THE DYNAMIC EFFECTS OF U.S. FOOD AID

I. INTRODUCTION The effects of United States food aid on recipient country agriculture have been heatedly debated for years. Does food aid depress producer incentives, thereby retarding output growth? Does it substitute for food that would otherwise be imported commercially from the donor, thereby providing balance of payments relief? Does food aid have long-run stimulative effects on recipient country commercial imports, thereby developing markets for donors? Are there pecuniary commercial trade externalities caused by food aid, wherein the donor captures either more or less than the marginal increase in recipient country commercial food imports that food aid induces? Although food aid may have important medium- to long-term effects, there is a glaring absence of empirical research on these questions using dynamic modeling techniques. We apply vector autoregression methods to a 1961-95 panel of data on food production, food trade, and program food aid shipments from the United States - by far the world's largest bilateral food aid donor - for the 18 countries that have most benefited from U.S. food aid over the past 40 plus years. This analysis uncovers important, intuitive multiyear patterns not previously identified in the vast literature on food aid. II. THE ISSUES Food aid was formalized in the United States in 1954 under Public Law 480 (PL480), the Agricultural Trade Development and Assistance Act (later renamed Food for Peace).(1) Title II (emergency) aid is distributed for humanitarian purposes through charities. Titles I and III, program food aid, provide food on concessional terms that recipient governments then sell to earn revenue (counterpart funds). Program (nonemergency) food aid represents the lion's share of food aid shipments, historically about 80% of direct, bilateral food aid. Compared to Title II, program food aid is more fungible, more commonly used for broader development purposes by recipients and for trade promotion purposes by donors, and its effectiveness and desirability are more contested. We study program food aid in this paper, hereafter referring to it simply as "food aid," for the sake of brevity. The multiple, sometimes conflicting objectives of food aid have sparked heated debate over its efficacy in promoting either agricultural development in recipient economies or trade development for donors. Particularly intense debates have surrounded the questions of whether food aid (1) is "additional" to commercial trade volumes, as the international food aid convention insists, (2) establishes distribution channels and fosters consumer taste for donor country products, thereby stimulating long-term commercial trade, or (3) depresses or stimulates recipient country food production. There are no unambiguous analytical answers to these questions; they demand empirical investigation. While there are other conceptual debates in the literature - and many over operational details - we restrict our attention to these three fundamental issues. The primary question to donor country agricultural producers is whether food aid creates additional commercial export opportunities. Under international aid agreements, food aid recipient countries are obliged to maintain a "normal" volume of commercial food imports (the "usual marketing requirement," or UMR) so as to ensure the "additionality" of food aid. If the additionality principle is honored, Acker [1989, 165] observes that "food aid programs provide an opportunity to empty granaries and warehouses, build up taste preferences for U.S. commodities, and through the economic development consequences of our PL 480 programs, build purchasing power for future commercial sales of United States agricultural commodities." As researchers such as Abbott and McCarthy [1982] and Von Braun and Huddleston [1988] note, however, food aid commonly seems to substitute in part for commercial imports, violating the additionality principle. …