Commodity aid, borrowing and employment in a small open economy

The thesis consists of three essays that examine how a small open economy responds to international transfers in the form of commodity aid and borrowing. The first essay develops a model to examine the effects of food aid on labor employment, food security and aggregate welfare in recipient countries. The model suggests that when firms pay efficiency wages to induce effort, the effects of food aid on labor employment, food security and aggregate welfare depend on the method of disbursement. In particular, it shows that when food aid is used to finance infrastructure development (project food aid) it has no labor disincentive effects in the food industry and increases food security. However, when food aid is distributed to consumers free of charge (non-project food aid) the model predicts that such aid creates labor disincentive effects in the food industry and decreases food security. Under both methods of distribution, the effect of food aid on aggregate welfare is ambiguous. The second essay tests the predictions of the model in the first essay using pooled time-series and cross-section data for eleven developing countries, spanning the period 1976-1993. Results from this empirical study provide some support for the proposition that project food aid increases food security while non-project food aid decreases food security. The third essay develops a model that provides an explanation for the observation that the unemployment rate and the export-GNP ratio are positively correlated with external indebtedness across developing countries. The central idea of this essay is that international borrowing affects unemployment and specialization patterns by unevenly changing the risk-sharing structure across sectors between firms and workers.