Foreign Aid, Wage Inequality and Welfare for a Small Open Economy with Tourism

Chao Chi-Chur, Jean-Pierre Laffargue () and Pasquale Sgro ()
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Chao Chi-Chur: CUHK - The Chinese University of Hong Kong [Hong Kong]
Jean-Pierre Laffargue: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: While the welfare effect of foreign aid has been extensively analyzed, the impact on the distribution of income has received less attention. At the same time, there has been recent work on tourism where it is complementary to aid in improving welfare. By combining these two strands, this paper concentrates on wage inequality in developing countries. We find that an increase in aid in the form of tied aid can lower the relative price of nontraded goods. The rent extracted from tourists declines, reducing welfare of domestic residents. In addition, the fall in the nontradable price can widen the wage inequality between skilled and unskilled workers. Thus, increased foreign aid may have detrimental effects on national welfare and the distribution of income. Rising wage inequality is confirmed by numerical simulations.

Keywords: tourism; income distribution; international economic assistance; wages; welfare economics (search for similar items in EconPapers)
Date: 2010-08
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Published in Review of International Economics, 2010, 18 (3), pp.454-464. ⟨10.1111/j.1467-9396.2010.00906.x⟩

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Journal Article: Foreign Aid, Wage Inequality, and Welfare for a Small Open Economy with Tourism (2010)
Working Paper: Foreign Aid, Wage Inequality and Welfare for a Small Open Economy with Tourism (2010)
Working Paper: Foreign Aid, Wage Inequality and Welfare for a Small Open Economy with Tourism (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00642089

DOI: 10.1111/j.1467-9396.2010.00906.x

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