Aid versus Trade Revisited
AbstractThis paper examines the (non) equivalance between aid flows and trade preferences as alternative forms of donor assistance in the presence of learning-by-doing externalities in recipient country export production. Using a two-period model based on vanWijnbergen (1985), in which the productivity externality consistitues the only (inter-temporal) distortion, we show that switching donor support on the margin from aid to trade preferences can increase recipient country welfare. To evaluate the size of this potential welfare gain to small African economies we simulate donor policy reforms using a dynamic CGE model where the productivity externality may also interact with private capital accumulation. We show that for reasonable values of key behavioural parameters, the potential growth and welfare gains from a (donor) revenue neutral re-orientation of assistance to developing countries could be substantial. The paper concludes by considering why these potential dynamic gains appear to be unexpoited by both donors and recipients.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2000-19.
Date of creation: 01 Jan 2000
Date of revision:
Foreign Aid; Trade Preferences; Africa.;
Find related papers by JEL classification:
- F35 - International Economics - - International Finance - - - Foreign Aid
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
- O55 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Africa
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- Davies, Rob & Rattso, Jorn & Torvik, Ragnar, 1998. "Short-Run Consequences of Trade Liberalization: A Computable General Equilibrium Model of Zimbabwe," Journal of Policy Modeling, Elsevier, vol. 20(3), pages 305-333, June.
- Westphal, Larry E, 1990. "Industrial Policy in an Export-Propelled Economy: Lessons from South Korea's Experience," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 41-59, Summer.
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