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

Abstract

Trade Ministers of the World Trade Organization adopted in 2005 an important Decision ("DFQF Decision") that aimed to provide duty-free-quota-free market access for products originating from least developed countries (LDCs). The present analysis has investigated the effect of the DFQF Decision on domestic investment in LDCs. The study has been performed in the difference-in-difference analytical framework, and using the two-step system generalized method of moments estimator. The panel dataset covers the period from 1996 to 2019, and contains 40 LDCs (which is the treatment group) and 15 low-income countries (designated as such by the International Monetary Fund) in the control group (which is the main control group). For a robustness check analysis, we use an alternative control group, which contains countries that had not been in the LDC category, but would not have met the criteria for graduating from this category if they were included in the category. Results suggest a negative effect of the DFQF Decision on domestic investment in LDCs. The intensity of adverse environmental and exogenous shocks that affect LDC economies is an important factor that prevented LDCs from expanding domestic investment further to the DFQF market access initiative. At the same time, the DFQF Decision led to the expansion of domestic investment in LDCs that enjoyed higher development aid flows, with the magnitude of this positive effect increasing as the amounts of development aid rose. These outcomes, therefore, underline the importance of not only helping LDCs cope with the adverse effects of environmental and external shocks on their economies, but also enhancing incentives for both LDC governments and private firms to expand domestic investment, which is key for exports, economic growth and development.