This paper constructs a model in which debt and aid are complementary. Specifically, the model shows how aid can be extracted from industrialized country governments by LDCs to finance debts. Policy implications for understanding debt crises are outlined. Using recent World Bank data, the fundamental equations of the model are estimated. While it is found that the model overestimates the actual amount of aid and debt, the relationship between aid, GDP and absorption; and debt, aid, GDP and absorption is of the predicted direction.
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