Development loans, poverty trap, and economic dynamics

Cuong Le Van (1, 2, 3) , Ngoc-Sang Pham (4, 5) , Thi Kim Cuong Pham (6, 7)

1 IPAG Business School
2 TIMAS, Thang Long University
3 PSE - Paris School of Economics
4 Métis Lab EM Normandie
5 EM Normandie - École de Management de Normandie
6 EconomiX - EconomiX
7 University of Paris Nanterre

This paper investigates the nexus between foreign aid (in the form of loans), poverty trap, and economic development in a recipient country by using a Solow model with two new ingredients: a development loan and a fixed cost in the production process. The presence of this fixed cost generates a poverty trap. Development loans may help the country to escape from the poverty trap and converge to a stable steady-state in the long run, but only if (i) the country's characteristics, such as saving rate, initial capital, governance quality, and in particular productivity, are good enough, (ii) the fixed cost is relatively low, and (iii) loans rule is generous enough. We also show that there is room for endogenous cycles in our model, unlike the standard Solow model.

Mots clés: Economic dynamics; economic growth; foreign aid; development loan; poverty trap

Domaines: Economies et finances; Économie et finance quantitative [q-fin]

Cuong Le Van, Ngoc-Sang Pham, Thi Kim Cuong Pham. Development loans, poverty trap, and economic dynamics. 2021. ⟨halshs-03456281⟩