Aid for trade and export performance of recipient countries: The moderating role of institutions

Abstract

Using bilateral trade and aid for trade (AfT) data for a sample of 155 countries over the period 2002-2019, we implement a gravity analysis to assess whether bilateral aggregate AfT and various AfT categories have stimulated exports of AfT-recipient countries to donors, and to examine if the institutional distance between recipients and donor countries affected the efficacy of AfT in promoting the former's bilateral exports. We show that AfT flows tend to foster exports of recipients, both at the extensive margin and intensive margin. Moreover, the trade-stimulating effect of AfT for trade policy and regulation is more pronounced than that of other AfT flows. Finally, institutional disparities between trading partners dampen the effectiveness of AfT in promoting exports at both margins of trade; and certain regions and income-based groups have managed to benefit more than others from AfT. Increasing the amount of disbursed aid flows is likely to speed-up the insertion of developing countries into world markets; strengthening governance in AfT-beneficiary countries and closing their institutional gap with donors would enhance the effect of AfT on their exports; and tying AfT flows to governance-related reforms in recipients can be an option to consider by donors.

KEYWORDS:

• Aid for trade
• trade
• institutions
• extensive/intensive margin
• institutional distance
• gravity model

JEL Classifications:

• F10
• F14

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 OECD and WTO flyer on the “Aid for Trade Initiative”, available online at: https://www.oecd.org/dac/aft/45581702.pdf

2 AfT flows are broadly classified under three main categories: (i) flows aiming at building trade policy and regulation capacity (AfT for trade policy and trade-related adjustment); (ii) flows targeting the development of productive capacity (AfT for building productive capacity); and (iii) flows with the objective of enhancing infrastructure (AfT for economic infrastructure). The first category of AfT includes all flows pertaining to trade policy administrative management, trade facilitation, enhancing regional trade agreements and multilateral negotiations, and trade-related adjustments. The second category regroups all flows related to economic sectors including agriculture, forestry, fishing, industry, and mining. Finally, the third category covers all flows targeting infrastructure like transport and storage, communications, energy, in addition to banking and financial services. Each of the three AfT categories is supposed to foster trade capacities in recipients: the first by harnessing trade policies and measures to promote the integration of recipients in the world markets, the second by enhancing the competitiveness of the economy, and the third by reducing transaction costs and increasing the efficiency of infrastructure.

3 Following the standard practice, we choose 2002 as a starting year since it is the first year with consistent data on annual disbursed aid flows. Although data on aid has recently been available for 2020 and 2021, we select 2019 as the last year of our examination period. Since our main aim is to examine the structural relationship between AfT and exports of recipients, we believe that it would be better not to include data for the years post the Covid-19 pandemic. Indeed, the latter pandemic has substantially altered international trade flows as well as their determinants, including AfT. Thus, incorporating the post Covid-19 data would “blur” the analysis of the fundamental relation between AfT and trade that we study and would distort the key lessons that can be learned.

4 As a measurement of AfT flows, researchers have typically opted for the sum of disbursed amounts in the three AfT-related areas: economic infrastructure, building productive capacity, and trade policy and regulations. In many cases however, researchers have also investigated the effect of (at least) one of the three categories separately or some components of a particular category.

5 This includes the set of rules, regulations and constitutions that prevail in a country. Additional informal channels can also impact the agents' behavior and encompass conventions and behavior norms. Those channels are often labeled informal institutions. In the present study our primary focus is on formal institutions.

6 When the dissimilarities are significant enough.

7 With the exception of Lemi (2017) who applied three-stage-least squares and estimated simultaneously trade and AfT to account for reverse causality. In addition, two papers have addressed the endogeneity of AfT differently in their robustness checks; however, their main findings are based on specifications with lagged values of AfT: Pettersson and Johansson (2013) and Martinez-Zarzoso, Nowak-Lehman D, and Rehwald (2017). The former used an instrumentation strategy whereas the latter applied the dynamic ordinary least squares estimator.

8 In this regard we significantly differ from the two papers. Ly-My, Lee, and Park (2021) study the effect of AfT on the extensive/intensive margins of imports of recipients, whereas our paper tackles the exports of recipient countries. In addition, unlike Nathoo et al. (2021), our sample is not confined to Sub-Saharan African countries.

9 When computing the mean aid of the group of “similar” countries, we exclude the aid received by the recipient country at hand.

10 Except in the case of aggregate AfT, at the extensive margin, where the coefficient of the interaction term is insignificant.

11 With the exception of the insignificant effect of GDP of the origin country at the extensive margin of trade when aggregate AfT is used.

12 The finding that countries that have not been large AfT-recipients have benefited the most from aid could reflect diminishing returns to AfT, as demonstrated in Ghimire, Debasri, and Eskander (2016). Moreover, the value of aid is not the only factor that matters when it comes to the efficacy of aid in stimulating its target-variable (Tadesse, Shukralla, and Fayissa 2017). We are grateful for the reviewers for drawing our attention to this matter.

13 With the exception of the case of aggregate AfT, at the extensive margin, where GDP of the origin is insignificant.

14 By and large, the quality of governance is better in donor countries. The average value of the aggregate governance indicator among donor countries over the period is 1.05, whereas its counterpart among recipient countries is -0.43. The indicator ranges from -2.5 to 2.5.