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Foreign Aid and Recipient Countries` Exports: Does Aid Promote Bilateral Trade?

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Abstract

This paper uses the gravity model of trade to investigate the link between foreign aid and exports in recipient countries. Most of the theoretical work emphasizes the negative impact of aid on recipient countries’ exports primarily due to exchange rate appreciation, disregarding possible positive effects of aid in promoting bilateral trade relations. The empirical findings, in contrast, indicate that the net impact of aid on recipient countries’ exports is positive -even though the macroeconomic impact of aid is rather small- and that the average return for recipients’ exports is about 1.50 US$ for every aid dollar spent. We argue that “bilateral aid” seems to promote good bilateral trade relations, mutual trust and familiarity and that those factors reinforce bilateral trade, including recipient country exports. The paper also estimates the effect of different types of aid (bilateral aid versus multilateral aid flowing to a specific recipient) and studies aid’s contribution to an expansion of exports in different regions of the world. It is found that aid is strongly export-enhancing in Asia and Latin America, but not in Africa.

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  • Felicitas Nowak-Lehmann D. & Inmaculada Martinez-Zarzoso & Adriana Cardozo & Dierk Herzer & Stephan Klasen, 2010. "Foreign Aid and Recipient Countries` Exports: Does Aid Promote Bilateral Trade?," Ibero America Institute for Econ. Research (IAI) Discussion Papers 206, Ibero-America Institute for Economic Research.
  • Handle: RePEc:got:iaidps:206
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    File URL: http://www2.vwl.wiso.uni-goettingen.de/ibero/working_paper_neu/DB206.pdf
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    1. World Bank, 2009. "World Development Indicators 2009," World Bank Publications - Books, The World Bank Group, number 4367.
    2. Felicitas Nowak-Lehmann D. & Inmaculada Martínez-Zarzoso & Dierk Herzer & Stephan Klasen & Axel Dreher, 2009. "In Search for a Long-run Relationship between Aid and Growth: Pitfalls and Findings," Ibero America Institute for Econ. Research (IAI) Discussion Papers 196, Ibero-America Institute for Economic Research.
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    Cited by:

    1. Dazoue Dongue Guy Paulin & Nemb Pierre Samuel & Abessolo Yves André, 2017. "Influence of Bilateral Aid on Cameroon's Bilateral Trade Performance with Respect to OECD Donor Countries," EuroEconomica, Danubius University of Galati, issue 2(36), pages 169-178, November.
    2. Wim Naudé, 2011. "Foreign Aid for Innovation: The Missing Ingredient in Private Sector Development?," Working Papers 2011/35, Maastricht School of Management.
    3. Liu, Ailan & Tang, Bo, 2018. "US and China aid to Africa: Impact on the donor-recipient trade relations," China Economic Review, Elsevier, vol. 48(C), pages 46-65.
    4. Léopold BIARDEAU & Anne BORING, 2017. "L’impact de l’aide au développement sur les flux commerciaux entre pays donateurs et pays récipiendaires," Working Paper 464d860e-562e-4ae7-98f5-1, Agence française de développement.

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    More about this item

    Keywords

    International trade; foreign aid; recipient exports; bilateral trade relations;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F35 - International Economics - - International Finance - - - Foreign Aid

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    This paper has been announced in the following NEP Reports:

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