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Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model

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  • Simone Juhasz Silva
  • Douglas Nelson

Abstract

Anderson and vanWincoop (2003) developed what has become the standard framework for framing and interpreting empirical work using the gravity model. Its main advantage is that it recognizes and tackles the issue of endogeneity of prices. Hoverer, two shortcomings of their framework are that 1) it relies heavily on an assumption of symmetry among countries; and 2) it requires nonlinear estimations. For issues related to North-South trade, the assumption of symmetry is problematic. In this paper we develop an asymmetric extension of the Anderson-vanWincoop framework appropriate to the analysis of North-South trade. To avoid nonlinear estimations, we also use an appropriately extended version of Baier and Bergstrand’s (2006) method of estimating a linear approximation to the model—thus permitting estimation using (“good old”) OLS and easily compute comparative statics. As an illustration of its use, we examine the empirical link between foreign aid and trade. The results are striking. The coefficients are positive and significant, matching a long list of empirical results in the aid and trade literature. However, the comparative statics shows that aid affects prices so as to reduce the volume of trade of non-donor Northern exporters. Since most Northern countries are non-donors, the total volume of exports from the North actually decreases.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 35 (2012)
Issue (Month): 5 (05)
Pages: 545-577

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Handle: RePEc:bla:worlde:v:35:y:2012:i:5:p:545-577

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Citations

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Cited by:
  1. Suwa Eisenmann, Akiko & Verdier, Thierry, 2007. "Aid and Trade," CEPR Discussion Papers 6465, C.E.P.R. Discussion Papers.
  2. Olivier CADOT & Melise JAUD, 2012. "A Second Look at the Pesticides Initiative Program: Evidence from Senegal," Working Papers P43, FERDI.
  3. Fabian Barthel & Eric Neumayer & Peter Nunnenkamp & Pablo Selaya, 2013. "Competition for Export Markets and the Allocation of Foreign Aid: The Role of Spatial Dependence among Donor Countries," Kiel Working Papers 1875, Kiel Institute for the World Economy.
  4. Matthias Busse & Ruth Hoekstra & Jens Königer, 2012. "The Impact of Aid for Trade Facilitation on the Costs of Trading," Kyklos, Wiley Blackwell, vol. 65(2), pages 143-163, 05.
  5. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann D. & Stephan Klasen & Mario Larch, 2009. "Does German Development Aid Promote German Exports?," German Economic Review, Verein für Socialpolitik, vol. 10, pages 317-338, 08.
  6. Philipp Hühne & Birgit Meyer & Peter Nunnenkamp, 2013. "Who Benefits from Aid for Trade? Comparing the Effects on Recipient versus Donor Exports," Kiel Working Papers 1852, Kiel Institute for the World Economy.
  7. Cadot, Olivier & Fernandes, Ana & Gourdon, Julien & Mattoo, Aaditya, 2011. "Impact Evaluation of Trade Interventions: Paving the Way," CEPR Discussion Papers 8638, C.E.P.R. Discussion Papers.
  8. Nowak-Lehmann D., Felicitas & Martínez-Zarzoso, Inmaculada & Cardozo, Adriana & Herzer, Dierk & Klasen, Stephan, 2011. "Does Aid translate into Bilateral Trade? Findings for Recipient Countries," Proceedings of the German Development Economics Conference, Berlin 2011 61, Verein für Socialpolitik, Research Committee Development Economics.
  9. Helble, Matthias & Mann, Catherine & Wilson, John S., 2009. "Aid for trade facilitation," Policy Research Working Paper Series 5064, The World Bank.

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