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Does foreign aid promote recipient exports to donor countries?

Research paper by Felicitas Nowak-Lehmann, Inmaculada Martínez-Zarzoso, Dierk Herzer, Stephan Klasen, Adriana Cardozo

Indexed on: 05 May '13Published on: 05 May '13Published in: Review of World Economics



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.