Policy coherence for development: trade policies
The purpose of this paper is to provide a theoretical and empirical background overview of the interactions between aid and foreign direct investment (FDI) policies, and trade flows and policies, taking the perspective of outcomes from the point of view of the recipient developing country. A first element that seems quite robust is the identification of a complementarity between trade and FDI flows and policies. There are theoretical arguments for this and it appears as quite robust in the few empirical papers addressing directly this issue. An important policy implication is however the fact that there is a risk of a two-tier system: between emerging developing countries on the one hand, and less developed economies on the other. The literature so far does not provide straightforward and robust results regarding a complementarity between aid and trade flows. There is though a presumption of the possibility of a complementarity between aid and a policy that would reduce domestic distortions in the developing country (provision of a public good, domestic market reforms).
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