How Does Foreign Aid Impact Australian Exports in the Long-Run?

Abstract

This study investigates the long-run effects of foreign aid on donor exports to recipient countries, using Australian exports to Asia as a case study. Dynamic panel econometric techniques and the Gravity Model of international trade are used to explore the relationship between official development assistance (ODA) and Australian exports to 17 Asian countries between 1980 and 2013. The modelling results show that Australian ODA is positively associated with exports to recipient countries and that, contrary to the findings of previous studies, ODA from other OECD donors also increases Australian exports. In the long-run on average, our preferred model suggests that one dollar of Australian aid increases Australian exports to the recipient by $7.10. Granger causality analysis suggests that causality runs in both directions, confirming that Australian ODA leads to Australian exports. Interestingly, the Australian government’s decision to untie Australian aid from domestic procurement requirements in 2006 does not appear to have reduced the impact of Australian aid on exports. We conclude that calls to ‘tie’ aid are, at best, a distraction, with aid increasing exports more significantly through other (non-tying) channels.

Keywords: International trade, official development assistance, Australia, Asian countries

JEL Classification: F10, F35