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Title:Does Aid translate into Bilateral Trade? Findings for Recipient Countries PDF Logo
Authors:Nowak-Lehmann D., Felicitas
Martínez-Zarzoso, Inmaculada
Cardozo, Adriana
Herzer, Dierk
Klasen, Stephan
Issue Date:2011
Series/Report no.:Proceedings of the German Development Economics Conference, Berlin 2011 61
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 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.
Subjects:International trade
foreign aid
recipient exports
bilateral trade relations
JEL:F10
F35
Document Type:Conference Paper
Appears in Collections:Proceedings of the German Development Economics Conference, 2011 (Berlin)

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