Comparative advantage and bilateral foreign aid policy

This paper formulates the problem of bilateral aid allocation in terms of the comparative advantage framework. It is argued that the adaptability of this framework to foreign aid critically depends on the assumption that each donor's aid budget is spent to a large extent on its home market. This assumption is not contradicted by empirical evidence. An analysis of Swiss foreign aid data then suggests that there is scope for considerable gains from specialization. We conclude that donors should coordinate their behavior according to their comparative advantage to achieve an optimal allocation of global aid resources.