Academic journal article Atlantic Economic Journal

Lingering Effect of Untied Foreign Aid on Exports

Academic journal article Atlantic Economic Journal

Lingering Effect of Untied Foreign Aid on Exports

Article excerpt

Much work has been written on the role of tied foreign aid in generating exports for a donor country. Little is known about the economic role of untied foreign aid, in which recipients are not formally obligated to reciprocate by buying the donor's exports. This note offers a new hypothesis arguing that untied aid has a lingering impact upon a donor country's level of exports. The idea parallels the marketing literature [Palda, The Measurement of Cumulative Advertising Effects, 1964], which states advertising can have a lingering and cumulative effect on sales. The model used assumes a donor country's exports at time t ([E.sub.t]) can be written as a linear function of its present and past levels of untied aid ([U.sub.t] and lagged U's) and a well-behaved random error term ([V.sub.t]):

[E.sub.t] = [Alpha] + [Beta][U.sub.t] + [Beta][Mu][U.sub.t-1] + [Beta][[Mu].sup.2][U.sub.t-2] + ... + [V.sub.t]. (1)

In (1), the untied aid in each successive lagged time period is weighted by a geometrically declining factor, [Mu] (0 [less than or equal to] [Mu] [less than] 1), which represents the carryover impact of untied aid. [Mu] is less than 1 since recipient countries forget the generosity of a donor over time.

Direct estimation of (1) is not feasible since there is only a finite number of observations. To find an estimating form of (1), lag it once and multiply by [Mu]:

[Mu][E.sub.t-1] = [Alpha][Mu] + [Beta][Mu][U.sub.t-1] + [Beta][[Mu]. …

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