ACDE Trade & Development Seminars
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This study investigates the effects of foreign aid on donor exports to recipient countries in the long run, using aid to Asia as a case study. Dynamic panel econometric techniques and the Gravity Model of international trade are used to explore the relationship between official development assistance (ODA) and Australian exports to 17 Asian countries. The results show that Australian ODA is positively associated with exports to recipient countries. In the long-run, on average, one dollar of Australian aid appears to increase Australian exports to the recipient by $7.10. Causality is estimated to run in both directions, confirming that Australian ODA leads to Australian exports. The government’s decision to untie Australian aid from domestic procurement requirements in 2006 does not appear to have reduced the impact of aid on exports. We conclude that calls to ‘re-tie’ aid are, at best, a distraction, with aid increasing exports more significantly through other channels.