Foreign Aid and Donor's Exports to the Recipients: The South Korean Case

Abstract

This paper examined the relationship between foreign aid and export, for the case of Korea from 1965 to 2015. I argue that foreign aid promotes donor's export to the recipient for following reasons: (1) the explicit and implicit tied-aid agreements directly increase export; and (2) implementing aid policy involves transferring not only money but also people. Thus, it serves as building the political, economic, and social relationships between donor and recipient countries. Those spillover effects of foreign aid can increase the export of donor countries. By applying a dynamic gravity model with GMM estimators, I provided empirical evidence that Korean bilateral ODA is positively related to its export to the recipients. The result showed that the impact of Korean ODA on its exports is positive and more significant in the post-1990s. In specific, for the later period, a percentage increase in Korean bilateral aid is associated with 0.095% increase in export in the short-term and 0.22% increase in export in the long run.