Donor aid is often regarded as being informally tied (aid increases donor-recipient exports) and this effect is, in general, interpreted as being harmful to aid recipients. However, in this paper, using a gravity model, we show that aid is also positively associated with recipient-donor exports. That is, aid increases bilateral trade flows in both directions. Our interpretation is that an intensified aid relation reduce the effective cost of geographic distance.
We analyse the effects of various foreign development assistance variables on both recipient and donor exports. We find a particularly strong relation between aid in the form of technical assistance and exports in both directions, thus supporting our interpretation that market knowledge through interpersonal relations is an important driving force for exports. The link between donor exports and aid is particularly strong in the case of exports to Sub-Saharan African countries while the relation between recipient exports and aid seems to be robust across regions. While the statistical relations between aid and trade seem robust to changes in the specification and time-periods, it is intrinsically hard to provide clear evidence of a causal relation. Our sample includes all countries for which data is available during the period 1990 to 2005.