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Do donors care about declining trade revenues from liberalization? an analysis of 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. Donor nations may take this into account in making their aid allocation decisions for developing nations. Our findings suggest that bilateral donors provide substantially larger amounts of aid to compensate (or reward) liberalizing recipient nations who also face declining trade tax revenues. Interestingly, these effects are statistically insignificant in the context of multilateral aid. Multilateral donors are more focused on income per capita and may be using it as a de facto measure of average living standards in the recipient nations.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2007-028.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2007-028

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Keywords: Free trade;

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  1. 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.
  2. John Luke Gallup & Jeffrey D. Sachs & Andrew Mellinger, 1999. "Geography and Economic Development," CID Working Papers 1, Center for International Development at Harvard University.
  3. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
  4. Alberto Alesina & Beatrice Weder, 2002. "Do Corrupt Governments Receive Less Foreign Aid?," American Economic Review, American Economic Association, vol. 92(4), pages 1126-1137, September.
  5. Wall, Howard J., 1995. "The allocation of official development assistance," Journal of Policy Modeling, Elsevier, vol. 17(3), pages 307-314, June.
  6. Dowling, J. M. & Hiemenz, Ulrich, 1985. "Biases in the allocation of foreign aid: Some new evidence," World Development, Elsevier, vol. 13(4), pages 535-541, April.
  7. Dani Rodrik, 1992. "The Limits of Trade Policy Reform in Developing Countries," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 87-105, Winter.
  8. Gallup, J.L. & Sachs, J.D. & Mullinger, A., 1999. "Geography and Economic Development," Papers 1, Chicago - Graduate School of Business.
  9. Trumbull, William N & Wall, Howard J, 1994. "Estimating Aid-Allocation Criteria with Panel Data," Economic Journal, Royal Economic Society, vol. 104(425), pages 876-82, July.
  10. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
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