Abstract:
Despite growing fiscal pressures and public scrutiny of aid spending, the domestic returns from official development assistance (ODA) remain understudied, particularly for services trade. This paper examines how bilateral ODA from five different European donors - Denmark, Germany, the Netherlands, Norway and Sweden - affects their exports to recipient countries over the period 2005-2024. Using a gravity model specification estimated with panel dynamic feasible generalised least squares, we mostly find robust positive aid-trade elasticities that hold across goods and services sectors. ODA variables retain explanatory power after controlling for Aid-for-Trade shares, suggesting that indirect channels, such as economic development and goodwill, persist next to direct procurement. These findings provide evidence for the benefits of aid for donor countries. When recipient countries are analysed separately by political importance or income level, evidence suggests that the aid-trade-link is mainly driven by larger emerging economies as the effect of aid for poorer countries yields comparable point estimates yet translates into smaller economic returns. Further analysis also shows heterogeneity by donor in terms of domestic effects. The underlying causes for the differences remain to be explored.
