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Welfare‐Worsening Aid Flows To Small Countries: The Role of Nontraded Goods

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  • Stephen Tokarick

Abstract

This paper presents the circumstances under which foreign aid can immiserize a small, tariff‐distorted economy, highlighting the role played by the nontraded sector in generating this outcome. An inflow of aid, provided in the form of an increase in the capital stock, can reduce real income of a small, tariff‐distorted economy if: (i) the inflow results in an increase in the price of the nontraded good and the nontraded good and imports are sufficiently strong complements in demand; or (ii) if the inflow leads to a reduction in the price of the nontraded good and the nontraded good and imports are substitutes in demand, provided the degree of substitutability is not too large.

Suggested Citation

  • Stephen Tokarick, 2008. "Welfare‐Worsening Aid Flows To Small Countries: The Role of Nontraded Goods," Review of Development Economics, Wiley Blackwell, vol. 12(4), pages 818-827, November.
    • Handle: RePEc:bla:rdevec:v:12:y:2008:i:4:p:818-827
    DOI: 10.1111/j.1467-9361.2008.00447.x
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    Cited by:

    1. Chi‐Chur Chao & Jean‐Pierre Laffargue & Pasquale M. Sgro, 2010. "Foreign Aid, Wage Inequality, and Welfare for a Small Open Economy with Tourism," Review of International Economics, Wiley Blackwell, vol. 18(3), pages 454-464, August.

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