Does aid for trade promote import diversification?

Abstract

aid for trade, developing countries, import diversification | INTRODUCTIONThe Aid for Trade Initiative, which was launched at the 2005 World Trade Organization (WTO) Ministerial Conference held in Hong Kong, aims to expand developing countries' access to global markets by addressing their supply-side capacity and trade-related infrastructure constraints. Aid for Trade (AfT) is part of overall Official Development Assistance (ODA) and has three components: Aid for trade-related infrastructure, Aid for building productive capacity and Aid for trade policy regulations and trade-related adjustment.Previous studies find that AfT is effective in promoting trade in recipient countries. For example, Cali and Te Velde ( 2011), Vijil and Wagner (2012), and Hühne et al. (2015) uncover a positive effect of AfT on the value of exports of recipient countries. Furthermore, Helble et al. (2012), Pettersson and Johansson (2013), and Hühne et al. ( 2014) find that AfT increases recipients' imports from donor countries. All these studies defined the outcome of AfT as trade value. However, AfT can not only expand trade but also diversify trade. For example, Kim (2019) and Gnangnon (2019) conclude that AfT plays an important role in the export diversification of recipient countries. Still, most existing studies look at exports rather than the other side of the story-import. Yet import diversification is essential for improving productivity and expanding access to superior technology (Cadot et al., 2013).We fill this gap in the literature by delving into the effect of AfT on import diversification. Using a panel dataset of 104 countries from 2003 to 2016, we find that AfT helps recipient countries diversify their imports. Specifically, AfT promotes import diversification by increasing the number of both import commodities and import partner countries. Our evidence also reveals that AfT promotes imports from both Development Assistance Committee (DAC) member countries (i.e., donor countries) and Non-DAC countries (i.e., non-donor countries). Lastly, we find that all three components of AfT contribute significantly to the import diversification of recipient countries.The rest of the paper is organised as follows. Section 2 presents the literature review and Section 3 offers descriptive statistics of AfT and import diversification. Section 4 provides the empirical framework. Section 5 reports and discusses the empirical results, and Section 6 concludes the paper.

Aid for trade initiative 16 years on: lessons learnt from the empirical literature and recommendations for future directions

“…For instance, Tadesse et al (2017) differentiated the countries into sub-categories: African countries; Pacific region countries; European countries; American countries; and Asian countries. Similarly, Ly-My et al (2020) focused on six sub-categories of recipient countries: Europe and Central Asia (14 countries); East Asia and Pacific (12 countries); Middle East and North Africa (13 countries); South Asia (5 countries); SSA (35 countries); and Latin America and the Caribbean (25 countries). It is worth mentioning that there are limitations in the studies concerning only one region.…”

“…The two-step GMM system has been particularly preferred to the one-step GMM system and the difference GMM. This approach has been used in most studies (Gnangnon and Roberts, 2017; Gnangnon, 2018d, 2018e; Ly-My et al , 2020; Lee and Kim, 2020). The method allows for the identification of potential endogeneity in the explanatory variables and the possible omitted variables biases.…”

“…While the available literature on AfT effectiveness mainly focused on exports diversification rather than import diversification, Ly-My et al (2020) conducted the first empirical research focusing on the latter. The study applied a two-step GMM technique to analyse a data set of 105 developing countries between the years 2003 and 2016.…”

“…The yearly increases in AfT disbursements pose one key question: has the rise in AfT disbursements enabled recipient countries to minimise their trade costs, boost their capacity to trade, strengthen regulatory and administrative processes and construct the trade-linked infrastructure as written in the agreement outlined by WTO? In other words, “Is Aid for Trade effective?” In an effort to answer this crucial question, various studies have been conducted since the establishment of the AfT initiative in 2005 (Calì and te Velde, 2011; Hühne et al , 2014; Martínez-Zarzoso et al , 2017; Gnangnon, 2018f; Kim, 2019; Ly-My et al , 2020). Most studies have reported the positive impacts of the initiative.…”

“…In other words, "Is Aid for Trade effective?" In an effort to answer this crucial question, various studies have been conducted since the establishment of the AfT initiative in 2005 (Calì and te Velde, 2011;Hühne et al, 2014;Martínez-Zarzoso et al, 2017;Gnangnon, 2018f;Kim, 2019;Ly-My et al, 2020). Most studies have reported the positive impacts of the initiative.…”