Aid for Trade and the Real Exchange Rate

Abstract

The current analysis contributes to the literature on the real exchange rate (RER) effect of development aid by separating out the RER effect of the development aid allocated to the trade sector -referred to as Aid for Trade (AfT) -from the effect of NonAfT ows. The empirical ndings show that AfT ows exert a RER depreciation in recipient-economies, while NonAfT ows are associated with a RER appreciation.From a policy perspective, these results show that scaling-up AfT ows could promote countries' competitiveness in the international trade market through a greater extent of RER depreciation.

Effect of the Duty-Free and Quota-Free Market Access Initiative in favour of Least developed countries on Domestic Investment in Least developed countries

“…Productive capacities covers sectors such as banking and financial services, business and other services, agriculture, fishing, industry, mineral resources and mining in recipient countries (e.g., Calì and te Velde, 2011;Gnangnon and Roberts, 2017;OECD-WTO, 2017;Tadesse et al, 2021;Vijil and Wagner, 2012). Development aid can also contribute to the accumulation of human capital (i.e., education and health) (e.g., Birchler and Michaelowa, 2016;Kotsadam et al, 2016), induce a depreciation of the real exchange rate or an appreciation of the real exchange rate in the recipient country (through the so-called Dutch disease effect) (e.g., Addison and Baliamoune-Lutz, 2017;Gnangnon, 2022a;Ouattara and Strobl, 2008). Aid can also help respond to humanitarian crises (e.g., Mary and Mishra, 2020), reduce political instability (e.g., Asongu and Leke, 2019;Steinwand, 2015), and enhance political institutions (e.g., Jones and Tarp, 2016).…”

Do Aid for Trade Flows Help Reduce the Shadow Economy in Recipient Countries?

“…On another note, AfT ows can affect the shadow economy through their effect on the real exchange rate in the recipient countries. In fact, AfT ows are associated with the depreciation of the real exchange rate, i.e., the fall in the relative price of non-tradables to tradables exports Gnangnon (2022). Hence, by altering relative prices of tradable to non-tradables and making exports more pro table, AfT ows would encourage the development of export activities, and provide greater incentives for underground trading rms (which were de facto less competitive) to develop their activities in the formal trade sector.…”

“…This is the case if such an aid genuinely improves human capital in recipient countries (e.g., Birchler and Michaelowa, 2016;Kotsadam et al, 2016), insofar as an improvement in human capital raises the opportunity of producing in the shadow economy (e.g., Berdiev et al, 2015;Berdiev and Saunoris, 2018;Buehn and Farzanegan, 2013; G€erxhani and van de Werfhorst, 2013). On the other hand, higher NonAfT ows can result in an appreciation of the real exchange rate, i.e., an increase in the relative price of non-tradables to tradables (Gnangnon, 2022) and makes exports less pro table, and consequently increases trading rms' incentives to operate underground. Overall, the net effect of NonAfT ows on the size of the shadow economy is a priori undetermined theoretically.…”

Do Aid for Trade Flows Help Reduce the Shadow Economy in Recipient Countries?

“…This is the case if such an aid genuinely improves human capital in recipient countries (e.g., Birchler and Michaelowa, 2016;Kotsadam et al, 2016), insofar as an improvement in human capital raises the opportunity of producing in the shadow economy (e.g., Berdiev et al, 2015;Berdiev and Saunoris, 2018;Buehn and Farzanegan, 2013;G€erxhani and van de Werfhorst, 2013). On the other hand, higher NonAfT ows can result in an appreciation of the real exchange rate, i.e., an increase in the relative price of non-tradables to tradables (Gnangnon, 2022) and makes exports less pro table, and consequently increases trading rms' incentives to operate underground. Overall, the net effect of NonAfT ows on the size of the shadow economy is a priori undetermined theoretically.…”