Does new donors' aid affect gross exports and GVC participation differently?

Abstract

This paper investigates whether new donors use foreign aid to facilitate their integration in the world economy. With this aim, the effect of foreign aid on gross trade and global value chains (GVC) is estimated for a sample of 12 new donors and 130 recipients over the period from 2000 to 2014. The results from a theoretically justified gravity model show that the aid effects are heterogeneous across donors and, although weak in the short run for GVC, they are however sizable in the long run. Foreign aid has a positive impact on gross trade for all donors, but only for some of them on the length of GVC. In particular, aid provided by Czech Republic, Hungary, Poland, Korea, Thailand and Turkey fosters the two forms of internationalization, whereas aid given by Russia and Israel only affects gross exports. Surprisingly, the magnitude of the aid effects is smaller for China than for other donors.

Keywords:

• New donors
• aid and trade
• aid and GVC
• zero value

JEL classifications:

• F35
• P33

Acknowledgements

We are grateful to the anonymous referees for their constructive and valuable comments and suggestions that helped us greatly improve the quality of this paper. Many thanks also to the participants at the 5th Groningen-Mainz Workshop on Foreign Direct Investment and Multinational Corporations for insightful comments on this paper. Inmaculada Martínez-Zarzoso would like to thank the financial support received from Project PID2020-114646RB-C42 (Ministerio de Economía y Competitividad) and from projects UJI-B2020-57 (Universitat Jaume I) and PROMETEO2018/108 (Generalitat Valenciana).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Here ‘new donors’ refers to the non-DAC members, which covers most of the emerging donors.

2 Naím Moises (2007). Rogue aid. Foreign policy, 159, pp 96. Available at: https://foreignpolicy.com/2009/10/15/rogue-aid/

3 The 12 new donors are the United Arab Emirates, China, the Czech Republic, Hungary, Israel, Kuwait, Poland, Russia, Saudi Arabia, South Korea; Thailand, and Turkey.

4 According to Kumar and Shepherd 2019 and Kaplan, Kohl, and Martínez-Zarzoso 2018, the gravity equation can also be used to explain trade in intermediate goods and VA exports. Hence, we employ the gravity model to study the impact of aid not only on gross trade, but also on the length of GVC.

5 The ISO3 code in Table 1 denote: ARE=United Arab Emirates; CHN=China; CZE=Czech Republic; HUN=Hungary; ISR=Israel; KOR=Korea; KWT=Kuwait; POL=Poland; RUS=Russia; SAU=Saudi Arabia; THA=Thailand; TUR=Turkey

6 This average effect is computed as: ${\beta }_{BAID}=\frac{\mathrm{\partial }X}{\mathrm{\partial }Ai{d}_{ijt}}\ast \frac{Ai{d}_{ijt}}{X}$, that is $\frac{\mathrm{\partial }X}{\mathrm{\partial }Ai{d}_{ijt}}={\beta }_{Aid}\ast \frac{Av(X)}{Av(Aid{)}_{ijt}}$=0.0275*(8.41e+08)/(1.87e+07)=1.24. Av. Denote averages.

7 Other such ministries include the Ministry of Finance of the Russian Federation (The Ministry of Foreign Affairs and the Ministry of Finance, in co-operation with other government agencies, play a leading role in formulating the Russian Federation's development co-operation policy); the Ministry of international Cooperation and Development (United Arab Emirates); and the Ministry of Commerce of the People's Republic of China.

8 Another agency body is the Kuwait Fund for Arab Economic Development, which show a special interest on ethnicity and religion. Others include Korea International Cooperation Agency (KOICA); Thailand International Cooperation Agency (TICA); Saudi Fund for Development (Saudi Arabia) and Israel's Agency for International Development Cooperation (MASHAV).