Chapter 12: The trade effects of foreign aid: an empirical perspective
Over the years, developed countries have used foreign aid as a means of broadening their foreign policy in the developing world. In some instances, donor countries have given bilateral aid mainly to countries that were previous colonies, and countries with which they share a common language, culture and history. In other instances, donors have given aid for strategic and economic reasons. This economic interest has usually been related to commercial motives. More specifically, donors have sometimes linked aid to trade – the so-called tied aid – and have conditioned the transfer of funds to the purchase of goods and services from the country transferring the funds. However, this practice has considerably decreased since 2005, when the Organisation for Economic Co-operation and Development-Development Assistance Committee (OECD-DAC) recommended abolishing it, in particular, for aid to low-income countries. The link between aid and trade is an issue that has raised significant interest in the academic community over the years. This link can be analyzed in a number of different contexts and the purpose of this chapter is to focus on two particular contexts. First, this chapter focuses on the relationship between regional trade policies, in the form of free trade agreements (FTAs) between donor and recipient countries, and aid policies. Surely, the most challenging question is whether aid is effective and helps poor countries climb the ladder of development.
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