Aid Effectiveness of Aid for Trade: An Empirical Analysis on the Extensive and Intensive Margins of Aid Recipients

Abstract

Paris Declaration on Aid Effectiveness held in 2005 emphasized the role of Aid for Trade (AFT) on capacity building of developing nations. Past literature showed mixed results regarding the aid effectiveness of foreign aid both theoretically and empirically. To test the impact of foreign aid thoroughly, we first focus on the AFT which purposes are not only stimulating the volume of trade flow but also facilitating the construction of robust infrastructure and environment for developing nations to participate in the global economy independently. Second, we disaggregate bilateral trade into the extensive and intensive margin of international trade to examine whether AFT affects more on the new products traded or incumbent good. Lastly, we conduct Poisson pseudo maximum likelihood (PPML) estimation to control for zero-value observations and possible heteroskedasticity stemming from the sample. With different sample groups, the results indicate that AFT overall benefits the exports of aid recipients. Particularly, AFT from European Union (EU) shows the most considerable and consistent effect on both the new export and incumbent relationships. Furthermore, AFT from the EU facilitates the new export relationship between developing nations with other developing nations, specifically with those without a Free Trade Agreement (FTA) relationship, indicating that the aid from the EU is relatively effective in establishing new trade partners.