When is Trade More Valuable than Aid?

The paper considers the rationale of the slogan ‘trade not aid’. In the absence of aid tying, foreign exchange from pure aid must always be more valuable than an equivalent amount of foreign exchange from exports. Thus, two alternative interpretations of the slogan are considered. First, a comparison of trade with the aid component of an equal amount of foreign assistance; second, a comparison of trade with an equal amount of foreign assistance itself, which, it is argued, is the most relevant comparison to make. It is shown that on realistic estimates of the excess cost of import substitution, the grant element of loans, and the excess cost of aid tying, it is unlikely that trade is more valuable than aid.