Foreign Aid,Wage Inequality,and Welfare for a Small Open Economy with Tourism |
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| Authors: | Chi‐Chur Chao Jean‐Pierre Laffargue Pasquale M Sgro |
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| Institution: | 1. Chinese University of Hong Kong, Hong Kong;2. University of Paris I and CEPREMAP, Paris, France;3. Faculty of Business and Law, Deakin University, Australia;4. We thank two anonymous referees for helpful comments. Any remaining errors are ours. The work described in this paper was supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project no. CUHK 441007). |
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| 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. |
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