Africa Midterm Brian Cabrera Answers

Africa Midterm Brian Cabrera Answers - Brian Cabrera...

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Brian Cabrera Midterm for: Africa in the World Economy Fall 2011 1. Did foreign aid get poor countries out of a “poverty trap”? Discuss your answer relative to the original model of economic growth that predicted that aid would have a strong effect on growth (and thus escape from the poverty trap). Foreign aid definitely did take part in getting poor countries out of a “poverty trap.” It is no coincidence that countries experiencing greater per capita growth rates require less amounts of foreign aid. A quarter of countries with the highest foreign aid (approximately 16% of National income) are the same countries experiencing the lowest per capita income rates (approximately 3.5%). The issue at hand is how the foreign aid is distributed. There is no doubt that additional income a country receives alleviates its economical burdens, but exactly how much of the funds are allocated to investment? This is definitely a blurry part of foreign aid. There is a reason why the countries that have higher per capita rates are the same countries receiving the least amount of foreign aid. These countries were therefore released from the infamous “poverty trap.” The whole concept behind the “poverty trap” illustrates the simple notion that if one is born into poverty, one does not have room to increase capital because the income produced is only enough to be self-sustained. The poverty trap model demonstrates that the impoverished cannot attain greater capita levels because there is not a reasonable amount of income that can be saved. The poverty trap model demonstrates the fact that savings is proportional to investment. I believe that a combination of foreign policy reforms from rich world nations can indeed play an integral role in helping Earth's extremely poor societies gain the boost in wealth needed to enter the second stage of development. Each of these elements supports the other in giving aid a central role. The poverty trap means that aid is necessary because otherwise countries will stay
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poor forever, and foreign aid is a way to escape the poverty trap. A possible complicating mechanism for assessing the poverty trap is that poor countries may be poor because of bad policies and institutions poverty trap rather than bad government that explains poor growth of low income countries and the failure to make progress towards it. It is easy to put these poverty trap ideas in the context of the neoclassical model. In the classic Solow model in which all countries have the same steady state, all countries converge to a high level of income. However, if saving is low at low compared to high income, if there are increasing returns at low income, and/or if population growth becomes very high at low income, then a poverty trap will occur at low income, driving the equilibrium down to low or zero capital (whether low or zero depends on the shape of the curves, zero capital is presumably equivalent to subsistence production). There is a threshold capital stock above which countries could escape
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Africa Midterm Brian Cabrera Answers - Brian Cabrera...

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