Aid and Trade - A Donor's Perspective

Abstract

Aid is given for various purposes. Its impact on donors' exports usually depends on whether it is given for altruistic reasons (to overcome human tragedies and disasters) or in an understanding to promote development (to finance infrastructure or social projects). As to humanitarian aid the impact of aid on donors' exports will be most probably lower than in the latter case where related and unrelated imports for realizing development projects have been explicitly or implicitly agreed upon. Germany is known to be a country that ranks below average in tying its aid among the EU countries. Nonetheless there have been studies that found an extremely high positive impact of German bilateral aid on German exports. This finding will be re-examined in this study. An augmented gravity model is utilized to evaluate the impact of German bilateral aid on German exports. Stochastic and deterministic trends in the series are controlled to avoid spurious regression results.

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