The Impact of Foreign Aid Linked to Infrastructure and Pollution Abatement

Abstract

This paper studies the macroeconomic effects of foreign aid taking into account environmental quality. We develop a dynamic equilibrium model in which public investments in both infrastructure and pollution abatement can be co-financed using domestic resources and international aid. We consider untied aid, aid fully tied to either infrastructure or abatement and aid equally tied to both expenditures. We find that when the extent to which agents are affected by environmental problems is taken into account, then, regardless of the chances of substitution between factors, transfers linked to both infrastructure and pollution abatement may be the best welfare-enhancing alternative.

An Empirical Analysis of the role of Institutional Quality in the Relationship between Foreign Development Assistance and Environmental Degradation in Developing Countries

“…On the contrary, a percentage increase in the quality of institutions will reduce the level of environmental degradation by about 0.24% in these countries. These findings are consistent previous empirical studies related to foreign aid and the environment (see Barañano & San Martín, 2015;Schweinberger & Woodland, 2008). It is important to state that the model passed all the necessary diagnostic tests to ascertain the reliability of the results.…”

“…Recently, several further research studied the macroeconomic effects of foreign aid while taking environmental quality into account. For example, Barañano and San Martín (2015) formulated a dynamic equilibrium model in which domestic and international resources can be used to co-finance public expenditures in infrastructure and pollution abatement. They analyzed four possibilities for assistance allocation: aid that is not related to infrastructure, aid that is wholly tied to abatement, and aid that is equally tied to both expenditures.…”

“…Additionally, foreign transfers must take into account the recipient countries' unique fiscal policies. They concluded that, in the majority of cases, aid that is not linked to pollution abatement programmes results in the lowest welfare gains, as these transfers improve environmental quality but have no effect on growth (Barañano & San Martín, 2015).…”

“…Most recipient countries are assumed to not have the required financial strength to meet development obligations and the cost of environmental abatement simultaneously, hence the need to be assisted by wealthier countries. Empirically, previous studies have considered the contribution of foreign aid to environmental sustainability (see, for example, Barañano & San Martín, 2015;Schweinberger & Woodland, 2008;Chao & Yu, 2000;Lahiri et al 2002). Schweinberger and Woodland (2008) and Naito (2003) examined the effectiveness of foreign aid in mitigating pollution.…”

Pollution in a globalized world: Are debt transfers among countries a solution?

“…The literature has also questioned the characteristics of international transfers to protect the environment to see whether donor countries should prioritize technology transfers oriented toward mitigation or adaptation (Barañano & San Martín, 2015; Sakamoto et al, 2017). A related literature considers the interplay between environmental policy and development aid transfers in low‐income countries and conclude that these transfers are in general ineffective (Bretschger & Suphaphiphat, 2014; Eyckmans et al, 2016).…”