Journal Screenshot

International Journal of Academic Research in Economics and Management Sciences

Open Access Journal

ISSN: 2226-3624

Aid for Trade and Economic Growth: Does the Quality of Institutions Matter?

Yakoub Benziane, Siong Hook Law, Muhammad Daaniyall Abd Rahman, Anitha Rosland

http://dx.doi.org/10.6007/IJAREMS/v12-i1/15771

Open access

This paper investigates the impact of Aid for Trade inflows on economic growth in developing countries, and whether this impact is dependent on the institutional quality of these countries. The empirical analysis covers 75 recipient countries over the 2009- 2018 period. This study applies the Quantile Regression approach. The empirical findings of the third objective suggested the significant impact of the aggregate Aid for Trade inflows over the full sample, precisely, the low-income recipients. In terms of its categories, Aid for Trade for productive capacity building generates the largest positive impact on the economic growth of the receiver countries followed by Aid for Trade for trade policy and regulation, while Aid for Trade for economic infrastructure was observed to have the weakest positive effect. Furthermore, Aid for Trade interaction with institutional variables was found to be negative. However, these coefficients appear to converge toward positive in the case of countries with better institutional quality (high-income recipients).

Adelman, I., & Chenery, H. B. (1966). The foreign aid and economic development: the case of Greece. The Review of Economics and Statistics, 1–19.
Alesina, A., & Dollar, D. (2000). Who Gives Foreign Aid to Whom and Why? Journal of Economic Growth, 5(1), 33–63. https://doi.org/10.1023/A:1009874203400
Alguacil, M., Cuadros, A., & Orts, V. (2011). Inward FDI and growth: The role of macroeconomic and institutional environment. Journal of Policy Modeling, 33(3), 481–496.
Ali, A. M., & Isse, H. S. (2005). An empirical analysis of the effect of aid on growth. International Advances in Economic Research, 11(1), 1–11.
Ang, J. B. (2010). Does foreign aid promote growth? Exploring the role of financial liberalization. Review of Development Economics, 14(2), 197–212.
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51.
Arrow, K. J. (1962). The Economic Implications of Learning by Doing. The Review of Economic Studies, 29(3), 155–173. https://doi.org/10.2307/2295952
Askarov, Z., & Doucouliagos, H. (2015). Development aid and growth in transition countries. World Development, 66, 383–399. https://doi.org/10.1016/j.worlddev.2014.08.014
Azman-Saini, W. N. W., & Law, S. H. (2010). FDI and economic growth: New evidence on the role of financial markets. Economics Letters, 107(2), 211–213.
Bacha, E. L. (1990). A three-gap model of foreign transfers and the GDP growth rate in developing countries. Journal of Development Economics, 32(2), 279–296.
Benziane, Y., Law, S. H., Rosland, A., & Abd Rahman, M. D. (2022). Aid for trade initiative 16 years on: lessons learnt from the empirical literature and recommendations for future directions. Journal of International Trade Law and Policy, 21(1), 79–104. https://doi.org/10.1108/jitlp-05-2021-0025
Bittencourt, M., Van Eyden, R., & Seleteng, M. (2015). Inflation and Economic Growth: Evidence from the S outhern A frican D evelopment C ommunity. South African Journal of Economics, 83(3), 411–424.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Burke, P. J., & Ahmadi-Esfahani, F. Z. (2006). Aid and growth: A study of South East Asia. Journal of Asian Economics, 17(2), 350–362.
Burnside, A. C., & Dollar, D. (2004). Aid, policies, and growth: revisiting the evidence. Policies, and Growth: Revisiting the Evidence (March 18, 2004).
Burnside, C., & Dollar, D. (2000). Aid, Policies, and Growth. American Economic Review, 90(4), 847–868. https://doi.org/10.1257/aer.90.4.847
Canay, I. A. (2011). A simple approach to quantile regression for panel data. The Econometrics Journal, 14(3), 368–386.
Chenery, H. B. (1967). Foreign assistance and economic development. In Capital movements and economic development (pp. 268–292). Springer.
Chenery, H. B., & Bruno, M. (1962). Development alternatives in an open economy: the case of Israel. The Economic Journal, 72(285), 79–103.
Chenery, H. B., & Strout, A. M. (1966). Foreign Assistance and Economic Development. American Economic Review, 56, 679–733.
Clemens, M. A., Radelet, S., Bhavnani, R. R., & Bazzi, S. (2012). Counting chickens when they hatch: Timing and the effects of aid on growth. The Economic Journal, 122(561), 590–617.
Collier, P., & Dollar, D. (2002). Aid allocation and poverty reduction. European Economic Review, 46(8), 1475–1500.
Easterly, W. (2003). Can foreign aid buy growth? Journal of Economic Perspectives, 17(3), 23–48.
Ekanayake, E. M., & Chatrna, D. (2010). The effect of foreign aid on economic growth in developing countries. Journal of International Business and Cultural Studies, 3, 1.
Eri?, M. N., & Ula?an, B. (2013). Trade openness and economic growth: Bayesian model averaging estimate of cross-country growth regressions. Economic Modelling, 33, 867–883.
Ghimire, S., Mukherjee, D., & Alvi, E. (2016). Aid-for-Trade and export performance of developing countries. Applied Econometrics and International Development, 16(1), 23–34.
Gnangnon, S. K. (2016). Aid for Trade and trade tax revenues in developing countries. Economic Analysis and Policy, 50, 9–22. https://doi.org/10.1016/j.eap.2016.02.002
Gnangnon, S. K. (2019a). Effect of aid for trade policy and regulations on tariff policy volatility: Does institutional and governance quality matter? Economies, 7(1). https://doi.org/10.3390/economies7010006
Gnangnon, S. K. (2019b). Impact of Aid for Trade on Trademarks Applications in Recipient-Countries. International Economic Journal, 34(1), 33–47. https://doi.org/10.1080/10168737.2019.1653951
Gnangnon, S. K. (2020). Aid for Trade flows and Real Exchange Rate Volatility in Recipient-Countries. Journal of International Commerce, Economics and Policy, 11(2). https://doi.org/10.1142/S1793993322500016
Grossman, G. M., & Helpman, E. (1991). Innovation and growth in the global economy. MIT press.
Gu, J., & Volgushev, S. (2019). Panel data quantile regression with grouped fixed effects. Journal of Econometrics, 213(1), 68–91.
Gyimah?Brempong, K., Racine, J. S., & Gyapong, A. (2012). Aid and economic growth: Sensitivity analysis. Journal of International Development, 24(1), 17–33.
Hansen, H., & Tarp, F. (2000). Aid effectiveness disputed. Journal of International Development, 12(3), 375–398.
Hansen, H., & Tarp, F. (2001). Aid and growth regressions. Journal of Development Economics, 64(2), 547–570.
Hayat, A. (2019). Foreign direct investments, institutional quality, and economic growth. The Journal of International Trade & Economic Development, 28(5), 561–579. https://doi.org/10.1080/09638199.2018.1564064
Herzer, D., Strulik, H., & Vollmer, S. (2012). The long-run determinants of fertility: one century of demographic change 1900–1999. Journal of Economic Growth, 17(4), 357–385.
Huang, T.-H., & Xie, Z. (2013). Population and economic growth: a simultaneous equation perspective. Applied Economics, 45(27), 3820–3826. https://doi.org/10.1080/00036846.2012.734596
Kargbo, P. M. (2012). Impact of foreign aid on economic growth in Sierra Leone: Empirical Analysis. WIDER Working Paper.
Kargbo, P. M., & Sen, K. (2014). Aid categories that foster pro?poor growth: The case of Sierra Leone. African Development Review, 26(2), 416–429.
Karras, G. (2006). Foreign aid and long?run economic growth: empirical evidence for a panel of developing countries. Journal of International Development: The Journal of the Development Studies Association, 18(1), 15–28.
Kato, K., Galvao Jr, A. F., & Montes-Rojas, G. V. (2012). Asymptotics for panel quantile regression models with individual effects. Journal of Econometrics, 170(1), 76–91.
Khan, M. A., & Ahmed, A. (2007). Foreign aid—blessing or curse: Evidence from Pakistan. The Pakistan Development Review, 215–240.
Kim, D.-H., & Lin, S.-C. (2009). Trade and growth at different stages of economic development. Journal of Development Studies, 45(8), 1211–1224.
Kim, J. (2011). Foreign aid and economic development: The success story of South Korea. Pacific Focus, 26(2), 260–286.
Kosack, S. (2003). Effective aid: How democracy allows development aid to improve the quality of life. World Development, 31(1), 1–22.
Law, S. H., & Singh, N. (2014). Does too much finance harm economic growth? Journal of Banking & Finance, 41, 36–44. https://doi.org/https://doi.org/10.1016/j.jbankfin.2013.12.020
Li, H., & Zhang, J. (2007). Do high birth rates hamper economic growth? The Review of Economics and Statistics, 89(1), 110–117.
Ly-My, D., & Lee, H. H. (2019). Effects of aid for trade on extensive and intensive margins of greenfield FDI. World Economy, 42(7), 2120–2143. https://doi.org/10.1111/twec.12787
Ly?My, D., Lee, H., & Park, D. (2021). Does aid for trade promote import diversification? The World Economy, 44(6), 1740–1769.
Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A contribution to the empirics of economic growth. The Quarterly Journal of Economics, 107(2), 407–437.
Martínez-Zarzoso, I., Nowak-Lehmann D., F., & Rehwald, K. (2017). Is aid for trade effective? A panel quantile regression approach. Review of Development Economics, 21(4), e175–e203. https://doi.org/10.1111/rode.12322
Mekasha, T. J., & Tarp, F. (2013). Aid and growth: What meta-analysis reveals. The Journal of Development Studies, 49(4), 564–583.
Moreira, S. B. (2005). Evaluating the impact of foreign aid on economic growth: A cross-country study. Journal of Economic Development, 30(2), 25–48.
Musila, J. W., & Yiheyis, Z. (2015). The impact of trade openness on growth: The case of Kenya. Journal of Policy Modeling, 37(2), 342–354.
Ndambendia, H., & Njoupouognigni, M. (2010). Foreign aid, foreign direct investment and economic growth in Sub-Saharan Africa: Evidence from pooled mean group estimator (PMG). International Journal of Economics and Finance, 2(3), 39–45.
Nwaogu, U. G., & Ryan, M. J. (2015). FDI, foreign aid, remittance and economic growth in developing countries. Review of Development Economics, 19(1), 100–115.
OECD/WTO. (2013). Aid for Trade at a Glance: Connecting to Value Chains. WTO, Geneva /OECD Publishing, Paris. https://doi.org/10.1787/aid_glance-2013-en
OECD/WTO. (2017). Aid for Trade at a Glance 2017 - Promoting Trade, Inclusiveness and Connectivity for Sustainable Development. http://dx.doi.org/10.1787/aid_glance-2017-en.
OECD. (2018). Development aid stable in 2017 with more sent to poorest countries. 1–8. https://www.oecd.org/development/financing-sustainable-development/development-finance-data/ODA-2017-detailed-summary.pdf
Rajan, R. G., & Subramanian, A. (2008). Aid and growth: What does the cross-country evidence really show? The Review of Economics and Statistics, 90(4), 643–665.
Rivera-Batiz, L. A., & Romer, P. M. (1991). Economic integration and endogenous growth. The Quarterly Journal of Economics, 106(2), 531–555.
Romer, P. M. (1990). Endogenous technological change. Journal of Political Economy, 98(5, Part 2), S71–S102.
Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9(1), 86–136.
Roy, C. K., Xiaoling, H., & Banik, B. (2021). Achieving SDG target 8.1 (sustain economic growth) in developing countries: how aid for trade policy and regulations can assist? Journal of Chinese Economic and Foreign Trade Studies, 14(3), 257–276. https://doi.org/10.1108/JCEFTS-12-2020-0071
Salman, M., Long, X., Dauda, L., & Mensah, C. N. (2019). The impact of institutional quality on economic growth and carbon emissions: Evidence from Indonesia, South Korea and Thailand. Journal of Cleaner Production, 241, 118331.
Sethi, N., Bhujabal, P., Das, A., & Sucharita, S. (2019). Foreign aid and growth nexus: Empirical evidence from India and Sri Lanka. Economic Analysis and Policy, 64, 1–12.
Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65–94.
Sothan, S. (2018). Foreign aid and economic growth: evidence from Cambodia. The Journal of International Trade & Economic Development, 27(2), 168–183.
Su, Y., & Liu, Z. (2016). The impact of foreign direct investment and human capital on economic growth: Evidence from Chinese cities. China Economic Review, 37, 97–109. https://doi.org/https://doi.org/10.1016/j.chieco.2015.12.007
Swan, T. W. (1956). Economic growth and capital accumulation. Economic Record, 32(2), 334–361.
Tadesse, T. (2011). Foreign aid and economic growth in Ethiopia: A cointegration analysis. The Economic Research Guardian, 1(2), 88–108.
Tan, K. Y. (2009). A pooled mean group analysis on aid and growth. Applied Economics Letters, 16(16), 1597–1601.
Tang, K.-B., & Bundhoo, D. (2017). Foreign aid and economic growth in developing countries: Evidence from Sub-Saharan Africa. Theoretical Economics Letters, 7(05), 1473.
Taylor, L. (1990). Foreign resource flows and developing country growth: a three-gap model. Problems of Developing Countries in 1990s, World Bank Discussion Paper, 97.
Teixeira, A. A. C., & Queirós, A. S. S. (2016). Economic growth, human capital and structural change: A dynamic panel data analysis. Research Policy, 45(8), 1636–1648. https://doi.org/https://doi.org/10.1016/j.respol.2016.04.006
Trejos, S., & Barboza, G. (2015). Dynamic estimation of the relationship between trade openness and output growth in Asia. Journal of Asian Economics, 36, 110–125.
Ula?an, B. (2015). Trade openness and economic growth: panel evidence. Applied Economics Letters, 22(2), 163–167.
Wagner, L. (2014). Identifying thresholds in aid effectiveness. Review of World Economics, 150(3), 619–638.
y Strout, C. (1966). Foreign assistance and economic development. American Economic Review, 56, 679–733.
Yahyaoui, I., & Bouchoucha, N. (2020). Foreign Aid-Growth Nexus in Africa: Do Institutions Matter? Journal of the Knowledge Economy, 11(4), 1–27. https://doi.org/10.1007/s13132-020-00638-0
Young, A. T., & Sheehan, K. M. (2014). Foreign aid, institutional quality, and growth. European Journal of Political Economy, 36, 195–208.

In-Text Citation: (Benziane et al., 2023)
To Cite this Article: Benziane, Y., Law, S. H., Rahman, M. D. A., & Rosland, A. (2023). Aid for Trade and Economic Growth: Does the Quality of Institutions Matter? International Journal of Academic Research in Economics and Management and Sciences, 12(1), 11–33.