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What is the relation between foreign aid and trade?

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  • Gachet, Adrian Nicholas

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.

Suggested Citation

  • Gachet, Adrian Nicholas, 2016. "What is the relation between foreign aid and trade?," MPRA Paper 70861, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:70861
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    References listed on IDEAS

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    1. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
    2. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
    3. Romain Wacziarg & Karen Horn Welch, 2008. "Trade Liberalization and Growth: New Evidence," The World Bank Economic Review, World Bank, vol. 22(2), pages 187-231, June.
    4. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 643-665, November.
    5. Wood, Adrian, 2008. "Looking Ahead Optimally in Allocating Aid," World Development, Elsevier, vol. 36(7), pages 1135-1151, July.
    6. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
    7. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
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    More about this item

    Keywords

    Trade; aid; endogeneity;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F35 - International Economics - - International Finance - - - Foreign Aid

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