In a nutshell
Aid-for-trade increases both the probability of exporting and the volume of bilateral exports by recipient countries; but the difference in the quality of institutions between recipient and donor countries dampens the positive effect of aid-for-trade on exports.
Given the positive impact of aid-for-trade on the exports of recipient countries, donors should consider increasing the amount of disbursed assistance of this kind, especially in regions that have not historically benefited from large aid inflows.
Since institutions in recipient countries influence the efficacy of aid-for-trade, tying the amount of aid disbursed by donors to reforms undertaken in recipients to strengthen the quality of their institutions would be advisable.
Following the World Trade Organization’s launch of the ‘Aid-for-Trade Initiative’ in 2005, donor countries started funnelling larger volumes of ‘official development assistance’ that aim to enhance the trade capacities of recipient countries.
The MENA region has benefited from aid-for-trade (AfT) inflows since 2002, before such assistance was officially labelled as AfT. Between 2002 and 2019, MENA countries received AfT amounting to US$20 billion on average each year. Moreover, the AfT flowing to them represented around 13% of total disbursed AfT over that period.
Many countries in the region pursued parallel reforms aimed at adopting less restrictive trade policies and opening up their markets to foreign investments. But while AfT can have important positive effects on the region’s development prospects, weak institutions can undermine the outcome.
AfT can be divided into three categories: aid to develop economic infrastructure, aid to enhance productive capacities, and aid to support trade policy reform:
- The first category includes aid flows targeting infrastructure such as transport and storage, communications, energy, in addition to banking and financial services.
- The second category groups all flows related to economic sectors including agriculture, forestry, fishing, industry and mining.
- The third category includes all flows pertaining to trade policy administrative management, trade facilitation, enhancing regional trade agreements and multilateral negotiations, and trade-related adjustments.
In new research, we show that AfT for trade policy comes first in terms of its impact on recipients’ exports (Aboushady et al, 2024). Given its role in promoting trade facilitation, supporting trade-related negotiations and streamlining trade policy, this result comes as no surprise.
By and large, we also find that AfT flows targeting productive capacities are particularly relevant for stimulating the value of exports, whereas AfT flows targeting economic infrastructure are especially important for increasing the probability of exports.
These findings hold for the MENA region and are also true for most of the other regions in the sample. Remarkably, among all the sample regions, the impact of AfT on export volumes is the largest in MENA, while its effect on the likelihood of exporting is the second-largest in MENA.
But we also argue that the effectiveness of AfT depends on the quality of institutions and policies in recipient countries. While poor domestic policies create distortions that would reduce the efficacy of aid through unproductive use, good governance conditions can enhance the effectiveness of aid by minimising the risk of aid diversion and capture by elites.
Our key findings show that the effect of AfT on exports is overall positive but decreasing with the institutional distance between aid recipients and donors: the larger the distance (that is, the lower the quality of institutions in recipient countries), the smaller the effect of AfT on exports.
Implications for policy
A number of policy recommendations stem from our research.
First, given the important role of institutions, recipient countries would further enhance the benefits of AfT if they improve their governance quality and reduce the institutional gap relative to donor countries. This is particularly relevant for MENA countries, in view of their comparatively weak institutions and in light of our findings on the large impact of AfT on their exports.
Second, in light of the positive contribution of AfT to the expansion of both the prospects of trade and the trade volume in aid-recipient countries, donors should consider increasing the amount of disbursed AfT, especially in regions that did not historically benefit from large aid inflows.
Lastly, since institutions in aid-recipient countries influence the efficacy of AfT, tying the amount of aid disbursed by donors to reforms undertaken in recipients to strengthen the quality of their institutions would be advisable.
Further reading
Aboushady, Nora, Georges Harb and Chahir Zaki (2024) ‘Aid for trade and export performance of recipient countries: the moderating role of institutions’, The Journal of International Trade and Economic Development 1-29.
Gnangnon, S-K (2019) ‘Aid for trade and export diversification in recipient-countries’, The World Economy 42(2): 396-418.
Lee, Y, and J Oh (2022) ‘Is aid for trade working? Evidence from Southeast Asian countries’, Asia Pacific Management Review 27(2): 137-44.
Lemi, A (2017) ‘Aid for trade and Africa’s trade performance: Evidence from bilateral trade flows with China and OECD countries’, Journal of African Trade 4: 37-60.
Nishitateno, S, and H Umetani (2023) ‘Heterogeneous effects of aid for trade on donor exports: why is Japan different?’, Review of International Economics 31(3): 1117-45.
