The authors are deeply indebted to the two anonymous referees for the constructive suggestions and insightful comments. Any remaining errors are the authors' responsibility.
Foreign Aid, Government Spending, and the Environment
Article first published online: 16 JAN 2012
© 2012 Blackwell Publishing Ltd
Review of Development Economics
Volume 16, Issue 1, pages 62–71, February 2012
How to Cite
Chao, C.-C., Hu, S.-W., Lai, C.-C. and Tai, M.-Y. (2012), Foreign Aid, Government Spending, and the Environment. Review of Development Economics, 16: 62–71. doi: 10.1111/j.1467-9361.2011.00646.x
- Issue published online: 16 JAN 2012
- Article first published online: 16 JAN 2012
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.