Competition for Export Markets and the Allocation of Foreign Aid: The Role of Spatial Dependence among Donor Countries

Abstract

We account for competition for export markets among donor countries of foreign aid by analyzing spatial dependence in aid allocation. Employing sector-specific aid data, we find that the five largest donors react to aid giving by other donors with whom they compete in terms of exporting goods and services to a specific recipient country at both stages of their allocation of aid for economic infrastructure and production sectors. By contrast, evidence for export competition driving aid allocation is lacking for more altruistic donors and for aid in social infrastructure.

Keywords: Aid allocation, sector-specific aid, export competition, spatial dependence

JEL Classification: F35