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Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model

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  • Douglas Nelson
  • Simone Juhasz Silva

Abstract

Anderson and vanWincoop (2003) developed what has become the standard framework for framing and interpreting empirical work using the gravity model. Its main advantage is that it recognizes and tackles the issue of endogeneity of prices. Hoverer, two shortcomings of their framework are that 1) it relies heavily on an assumption of symmetry among countries; and 2) it requires nonlinear estimations. For issues related to North-South trade, the assumption of symmetry is problematic. In this paper we develop an asymmetric extension of the Anderson-vanWincoop framework appropriate to the analysis of North-South trade. To avoid nonlinear estimations, we also use an appropriately extended version of Baier and Bergstrand’s (2006) method of estimating a linear approximation to the model—thus permitting estimation using (“good old”) OLS and easily compute comparative statics. As an illustration of its use, we examine the empirical link between foreign aid and trade. The results are striking. The coefficients are positive and significant, matching a long list of empirical results in the aid and trade literature. However, the comparative statics shows that aid affects prices so as to reduce the volume of trade of non-donor Northern exporters. Since most Northern countries are non-donors, the total volume of exports from the North actually decreases.

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  • Douglas Nelson & Simone Juhasz Silva, "undated". "Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model," Discussion Papers 08/21, University of Nottingham, GEP.
  • Handle: RePEc:not:notgep:08/21
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    Cited by:

    1. Kruse, Hendrik W. & Martínez-Zarzoso, Inma, 2016. "Transfers in the gravity equation: The case of foreign aid," Center for European, Governance and Economic Development Research Discussion Papers 288, University of Goettingen, Department of Economics.
    2. 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.
    3. Sèna Kimm Gnangnon, 2016. "Market Access of OECD Donor Countries and Their Supply of Aid for Trade," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 1-38, February.
    4. Sylvanus Kwaku Afesorgbor & Kaleb Girma Abreha, 2015. "Preferential Market Access, Foreign Aid and Economic Development," Economics Working Papers 2015-04, Department of Economics and Business Economics, Aarhus University.
    5. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann D. & Stephan Klasen & Mario Larch, 2009. "Does German Development Aid Promote German Exports?," German Economic Review, Verein für Socialpolitik, vol. 10, pages 317-338, August.
    6. Matthias Helble & Catherine Mann & John Wilson, 2012. "Aid-for-trade facilitation," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(2), pages 357-376, June.
    7. repec:dug:journl:y:2017:i:2:p:169-178 is not listed on IDEAS
    8. Jaud, Melise & Cadot, Olivier, 2012. "A second look at the pesticides initiative program: evidence from Senegal," World Trade Review, Cambridge University Press, vol. 11(03), pages 490-506, July.
    9. Akiko Suwa-Eisenmann & Thierry Verdier, 2007. "Aid and trade," Oxford Review of Economic Policy, Oxford University Press, vol. 23(3), pages 481-507, Autumn.
    10. Cadot, Olivier & Fernandes, Ana M. & Gourdon, Julien & Mattoo, Aaditya, 2011. "Impact evaluation of trade interventions : paving the way," Policy Research Working Paper Series 5877, The World Bank.
    11. Inmaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann & M. D. Parra & Stephan Klasen, 2014. "Does Aid Promote Donor Exports? Commercial Interest versus Instrumental Philanthropy," Kyklos, Wiley Blackwell, vol. 67(4), pages 559-587, November.
    12. Nowak-Lehmann D., Felicitas & Martínez-Zarzoso, Inmaculada & Cardozo, Adriana & Herzer, Dierk & Klasen, Stephan, 2011. "Does Aid translate into Bilateral Trade? Findings for Recipient Countries," Proceedings of the German Development Economics Conference, Berlin 2011 61, Verein für Socialpolitik, Research Committee Development Economics.
    13. 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.
    14. repec:pal:eurjdr:v:29:y:2017:i:4:d:10.1057_s41287-016-0060-5 is not listed on IDEAS
    15. Matthias Busse & Ruth Hoekstra & Jens Königer, 2012. "The Impact of Aid for Trade Facilitation on the Costs of Trading," Kyklos, Wiley Blackwell, vol. 65(2), pages 143-163, May.

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    Foreign aid; trade; gravity;

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