Foreign aid, the environment, and welfare

Using a two-country, general equilibrium model with environmental goods, th is paper examines the welfare effect of tying aid to environmental clean-up . Because of the gain resulting from environmental clean-up, tied aid can r ead to a win-win situation, i.e., Pareto improvement, for both donor and re cipient countries despite the presence of a terms-of-trade deterioration. H owever, if the environmental gain is small, the paradoxical result of donor enrichment and recipient immiserization can occur. Furthermore, the condit ions for transfer caused normal welfare effects, i.e., donor immiserization and recipient enrichment, are identified and interpreted. (C) 1999 Elsevie r Science B.V. All rights reserved. JEL classification: O10; Q28; F10.