Aid versus Trade Revisited: Donor and Recipient Policies in the Presence of Learning-by-Doing
We examine the (non) equivalence of aid and trade preferences as alternative forms of donor assistance in the presence of learning-by-doing externalities in recipient-country export production. Using a model based on van Wijnbergen (1985), we show that switching donor support on the margin from aid to trade preferences can increase recipient-country welfare. Simulations in which the productivity externality also interacts with private capital accumulation and fiscal distortions illustrate the potential growth and welfare gains from a revenue neutral re-orientation of donor assistance. We conclude by considering why these potential dynamic gains remain unexploited by both donors and recipients. Copyright 2004 Royal Economic Society.
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Volume (Year): 114 (2004)
Issue (Month): 492 (January)
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