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Do donors care about declining trade revenue from liberalization? an analysis of bilateral aid allocation

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  • Subhayu Bandyopadhyay
  • Javed Younas

Abstract

Many developing-country governments rely heavily on trade tax revenue. Therefore, trade liberalization can be a potential source of significant fiscal instability and may affect government spending on development activities-at least in the short run. This article investigates whether donors use aid to compensate recipient nations for lost trade revenue or perhaps to reward them for moving toward freer trade regimes. The authors do not find empirical evidence supporting such motives. This is of some concern because binding government revenue constraints may hinder development prospects of some poorer nations. The authors use fixed effects to control for the usual political, strategic, and other considerations for aid allocations.

Suggested Citation

  • Subhayu Bandyopadhyay & Javed Younas, 2009. "Do donors care about declining trade revenue from liberalization? an analysis of bilateral aid allocation," Review, Federal Reserve Bank of St. Louis, vol. 91(May), pages 141-154.
    • Handle: RePEc:fip:fedlrv:y:2009:i:may:p:141-154:n:v.91no.3
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    1. Sijeong Lim & Victor Menaldo & Aseem Prakash, 2015. "Foreign aid, economic globalization, and pollution," Policy Sciences, Springer;Society of Policy Sciences, vol. 48(2), pages 181-205, June.
    2. Bandyopadhyay, Subhayu & Lahiri, Sajal & Younas, Javed, 2011. "Should Easier Access to International Credit Replace Foreign Aid?," IZA Discussion Papers 6024, Institute of Labor Economics (IZA).
    3. Lim, Sijeong & Mosley, Layna & Prakash, Aseem, 2015. "Revenue Substitution? How Foreign Aid Inflows Moderate the Effect of Bilateral Trade Pressures on Labor Rights," World Development, Elsevier, vol. 67(C), pages 295-309.
    4. Gnangnon, Sèna Kimm, 2016. "Aid for Trade and trade tax revenues in developing countries," Economic Analysis and Policy, Elsevier, vol. 50(C), pages 9-22.
    5. Subhayu Bandyopadhyay & Sajal Lahiri & Javed Younas, 2012. "Do countries with greater credit constraints receive more foreign aid?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 481-493.
    6. Sèna Kimm Gnangnon, 2017. "Multilateral Trade Liberalization, Export Share in the International Trade Market and Aid for Trade," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-35, October.

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