This study investigates the impact of aid for trade (AfT) for trade facilitation (henceforth aid for trade facilitation) on export performance in a sample of 58 low-income and lower-middle-income countries over the period 1996-2011. This was done using panel data techniques and by assessing the extent to which recipient countries’ institutional quality may affect the effectiveness of aid for trade facilitation.
The study contributes to the literature on the effectiveness of AfT in three ways. First, it provides additional evidence on the effectiveness of aid for trade facilitation. Second, it adds to existing studies by looking specifically at a sample of lower-income countries over a longer time period. Third, and most importantly, it analyses for the first time the impact of the quality of institutions in recipient countries on the effectiveness of aid for trade facilitation.
Key Findings:
- Country case studies suggest that the quality of local institutions determine the impact of Aid for Trade.
- The results point to a strong relationship between exports and institutional quality, as well as to a significant impact of aid for trade facilitation on export flows. Importantly, the positive and significant effect of aid for trade facilitation on export flows is found to be affected strongly by the quality of institutions in recipient countries.
- On average, good-quality institutions are found to be associated with as much as a 22% increase in export flows. Aid for trade facilitation is found to be associated with a 0.02% increase in export flows. This has implications for the wider literature on how resource flows (e.g. Aid for Trade) and policies and institutions interact to achieve better development outcomes.
Recommendations:
- For donors, it appears that one prerequisite for providing effective aid for trade facilitation should be to assess first the adequacy of the institutions of recipient countries. On the other hand, recipient countries’ governments should work hard in improving the institutional framework of their economies in order to be able to make the most of the aid for trade facilitation flows they receive. Failing to do so may be counterproductive or reduce significantly the impact aid for trade facilitation may have on fostering export flows.
- Future avenues of research may include the extension of this study to consider bilateral export flows. Moreover, it would be interesting to repeat the analysis including interaction terms between different AfT categories (AfT to economic infrastructure, AfT to productive capacity building and AfT to trade policy and regulations) and institutional quality.
