Capital Utilization, Economic Growth and Convergence

Economic growth, capital utilization, speed of convergence, depreciation

Tied Versus Untied Foreign Aid: Consequences for a Growing Economy

This paper contrasts the effects of tied and untied foreign aid programs on the welfare and macroeconomic performance of a small open economy. We show that the acceptance of tied aid inevitably obligates the recipient economy to undertake certain internal structural adjustments, and the flexibility it possesses to undertake these adjustments eventually determines the effectiveness of the aid program. The economic consequences of tied and untied aid programs, their relative merits from a welfare standpoint, and the transitional dynamics depend crucially upon several characteristics of the recipient economy that summarize this flexibility. These include: (i) the costs of installing public capital relative to private capital (intertemporal adjustment costs), (ii) the substitutability between factors of production (intratemporal adjustment costs), (iii) the flexibility of labor supply (work effort), (iv) the recipient's degree of access to the world financial markets (capital market imperfections), and (v) the recipient's opportunities for co-financing infrastructure projects by domestic resourcesForeign aid, International transfers, Economic growth, Public investment

Infrastructure Provision and Macroeconomic Performance

Behavioral differences between economies where infrastructure is privately provided and where the government is the sole provider are examined in the context of a growing economy. The choice between private and public provision generates differences in the private sector\u27s ability to internalize capital utilization decisions and market prices along the equilibrium path. This in turn has a crucial impact on the effects of fiscal policy on resource allocation and welfare in each regime. If the government wants to stimulate infrastructure investment, a subsidy to private providers yields significantly higher welfare gains than an equivalent increase in direct government investment, even with lump-sum tax financing. On the other hand, an income tax is more distortionary under private than under government provision. In designing optimal fiscal policy, while a constant income tax-infrastructure subsidy combination is jointly required to attain the first-best equilibrium under private provision, the optimal income tax rate must be time-varying under government provision