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Do donors care about declining trade revenue from liberalization? an analysis of bilateral aid allocation

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  • Javed Younas
  • Subhayu Bandyopadhyay

Abstract

Many developing-country governments rely heavily on trade tax revenue. Therefore, trade liberalization can be a potential source of significant fiscal instability and may affect government spending on development activities-at least in the short run. This article investigates whether donors use aid to compensate recipient nations for lost trade revenue or perhaps to reward them for moving toward freer trade regimes. The authors do not find empirical evidence supporting such motives. This is of some concern because binding government revenue constraints may hinder development prospects of some poorer nations. The authors use fixed effects to control for the usual political, strategic, and other considerations for aid allocations.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2009)
Issue (Month): May ()
Pages: 141-154

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Handle: RePEc:fip:fedlrv:y:2009:i:may:p:141-154:n:v.91no.3

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  1. Subhayu Bandyopadhyay, 2006. "The Determinants of Aid in the Post-Cold War Era," Working Papers 06-14 Classification- JEL, Department of Economics, West Virginia University.
  2. Axel Dreher, 2006. "Does globalization affect growth? Evidence from a new index of globalization," Applied Economics, Taylor & Francis Journals, vol. 38(10), pages 1091-1110.
  3. Alesina, Alberto & Dollar, David, 2000. " Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
  4. Lahiri, Sajal & Raimondos-Moller, Pascalis, 1997. "Competition for aid and trade policy," Journal of International Economics, Elsevier, vol. 43(3-4), pages 369-385, November.
  5. Ilyana Kuziemko & Eric Werker, 2006. "How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 905-930, October.
  6. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  7. Bagwell, Kyle & Staiger, Robert W., 2001. "Reciprocity, non-discrimination and preferential agreements in the multilateral trading system," European Journal of Political Economy, Elsevier, vol. 17(2), pages 281-325, June.
  8. Michael Keen & Thomas Baunsgaard, 2005. "Tax Revenue and (or?) Trade Liberalization," IMF Working Papers 05/112, International Monetary Fund.
  9. Dollar, David & Levin, Victoria, 2004. "Increasing selectivity of foreign aid, 1984-2002," Policy Research Working Paper Series 3299, The World Bank.
  10. Anne Boschini & Anders Olofsg�rd, 2007. "Foreign aid: An instrument for fighting communism?," Journal of Development Studies, Taylor & Francis Journals, vol. 43(4), pages 622-648.
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Cited by:
  1. Bandyopadhyay, Subhayu & Lahiri, Sajal & Younas, Javed, 2011. "Should Easier Access to International Credit Replace Foreign Aid?," IZA Discussion Papers 6024, Institute for the Study of Labor (IZA).
  2. Bandyopadhyay, Subhayu & Lahiri, Sajal & Younas, Javed, 2012. "Do countries with greater credit constraints receive more foreign aid?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 481-493.

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