Does aid create trade? An investigation for European donors and African recipients

This article has a simple aim ‐ to demonstrate that an empirical link between aid and trade may exist (for some donor‐recipient pairs), but that the nature of this linkage is complex and can take a variety of forms. We challenge the commonly made assertion that aid creates trade. Theoretical considerations can be used to justify a link from aid to trade, from trade to aid, or in both directions together. Indeed, there may be no empirical linkage at all. We examine data on aid and trade flows for a sample of four European donors and 26 African recipients over 1969–95. Three broad findings emerge. First, a statistical link between aid and trade, of whatever form, is the exception rather than the norm. Second, there is very little evidence that aid creates trade; this argument for tied aid is unproven on our analysis of aggregate bilateral flows. Third, France, unlike the other donors examined, does appear more likely to use trade links as a criterion in determining aid allocations.