Munich Personal RePEc Archive

What is the relation between foreign aid and trade?

Gachet, Adrian Nicholas (2016): What is the relation between foreign aid and trade?

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Abstract

This essay will discuss the relationship between foreign aid and trade. Major scholars on both topics often find two outcomes: 1) trade openness is commonly part of the constitution of “good” policies that promotes effectiveness of foreign aid, hence endorses growth (Burnside and Dollar, 2000). Furthermore there is a a great amount of literature about trade promoting growth directly (Frankel and Romer,1999;Wacziarg andWelch, 2008; Sachs andWarner,1995). 2) Foreign aid does not promote growth by its own (Easterly,2003; Denizer et al,2014) thus, probably, if trade promotes growth, foreign aid does not have a significant “indirect” effect on trade. This essay will discuss if foreign aid correlates with trade. The result suggests that for a set of developing countries between 1990-2013,foreign aid correlates positively with future trade; e.g foreign aid applied yesterday will be positively correlated with today’s trade. It is important to mention that I am not looking for causal relations, just a correlation (as an exercise) that can help to visualize how both variables relate across the selected developing countries and time.

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