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Tied Aid, Trade-Facilitating Aid or Trade-Diverting Aid?

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  • Lars M. Johansson
  • Jan Pettersson

Abstract

Donor aid is often regarded as being informally tied (aid increases donor-recipient exports) and this effect is in general interpreted as being harmful to aid recipients. However, in this paper, using a gravity model, we show that aid is positively associated with recipient-donor exports as well. That is, aid increases bilateral trade flows in both directions. Our interpretation is that an intensified aid relation works as to reduce the effective cost of geographic distance. We analyse the effects from various foreign development assistance variables on the recipient as well as donor country exports. We find a particularly strong relation between aid in the form of technical assistance and exports in both directions, supporting our interpretation that market knowledge through interpersonal relations is an important driver for exports. Moreover, when disaggregating aid to specifically study the effects from trade-related assistance (Aid for Trade), the positive correlation shows up with donor exports only. The link between donor export and aid is particularly strong in the case of export to Sub-Saharan African countries while the relation between recipient export and aid seems to be robust across regions. While the statistical relations between aid and trade seems robust to changes in specification and time-periods, it is intrinsically hard to provide clear evidence on a causal relation. Our sample includes all 184 countries for which there are data available during the period from 1990 to 2005.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c013_008.

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Length: 36 pages JEL Classification: F10, F35, O11
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:deg:conpap:c013_008

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Keywords: foreign aid; trade;

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References

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  1. Mark McGillivray & Simon Feeny & Niels Hermes & Robert Lensink, 2006. "Controversies over the impact of development aid: it works; it doesn't; it can, but that depends …," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(7), pages 1031-1050.
  2. Francois, Joseph & Manchin, Miriam, 2007. "Institutions, infrastructure, and trade," Policy Research Working Paper Series 4152, The World Bank.
  3. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  4. Jan Pettersson, 2007. "Child Mortality: Is Aid Fungibility in Pro-Poor Expenditure Sectors Decisive?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(4), pages 673-693, December.
  5. Feenstra, Robert C, 2002. "Border Effects and the Gravity Equation: Consistent Methods for Estimation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(5), pages 491-506, December.
  6. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development.
  7. Simon Feeny & Mark McGillivray, 2008. "What Determines Bilateral Aid Allocations? Evidence From Time Series Data," Review of Development Economics, Wiley Blackwell, vol. 12(3), pages 515-529, 08.
  8. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
  9. Dollar, David & Alesina, Alberto, 2000. "Who Gives Foreign Aid to Whom and Why?," Scholarly Articles 4553020, Harvard University Department of Economics.
  10. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, vol. 79(1), pages 99-106, April.
  11. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, 06.
  12. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  13. Paul Collier & Anke Hoeffler, 2007. "Unintended Consequences: Does Aid Promote Arms Races?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(1), pages 1-27, 02.
  14. Adrian Wood (QEH), . "Looking ahead optimally in allocating aid," QEH Working Papers qehwps137, Queen Elizabeth House, University of Oxford.
  15. Paul Collier & Benedikt Goderis, 2009. "Does Aid Mitigate External Shocks?," Review of Development Economics, Wiley Blackwell, vol. 13(s1), pages 429-451, 08.
  16. 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.
  17. Peter Egger, 2005. "Alternative Techniques for Estimation of Cross-Section Gravity Models," Review of International Economics, Wiley Blackwell, vol. 13(5), pages 881-891, November.
  18. Wagner, Don, 2003. "Aid and trade--an empirical study," Journal of the Japanese and International Economies, Elsevier, vol. 17(2), pages 153-173, June.
  19. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
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  21. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2007. "Estimating Trade Flows: Trading Partners and Trading Volumes," NBER Working Papers 12927, National Bureau of Economic Research, Inc.
  22. Jan Pettersson, 2007. "Foreign sectoral aid fungibility, growth and poverty reduction," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(8), pages 1074-1098.
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Cited by:
  1. 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.
  2. Felicitas Nowak-Lehmann & Inmaculada Martínez-Zarzoso & Dierk Herzer & Stephan Klasen & Adriana Cardozo, 2013. "Does foreign aid promote recipient exports to donor countries?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 149(3), pages 505-535, September.

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