Environment and Development Economics

Table of Contents - June 2012 - Volume 17, Issue 03  

Theory and Applications

Foreign aid and oil taxes: helping the poor in oil-rich countries

Ruxanda Berlinschia1 and Julien Daubanesa2

a1 LICOS, Centre for Institutions and Economic Performance, Catholic University of Leuven, Belgium. Email: ruxanda.berlinschi@econ.kuleuven.be

a2 CER-ETH at ETHZ, Swiss Federal Institute of Technology Zurich, Zürichbergstrasse 18, 8092 Zurich, Switzerland. Tel: +41 44 632 24 27. Fax: +41 44 632 13 62. Email: jdaubanes@ethz.ch

Abstract

This paper proposes a theoretical analysis of the joint impact of foreign aid and oil taxes on the revenues of a rich oil importing country (North) and a two-class, oil exporting country (South). Without coordination, oil taxes are strictly higher in the North and the global allocation of oil is inefficient. Moreover, oil taxes in the North extract some of the South's oil rents, undoing the revenue transfers from foreign aid. We show that a policy coordination mechanism reduces inefficiencies and improves global welfare.

(Received October 29 2010)

(Revised September 04 2011)

(Accepted December 27 2011)

(Online publication March 27 2012)

Footnotes

This paper has benefited from comments by Yann Bramoullé, Christian Gollier, Patrick Gonzalez, Yolande Hiriart, Christian Kiedaish, Bruno Lanz, Pepita Miquel-Florensa, Andrew V. Perry, Gilles Saint-Paul, Sjak Smulders, Stéphane Straub and Cees Withagen, as well as by participants at the SURED 2008 conference, the Frontiers in Environmental Economics and Natural Resources Management TSE-AFSE conference, the 23rd Annual Congress of the EEA, the Economics seminar at the University of Geneva and the Matuszewski seminar at Laval University. Particular thanks go to Jean-Paul Azam and André Grimaud, and to two anonymous referees.