Economic Research Forum (ERF)

Making aid-for-trade more effective in the MENA region

859
Aid-for-trade represents an important opportunity for developing countries to enhance their trade capacities. But the positive effect of aid-for-trade on exports can hinge on the quality of institutions in recipient countries. According to research reported in this column, in the Middle East and North Africa, it is specific aid types – such as aid to support trade policy reform and aid to enhance productive capacities – that matter most for exports.

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.

Most read

EU climate policy: potential effects on the exports of Arab countries

The carbon border adjustment mechanism aims to ensure that Europe’s green objectives are not undermined by the relocation of production to parts of the world with less ambitious climate policies – but it could impose substantial costs on developing countries that export to the European Union. This column examines the potential impact on exporters in the Arab world – and outlines possible policy responses that could mitigate the economic damage.

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Financial development, corruption and informality in MENA

Reducing the extent of informality in the Middle East and North Africa would help to promote economic growth. This column reports evidence on how corruption and financial development influence the size of the informal economy in countries across the region. The efficiency of the financial sector in MENA economies reduces the corruption incentive for firms to seek to join and stay in the formal sector.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Climate change threats and how the Arab countries should respond

The Arab region is highly vulnerable to extreme events caused by climate change. This column outlines the threats and explores what can be done to ward off disaster, not least moving away from the extraction of fossil fuels and taking advantage of the opportunities in renewable energy generation. This would both mitigate the potential for further environmental damage and act as a catalyst for more and better jobs, higher incomes and improved social outcomes.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Exchange rate undervaluation: the impact on participation in world trade

Can currency undervaluation influence participation in world trade through global value chains (GVC)? This column reports new evidence on the positive impact of an undervalued real exchange rate on the involvement of a country’s firms in GVCs. Undervaluation acts as an economy-wide industrial policy, supporting the competitiveness of national exports in foreign markets vis-à-vis those of other countries.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Egypt’s labour market: new survey data for evidence-based decision-making

As Egypt faces substantial social and economic shifts, understanding the labour market is crucial for designing policies that promote employment and inclusive economic growth. This column introduces the latest wave of the Egypt Labor Market Panel Survey, which provides fresh, nationally representative data that are vital for examining these dynamics.




LinkedIn