Does Aid translate into Bilateral Trade? Findings for Recipient Countries
AbstractThis paper uses the gravity model of trade to investigate the link between foreign aid and exports in recipient countries. Most of the theoretical work emphasizes the negative impact of aid on recipient countries' exports primarily due to exchange rate appreciation, disregarding possible positive effects of aid in overcoming supply bottlenecks and promoting bilateral trade relations. Our empirical findings -all based on endogeneity-proof techniques (such as Dynamic OLS or more refined techniques) - depend very strongly on whether bilateral trade relations and autocorrelation of the disturbances are controlled for. When not controlling for these phenomena, the impact of aid is quite substantial (especially in Asia, Latin America & Caribbean) but when sound estimation techniques are applied the net impact of aid on recipient countries' exports becomes insignificant in the full 130-country sample and the subsamples: Sub-Saharan Africa & MENA, Asia and Latin America & the Caribbean. However, this rather disappointing finding is in line with the small macroeconomic impact of aid found in earlier studies. --
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Bibliographic InfoPaper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Berlin 2011 with number 61.
Date of creation: 2011
Date of revision:
International trade; foreign aid; recipient exports; bilateral trade relations;
Find related papers by JEL classification:
- F10 - International Economics - - Trade - - - General
- F35 - International Economics - - International Finance - - - Foreign Aid
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-27 (All new papers)
- NEP-CWA-2011-07-27 (Central & Western Asia)
- NEP-INT-2011-07-27 (International Trade)
- NEP-SEA-2011-07-27 (South East Asia)
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