Aid versus Trade Revisited: Donor and Recipient Policies in the Presence of Learning-by-Doing

Christopher S Adam and Stephen O'Connell ()

Economic Journal, 2004, vol. 114, issue 492, 150-173

Abstract: We examine the (non) equivalence of aid and trade preferences as alternative forms of donor assistance in the presence of learning-by-doing externalities in recipient-country export production. Using a model based on van Wijnbergen (1985), we show that switching donor support on the margin from aid to trade preferences can increase recipient-country welfare. Simulations in which the productivity externality also interacts with private capital accumulation and fiscal distortions illustrate the potential growth and welfare gains from a revenue neutral re-orientation of donor assistance. We conclude by considering why these potential dynamic gains remain unexploited by both donors and recipients. Copyright 2004 Royal Economic Society.

Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ecj:econjl:v:114:y:2004:i:492:p:150-173

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