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 13: Foreign aid, international trade, and financial crises: a developing country perspective

Jose Brambila-Macias, Isabella Massa and Matthew Salois

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


The twin crises of the credit crunch and the economic slowdown severely hit export flows from emerging and developing countries, which dropped by 12 per cent in 2009 compared with 2008 (IMF, 2010). According to the International Monetary Fund (IMF), the decline in trade flows was triggered by both a fall in international demand and a contraction in available trade finance (Thomas, 2009). International demand, on the one hand, dropped as reduced incomes and increased exchange rate volatility led to a decline in consumer spending in the developed world and in particular in the US and Europe. On the other hand, the distress in the international banking system and the deterioration of the relationships between firms due to the growing market uncertainty led to declines in trade financing. The International Chamber of Commerce (2008) reported that the credit crunch was raising concerns about the availability of trade finance especially in developing countries, and this fact was confirmed by a survey conducted by the IMF jointly with the Bankers’ Association for Finance and Trade which showed that trade finance transactions in developing economies have fallen on average by 6 per cent (Auboin, 2009; IMF, 2009). Previous historical episodes suggest that crises are associated with a decline in available trade finance. For example, the 1997 Asian financial crisis witnessed a 16 per cent decline in trade financing (Herger, 2009).

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