Does foreign aid promote recipient exports to donor countries?

Felicitas Nowak-Lehmann (), Inmaculada Martínez-Zarzoso, Dierk Herzer, Stephan Klasen and Adriana Cardozo Silva

Review of World Economics (Weltwirtschaftliches Archiv), 2013, vol. 149, issue 3, 505-535

Abstract: This paper uses the gravity model of trade to investigate the effect of foreign aid on exports of aid recipients to donor countries. Most of the theoretical work emphasises the possible 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. Using non-stationary panel (cointegration) estimators to control for omitted variable and endogeneity bias, we find that the net effect of aid on recipient countries’ exports is insignificant, both for our sample (of 123 countries) as a whole and for important regional sub-samples. This finding is in line with the small or insignificant macroeconomic impact of aid found in earlier studies and also suggests that exporters in recipient countries are not benefiting from improved trade relations with donors. Copyright Kiel Institute 2013

Keywords: International trade; Foreign aid; Recipient exports; Non-stationary panel data; F10; F35 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (28)

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DOI: 10.1007/s10290-013-0155-4

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