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

Author

Listed:
  • 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 des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Pasquale M Sgro

    (Deakin University [Burwood])

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.

Suggested Citation

  • Chao Chi-Chur & Jean-Pierre Laffargue & Pasquale M Sgro, 2010. "Foreign Aid, Wage Inequality and Welfare for a Small Open Economy with Tourism," Post-Print hal-00642089, HAL.
    • Handle: RePEc:hal:journl:hal-00642089
    DOI: 10.1111/j.1467-9396.2010.00906.x
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    References listed on IDEAS

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    Cited by:

    1. Asongu, Simplice, 2014. "Reinventing foreign aid for inclusive and sustainable development: a survey," MPRA Paper 65300, University Library of Munich, Germany.
    2. 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.
    3. Gnangnon, Sèna Kimm, 2020. "Aid for Trade flows and Wage Inequality in the manufacturing sector of recipient-countries," EconStor Preprints 213936, ZBW - Leibniz Information Centre for Economics.
    4. 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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