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Promoting Trade Liberalization: Theoretical Analysis of Foreign Aid as Prize

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  • Malokele Nanivazo
  • Sajal Lahiri

Abstract

We investigate whether foreign aid can be used to induce trade policy reforms. We develop a two-period political economic model where promise of aid in period 2 depends on chosen tariff in period 1. We consider three scenarios depending on whether the donor is passive/active and whether the two governments move simultaneously or sequentially. We find a sufficient condition for unconditional aid to increase the level of optimal tariff, and the possibility of unconditional aid increasing optimal tariff decreases when the donor is active rather than passive.

Suggested Citation

  • Malokele Nanivazo & Sajal Lahiri, 2015. "Promoting Trade Liberalization: Theoretical Analysis of Foreign Aid as Prize," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 748-757, August.
    • Handle: RePEc:bla:rdevec:v:19:y:2015:i:3:p:748-757
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    File URL: http://hdl.handle.net/10.1111/rode.12157
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    References listed on IDEAS

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    1. repec:bla:rdevec:v:13:y:2009:i:s1:p:403-415 is not listed on IDEAS
    2. Claudia Williamson, 2010. "Exploring the failure of foreign aid: The role of incentives and information," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(1), pages 17-33, March.
    3. Van Long, Ngo & Vousden, Neil, 1991. "Protectionist responses and declining industries," Journal of International Economics, Elsevier, vol. 30(1-2), pages 87-103, February.
    4. Swaroop, Vinaya & Jha, Shikha & Sunil Rajkumar, Andrew, 2000. "Fiscal effects of foreign aid in a federal system of governance: The case of India," Journal of Public Economics, Elsevier, vol. 77(3), pages 307-330, September.
    5. Lahiri, Sajal & Raimondos-Moller, Pascalis & Wong, Kar-yiu & Woodland, Alan D., 2002. "Optimal foreign aid and tariffs," Journal of Development Economics, Elsevier, vol. 67(1), pages 79-99, February.
    6. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," The World Bank Economic Review, World Bank, vol. 12(1), pages 29-58, January.
    7. Lahiri, Sajal & Raimondos-Moller, Pascalis, 1997. "On the tying of aid to tariff reform," Journal of Development Economics, Elsevier, vol. 54(2), pages 479-491, December.
    8. repec:bla:rdevec:v:13:y:2009:i:s1:p:373-381 is not listed on IDEAS
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    10. Steve Radelet, 2006. "A Primer on Foreign Aid," Working Papers 92, Center for Global Development.
    11. Schweinberger, Albert G. & Lahiri, Sajal, 2006. "On the provision of official and private foreign aid," Journal of Development Economics, Elsevier, vol. 80(1), pages 179-197, June.
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    Cited by:

    1. Lorz, Oliver & Thede, Susanna, 2024. "Tariff overhang and aid: Theory and empirics," Journal of Development Economics, Elsevier, vol. 166(C).

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