Unconditional Aid and Green Growth

Moutaz Altaghlibi and Florian Wagener
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Moutaz Altaghlibi: University of Amsterdam, the Netherlands, and Université Paris 1 Panthéon-Sorbonne, France

No 16-037/II, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Environmentally motivated aid can help developing countries to achieve economic growth while mitigating the impact on emission levels. We argue that the usual practice of giving aid conditionally is not effective, and we therefore study aid that is given unconditionally. Our framework is a differential open-loop Stackelberg game between a developed country (leader) and a developing country (follower). The leader chooses the amount of mitigation aid given to the follower, which the follower either consumes or invests in costly nonpolluting capital or cheap high-emission capital. The leader gives unconditional mitigation aid only when sufficiently rich or caring sufficiently about the environmental quality, while the follower cares about environmental quality to some extent. If aid is given in steady state, it decreases the steady state level of high-emission capital and capital investments in the recipient country and the global pollution stock, but it has no effect on the levels of non-polluting capital and non-polluting investments. It accelerates the economic growth of the follower; this effect is however lower than what static growth theory predicts since most of the aid is consumed. Moreover, we find that the increase in growth takes place in the nonpolluting sector.

Keywords: Development aid; Green growth; Conditionality; Open loop Stackelberg equilibrium (search for similar items in EconPapers)
JEL-codes: O13 Q56 (search for similar items in EconPapers)
Date: 2016-05-17
New Economics Papers: this item is included in nep-dev, nep-ene, nep-env, nep-gro and nep-res
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Journal Article: Unconditional aid and green growth (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20160037

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