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Competition for Aid and Trade Policy

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  • Sajal Lahiri
  • Pascalis Raimondos

Abstract

This paper considers the optimal allocation by a donor country of a given amount of foreign aid between two recipient countries. It is shown that, ceteris paribus, a country following a more restrictive trade policy would receive a smaller share of the aid if the donor country maximises its own welfare. If, on the other hand, the donor country maximises the sum of the welfare of the two recipient countries, the result is just the opposite. We also analyse the situation where the recipient countries compete with each other for aid taking into account the behaviour of the donor. It is shown that this competition tend to lower the level of optimal tariffs in the recipient countries.

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Bibliographic Info

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 94-12.

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Handle: RePEc:kud:epruwp:94-12

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  1. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-65, May.
  2. 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.
  3. WILDASIN, David E., . "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," CORE Discussion Papers RP -831, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Kar-yiu Wong & Sajal LAHIRI & Pascalis RAIMONDOS-M & Alan D. WOODLAND, 1998. "Optimal Income Transfers and Tariffs," Working Papers 0076, University of Washington, Department of Economics.
  5. 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.
  6. Turunen-Red, Arja H. & Woodland, Alan D., 1988. "On the multilateral transfer problem : Existence of Pareto improving international transfers," Journal of International Economics, Elsevier, vol. 25(3-4), pages 249-269, November.
  7. Hopkin, Bryan, 1970. "Aid and the Balance of Payments," Economic Journal, Royal Economic Society, vol. 80(317), pages 1-23, March.
  8. Kemp, Murray C. & Wong, Kar-yiu, 1993. "Paradoxes associated with the administration of foreign aid," Journal of Development Economics, Elsevier, vol. 42(1), pages 197-204, October.
  9. Khilji, Nasir M. & Zampelli, Ernest M., 1994. "The fungibility of U.S. military and non-military assistance and the impacts on expenditures of major aid recipients," Journal of Development Economics, Elsevier, vol. 43(2), pages 345-362, April.
  10. Bhagwati, Jagdish N & Brecher, Richard A & Hatta, Tatsuo, 1983. "The Generalized Theory of Transfers and Welfare: Bilateral Transfers in a Multilateral World," American Economic Review, American Economic Association, vol. 73(4), pages 606-18, September.
  11. Dudley, Leonard & Montmarquette, Claude, 1976. "A Model of the Supply of Bilateral Foreign Aid," American Economic Review, American Economic Association, vol. 66(1), pages 132-42, March.
  12. Maizels, Alfred & Nissanke, Machiko K., 1984. "Motivations for aid to developing countries," World Development, Elsevier, vol. 12(9), pages 879-900, September.
  13. Lahiri, Sajal & Raimondos, Pascalis, 1995. "Welfare effects of aid under quantitative trade restrictions," Journal of International Economics, Elsevier, vol. 39(3-4), pages 297-315, November.
  14. Lahiri, Sajal & Raimondos-Moller, Pascalis, 1997. "On the tying of aid to tariff reform," Journal of Development Economics, Elsevier, vol. 54(2), pages 479-491, December.
  15. Gale, David, 1974. "Exchange equilibrium and coalitions : An example," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 63-66, March.
  16. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
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Citations

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Cited by:
  1. Subhayu Bandyopadhyay & Sajal Lahiri & Javed Younas, 2013. "Should Easier Access to Credit Replace Foreign Aid? A Trade-theoretic Analysis," Economics Bulletin, AccessEcon, vol. 33(3), pages 2320-2327.
  2. Epstein, Gil S. & Gang, Ira N., 2008. "Poverty and Governance: The Contest for Aid," Working Paper Series RP2008/76, World Institute for Development Economic Research (UNU-WIDER).
  3. Lahiri, Sajal & Raimondos-Moller, Pascalis & Wong, Kar-yiu & Woodland, Alan D., 2002. "Optimal foreign aid and tariffs," Journal of Development Economics, Elsevier, vol. 67(1), pages 79-99, February.
  4. Javed Younas & Subhayu Bandyopadhyay, 2009. "Do donors care about declining trade revenue from liberalization? an analysis of bilateral aid allocation," Review, Federal Reserve Bank of St. Louis, issue May, pages 141-154.
  5. Bandyopadhyay, Subhayu & Majumdar, Baishali, 2004. "Multilateral transfers, export taxation and asymmetry," Journal of Development Economics, Elsevier, vol. 73(2), pages 715-725, April.
  6. Hadjiyiannis, Costas & Hatzipanayotou, Panos & Michael, Michael S., 2013. "Competition for environmental aid and aid fungibility," Journal of Environmental Economics and Management, Elsevier, vol. 65(1), pages 1-11.
  7. Panos Hatzipanayotou & Michael S. Michael, 2005. "Migration, Tied Foreign Aid and the Welfare State," CESifo Working Paper Series 1497, CESifo Group Munich.
  8. 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.
  9. Sajal Lahiri & Pascalis Raimondos-Møller, 1999. "Lobbying by Ethnic Groups and Aid Allocation," EPRU Working Paper Series 99-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Oct 2003.
  10. Stéphane Pallage & Michel A. Robe & Catherine Bérubé, 2006. "The Potential of Foreign Aid as Insurance," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 5.
  11. Stéphane Pallage & Michel A. Robe & Catherine Bérubé, 2004. "On the Potential of Foreign Aid as Insurance," Cahiers de recherche 0404, CIRPEE.
  12. Douglas Nelson & Simone Juhasz Silva, . "Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model," Discussion Papers 08/21, University of Nottingham, GEP.

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