Foreign Aid, Illegal Immigration, and Host Country Welfare

• Author: Jonathan Munemo,Dustin Chambers,Subhayu Bandyopadhyay
• Published date: 01 May 2014
• DOI: http://doi.org/10.1111/rode.12090
• Date: 01 May 2014

Foreign Aid, Illegal Immigration, and Host

Country Welfare

Subhayu Bandyopadhyay, Dustin Chambers, and Jonathan Munemo*

Abstract

This paper analyzes the effect of foreign aid on illegal immigration and host country welfare using a general

equilibrium model. It shows that foreign aid may worsen the recipient nation’s terms of trade. Furthermore,

it may also raise illegal immigration, if the terms of trade effect on immigration flows dominates the other

effects identified in our analysis. Empirical analysis of the effect of foreign aid on illegal immigration to the

USA broadly supports the predictions of our theoretical model. Foreign aid worsens the recipient’s terms

of trade. While the terms of trade effect tends to reduce illegal immigration, countervailing effects are

found to dominate. The paper contributes to the related literature by establishing that there are unintended

consequences of foreign aid and, while some of them are reminiscent of the classical transfer problem,

others are new and arise as a result of endogenous illegal immigration flows.

1. Introduction

The USA increasingly relies on both border and internal enforcement measures to

curb the rise of illegal immigrants from Mexico, and Central and South America.1

Figure 1 chronicles these intensified efforts along the USA–Mexico border. Since the

passage of the Immigration Reform and Control Act (IRCA) in 1986, the number of

Border Patrol agents has tripled, the use of high-tech equipment such as unmanned

spy planes with infrared cameras has become routine, and a 15 foot high fence span-

ning 700 miles of the Mexican border is currently under construction. In addition to

intensified border enforcement, internal enforcement efforts punish firms that employ

illegal workers.

However, tougher enforcement at the border and workplace have failed to control

illegal immigration. Numerous studies, such as Todaro and Maruszko (1987) and

Faini and Venturini (1993), reach the conclusion that the most effective way of con-

trolling illegal immigration is to promote development in the source nations of illegal

immigrants. While the literature on foreign aid continues to grow,2the effects of

foreign aid on illegal immigration has received less attention. Some notable excep-

tions are the papers by Gaytan-Fregoso and Lahiri (2000), Myers and Papageorgiou

(2000), and Djajic (2007). However, none of these studies consider the effect of aid on

the terms of trade of recipient nations, which also affects illegal immigration.

This paper considers the effect of foreign aid on illegal immigration and host

country welfare when the commodity terms of trade are endogenous. We build a

general equilibrium model with two countries (a donor/host country and a recipient)

* Bandyopadhyay: Research Division, Federal Reserve Bank of St. Louis, PO Box 442, St. Louis, MO

63166, USA. Tel: +1-314-444-7425; Fax: +1-314-444-8731; E-mail: bandyopadhyay@stls.frb.org. Chambers

and Munemo: Department of Economics and Finance, Salisbury University, 1101 Camden Ave., Salisbury,

MD 21801, USA. The authors are grateful to seminar participants at Lehigh University. We alone are

responsible for any errors. Any opinions, findings, and conclusions or recommendations are solely those of

the authors and do not necessarily reflect the view of the Federal Reserve Bank of St. Louis, and the

Federal Reserve System.

Review of Development Economics, 18(2), 372–385, 2014

DOI:10.1111/rode.12090

© 2014 John Wiley & Sons Ltd