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The impact of tied aid on trade flows between donor and recipient countries

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  • Lucia Tajoli

Abstract

This paper aims to contribute to the current debate on aid effectiveness and suitability by examining a specific aspect of the problem: the theoretical and empirical relationship between tied aid and trade flows. In the first part, we evaluate the theoretical implications of the use of tied aid as a hidden trade policy. The possibility that aid flows directly benefit the donor country (especially its exporters) can make aid more viable from the domestic point of view, but since it also might affect foreign competitors, international conflicts can arise. These issues are examined in a framework adapted from the well-known strategic trade policy literature, showing that tied aid cannot be considered equivalent to an export subsidy. The second part of the paper is empirical and tests some propositions suggested by the theory. We estimate the impact of tied aid on total imports of recipient countries in order to examine whether the distortionary impact of tied aid overcomes the trade generating effect. We also look at the consequences of tied aid on the donor's market share in the recipient country in order to evaluate the effectiveness of this policy in supporting domestic exporters. The (preliminary) evidence shows that tied aid does not necessarily generate trade flows and that the donor's export shares are not correlated to the degree of tying.

Suggested Citation

  • Lucia Tajoli, 1999. "The impact of tied aid on trade flows between donor and recipient countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 8(4), pages 373-388.
  • Handle: RePEc:taf:jitecd:v:8:y:1999:i:4:p:373-388
    DOI: 10.1080/09638199900000023
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    References listed on IDEAS

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    1. Sajal Lahiri & Pascalis Raimondos, "undated". "Is There Anything Wrong with Tied-Aid?," EPRU Working Paper Series 94-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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    Cited by:

    1. Katarzyna Andrzejczak & Agata Kliber, 2015. "The Model of French Development Assistance – Who Gets the Help?," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 15, pages 89-109.
    2. Akiko Suwa-Eisenmann & Thierry Verdier, 2007. "Aid and trade," Oxford Review of Economic Policy, Oxford University Press, vol. 23(3), pages 481-507, Autumn.
    3. Shwe Sin Oo & Masaru Ichihashi, 2015. "How Does Aid For Trade Contribute To ASEAN`s Trading?," IDEC DP2 Series 5-2, Hiroshima University, Graduate School for International Development and Cooperation (IDEC).
    4. Jonathan Munemo & Subhayu Bandyopadhyay & Arabinda Basistha, 2006. "Foreign Aid and Export Performance: A Panel Data Analysis of Developing Countries," Working Papers 06-10 Classification-, Department of Economics, West Virginia University.
    5. Philipp Hühne & Birgit Meyer & Peter Nunnenkamp, 2014. "Who Benefits from Aid for Trade? Comparing the Effects on Recipient versus Donor Exports," Journal of Development Studies, Taylor & Francis Journals, vol. 50(9), pages 1275-1288, September.
    6. Pincin, Jared, 2013. "Political power and aid tying practices in the development assistance committee countries," MPRA Paper 49806, University Library of Munich, Germany.
    7. Barthel, Fabian & Neumayer, Eric & Nunnenkamp, Peter & Selaya, Pablo, 2014. "Competition for Export Markets and the Allocation of Foreign Aid: The Role of Spatial Dependence among Donor Countries," World Development, Elsevier, vol. 64(C), pages 350-365.
    8. Pincin, Jared, 2012. "Political power and aid tying practices in the development assistance committee countries," MPRA Paper 39463, University Library of Munich, Germany.
    9. Simone Juhasz Silva & Douglas Nelson, 2012. "Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model," The World Economy, Wiley Blackwell, vol. 35(5), pages 545-577, May.

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    Keywords

    Tied aid; trade; trade policy;

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