Does Korea's Official Development Assistance Promote Its Exports?: Theoretical and Empirical Analyses

This paper aims to contribute to narrowing the knowledge gap of aid effects on donor's exports through theoretical and empirical analyses of various ODA types. To explain how aid affects donor's exports, we constructed a theoretical framework that considers aid as "public goods" with externality effects. We also estimate augmented gravity equations using Korea's bilateral exports and ODA data, employing Hausman-Taylor Method and system-GMM to address the endogeneity problem. Through the long-term analysis with aggregated data, we confirmed the positive effects of total ODA, loans, grants and economic aid but no such effect in non-economic (humanitarian) aid At the sub-sector level, we found out that in some cases infrastructure aid had no effects and humanitarian aid showed positive effects, which was contrary to the results obtained analyzing aggregated data. These conflicting results imply that the effects of ODA on exports depend on both ODA types and industrial sectors. By comparing two distinct periods, we found out that the vanguard effects of ODA on donor exports have lasted even after untying aid was introduced These results show that donors are not necessarily anxious about expanding untying aid, since they are highly likely to continue to benefit if aid packages are well designed The government efforts to sophisticatedly make the combination of various ODA types would not only enhance the trade creation effects of ODA but also secure domestic supports for scaling up ODA; hence eventually helping the international community to mobilize financial resources.