Aid and Trade – A Donor's Perspective

One reason donors provide foreign aid is to support their exports to aid-recipient countries. Time series data for Germany suggests an average return of between US$1.04–$1.50 for each US dollar of aid spent by Germany. Although this is well below previous estimates, the value is robust to different specifications and econometric approaches. Interestingly, we find strong evidence of crowding out between bilateral donors in the sense that bilateral aid from other EU members significantly reduces exports from Germany to the recipients. The evidence suggests that, in the long run, aid causes exports and not vice versa. We discuss the implications these findings might have for aid volumes and allocation.     

The Long-run Relationship between Outward Foreign Direct Investment and Total Factor Productivity: Evidence for Developing Countries

Outward foreign direct investment (FDI) from developing countries has been growing significantly in both absolute and relative importance in recent years. Nevertheless, there is surprisingly little research on the home-country effects of outward FDI for these countries. This paper examines the long-run relationship between outward FDI and total factor productivity for a sample of 33 developing countries over the period from 1980 to 2005. Using panel co-integration techniques, we find that outward FDI has, on average, a robust positive long-run effect on total factor productivity in developing countries and that increased factor productivity is both a consequence and a cause of increased outward FDI.     

The Effectiveness of Aid under Post-Conflict Conditions: A Sector-Specific Analysis

It is widely believed that foreign aid may help conflict-affected countries to recover after the termination of conflicts. However, the available empirical evidence supporting this view largely neglects the heterogeneous nature of aid. Drawing on the conflict database of the Uppsala Conflict Data Program, we address the hypothesis that the effectiveness of post-conflict aid differs between specific sectors. Our focus is on social and economic infrastructure which is most likely to suffer during conflict episodes so that the need for aid is particularly pressing in this area. We find fairly robust evidence that post-conflict aid is effective in improving social infrastructure. In contrast, aid appears to be ineffective in improving economic infrastructure.