The short and long run effects of tied foreign aid on pollution abatement, pollution and employment: A pilot model

There exists in the literature a presumption that tied foreign aid can be used effectively to reduce cross-border pollution. Focusing, in contrast to the received literature, on the interaction between the public and private provisions of pollution abatement in the recipient country, we question the effectiveness of tied foreign aid in reducing pollution. In this context, we obtain many novel and policy relevant insights. Allowing for changes in labour employment and distinguishing between short and long run effects, tied foreign aid is shown to crowd out the private provision for pollution abatement in the short run. In the long run, tied foreign aid raises employment and therefore may be desirable for the recipient but undesirable for the donor country because it also raises pollution. The results change drastically if only the government provides pollution abatement.