Table of Contents

Handbook on the Economics of Foreign Aid

Handbook on the Economics of Foreign Aid

Edited by B. Mak Arvin and Byron Lew

It would be fair to say that foreign aid today is one of the most important factors in international relations and in the national economy of many countries – as well as one of the most researched fields in economics. Although much has been written on the subject of foreign aid, this book contributes by taking stock of knowledge in the field, with chapters summarizing long-standing debates as well as the latest advances. Several contributions provide new analytical insights or empirical evidence on different aspects of aid. As a whole, the book demonstrate how researchers have dealt with increasingly complex issues over time – both theoretical and empirical – on the allocation, impact, and efficacy of aid, with aid policies placed at the center of the discussion.

Chapter 12: The trade effects of foreign aid: an empirical perspective

Inmaculada Martinez-Zarzoso

Subjects: development studies, development economics, economics and finance, development economics, politics and public policy, international relations


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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