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Foreign aid and recipient countries' exports: How important are improved bilateral trade relations?

  • Nowak-Lehmann D., Felicitas
  • Martínez-Zarzoso, Inmaculada
  • Cardozo, Adriana
  • Klasen, Stephan

This paper uses the gravity model of trade to investigate the link between foreign aid and exports in recipient countries and tests for the transmission channels between aid and exports/economic development in developing countries. Most of the theoretical work emphasizes the negative impact of aid on recipient countries' exports primarily due to exchange rate appreciation, disregarding the positive impact of aid linked to the income effect. The empirical findings, in contrast, indicate that the net impact of aid on recipient countries' exports is positive and that the average return for recipients' exports is about 1.50 US$ for every aid dollar spent. The paper also estimates the effect of different types of aid (bilateral aid [from one donor to one specific recipient, and bilateral aid from all the other donors to one specific recipient], as well as multilateral aid flowing to a specific recipient) and finds that at least two types of aid have a positive and significant effect on recipients' exports, thus ruling out a major crowding out effect. It is further found that aid is hardly export-enhancing in Africa.

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Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Hannover 2010 with number 44.

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Date of creation: 2010
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Handle: RePEc:zbw:gdec10:44
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  1. Berthelemy, Jean-Claude & Tichit, Ariane, 2002. "Bilateral Donors' Aid Allocation Decisions: A Three-dimensional Panel Analysis," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Felicitas Nowak-Lehmann D. & Inmaculada Martínez-Zarzoso & Stephan Klasen & Dierk Herzer, 2008. "Aid and Trade - A Donor´s Perspective," Ibero America Institute for Econ. Research (IAI) Discussion Papers 171, Ibero-America Institute for Economic Research.
  3. Martínez-Zarzoso, Inmaculada & Nowak-Lehmann D., Felicitas & Klasen, Stefan & Larch, Mario, 2008. "Does German Development Aid Promote German Exports?," Proceedings of the German Development Economics Conference, Zurich 2008 26, Verein für Socialpolitik, Research Committee Development Economics.
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