Effect of AfT flows on Investment-Oriented Remittances flows

Abstract

Despite the voluminous literature on the effect of Aid for Trade (AfT) flows on recipient countries' trade performance, little is known about the relationship between AfT flows and other capital flows to developing countries. This paper contributes to the literature by exploring the effect of AfT inflows on investment-oriented remittances inflows, notably through the channel of trade costs. Using an unbalanced panel dataset of 106 countries over the period 2002–2019, and the two-step system generalized method of moments, the empirical analysis has established several outcomes. AfT flows exert a positive effect on investment-oriented remittances flows, with the magnitude of this positive effect being higher in Least developed countries than in other countries, and in remittance-dependent countries. AfT flows stimulate investment-oriented remittances flows in countries that face higher trade costs. Finally, total AfT flows reduce investment-oriented remittances flows in countries that experience a higher volatility of the overall trade costs, but boost investment-oriented remittances in countries that improve the quality of trade measures. The analysis shows that AfT flows could be an important leverage for stimulating investment-oriented remittances flows, and promote the development of the private sector in beneficiary countries.

Aid for Trade is more effective when the trading environment is more predictable

“…The present analysis extends Gnangnon (2022b) by investigating whether the effect of AfT flows on investment‐oriented remittances inflows depends on the quality of the trade measures implemented by these countries. In other words, I deepen this analysis by investigating here whether AfT flows reduce investment‐oriented remittances flows in countries that experience a higher volatility of overall trade costs, but boost investment‐oriented remittances in countries that improve the quality of trade measures (the latter reflecting lower levels of trade costs and lower trade costs volatility).…”

“…There are then six sub‐periods, which are 2002–2004; 2005–2007; 2008–2010; 2011–2013; 2014–2016; and 2017–2019. The baseline model also contains sub‐period dummies to apprehend global shocks that could affect simultaneously all countries' investment‐oriented remittances inflows (see Gnangnon, 2022b).…”

“…The lags of the variables in first differences are used as instruments in the equation in levels, and the lags of the variables in levels are used as instruments in the first‐difference equation. In the analysis, the variables considered as endogenous are total AfT flows, the quality of trade measures, non‐investment‐oriented remittances inflows, NonAfT flows, the real per capita income, financial development, and the real exchange rate (see Gnangnon, 2022b, for the rationale for considering these regressors as endogenous).…”

“…Harding & Javorcik, 2012; Xiong, 2022; Ye et al, 2021; Zhang & Felmingham, 2001). In a recent work (Gnangnon, 2022b), I have added to the literature on the relationship between AfT flows and other private capital flows by investigating the effect of AfT flows on investment‐oriented remittances inflows.…”

“…More particularly, in Gnangnon (2022b) I take trade costs to encompass all costs involved in trading goods bilaterally relative to those involved in trading goods domestically, including international shipping and logistic costs, tariff and non‐tariff costs (i.e. direct and indirect costs associated with trade procedures and regulations), and additional costs arising from differences in language, culture and currencies (Novy, 2013).…”