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Foreign aid, wage inequality and welfare for a small open economy with tourism

journal contribution
posted on 2010-08-01, 00:00 authored by Chi-Chur Chao, J P Laffargue, Pasquale SgroPasquale Sgro
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.

History

Journal

Review of international economics

Volume

18

Issue

3

Pagination

454 - 464

Publisher

Wiley-Blackwell Publishing Ltd.

Location

Oxford, England

ISSN

1467-9396

eISSN

0965-7576

Language

eng

Notes

Article first published online: 15 JUL 2010

Publication classification

C1 Refereed article in a scholarly journal

Copyright notice

2010, Blackwell Publishing Ltd

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