A Model of Aid Impact in Some South Pacific Microstates

Abstract

This paper investigates the impact of foreign aid on the economic structure of therecipient economy using a two-sector general equilibrium model. Underlying assumptions aredesigned to mirror a number of stylized facts about a group of South Pacific microstates known asMIRAB countries. Two variants of the model are constructed to reflect these countries’ unequalaccess to overseas labor markets. Qualitative results reveal the likelihood of a structuraltransformation of the economy akin to that known as Dutch Disease, namely the relativecontraction of the tradables sector. Quantitative results confirm the plausibility of this outcome.