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American Economic Review: Vol. 89 No. 3 (June 1999)

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Aid, Nontraded Goods, and the Transfer Paradox in Small Countries

Article Citation

Yano, Makoto, and Jeffrey B. Nugent. 1999. "Aid, Nontraded Goods, and the Transfer Paradox in Small Countries." American Economic Review, 89(3): 431-449.

DOI: 10.1257/aer.89.3.431

Abstract

This paper constructs a model of the transfer paradox for a small open economy with nontraded goods. It demonstrates that increased production of nontraded goods can change their domestic price so as to offset the otherwise beneficial effect of aid and, under certain conditions, to create a transfer paradox even in a small country. The model is estimated with time-series data for 44 aid-dependent countries for the period 1970-90. The results support the model and show that the nontraded goods expansion effect is more likely to cause immiserization than Harry G. Johnson's (1967) tariff-distorting export-displacement effect.

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Authors

Yano, Makoto (Keio U)
Nugent, Jeffrey B. (U Southern CA)

JEL Classifications

O19: International Linkages to Development; Role of International Organizations
F35: Foreign Aid
F43: Economic Growth of Open Economies


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