What is the relation between foreign aid and trade?

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

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade, aid, endogeneity
• Subjects: F - International Economics > F1 - Trade; F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; F - International Economics > F3 - International Finance > F35 - Foreign Aid

References

Burnside, C. & Dollar, D. (2000). Aid , Policies , and Growth: Comment. American Economic Review, 90(4), 847–868. Denizer, C., Kaufman, D., & Kraau, A. (2015). Good Countries or Good Projects ? Comparing Macro and Micro Correlates of World Bank and Asian Development Bank Project Performance. (April). Easterly, W. (2003). Can Foreign Aid Buy Growth? Journal of Economic Perspectives, 17(3), 23–48. Jeffrey, F. & Romer, D. (1999). Does Trade Cause Growth. American Economic Review, (1991). Rajan, R. G. & Subramanian, A. (2008). Aid and Growth: What Does the Cross-Country Evidence Really Show? Review of Economics and Statistics, 90(4), 643–665. Sachs, J. D. &Warner, A. (1995). Economic reform and the process of Global integration. Brookings Papers on Economic Activity, 1995(1), 1–95. Wacziarg, R. & Welch, K. H. (2008). Trade liberalization and growth: New evidence. World Bank Economic Review, 22(2), 187–231. Wood, A. (2008). Looking Ahead Optimally in Allocating Aid. World Development, 36(7), 1135– 1151