The Journal of Politics

Articles

Strategic Side Payments: Preferential Trading Agreements, Economic Reform, and Foreign Aid

Leonardo Baccinia1 and Johannes Urpelainena2

a1 Princeton University

a2 London School of Economics and Political Science

Abstract

We propose that major powers give foreign aid to developing countries to facilitate politically costly economic reforms that preferential trading agreements prescribe. Democratic developing countries (1) need adjustment assistance more than autocracies and (2) can credibly commit to using fungible revenue to compensate the domestic losers, so a side payment for deeper reforms should only be available for democracies. A quantitative test lends support to the theory. Fully democratic developing countries that form a preferential trading agreement with the European Union or the United States obtain a large increase in foreign aid in the short run. These results imply that donors have used foreign aid to strengthen the effect of preferential trading agreements on economic reforms.

Footnotes

  Leonardo Baccini is a Lecturer in the Department of International Relation at the London School of Economics, London, WC2A 2AE, U.K.

Johannes Urpelainen is Assistant Professor of Political Science at Columbia University, New York, NY 10027.

Metrics