The Welfare Analyses of Aid Tied with Tariff Wedge Adjustment

A general equilibrium model is established to analyze the effect of foreign aid tied with tariff wedge adjustments on economic welfare. The welfare effect of foreign aid depends on whether the government rebates tax revenue to households. I show that foreign aid tied with tariff wedge adjustment may immiserize the recipient country only if the government doesn¡¦t rebate tax revenues to households or if the increase of the tariff wedge of the imported goods over exported goods is too large.