The Effects of Foreign Aid on Government Policies: Theoretical and Empirical Analyses
Chapter 1 develops a two-period general equilibrium trade-theoretic model to examine if foreign aid discourages the recipient countries from pursuing trade liberalization. In the model, foreign aid is given to the recipient in period two and its amount is negatively related to the period-one real income. The recipient optimally chooses a tariff on imports. It can also choose domestic investment endogenously in period one, and this choice has an important bearing on our main result. We consider two variants of the model depending upon whether the recipient can or cannot have access to international borrowing. In the case without international borrowing, when domestic investment is exogenous, optimal tariff is zero. In contrast, when domestic investment is endogenous, optimal tariff is positive. This positive optimal tariff is induced by the link of aid negatively to the period-one real income. In the case with international borrowing, even though domestic investment is exogenous, optimal tariff is positive. But the reason for the positive tariff is its beneficial effect on an improvement in the terms-of-trade of international borrowing. When, in addition, domestic investment is endogenous, the tying of aid increases positive optimal tariffs further. Chapter 2 develops a microeconomic model of health policies and the optimal allocation of health aid in a poor recipient country. In the model, each poor household in the country chooses the optimal number of sick children taken to hospitals to maximize its lifetime utility. There are three policy options for policymakers to improve public health: raising the quality of health care, providing more preventive care and reducing the cost of health care. We examine how three policy options influence the optimal number of sick children who are medically treated. Also, the country's health authority allocates health aid for three policy options to support poor households' lifetime utility maximization. We find that more health aid should be allocated for cost reduction in health care so as to help poor households maximize their lifetime utility. Chapter 3 primarily examines the hypothesis that there is heterogeneity in health aid, that is, different types of health aid work differently for health outcomes in aid-recipient countries. In order to test our hypothesis, we first disaggregate health aid per capita data into three policy options: health aid per capita for improving the quality of health care, health aid per capita for providing preventive care and health aid per capita for reducing the cost of health care. Then, we empirically examine the effects of disaggregated health aid on three different health indicators: child mortality, life expectancy and death rate. Using a panel data set of 119 aid-recipient countries from 1975 and 2010, we find supporting evidence for the hypothesis of heterogeneity in health aid. We find no empirical evidence of the beneficial effects of health aid on reducing child mortality. In contrast, we find that an improvement in life expectancy and a reduction in death rate are driven mostly by health aid for reducing the cost of health care. We also find that there is heterogeneity in the allocation of health aid. Health aid for preventive care and the cost reduction of health care is allocated by the needs of the recipients. However, more health aid for the quality of health care flows to countries with better health status.
Foreign Aid, Global Health, Trade Liberalization
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