The Impact of Development Aid on Swiss Exports

2. Objectives

This paper investigates the relationship between Swiss bilateral official development assistance (ODA) and Swiss exports to recipient countries. The consensus-based Swiss political process which combines a wide-coalition government and semi-direct democracy renders such a study particularly useful in the sense that significant domestic returns from aid definitely facilitate obtaining business community backing for development aid packages. Moreover, the fact that Swiss aid is largely untied and has been so for quite some time makes Switzerland a particularly interesting case study for testing the so-called “goodwill” hypothesis.

3. Data/Methods

The study combines longitudinal (time-series extending backwards to the 1960s) and cross-section (across close to a hundred recipient countries) data on aid and exports of goods to first test the direction of causality between the two variables and then measure the magnitude of this relationship. We use both strands of the econometric methodology, namely time-series analysis and structural econometrics.

4. Results
According to bi-variate as well as tri-variate – i.e. by adding a third variable such as Gross National Income (GNI) of the recipient country – time-series analysis, the general evidence speaks in favour of unidirectional causality between ODA and exports but no global generalization can be made concerning the direction of the causal relationship. Indeed, the nature of the Granger-causality link between aid and exports varies across recipients. However, there is no overwhelming evidence in favour of a causality running from exports to aid that would invalidate our econometric modelling.
The estimation of a structural econometric model through which Swiss exports of goods to developing countries are explained inter alia by Swiss bilateral ODA suggests, generally speaking, a positive and quite strong impact of aid on exports. The elasticity of Swiss exports with respect to Swiss net ODA is estimated at around 0.36. This is however much lower than the estimated elasticity with respect to GNI of the recipient country (0.99) which suggests that – even in Swiss exporters’ interest – development aid should mainly target sustained growth in recipient countries. As for the elasticity of Swiss exports with respect to other OECD countries’ aid, it turns out to be negative (-0.41). This is an indication of a strong substitution effect between Swiss and other countries’ aid which can be explained by the more tied nature of other countries’ aid on average compared to Swiss aid.

Finally, the results also show that, in several cases, the full impact of Swiss ODA on Swiss exports takes time to materialise. This is a clear indication of the validity of the goodwill hypothesis for Switzerland. The long-run impact turns out to be between 1.5 and 7 times higher than the short-run impact depending on the recipient country.