Tying of Aid to Trade Policy Reform and Welfare

This paper considers the welfare effect of foreign aid when the recipient country has protectionist policy in the form of tariffs in place and aid is tied to the reduction of tariffs. It is shown that in a two country framework such aid cannot give rise to the well known transfer paradox. In the presence of a third country, we derive a necessary condition for donor enrichment and a necessary and sufficient condition for recipient immiserisation. It is shown that, although our type of tied aid can increase global welfare, strict Pareto improvement is impossible.