Foreign aid and export performance of aid-recipient countries: A panel data analysis

• Main Author: Herrera, Gizella Marie A.
• Format: text
• Published: Animo Repository 2008
• Subjects: Economic assistance; Exports; International trade; Economics
• Online Access: https://animorepository.dlsu.edu.ph/faculty_research/6868
• Institution: De La Salle University

This paper examines the relationship between foreign aid inflows and the export performance of the aid-recipient countries through general and specific, that is, by sector-type and by country-income type, terms. Using the panel fixed effect model, this study finds that aid inflows, whether current or previous or whether moderate or excessive levels, are generally not statistically significant in determining exports. The direct effect of current aid at moderate levels to current exports is ambiguous (e.g., positive relationships in general, agriculture and middle income country estimations but negative in manufacturing and low-income countries). Previous aid does increase exports but the positive relationship is stronger for current aid and current exports than previous aid and current exports. Excessive (and unpredictable) aid inflows adversely affect exports except for the manufacturing sector confirming the potential Dutch disease effects of aid. Current aid at moderate levels have a stronger positive effect on agricultural exports but excessive aid has a stronger positive effect on manufacturing exports. Finally, although the results revealed ambiguous results on the lag and parabolic analyses for the country-income-type estimations, aid yields more favorable results towards middle income country reports as compared to its general negative effects on the low-income countries. In order to address the adverse effects of aid on exports, sound policy management should be in place to respond to potential RER appreciation and prioritization of channeling the aid flow toward trade facilitating productive investments. Countries may still continue receiving aid as long as these issues are addressed and as long as aid is used with the end view of graduating into an income-generating economy rather than continuously depending on aid growth and development.