Trade as a Motivation in Aid Allocation as the Economy of Donor Countries Fluctuates

Sammanfattning: In this paper we examine whether foreign aid commitments to closer trading partners are less sensitive to economic fluctuations in the donor country. We argue that this is the case. If donors act in their own self-interest, they will prioritize aid to closer trading partners in economic difficult times, as a means to keep the exports up. We test this argument by using fixed effect regressions on panel data on output gap and bilateral aid, and trade for 28 donors and 154 recipients from 1992 to 2009. Our results are in line with our hypothesis. We note that the effect of prioritizing closer trading partners is more likely to emerge when donor countries are in economic crises. Our results hold up when adding control variables frequently used in the academic literature on aid allocation. Our findings contribute to the current literature on aid allocation in so much that it provides an explanation as to how short-term self-interest of donors can explain aid motivation. These findings may have implications for countries that are considered to be less attractive trading partners, as their aid volatility would increase more.