Foreign aid

Question 1

Please explain how donations of food to a country can hurt local farmers by
undermining the incentives for them to produce food. [PRLB box 14-5]

Question 1

Please give three different motives for providing foreign aid

Answer 1

Political motives:
- Foreign policy and alliances
- Diplomatic influence
- National security

Historical motives
- Economic trade

Humanitarian motives
- Moral obligation

Question 2

Please explain and present graphically the three views on aid and growth

Answer 2

1. The optimistic view:
   positive impact
   - providing resources for investment,

• promoting trade and economic integration
• improving social and physical infrastructure.

2. The pessimistic view: negative impact on economic growth
   - fostering dependency
   - creating inflationary pressures
   - distorting resource allocation and market incentives.
3. The pragmatic view: The impact of foreign aid on economic growth depends on factors, including the recipient country’s policies, institutions, and governance.

Question 3

Draw two simple versions of the Solow growth model in which a
temporary inflow of foreign aid may have permanent effects on the level of income
per capita.

Answer 3

According to Solow model:
- foreign aid can have a permanent effect on the level of income pr. capita if it increases the capital stock or reduce the population growth in the recipient country.

Question 4

Please explain how Galiani et al. (2017) identifies exogenous changes in foreign aid to 38 recipient countries.

Answer 4

Galiani wants to identify exogenous changes in foreign aid by exploiting the income thresholds for aid allocation across countries.

Methodology: They use a difference-in-differences approach combined with instrumental variables to estimate the impact of changes in aid on economic growth.

Natural expirement