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Does Aid translate into Bilateral Trade? Findings for Recipient Countries

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

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 overcoming supply bottlenecks and promoting bilateral trade relations. Our empirical findings -all based on endogeneity-proof techniques (such as Dynamic OLS or more refined techniques) - depend very strongly on whether bilateral trade relations and autocorrelation of the disturbances are controlled for. When not controlling for these phenomena, the impact of aid is quite substantial (especially in Asia, Latin America & Caribbean) but when sound estimation techniques are applied the net impact of aid on recipient countries' exports becomes insignificant in the full 130-country sample and the subsamples: Sub-Saharan Africa & MENA, Asia and Latin America & the Caribbean. However, this rather disappointing finding is in line with the small macroeconomic impact of aid found in earlier studies.

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Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Berlin 2011 with number 61.

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Date of creation: 2011
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Handle: RePEc:zbw:gdec11:61
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  1. Joong Shik Kang & Alessandro Prati & Alessandro Rebucci, 2010. "Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis," Research Department Publications 4678, Inter-American Development Bank, Research Department.
  2. Christopher Adam & David Bevan, 2004. "Aid and the Supply Side: Public Investment, Export Performance and Dutch Disease in Low Income Countries," Economics Series Working Papers 201, University of Oxford, Department of Economics.
  3. Jonathan Munemo & Subhayu Bandyopadhyay & Arabinda Basistha, 2007. "Foreign aid and export performance: a panel data analysis of developing countries," Working Papers 2007-023, Federal Reserve Bank of St. Louis.
  4. Doucouliagos , H. & Paldam, M., 2007. "The aid effectiveness literature: The sad results of 40 years of research," Cambridge Working Papers in Economics 0773, Faculty of Economics, University of Cambridge.
  5. 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.
  6. Pettersson, Jan & Johansson, Lars M, 2009. "Tied Aid, Trade-Facilitating Aid or Trade-Diverting Aid?," Working Paper Series 2009:5, Uppsala University, Department of Economics.
  7. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  8. 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.
  9. Minoiu, Camelia & Reddy, Sanjay G., 2010. "Development aid and economic growth: A positive long-run relation," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 27-39, February.
  10. Hristos Doucouliagos & Martin Paldam, 2005. "Aid Effectiveness on Growth. A Meta Study," Economics Working Papers 2005-13, School of Economics and Management, University of Aarhus.
  11. Robert C. Feenstra & James R. Markusen & Andrew K. Rose, 2001. "Using the gravity equation to differentiate among alternative theories of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 430-447, May.
  12. Stephen Redding & Anthony J. Venables, 2001. "Economic Geography and International Inequality," International Trade 0103003, EconWPA.
  13. Hristos Doucouliagos & Martin Paldam, 2010. "Conditional aid effectiveness: A meta-study," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(4), pages 391-410.
  14. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 441-487, 05.
  15. Uwe Hassler & Jürgen Wolters, 2006. "Autoregressive distributed lag models and cointegration," AStA Advances in Statistical Analysis, Springer, vol. 90(1), pages 59-74, March.
  16. Simone Juhasz Silva & Douglas Nelson, 2012. "Does Aid Cause Trade? Evidence from an Asymmetric Gravity Model," The World Economy, Wiley Blackwell, vol. 35(5), pages 545-577, 05.
  17. Jon Haveman & David Hummels, 2004. "Alternative hypotheses and the volume of trade: the gravity equation and the extent of specialization," Canadian Journal of Economics, Canadian Economics Association, vol. 37(1), pages 199-218, February.
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