Foreign Aid Linked to Infrastructure and/or Pollution Abatement

Ilaski Barañano () and Marta San Martín Lizarralde

No 11751, IKERLANAK from Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I

Abstract: This paper studies the macroeconomic effects of a permanent increase in foreign aid in a model that takes into account environmental quality. We develop a dynamic equilibrium model in which both public investment in infrastructure and environmental protection can be financed using domestic resources and international aid programs. The framework considers four scenarios for international aid: untied aid,aid fully tied to infrastructure, aid fully tied to abatement, and aid equally tied to both types of expenditures. We find that the effects of the transfers may depend on (i) the structural characteristics of the recipient country (the elasticity of substitution in production and its dependence on environment and natural resources) and on (ii) how recipient countries distribute their public expenditure. These results underscore the importance of these factors when deciding how and to what extent to tie aid to infrastructure and/or pollution abatement.

Keywords: foreign aid; environment; infrastructures; endogenous growth (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:ehu:ikerla:11751

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