigated due to rent seeking activities in the economy. One of the key findings of this thesis is that development aid does have an impact on the growth rate of the economy of a developing country in a case where public infrastructure projects are co-financed with domestic taxes aid from abroad. Rent seeking activities have a negative impact on the effectiveness of aid with regards to its growth impact.