De Facto Fiscal Space in Donor-countries and Their Aid Supply: To What Extent is Trade-related Aid Supply Affected?

Abstract

This article investigates the impact of fiscal space in donor-countries on their official development aid (ODA) supply. It relies on the indicator of ‘De Facto Fiscal Space’ proposed by Aizenman and Jinjarak (The Fiscal Stimulus of 2009–10: Trade Openness, Fiscal Space and Exchange Rate Adjustment, NBER Working Paper 17427, 2011) and on a panel of 22 donor-countries over the period 1964–2015. The analysis considers four measures of ODA, including the total net aid transfers (NAT), ODA allocated to all sectors in the recipient-countries (ODAALLSECT), ODA allocated to the trade sector and ODA provided for the non-trade sector. The empirical results show that greater fiscal space in donor-countries influences positively donors’ NAT, their ODA allocated to all sectors as well as their ODA allocated to the non-trade sector in recipient-countries. At the same time, greater fiscal space in donor-countries does not influence ODA relating to the trade sector. Furthermore, the impact of fiscal space on ODA supply to the trade and non-trade sectors depends on donor-countries’ level of economic wealth. Jel Classification: E62, F35