Financial Openness and Aid for Trade in Developing Countries

Abstract

This article examines the effect of De Jure financial openness in developing countries on the total amount of bilateral AfT inflows that accrues to these countries. The analysis relies on 126 countries over the period 1995–2015 and uses both the within fixed effects and the two‐step system GMM estimators. Results suggest that the effect of financial openness on AfT depends on the level of financial openness, whose values range between 0 and 100. A positive and significant effect is obtained for levels of financial openness lower than the value 48. In contrast, the effect becomes negative for countries whose level of financial openness is higher than 62. Countries whose degree of financial openness is comprised between 48 and 62 experience no significant effect of financial openness on the amount of the AfT flows that they receive. Overall, the analysis shows that financial openness does matter for the amount of AfT that recipient‐countries receive from donor‐countries.