Unconditional aid and green growth

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 fully developed leader country and a developing follower country. The leader chooses the amount of mitigation aid given to the follower, which the follower either consumes or invests in either costly non-polluting capital or cheap high-emission capital. We show that giving aid conditionally is only rarely effective and, if so, is based on a forced intertemporal savings effect. In all other cases it is ineffective at best and counterproductive at worst. Moreover, we find that the leader gives unconditional mitigation aid only when sufficiently rich or when caring sufficiently about environmental quality. If unconditional aid is given in steady state, it decreases the steady state level of high-emission capital and capital investments in the recipient country as well as the global pollution stock, but it has no effect on the levels of non-polluting capital and non-polluting investments. Transitional aid accelerates the economic growth of the follower. Moreover, we find that the increase in growth takes place in the non-polluting sector.