On the Optimal Timing of Foreign Aid
We offer a dynamic formulation of the aid process, in which questions of timing are central. It is shown that in most cases it is optimal to give the aid partly in a lump, at the outset, and partly as a flow, over time. However, if the donor and recipient cooperate, stock and flow aid may be of opposite sign. It is shown also that when marginal utility is of constant elasticity, the rate of flow of aid increases (decreases) if and only if the initial world stock of capital is less than (greater than) its steady-state value.
Dynamic Aid Allocation
This paper introduces a framework for studying the optimal dynamic allocation of foreign aid among multiple recipients. We pose the problem as one of weighted global welfare maximization. A donor in the North chooses an optimal path for international transfers, anticipating that consumption and investment decisions will be made by optimizing households in the South, and accounting for limits in the extent to which recipients can effectively absorb aid. We present quantitative results on optimal aid policy by applying our approach to a neoclassical growth model, where the scope for aid-funded growth is determined by the recipients' distance from steady-state.
Foreign Capital and Domestic Savings: A Test of Haavelmo's Hypothesis with Cross-Country Data
Trygve Haavelmo [1], in a question to Professor Leontief (2, p. 1062) has suggested the following interesting hypothesis about a developing country's savings function: I(t) = a[Y(t) + H(t)], where I stands for gross investment, Y for GNP and H for capital inflows. "That is to say," in Haavelmo's words, "that investment . . . is a function of . . . income including what they get from abroad." "I think," Haavelmo adds, "we see the implications. It means, for example, that domestic savings could be negative if H is very large." The core of Haavelmo's suggestion is, I believe, that domestic savings is not a function of national income alone but is also related, inversely, with the inflow of foreign capital. To impart more generality I shall alter the Haavelmo equation slightly without distorting its central message. Let us postulate l(t) = aY(t) + bH(t). From this we have domestic savings, denoted by S(t), as given by S(t) = aY(t) + b'H(t), where b' = b 1.