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About the Editor: Sajal Lahiri is the Vandeveer Professor of Economics at the Southern Illinois University – Carbondale; has worked as consultants to the FAO, IFAD, and the World Bank; has written extensively in top economics journals on issues related to development in general and to foreign aid in particular.

The importance of foreign aid cannot be overstated.¹ Unprecedented integration of the world economy in recent years has brought the issue of poverty back in the policy debate at the international level. Some of the recent initiatives such as the United Nation's Millennium Development Goals and the report by the Africa Commission (set up by the British Prime Minister Tony Blair) which was discussed at length at G8 meetings, recognize this fact. The analysis of foreign aid is however fraught with controversies and paradoxes. This applies to both the theoretical and the empirical literature. There are two broad strands in the literature. First, in international trade theory, researchers have examined the welfare effects of foreign aid and, in particular, if aid can be donor-enriching and recipient-immiserizing – the so-called Transfer Paradox.² The main mechanism here is via changes in the international terms of trade. The primary benefit (loss) to the recipient (donor) can be offset by a secondary loss (gain) because of deterioration (improvement) in the international terms of trade. More recently, a number of studies have examined the possibility of strictly Pareto improving foreign aid, i.e., situations where both the donor and the recipient are better off as a result of the transfer.

We construct a specific-factor trade-theoretic model for two small open economies that are in conflict with each other and where war efforts are determined endogenously. War efforts involve the use of soldiers and imported military hardware. The purpose of war is to capture disputed land or some other resource, but with war lives are lost and production is sacrificed. In this framework, we examine the effect of foreign aid on the war efforts in the warring countries. We find, inter alia, that an increase foreign aid to the warring countries may increase war efforts when arms protect lives in a significant way.

We develop a 2×2×2 model of international trade in which one of the sectors is oligopolistic. The oligopolistic sector consists of a given number of a priori identical firms belonging to one of the two countries, but some deciding to locate in the other country so as to realize higher profits. If a firm locates in the foreign country, its technological capability is assumed to go down due to the alien environment. In this framework we examine the effect of the environment on the level of foreign direct investment and on factor prices in the two countries.

We examine the effect of borrowing constraint facing new immigrants on the process of their assimilation in the new society. We shall do so in a two-period model. In period 1, immigrants invest, with some costs to them, in trying to assimilate. The probability of success in this endeavor depends on the amount invested and also on the level of the provision of a “public” good paid for by lump-sum taxation of “natives”. Those who succeed enjoy a higher level of productivity and therefore wages in period 2. The level of investment is endogenously determined. Assimilation also affects remittances by immigrants. Given this framework, we examine the effect of public support on the degree of assimilation and income repatriation. We do so under two scenarios regarding the credit market facing new immigrants. In the first, they can borrow as much as they want in period 1 at an exogenously given interest rate. In the second scenarios, there is a binding borrowing constraint. We compare the equilibrium under the two scenarios.

This chapter investigates how international trade affects pollution using annual data from 34 Asian countries for the period 1970–2019. Following the work of Antweiler, Copeland, and Taylor (2001), the authors divide the impact into three effects – scale, technique, and composition effects. The scale of economic activity drives pollution demand. The technique effect reflects increased willingness to bear the costs of abating pollution as a country gets more prosperous because of increased international trade. International trade changes the composition of output in a country and therefore the level of pollution as different goods are produced with different pollution intensities. This is called the composition effect. This chapter measures pollution using carbon dioxide emissions (metric tons per capita) obtained from the United States Energy Information Administration. This study estimates a regression model that provides estimates of the magnitudes of trade’s impact on pollution as per the aforesaid three effects. The authors find that the scale and the composition effects of pollution are positive, but the technique effect is negative, and that the net effect is negative (international trade leads to a lower level of emission) when the underlying model is linear, but it is positive (international trade leads to a higher level of emission when non-linearities are considered).

The paper discusses various important issues of development aid in the context of the emerging new landscape for Official Development Assistance (ODA) and in particular how aid effectiveness issues are now perceived in a world of scaled-up aid. The paper also discusses the overall nexus between aid, growth and domestic policies in aid-recipient countries by reflecting on the relevant ongoing debate in this area. A substantial part of the paper is devoted to the discussion of the central issues involved in development aid, particularly in connection with recent calls in the international development community for scaling-up aid so that the Millennium Development Goals can be attained, as well as the challenging new policy agenda in this regard.