Political Stability and Foreign Aid on Economic Growth with Reference to Overlapping Generations Model:

AN ANALYSIS

Abstract

In a developing economy, the impact of foreign aid could have different implications depending on the political stability of the country. Viewed through an Overlapping Generations Model of two periods, we observe the effects of a one-time foreign aid on economic growth of the country. It is seen that political stability plays a major role in the future growth. A politically stable country has the incentive to invest the aid received into enhancing future production. However, a politically unstable country would find it more opportune to spend the aid on current consumption and thereby reducing potential future growth.