Estimating the Evolving Trade Effect of Foreign Aid in the Context of Aid Competition: Evidence From European Countries

Abstract

This paper explores the evolving trade effect of foreign aid using data from European countries from 1962 to 2020 in the context of multidonor competition. Our varying-coefficient panel shows a significant country- and time-heterogeneous trade effect of European donors' aid; however, aid competition can produce a mix of trade promotion and inhibitory effects. Estimations of aid's evolving trade effect reveal that donors' aid scale and (export) industrial concentration have a positive effect on promoting the trade–aid relationship with aid scale showing a reverse U-shaped effect; the share of Aid for Trade (AfT) exerts a negative effect, and the donor's trade deficit demonstrates a positive impact on aid–trade effect.