Foreign Aid, Government Spending, and the Environment

Abstract

Using an endogenous growth model, this paper examines the growth and welfare effects of the allocation of foreign aid in the recipient economy. As public inputs are a productive factor, a rise in the allocation of aid to the public inputs increases growth and hence the welfare of the economy. However, raising the ratio of aid to pollution abatement may not help an economy, because it crowds out public inputs. Since public inputs are also partly financed by income taxation, the welfare‐maximizing income tax rate is larger than the growth‐maximizing rate, because a portion of the aid constitutes a lump‐sum transfer and can increase household consumption and hence welfare.

The Impact of Foreign Aid Linked to Infrastructure and Pollution Abatement

“…In this paper we extend the analysis of Chatterjee and Turnovsky () and Chao et al () in three ways. First, we consider different policies for the recipient country's decision on how to distribute its public expenditure between infrastructures and pollution abatement.…”

“…Chao et al () study the long‐run effects of transfers tied to both infrastructure and pollution abatement for a Cobb–Douglas production function. They find that a raise in the ratio of aid that is used for pollution abatement (infrastructure) decreases (increases) the growth rate and, hence, welfare.…”

“…Economides and Philippopoulos, ; Barman and Gupta, ; Nguyen‐Van and Pham, ), and little attention is given to the link between environmental policies, economic growth and foreign aid in dynamic equilibrium models . An exception is Chao et al () who examine the long‐run growth and welfare effects of the allocation of aid in the recipient economy. Considering a Cobb–Douglas production function, they find that raising the allocation of aid to infrastructure increases growth and welfare, while aid tied to pollution abatement may not be growth‐enhancing, and hence welfare‐enhancing, because it crowds out public inputs.…”

“…This allows us to account for the current controversy about the complementarity or substitutability of public and private investments in developing countries, because both crowding‐in and crowding‐out effects of public investments on private investments in developing countries appear to be observed (see Atukeren, ) . With regard to the type of transfers, in addition to untied aid we also consider aid that may be allocated to infrastructure and/or pollution abatement, as in Chao et al (). The question of whether to tie aid to specific uses, and to what extent, is also empirically relevant.…”

Are retailers “bagging” the carrier bag levy in England? An exploratory enquiry

“…The theoretical foundation of environmental taxation is rooted in the works of Pigou (1920). This was then followed by many studies which explored environment charges and taxation in different contexts such as fuel and energy (Bourgeon and Ollivier 2012;Miranda and Hale 2002; Saelen and Kallbekken 2011), climate change (Feng et al 2010), carbon emissions (Ekins and Barker 2001), and foreign aid (Chao et al 2012). These studies concur on the benefits of using taxes to render individuals and institutions alike directly accountable toward the environment.…”