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May/June 2009, 
Vol. 91, No. 3
Posted 2009-05-01

Do Donors Care About Declining Trade Revenue from Liberalization? An Analysis of Bilateral Aid Allocation

by Javed Younas and Subhayu Bandyopadhyay

Many developing-country governments rely heavily on trade tax revenue. Therefore, trade liberalization can be a potential source of significant fiscal instability and may affect government spending on development activities—at least in the short run. This article investigates whether donors use aid to compensate recipient nations for lost trade revenue or perhaps to reward them for moving toward freer trade regimes.