Does Aid Promote Donor Exports? Commercial Interest versus Instrumental Philanthropy

Abstract

This paper investigates by means of advanced panel data techniques whether bilateral aid has been successful in promoting bilateral exports to recipient countries during the period 1988–2007 and to what extent changes in aid policies have influenced this relationship. The main novelty of this research is the distinction between tied and untied aid in a multi‐donor gravity model of trade and the comparison between trade and aid policies in this setting. We find an average positive effect of bilateral aid on exports, which varies over time and across donors and which appears to depend on the extent to which donors tied aid to exports. The effect does appear to have decreased substantially over the period studied and it is even not statistically significant in the 2000s, which could suggest that the recommendations given by the OECD Development Assistance Committee (DAC) concerning the untying of aid and aid allocation have been followed by the donors and led to declining impacts on their exports. Interestingly, these decreasing aid‐elasticities are accompanied by increasing coefficients of the regional trade agreement variable, which is positive and statistically significant after 1994. Finally, we find that the strength of the relationship between exports and bilateral aid is correlated with the extent to which aid is tied and partially related to the sectoral allocation of aid.