Foreign aid, economic globalization, and pollution

Victor Menaldo. “Foreign Aid, Economic Globalization, and Pollution (with Sijeong Lim and Aseem Prakash)". Policy Sciences. vol. 48, no. 2, 2015, pp. 181-205.

This paper explores how trade and foreign direct investment (FDI) conditionthe effect of foreign aid on environmental protection in aid-recipient countries. We suggestthat (1) environmental protection should be viewed as a public good and (2) all else equal,resource flows from abroad (via aid, trade, and FDI) influence governments’ incentives toprovide public goods. (3) Because these resources shape governments’ incentives differ-ently, their interactive effects should be examined. We begin with the assumption thatdeveloping country governments seek some optimal level of environmental protection, alevel conditioned by their factor-intensive growth phase. We hypothesize that at low levelsof export receipts or FDI inflows from the developed world, foreign aid is associated withsuperior environmental protection. This is because foreign aid, as an environmentallyneutral addition to revenue, allows recipient governments to partially relax the trade-off between economic growth and environmental protection. As levels of export receipts orFDI inflows from the developed world increase, however, the salutary effect of foreign aidwill diminish and eventually be reversed. This is because foreign aid mitigates the recipientgovernment’s dependence on traders and investors in the developed world, and concom-itantly reduces their pro-environmental policy leverage. Our analysis of 88 aid recipients,for the period 1980–2005, lends support to our argument.

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