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

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  • Chi-Chur Chao
  • Jean-Pierre Laffargue
  • Pasquale M. Sgro

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. Copyright © 2010 Blackwell Publishing Ltd.

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  • 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.
  • Handle: RePEc:bla:reviec:v:18:y:2010:i:3:p:454-464
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    1. Simplice Asongu, 2016. "Reinventing Foreign Aid For Inclusive And Sustainable Development: Kuznets, Piketty And The Great Policy Reversal," Journal of Economic Surveys, Wiley Blackwell, vol. 30(4), pages 736-755, September.
    2. Simplice Asongu, 2014. "Reinventing foreign aid for inclusive and sustainable development: a survey," Working Papers 14/033, African Governance and Development Institute..
    3. Chen, Ping-ho & Lai, Ching-chong & Chu, Hsun, 2016. "Welfare effects of tourism-driven Dutch disease: The roles of international borrowings and factor intensity," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 381-394.

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