Welfare effects of tied food aid

Abstract

An important part of the overall U.S. aid program is Public Law 480 food aid. The design of the program seeks to satisfy numerous and often conflicting objectives. Several constraints have been placed on the use by recipient countries of that aid to insure that the intentions of the program are achieved. This paper examines the implications for recipient country welfare of both the traditional and the proposed restrictions on PL480 aid. It also seeks to clarify the interpretation of empirical work on the effects of this aid. It is shown that the net value of such commodity tied aid is simply the grant component of the subsidized sale and may easily be realized by substituting food aid imports for commercial imports. Restrictions which prevent aid recipients from doing so are costly to the recipient and could lead even to immuserization. Empirical evidence obtained by others is consistent with the notion that such restrictions are circumvented, where possible, by food aid recipients. The results presented indicate that a ‘Schultzian’ disincentive effect is characteristic of a closed economy. Typical interventions on the part of recipient country governments do not effectively reclose the economy. Hence, open economy models are more appropriate frameworks for evaluating the effects of PL480 aid.