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Tied Aid, Trade-Facilitating Aid or Trade-Diverting Aid?

  • Lars M. Johansson
  • Jan Pettersson

Donor aid is often regarded as being informally tied (aid increases donor-recipient exports) and this effect is in general interpreted as being harmful to aid recipients. However, in this paper, using a gravity model, we show that aid is positively associated with recipient-donor exports as well. That is, aid increases bilateral trade flows in both directions. Our interpretation is that an intensified aid relation works as to reduce the effective cost of geographic distance. We analyse the effects from various foreign development assistance variables on the recipient as well as donor country exports. We find a particularly strong relation between aid in the form of technical assistance and exports in both directions, supporting our interpretation that market knowledge through interpersonal relations is an important driver for exports. Moreover, when disaggregating aid to specifically study the effects from trade-related assistance (Aid for Trade), the positive correlation shows up with donor exports only. The link between donor export and aid is particularly strong in the case of export to Sub-Saharan African countries while the relation between recipient export and aid seems to be robust across regions. While the statistical relations between aid and trade seems robust to changes in specification and time-periods, it is intrinsically hard to provide clear evidence on a causal relation. Our sample includes all 184 countries for which there are data available during the period from 1990 to 2005.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c013_008.

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Length: 36 pages JEL Classification: F10, F35, O11
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:deg:conpap:c013_008
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  7. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2002. "Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development," NBER Working Papers 9305, National Bureau of Economic Research, Inc.
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  15. Peter Egger, 2005. "Alternative Techniques for Estimation of Cross-Section Gravity Models," Review of International Economics, Wiley Blackwell, vol. 13(5), pages 881-891, November.
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  17. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
  18. Paul Collier & Anke Hoeffler, 2007. "Unintended Consequences: Does Aid Promote Arms Races?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(1), pages 1-27, 02.
  19. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, vol. 79(1), pages 99-106, April.
  20. Michael A. Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting chickens when they hatch: The short-term effect of aid on growth," International Finance 0407010, EconWPA.
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