JOURNAL OF ECONOMIC DEVELOPMENT 63 Volume 31, Number 1, June 2006 DOES FOREIGN AID AFFECT THE ENVIRONMENT IN DEVELOPING ECONOMIES? B. MAK ARVIN, PARVIZ DABIR-ALAI, AND BYRON LEW ∗ Trent University, Richmond University, and Trent University Preserving the environment is important from both national and international perspectives. Similarly, the provision of foreign assistance from richer to poorer nations is often seen as an imperative. However, there is a noticeable gap in research on how aid flows are linked to the environment in developing economies. Using the method of Granger causality, this paper explores the possible linkages. Results indicate that the external debt of a developing country bears upon the relationship in important ways. The second part of the paper entertains the possibility of spurious causality, tests for cointegration, and present additional results using an error-correction model. Keywords: Developing Countries, Pollution, Foreign Aid JEL classification: F35, O13 1. INTRODUCTION The notion that foreign flows influence the environment in developing countries is not a new line of investigation. The literature, however, concentrates almost exclusively on the relationship between trade and the environment. For example, Lofdahl (2002) investigates whether international trade helps or hurts the environment. Copeland and Taylor (2000) establish a framework under which the impact of trade liberalization on an economy’s adopted environmental standard can be assessed. 1 Their most important prediction is that, at the national level, income gain (motivated through additional trade) affects pollution levels differently than income gain achieved through economic growth. The counter-part finding they also report is that economic growth affects pollution levels differently under free trade than under autarky. However, of particular interest to this work is their finding that economic growth in richer countries is likely to have very ∗ The authors thank Christopher Hearty for his valuable assistance in compiling the data. They also thank an anonymous referee of JED for useful comments on an earlier version of the manuscript. 1 See Copeland and Taylor (2004) for a useful survey of all the issues surrounding trade and the environment.