Aid for trade and export diversification in recipient‐countries

The Aid‐for‐Trade (AfT) Initiative was launched by the Members of the World Trade Organization (WTO) with a view to helping developing countries and the least‐developed countries (LDCs) expand their trade. The current paper contributes to the literature on AfT effectiveness by examining how AfT affects recipient‐countries' export product diversification. The analysis has been carried out on a sample of 104 AfT recipient‐countries over the period 2002–2015 and uses the two‐step system generalised methods of moments (GMM) approach. Results show that AfT flows are conducive to export product diversification in recipient‐countries. In addition, the analysis has shown a positive impact of the cumulative AfT flows on the export product diversification path of these countries. These results apply as well to the subsamples of LDCs and other developing countries. One policy implication of these results is that a scale‐up of AfT would help recipient‐countries to diversify their export products baskets and hence facilitate their greater integration into the global trading system.     

Aid for trade and trade policy in recipient countries

ABSTRACT

This article explores the impact of Aid for Trade (AfT) flows on trade policy in 123 recipient countries over the period of 2002 to 2015. It shows empirical evidence that AfT interventions are conducive to trade policy liberalization. These results apply to both the entire sample and to the sub-sample of least developed countries (LDCs). Additionally, the analysis shows that the lower the development level, the higher the positive impact of AfT inflows on recipient countries’ trade policy liberalization, although above the US$ 4,885.40 threshold of real per capita income, AfT inflows exert no significant impact on trade policy.     

Effects of aid for trade on extensive and intensive margins of greenfield FDI

Using a panel dataset of 105 developing countries for the period 2003–15, this paper assesses the effects of Aid for Trade (AfT) on greenfield FDI flows to the aid‐recipient countries. Particularly, this paper classifies the total dollar value of greenfield FDI flows to each recipient country in terms of four different layers: the extensive and intensive margins of projects as well as the extensive and intensive margins of source countries. Applying the system GMM estimator, this paper finds that AfT not only increases the dollar value of FDI flows to the recipient countries but also helps diversify the greenfield projects and source countries. In addition, this paper finds that AfT has a greater effect for greenfield FDI from donor (developed) countries than from non‐donor (developing) countries. Among the three components of AfT, aid for trade‐related infrastructure and aid for trade policy regulations are found to have positive links with greenfield FDI, irrespective of source‐country groups, yet their effects are larger for developed source countries. In contrast, aid for building productive capacity hinders greenfield FDI flows from non‐donor countries, while it promotes greenfield FDI from donor countries. We offer some explanations for this finding.     

Aid,Aid for Trade,and bilateral trade: An empirical study

In a gravity model for 184 countries between 1990 and 2005, we show that bilateral aid is not only positively correlated with donor exports, as suggested in earlier studies, but also positively associated with recipient exports to donors. Our interpretation is that an intensified aid relation reduces the effective cost of distance. We find a particularly strong effect of aid in the form of technical assistance. The effect of trade-related assistance (Aid for Trade) is small and fully accounted for by aid to investments in trade-related infrastructure. The aid-trade link is particularly strong for donor exports to Sub-Saharan African countries and for recipient exports of strategic materials.     

Foreign assistance and emigration: Accounting for the role of non-transferred aid

Since policymakers increasingly regard foreign aid as a means to manage international flows of migrants, it is important to obtain accurate empirical evidence on the complex link between aid and migration. Recent research has shown that the impact of foreign assistance on migrant flows is highly heterogeneous across aid categories. In this paper, we focus on a dimension of heterogeneity that has so far not been considered in the literature, namely whether or not the delivery of foreign aid is associated with a transfer of resources to the recipient country. We show in a first step that non-transferred aid is quantitatively important, accounting for more than 25% of overall aid given by OECD DAC donors in 2016. Running separate gravity-type regressions for transferred and non-transferred aid, we then find that transferred aid has a much stronger (negative) impact on migration than the previously used total aid variable that includes the non-transferred component. As may be expected, non-transferred aid itself does not appear to affect migrant flows. A high share of non-transferred aid would therefore be at odds with the donors’ stated goal of tackling the root causes of migration.     

The Impact of Conflict Types and Location on Trade

This article investigates the impact of interstate and intrastate conflict on trade. Analyses rely on a pooled time-series cross-sectional dataset with observations for 134 countries from 1979 to 2000. Results show that intrastate conflict has a larger negative impact on trade than interstate conflict; conflict in the exporting country has a more negative impact on trade than conflict in the importing country; and, finally, conflict's destructive effects go beyond the borders of the countries that directly experience it, as trade flows are also negatively influenced by conflict in neighboring countries.     

Aid Delivery through Non‐governmental Organisations: Does the Aid Channel Matter for the Targeting of Swedish Aid?

This paper analyses whether aid channelled through non‐governmental organisations (NGOs) is less affected by selfish donor motivations and better targeted to needy recipient countries than aid distributed by state agencies. We employ Tobit (and Probit) models and make use of an exceptionally detailed database that allows an assessment of the allocation of Swedish aid channelled through NGOs in comparison to the allocation of Swedish official aid. Our analysis provides mixed results. On the one hand, NGOs appear to be altruistic as far as available indicators on political and commercial motivations of aid can tell. On the other hand, needs‐based targeting of aid by NGOs turns out to be surprisingly weak. GDP per capita of recipient countries shapes the allocation of official aid, but not that of aid channelled through NGOs. The headcount of absolute poverty has a significantly positive effect on aid allocation, but its impact is not particularly strong when NGOs are involved. Overall, the Swedish case supports the sceptical view that NGOs are not necessarily superior donors compared to state aid agencies.     

Trade and the rate of income convergence

To the extent that trade policy affects trade flows between countries, the ramifications can be far-reaching from an economic growth perspective. This paper examines one aspect of these ramifications, namely the impact of changes in the extent of trade between countries on changes in the rate of reduction in the size of the income gap that exists between them. Export and import data are used as the criteria for determining bilateral trade between major trade partners, resulting in the creation of 127 pairs of countries on the basis of export data and 134 pairs on the basis of import data. An increase in trade between major trade partners - and, in particular, increased exports by poorer countries to their wealthier partners - is shown to be related to an increase in the rate of convergence between the countries.     

The Impact of Services Trade Restrictiveness on Trade Flows

This paper uses recent OECD data on services trade restrictions (STRI) to analyse the relationship between services trade policies and cross‐border trade in services. A standard gravity model is enhanced by the STRI indices in a cross‐section regression analysis. Services trade restrictions are negatively associated with both imports and exports of services. The surprisingly strong effect on services exports is probably explained by a negative relationship between the STRIs and sector performance indicators. Consequently, services suppliers from less open countries are less competitive abroad. Bilateral differences in regulation are also found to curtail services trade over and above the impact of the trade liberalisation level. At the margin, regulatory differences have a larger effect on trade flows the lower the level of the STRI.     

Impact of Trade Facilitation on Parts and Components Trade

This article utilizes data from seventy-seven countries over the period 2004–07 in a gravity trade model to examine the impact of four dimensions of trade facilitation—physical infrastructure, information and communication technology, business environment, and border efficiency—on parts and components and final goods trade for the machinery and transport equipment sector. The results show that the effect of importers’ overall trade facilitation measures is stronger for promoting parts and components than for final goods trade. Among the four dimensions, border efficiency has the largest impact on trade flows for this sector, and the effect of exporter and particularly importers’ border efficiency is important for parts and components, as compared to final goods trade.     

Trade Creation and Diversion Effects of Regional Trade Agreements: A Product‐level Analysis

This paper examines the impacts of regional trade agreements (RTAs) on trade flows at product level, with a particular focus on trade creation and diversion. Based on estimation of the gravity equation, dealing with the zero trade flows and endogeneity bias problems, we analyse the impacts of various types of RTAs involving 67 countries for 20 products during the 1980–2006 period. We find that RTAs among developing countries tend to cause trade diversion compared with RTAs among developed countries. Taking the higher external tariff rates of developing countries compared with developed countries into consideration, our results suggest trade diversion is likely to be caused by remaining high tariffs on imports from non‐members. In addition, we find the trade creation effect for many products in the cases of Customs Unions and plurilateral RTAs. These results imply that trade creation would be caused by various factors besides the reduction in tariff rates. Based on these results, we draw a policy implication that external tariff rate reduction is an important factor in avoiding trade diversion in the formation of RTAs, in particular for RTAs among developing countries, while a large number of members and the common external tariff appear to be important for generating the trade creation effect.     

The Role of Geography in Financial and Economic Integration: A Comparative Analysis of Foreign Direct Investment,Trade and Portfolio Investment Flows

The objective of this paper is to examine the role of geography in explaining the patterns of financial and economic integration among both developed and developing countries. Using a gravity model, we compare North‐North, North‐South and South‐North FDI, trade and portfolio investment flows to examine how geographical factors influence these bilateral flows. The results indicate that the impact of geography variables on FDI and portfolio are similar to their effect on trade. Geography variables have a statistically significant effect both on FDI and portfolio investment, but FDI is more sensitive to distance. We interpret the negative effect of distance as the existence of information costs in financial flows. Also bilateral FDI, trade and portfolio investment flows react to macroeconomic fundamentals in the same way, however, with different degrees of sensitivity. There are significant differences between North‐North and North‐South flows. Our results find support for the argument that most FDI among industrial countries are horizontal, whereas most FDI investment in developing countries is vertical. The fact that the significance of geographical variables on financial flows still remained even after controlling for the macroeconomic fundamentals, is in contrast with the standard capital market model. The results can, however, be reconciled if geographical factors can proxy for information costs, which may in turn explain why country portfolios are still home‐biased. The significant effect of distance on financial flows may also explain how idiosyn cratic shocks are spread (i.e. contagion) to other countries in the same region. Ultimately, the geographical location of a country may determine its economic and financial integration into the world economy.     

Impact of Environmental Regulations on Trade in the Main EU Countries: Conflict or Synergy?

In an increasingly integrated world with declining trade barriers, environmental regulations can have a decisive role in shaping countries’ comparative advantages. The conventional wisdom about environmental protection is that it comes at an additional cost on firms imposed by the government, which may erode their global competitiveness. However, this paradigm has been challenged by some analysts. In particular, Porter and van der Linde argue that pollution is often associated with a waste of resources and that more stringent environmental policies can stimulate innovations that may overcompensate for the costs of complying with these policies. This is known as the Porter hypothesis. While there is a broad empirical literature on the impact of trade on environment, the empirical literature on the impact of environmental regulations on trade flows is relatively scarce, very heterogeneous and presents mixed results. The innovative feature of this paper is its attempts to estimate, in a gravity setting, augmented with a proxi of environmental stringency, the impact of three major multilateral environmental agreements (MEAs) on 15 EU countries’ bilateral exports. According to our estimates, in the period 1988–2008, to be member of MEAs had a positive average impact on EU‐15 bilateral exports. This evidence can be partly explained by a possible trade diversion effect with respect to countries that did not sign MEAs and a corresponding trade creation effect among members of the environmental agreements. Furthermore, evidence coming from interaction effects estimates seems to show that for exporting countries, having signed the United Nations Framework Convention on Climate Change and the Montreal agreements partly mitigates (by the amount of the estimated coefficient) the negative impact of having a relatively more stringent environmental regulation on bilateral trade. This result could have important policy implications for the future international trade–environmental negotiations.     

Trade creation and diversion effects in the Mediterranean area: Econometric analysis by gravity model

Since the early 1990s, the world has seen a proliferation of free trade agreements (FTAs). A major goal of free trade is to develop trade between its signatories. The gravity model is used to analyze the bilateral trade data against the variables of the relative size of the pair of countries involved in trade, distance, common border and language and dummies for each of the FTAs. This article focuses on the studying of the influence of the FTAs in the Mediterranean countries in which we integrate the role of the regional dummy EU-15, Economic and Monetary Union (eurozone), the Arab Maghreb Union and AGADIR Agreement (FTA between Jordan, Egypt, Tunisia and Morocco) in trade flows. In addition, this work aims to detect the impact of the global financial crisis on export flows between the FTAs in the Mediterranean region. The use of regional variables in gravity models designed to determine whether the FTAs contribute to the creation or trade diversion. This study examines a cross section and panel (static and dynamic) of 27 countries for 1980–2011. The results show the existence of a strong relationship between the factors of FTAs and trade flows.     

Donors’ Mechanisms for Financing International and National Public Goods: Loans or Grants?

This paper investigates whether three classes of donors – multilateral organisations, regional institutions and bilateral donors – tailor their mix of grants and loans to reflect international benefit spillovers and recipient‐specific benefits, derived from aid‐funded activities in developing and transition countries. To account for recipient benefit shares, donors should use a greater share of grants when supported activities yield a larger portion of international public benefits. A greater reliance on loans is appropriate when a large portion of recipient‐specific benefits are associated with the assistance. By reflecting recipient benefit shares in the grant‐loan mix, donors’ assistance also promotes allocative efficiency. Using the Credit Reporting System (CRS) database from OECD for 1980–2000, our analysis establishes that various donor classes apply different grant‐loan mixtures when supporting the environment, health, knowledge and governance sectors of recipient countries. We employ analysis of variance and other statistical comparisons of the means to investigate differences among donor classes. We demonstrate that bilateral donors do the best job in tailoring their grant‐loan mix to accord with the extent of international public good benefits embodied in the aid‐supported activity. Multilateral organisations’ grant‐loan mix is intermediate of the three types of donors, with some evidence of them relying more on grants to finance activities that possess a larger share of international public good spillovers. Regional institutions, however, do not discriminate their grant‐loan mix by either sectors or the associated public good spillovers. This finding suggests that regional development banks need to adjust their grant‐loan mix to better account for international benefit spillovers if these institutions are to warrant the increased funds to underwrite regional public goods that they have been seeking. If, however, their mix is institutionally set, then the stakeholders must give these institutions greater flexibility to tailor their grants and loans to who benefits from the aid‐supported public goods. This is the first paper to empirically ascertain whether the grant‐loan mix is tied to the inherent publicness of the aid‐funded activities.     

Trade and migration flows between some CEE countries and the UK

The recent enlargement of the European Union (EU) has enhanced interest in the causes and also the consequences of migration between Central and Eastern European (CEE) and Western European countries. This paper considers the possibility that some of these consequences make themselves felt in the trade flows between migrants' countries of origin and destination. Using a panel of data covering a number of CEE countries between 1996 and 2003, we employ an augmented gravity model to examine the effects of immigration from these transition countries on their bilateral trade flows with the UK. We pay attention to a number of issues that have been raised within the literature on gravity models. We find evidence that migration positively enhances the bilateral exports of the migrants' home country; however, there is less (but some) evidence that the imports from their destination country are also enhanced.     

Infrastructure or foreign direct investment?: An examination of the implications of MNE strategy for economic development

This paper explores the paradoxical relationship between MNE current strategies and economic development. There is evidence that positive developmental impacts of FDI flows are conditional on high levels of human capital and thus on the existence of ‘good’ infrastructure in recipient countries. In this paper we suggest that current MNE strategies have a negative impact on the development of infrastructure in LDCs. The justification for this argument arises from the low developmental impact of current FDI patterns and from rising costs of attracting increasingly footloose investment. The overall effect is to aggravate government financial constraints on the development of basic infrastructure. We develop propositions for future empirical research. We also consider implications for MNE strategy and argue that current MNE strategies are not only ineffective for delivering poverty reduction but that current strategies in developing countries do not necessarily serve the interest of MNEs either.     

Are Trade Preferences more Effective than Aid in Supporting Exports? Evidence from the ‘Everything But Arms’ Preference Scheme

This study examines the effect of the ‘Everything But Arms’ (EBA) trade preferences regime on exports from the African, Caribbean and Pacific countries (ACP) to the European Union (EU). With this aim, an augmented gravity model is estimated for exports from the 79 ACP countries to the EU‐15 for the time period of 1995—2013 using panel data techniques. The results are used to quantify the effect of the eligibility for EBA preferences on the export performance of the ACP least developed countries (LDCs) and to relate it to the impact of official development assistance on exports. In addition to their separate effects, the combined impact of EBA and aid flows is examined. The main results do not provide evidence for an additional positive effect of the EBA agreement on the export performance of the ACP LDCs. However, receiving aid shows a significant and positive effect on exports from EBA‐eligible ACP countries to the EU‐15, supporting an EU development strategy that includes both sorts of assistance, aid and trade preferences.     

Estimating Trade Misinvoicing from Bilateral Trade Statistics: The Devil is in the Details

Trade misinvoicing, an important channel of illicit financial flows, is frequently estimated by the partner-country trade data comparison method. However, this method relies on a critical but incorrect assumption that the trade statistics in partner countries exhibit no misinvoicing. This study proves that the assumption of no misinvoicing in partner countries cannot be supported, raising serious doubts about the reliability of the method and a possibility that inappropriate policy decisions may be made based on the erroneous estimates of trade misinvoicing. We introduce an alternative method to estimate trade misinvoicing which does not rely on the trade statistics of partner countries.     

Does Aid for Trade Enhance Export Performance? Investigating the Infrastructure Channel

There are few empirical studies assessing the effectiveness of aid for trade as regards trade performance. Furthermore, existing work does not test which are the channels through which aid for trade has an impact on trade performance. We address this question using a two‐step empirical analysis. Relying on an export performance model, we first test whether institutions and infrastructure, our two potential channels of transmission, are significant determinants of export performance. Second, we test the impact of aid for trade sectoral flows on the previously detected determinants of export performance. We show, as part of the first step, that the infrastructure channel is a highly significant determinant of export performance, whereas the institutional channel turns out to have a limited positive impact on developing countries’ export performance. Furthermore, we show, from the second step, that aid for infrastructure, once instrumented, has a strong and positive impact on the infrastructure level. As a result, we find that a ten per cent increase in aid for infrastructure commitments per capita in developing countries leads to an average 2.34 per cent increase in the exports over GDP ratio. It is also equivalent to a 2.71 per cent reduction in tariff and nontariff barriers. These results highlight the high potential impact of aid for trade on developing countries’ export performance throughout the infrastructure channel.