The Possibility of Recipient-harming, Donor-benefiting Transfers with More than Two Countries

The effects of an intercountry transfer of purchasing power were first prominently discussed by Keynes (1929) and Ohlin (1929) in a debate concerning the secondary effects of such a transfer. In subsequent years several economists, including Pigou (1932), Metzler (1942), Samuelson (1952, 1954) and Johnson (1955), joined the debate. Throughout this debate, these writers all agreed that the transferor, or donor, would suffer a net burden from the transfer, the only point of contention being the direction of any secondary effect on the donor’s welfare. On the other hand, Leontief (1937) constructed a two-country example where the secondary improvement in terms of trade for the donor overwhelmed the initial burden of that country, so that welfare increased with the transfer. Samuelson (1947), however, argued that the dynamics of the Leontief example are incorrect, noting that his result ‘can only happen for a system in which an increase in demand for a commodity lowers rather than raises its price’ (1947, p. 29). It is formally shown in Postlewaite and Webb (1980) that for the twocountry case if there is a transfer which simultaneously benefits the donor and harms the recipient relative to the competitive equilibrium associated with the original initial endowment, then there must be multiple equilibria after the transfer where one of the competitive equilibria after the transfer does not give the counter-intuitive result. Balasko (1978) uses differential