1887

Effectiveness of Aid for Trade in Small and Vulnerable Economies

An Empirical Assessment

image of Effectiveness of Aid for Trade in Small and Vulnerable Economies
This Economic Paper presents the first analyses of the use and effectiveness of Aid for Trade (AfT), the initiative to help developing countries boost their involvement in the global economy, for small and vulnerable economies (SVEs). It examines in detail the extent to which SVEs have been able to access AfT funds and to what extent this assistance has helped them to improve their trade performance.



Well designed traderelated assistance will help SVEs face the challenges posed by their characteristics, particularly when the prospects for small states have been deteriorating further due to preference erosion and the emergence of new and large competitors.

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How aid for trade could help SVEs integrate in the global economy

How can AfT address the typical constraints of SVEs? There are a number of theoretical models that could account for the role that AfT may have in promoting the export competitiveness of SVEs. One such model is developed by Limao and Venables (2002). They combine a traditional Hecksher-Ohlin model of trade with a spatial economics model in von Thünen spirit to show that regions located far away from the economic centre tend to develop import-substituting activities and few exports, due to their transport cost disadvantage. A generalised reduction in the cost of trading (due for instance to globalisation) leads the regions far from the centre to gain, with a more than proportionate increase in export activities. If AfT was able to reduce transport costs (i.e. the geographic remoteness in the model), the country’s income would benefit. Limao and Venables’ model is more concerned with incomes than export activities per se. This focus makes the identification strategy of the effects of AfT difficult. In fact, a review of a large number of empirical studies on the impact of aid on income growth (Doucouliagos and Paldam, 2007) concludes that this literature is fairly inconclusive. A number of factors may explain the inconclusiveness of these research efforts. Bourguignon and Sundberg (2007) argue that these mixed results are not surprising, given the heterogeneity of motives for giving aid and the complex causality chain linking aid to growth. Further, the impact of aid might depend on domestic economic policies, institutions and other conditions. The channels linking aid to economic growth are very complex and it is difficult for any reduced form equations to capture all these links. In particular, AfT is related specifically to trade-related performance; thus a more appropriate way to identify the impact of AfT is to measure it on trade-related variables.

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