Foreign aid effectiveness: Three essays on aid-for-trade and export performance of developing countries

Abstract

This dissertation examines the effectiveness of foreign aid in enhancing international trade in developing countries. In that light, it presents three essays that focus on foreign aid targeted towards improving trade capacity of developing countries (Aid-for-Trade or AfT) and analyzes its impact on export performance of 121 AfT-recipient countries over a period of 16 years [1995-2010].\nThe first essay examines whether aggregate AfT helps aid recipients improve their aggregate export performance. The analysis using System-GMM shows a positive and significant impact of AfT on the level and growth of exports as well as export volume relative to GDP. These findings indicate that AfT can be effective in stimulating overall exports in aid receiving countries. However, such targeted aid is found to exhibit diminishing returns, suggesting AfT’s limited role in the development of trade capacity.\nThe second essay concentrates on compilation of sector-wise disaggregated aid-for-trade (SAfT) for agriculture, manufacturing, and service sectors and examines the impact of SAfT on corresponding sectoral export levels. Since exports in one sector can be correlated with exports in other sectors within a country, a Seemingly Unrelated Regression (SUR) framework is used to capture the interdependence among various sectors in an explicit way, producing efficient empirical estimates. The results show, in most cases, that SAfT is effective in enhancing corresponding sectoral exports.\nThe third essay examines the role of AfT on reducing export variability. The data are purely cross-sectional with only 121 available observations, but there are many likely regressors that impact export variance, creating an interesting model selection problem. This study uses Least Angle Regression (LARS) as the model selection method to assess the effectiveness of AfT to pinpoint the set of predictors that are statistically robust and have strong predictive power, finding that AfT is one such variable.\nOverall results indicate that AfT initiatives favorably impact both the level and variability measures of exports. This is strong evidence in support of such targeted aid, offering a potent channel of economic expansion and growth in developing countries.

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