Chapter 9: Inter-linkages of foreign aid and trade policy in trade-theoretic frameworks
The link between foreign aid (often called international transfer) and foreign (or, international) trade is an obvious one. One country is giving money to another, and the same pair of countries are also trading goods and services with each other. Therefore it is not surprising that academics and policy makers have explored the implications of possible interdependence between the two. The interdependence can occur via a variety of channels. It could be a spurious interdependence as well: a third factor affecting both. For example, a historical/colonial relationship could be affecting both foreign aid and foreign trade. In a survey of the literature on aid for trade, Suwa-Eisenmann and Verdier (2007: 485) concluded that ‘aid flows may affect trade flows, either because of the general effects they induce in the recipient country, or because aid is directly tied to trade, or because it reinforces bilateral economic and political links (or a combination of all three)’. The first question that arises is, do donor countries give foreign aid in return for a better access to markets in the recipient countries? This is the issue of tying aid to more trade, possibly at the expense of trade with other trading partners. There is a large empirical literature on the motive for giving aid (see, for example, McKinlay and Little, 1977; Maizels and Nissanke, 1984; Khilji and Zampelli, 1994; Trumbull and Wall, 1994; Alesina and Dollar, 2000).
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