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The impact of tied aid on trade flows between donor and recipient countries

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  • Lucia Tajoli

Abstract

This paper aims to contribute to the current debate on aid effectiveness and suitability by examining a specific aspect of the problem: the theoretical and empirical relationship between tied aid and trade flows. In the first part, we evaluate the theoretical implications of the use of tied aid as a hidden trade policy. The possibility that aid flows directly benefit the donor country (especially its exporters) can make aid more viable from the domestic point of view, but since it also might affect foreign competitors, international conflicts can arise. These issues are examined in a framework adapted from the well-known strategic trade policy literature, showing that tied aid cannot be considered equivalent to an export subsidy. The second part of the paper is empirical and tests some propositions suggested by the theory. We estimate the impact of tied aid on total imports of recipient countries in order to examine whether the distortionary impact of tied aid overcomes the trade generating effect. We also look at the consequences of tied aid on the donor's market share in the recipient country in order to evaluate the effectiveness of this policy in supporting domestic exporters. The (preliminary) evidence shows that tied aid does not necessarily generate trade flows and that the donor's export shares are not correlated to the degree of tying.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09638199900000023
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

Volume (Year): 8 (1999)
Issue (Month): 4 ()
Pages: 373-388

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Handle: RePEc:taf:jitecd:v:8:y:1999:i:4:p:373-388

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Related research

Keywords: Tied aid; trade; trade policy;

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Cited by:
  1. SUWA-EISENMANN Akiko & VERDIER Thierry, 2007. "Aid and trade," Research Unit Working Papers 0709, Laboratoire d'Economie Appliquee, INRA.
  2. 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.
  3. Jonathan Munemo & Subhayu Bandyopadhyay & Arabinda Basistha, 2007. "Foreign aid and export performance: a panel data analysis of developing countries," Working Papers 2007-023, Federal Reserve Bank of St. Louis.
  4. Pincin, Jared, 2013. "Political power and aid tying practices in the development assistance committee countries," MPRA Paper 49806, University Library of Munich, Germany.
  5. Pincin, Jared, 2012. "Political power and aid tying practices in the development assistance committee countries," MPRA Paper 39463, University Library of Munich, Germany.
  6. Douglas Nelson & Simone Juhasz Silva, . "Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model," Discussion Papers 08/21, University of Nottingham, GEP.
  7. 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.

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