The Respending Effects of Untying Aid

Analyzes the effect on the U.S. balance of payments of the long-run changes in world trade that would result from "untying" U.S. development loans. In the short run, no longer requiring aid recipients to purchase U.S. products causes a loss of U.S. exports in favor of other nations. As their incomes rise, they import more from the United States. As U.S. export income declines, so will U.S. imports, further improving the payments balance. Unlike earlier models used to estimate this respending effect, the authors' multisector multiplier model links changes in exports to changes in income and thus to changes in imports, with results which fall at the low end of the range established by previous estimates. Under likely variations of basic behavioral assumptions, the multisector multiplier model predicts that the United States would recover 8 to 19 percent of its initial loss from untying. In the most optimistic case, the United States might regain one-third of its first-round loss. (See also R-973, R-974.)