Essay on Does Bilateral Aid Benefit the Country's Economy?

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1.1 Description of foreign aid

Foreign aid is a relatively simple thing to understand. It is essentially the idea that when a foreign economy is struggling, developing nations can aid the growth of said economy by providing them with some sort of capital. Foreign aid can exist through the mediums of goods, services or financial assistance. Since its inception post World War 2, foreign aid is seen as a staple in the modern world when moving towards a more centralized market throughout the world. It has been though that it increases the relationship of those involved in it, creating stronger ties with foreign economies and facilitating the expansion of the global economy. These were the original ideas that were used to promote the idea of
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To do this, several different works from different fields will be assessed. Jeffery Sachs (2005) The End of Poverty identifies this problem using classic economic development models, primarily the Solow model of economic growth. Easily enough explained, the Solow growth model essentially states that there is a steady state of economic growth that a country will converge to over time. After shocks to the economy the country will always converge to this steady state level of growth. In the long run, this steady state is known as the golden rule steady state, in which a country cannot achieve a higher growth rate without sacrificing some part of their economy. But, within this growth model, there is a hindering factor for developing nations known as the poverty trap. The poverty trap model shows that any country with a significant amount debt or scarcity will never be able to converge on to the steady state of development without a significant shock to the economy. It was once thought that foreign aid was the best way to end this but Sachs (2005) showed that financial assistance can only ever be a temporary measure and that after the aid is gone, an impoverished country will once again converge to the poverty trap state. Erick Lal (2005) Why Foreign Aid Doesn’t Work Takes this idea a step further. Lal provides evidence to show that the reason these countries re-converge to their poverty states is that the

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