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Copyright © The Author 2007. Published by Oxford University Press.
Aid and trade
* Paris School of Economics, e-mail: akiko.suwa{at}ens.fr
** Paris School of Economics, University of Southampton, and CEPR, e-mail: thierry.verdier{at}ens.fr
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This paper surveys the recent theoretical and empirical literature that explores the relations between aid and trade and asks about the complementarity or substitution effects at work. We distinguish between the effects of aid on trade flows and on trade policies, of the donor as well as the recipient countries. Special focus is given on trade facilitation, or ‘aid for trade’.
Key Words: aid for trade • aid • competitiveness
A first version of this paper (June 2005) was prepared as a background paper for the OECD Development Centre project on ‘Policy Coherence for Development’ under the supervision of Jeff Dayton-Johnson. Juan Carluccio provided superb research assistance. We thank Jeff Dayton-Johnson and participants at the June 2005 meeting at the OECD, and Bernard Hoekman for insightful advice and suggestions.
1 Stability means that in global markets, an excess demand for a particular good leads to increase of the price of this good in order to restore the initial competitive equilibrium.
2 See also, for more details, the survey in Brakmann and van Marrewijk (1988).
3 As noted in the literature, an important necessary condition for the transfer paradox to occur in such a context is the existence of inferiority in national consumption in the donor country of the recipient's importable good (i.e. a negative income elasticity). While this may initially appear as a rather pathological situation, two remarks are worth making to make the case empirically plausible. First, some products (such as food items) may well be inferior for individual consumers, implying that inferiority at the national level cannot be automatically dismissed. Furthermore, even when each good is normal at the individual level, national consumption may well exhibit inferiority when there is a certain pattern of individual heterogeneity.
4 More specifically, the recipient cannot be impoverished if the tariff rate is adjusted to hold imports or exports to the pre-aid level (Ohyama, 1974).
5 The most complete welfare analysis of tied aid in the context of a two-country world has been undertaken by Kemp and Kojima (1985). More specifically, they consider the situation where the tying of aid takes the form of an expenditure pattern forced on the recipient government. The latter has to spend a certain fraction of the transfer on the importable good. See also Schweinberger (1990), who considers an alternative tying rule, constraining the spending of the income by the private sector of the economy.
6 More precisely, Hatzipanayotou and Michael (1995) show that when the imported and public goods are net complements and the consumer's marginal willingness to pay for the public good is larger than its unit cost of production (something which may be expected to hold in LDCs in which the level of public goods is quite small), then a small aid transfer can reduce the welfare of the recipient country.
7 Schweinberger (2002) extends their analysis by showing how different assumptions about the mobility or immobility of factors across industries affect the sign and magnitude of the Johnson and the non-traded-goods effects.
8 These determinants either respond to recipient needs (humanitarian motives) or to donors’ interests (McKinley and Little, 1979). The donor might be willing to extend its political influence (aid will, for instance, incite the recipient country to join the donor's position in UN voting), comfort a military ally, or increase its market share for exports. Dudley and Montmarquette (1976) build a structural model where aid enters into the utility function of the donor country and test it on a cross-section of LDCs in 1970 considering one donor at a time (hence, a small number of observations). Most papers, though, deal with reduced-form estimations, a good example with multiple donors/multiple recipients/multiple years (1980–99) being Berthelemy and Tichit (2002). They find that aid will go to countries attracting FDI from any other countries (and not only from the donor country) and linked by strong bilateral trade with the donor.
9 A recent study (Egger and Nelson, 2007) considers the aid–trade link through an amended asymmetric North–South gravity model, extending the Anderson and Van Wincoop framework to the case where the North produces differentiated goods and the South produces homogeneous products. Modelling the impact of aid on trade through its effects on bilateral political and economic links (themselves, in turn, affecting bilateral resistance to trade indices), they also find a positive effect of foreign aid on exports from the donor to the recipient.
10 In their study, France appears as an exception: for quite a large number of recipients of French aid (7 out of 20), the causality runs from aid to trade.
11 ‘Sector allocable ODA includes general budget support and excludes food aid and other commodity assistance, debt relief, humanitarian aid, administrative costs, support to NGOs, refugees in donor countries and imputed student costs.’ (WTO/OECD, 2006)
12 These are UNCTAD, ITC, UNDP, the WTO, the IMF, and the World Bank. The International Trade Centre (ITC) is a joint venture of the WTO and UNCTAD. The IF received US$19 m in pledges during 2003, of which around US$10 m were disbursed during that year.
13 The JITAP is more a ‘results-oriented’ programme than the IF. By September 2003, the JPTA had received US$12.6 m in its Common Trust Fund.
14 OIE is the world organization for animal health.
15 Anecdotal evidence points also to contradicting objectives in trade-related assistance versus market-access policies. Bogart and Trzeciak-Duval (2004, p. 12) mention that the EU announced in February 2004 an ‘Action Plan on Commodities’ to favour diversification in exports from the developing countries. However, on the other hand, the EU restricted market access for some of the commodities targeted by the action plan, such as sugar and rice.
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