Promoting Trade Liberalization: Theoretical Analysis of Foreign Aid as Prize

Malokele Nanivazo and Sajal Lahiri

Review of Development Economics, 2015, vol. 19, issue 3, 748-757

Abstract: We investigate whether foreign aid can be used to induce trade policy reforms. We develop a two-period political economic model where promise of aid in period 2 depends on chosen tariff in period 1. We consider three scenarios depending on whether the donor is passive/active and whether the two governments move simultaneously or sequentially. We find a sufficient condition for unconditional aid to increase the level of optimal tariff, and the possibility of unconditional aid increasing optimal tariff decreases when the donor is active rather than passive.

Date: 2015
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