Transfers: more than a balance-of-payments problem

The appendix of the preceding chapter discussed over- or undereffected transfers, that is whether or not there is excess demand or supply at given prices, which results in a secondary burden if markets have to clear. The initial motivation for this research was the fear that transfers could lead to serious balance-of-payments difficulties in the donor country. After World War II this issue became less important, although it was still in the mind of many economists; see, for example, Johnson (1955, 1956). The dominant reason for making international transfers is no longer war reparations payments but development assistance. The old colonial powers feel obliged to help their former colonies and other less developed countries on the path to development. The relevant question with respect to the effects of international transfers therefore shifts from whether or not the donor has difficulties in financing the transfer to whether or not the recipient benefits from the gift. A related question is, of course, what the welfare effects are for the donor.

Development aid has two basic functions: first, to give a “big push” to the developing world or, to put it differently, to set a country on the path to self-sustained growth; and second, to alleviate poverty in the receiving countries. The latter function of aid will be the main topic of this chapter. We do not define “poverty” explicitly, but assume that the poverty problem is alleviated if the recipient's welfare level rises as a result of the transfer. We therefore ignore the many (inequality) problems underlying the microeconomic foundation for this macroeconomic concept (see, however, chapter 7).