Revenue Substitution? How Foreign Aid Inflows Moderate the Effect of Bilateral Trade Pressures on Labor Rights

This paper investigates how foreign aid inflows moderate bilateral trade-based pressures on the exporting countries' labor rights. Because aid provides additional resources to recipient governments, it reduces the importance aid-recipient governments attach to the preferences of their export partners. Consequently, aid inadvertently moderates the leverage exercised by importing countries on the governments of exporting, developing countries. Our analysis of a panel of 91 aid recipient countries for the period 1985-2002 lends support to the “revenue substitution” hypothesis. When aid levels are low, bilateral trade-based pressures are associated with improved labor rights. As aid levels rise, however, the effect loses significance.