Aid for Trade Effectiveness: Complementarities with Economic Integration

Abstract

Developing countries are increasingly using regional integration as a main policy lever when pursuing a trade‐led growth strategy, and today, ‘deep’ preferential trade agreements go beyond trade policy negotiations and cover trade facilitation issues. Since aid for trade (AfT) has been recognised as a powerful instrument for increasing developing countries' trade capacity by targeting internal trade costs, this article tests whether complementarities exist between this type of aid and economic integration using a gravity model on panel data for the period 1995–2005. Results indicate that AfT, when combined with economic integration, has been effective in increasing trade flows. Both South–South and North–South trade flows have benefited, and the combination of the two instruments has been particularly effective in expanding the South's exports to the North. Finally, when breaking down AfT into categories, assistance to trade‐related institutions seems to generate the strongest complementarities with economic integration.

Aid, trade and migration: How do bilateral flows interact?

“…On the other hand, aid can be tied to donors' exports (Canavire‐Bacarreza, Nunnenkamp, Thiele, & Triveño, ; Claessens, Cassimon, & Van Campenhout, ; Dollar & Levin, ): bilateral donors are prone to reward trade partners and new market opportunities. Finally, aid efforts can support trade activities, in particular since the inception of the “Aid for Trade” initiative, in which aid is associated with economic integration (see Cadot, Fernandes, Gourdon, Mattoo, and Melo, ; Vijil, for details). Studies have found that up to one‐third of assistance delivered is spent directly on imports of goods from the donor economy (Wagner, ).…”

Aid for Trade and Real Exchange Rate in Recipient-Countries

“…Against this backdrop, we now analyse how AfT flows and NonAfT flows (which summing up constitute total ODA flows) affect the real exchange rate in recipient-countries. According to the Organization of Ghimire et al, 2016;Helble, et al, 2012;Hoekman, and Shingal, 2017;Hühne et al, 2014a;2014b;Hynes and Holden, 2016;Martínez-Zarzoso et al, 2017;Vijil, 2014;Vijil and Wagner, 2012) or export product diversification/economic complexity (e.g., Gnangnon, 2019bGnangnon, , 2019cKim, 2019). We, therefore, hypothesize that as it is invested to promote the expansion of the tradables sector, AfT flows could be associated with real exchange rate depreciation in the recipient-countries.Specially, AfT allocated to the development of economic infrastructure in recipient-countries is the dominant category of AfT flows.…”

Effects of Foreign Aid on Income through International Trade

“…In some cases, donors give aid to countries with which they have weak trade links, with the aim of establishing closer relations. The nexus between giving aid and forming FTAs has only been investigated in specific contexts, namely in the aid for trade literature (Vijil, 2014) and in research on trade flows between EU and North African countries (Martínez-Zarzoso, Nowak-Lehmann, & Johannsen, 2012). Vijil (2014) found complementarities between aid for trade and regional economic integration, while Martínez-Zarzoso et al 2012found that both aid and FTA/CU agreements promote trade in North African countries, and that the two measures complement each other.…”