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Aid versus trade revisited

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Listed:
  • Christopher S. Adam
  • Stephen A. O'Connell

Abstract

This 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.

Suggested Citation

  • Christopher S. Adam & Stephen A. O'Connell, 2000. "Aid versus trade revisited," CSAE Working Paper Series 2000-19, Centre for the Study of African Economies, University of Oxford.
    • Handle: RePEc:csa:wpaper:2000-19
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    References listed on IDEAS

    as
    1. van Wijnbergen, Sweder, 1985. "Aid, Export Promotion and the Real Exchange Rate: An African Dilemma?," CEPR Discussion Papers 88, Centre for Economic Policy Research.
    2. 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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    Keywords

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    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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