Are bilateral and multilateral aid‐for‐trade complementary?

• DOI: http://doi.org/10.1111/twec.12485
• Author: Elias Shukralla,Bichaka Fayissa,Bedassa Tadesse
• Published date: 01 October 2017
• Date: 01 October 2017

ORIGINAL ARTICLE

Are bilateral and multilateral aid-for-trade

complementary?

Bedassa Tadesse

1

|

Elias Shukralla

2

|

Bichaka Fayissa

3

1

Department of Economics, University of Minnesota-Duluth, Duluth, MN, USA

2

Department of Economics, Siena College, Loudonville, NY, USA

3

Department of Economics and Finance, Middle Tennessee State University, Murfreesboro, TN, USA

1

|

INTRODUCTION

It is well documented that developing countries face significant supply-side constraints to fully

engage and benefit from global trade and investment. Remoteness, inadequate and defective infras-

tructure and the small size of domestic markets often limit their access to foreign markets (Clark,

Dollar, & Micco, 2004; Gulati, Minot, & Bora, 2007; Limao & Venables, 2001). Frictions arising

from policy measures governing the operation of domestic markets and the cross-border move-

ments of goods and services render exports from developing countries to be less competitive (Har-

rison, 2006). Narrowing the range of goods and services on offer and pushing up prices, these

constraints also erode consumer confidence (Hayashikawa, 2009). Furthermore, by increasing trade

costs and limiting access to technology and intermediate inputs, supply-side constraints may pre-

vent the entry of firms in developing countries into world markets, and their movement up the glo-

bal value chains (Arvis, Duvall, Shepherd, & Utoktham, 2013).

Albeit the presence of a variety of concerted efforts, these challenges continue to pose signifi-

cant influence on the ability of developing countries to grow and diversify their economies

(OECD/WTO, 2015). With the primary goal of overcoming the lingering effects, the 2005 World

Trade Organization Ministerial Conference held in Hong Kong, thus, launched a new initiative

called aid-for-trade (AFT). Making technical assistance and capacity building key components of

the effort, the initiative calls for directly tackling trade-related barriers that impede developing

countries from actively participating and fully benefiting from the global trade and investment

flows. Given its emphasis on using trade as a vehicle for promoting economic growth and reducing

poverty, the initiative has since attracted sizable amount of financial resources and covered a num-

ber of countries.

1

An evaluation of the allocation of AFT funds and the effectiveness of the initia-

tive, hence, garners considerable interest among policymakers and development practitioners.

Results from both micro and macro-level studies that examine the effect of the initiative on trade

performances of the recipients indicate that AFT has, indeed, made significant inroads in reducing

supply-side constraints and, thereby, improved the trade performances of the recipients. Summaris-

ing the observations from available studies, the joint OECD/WTO (2013) report, for example, con-

cludes that one US dollar invested in AFT is associated with an increase of eight US dollars in

exports from all developing countries, and twenty US dollars increase in exports from the poorest

countries, on the average. The report, however, further notes that considerable variations exist in the

DOI: 10.1111/twec.12485

World Econ. 2017;40:2125–2152. wileyonlinelibrary.com/journal/twec ©2017 John Wiley & Sons Ltd

|

2125

impact of AFT across the geographic regions in which the recipients are located, income levels of

the recipients, the type of AFT interventions and the sector to which the support is directed. These

observations make an understanding of the underlying causes of the discrepancies in the observed

effects relevant and timely.

The main objectives of this study are, therefore, twofold: to examine the cross-country variations

in the observed effects and to explore the underlying reason(s) for the differences. We present com-

plementarity in both the flow and functionality of AFT originating from bilateral and multilateral

sources as a primary explanation. First, contrary to its conception as a “global”solution to address

supply-side constraints impeding the participation of developing countries in the global trading sys-

tem, AFT has been promoted to function using “local”approaches pertinent for addressing country-

specific constraints. Recipient, thus, maintain considerable discretion in the identification and priori-

tisation of the challenges to be addressed, the sectors targeted, and the selection and implementation

of the projects involved. These differences may give rise to variations in the amount of AFT

extended to two, otherwise, equally needy recipients. Second, AFT originates from bilateral and

multilateral sources.

2

Given the overwhelming evidence indicating differences in the functionality of

aid originating from these sources, the impacts of equal amounts of AFT extended to identical recip-

ients may vary significantly. Third, some countries receive AFT from a few donors, and other s

receive AFT from multiple donors. While the inflow of aid from multiple donors may have an added

benefit of economies of scale, higher transaction costs associated with contrasting demands of multi-

ple donors have the potential to reduce the effectiveness of aid (Anderson, 2012). Cross-country

variations in the effects of AFT may, thus, correlate with the inflows and the functionality of AFT

originating from the alternative sources. Focusing on bilateral and multilateral sources, for ease of

exposition, we hypothesise that cross-country variations in the observed effects of AFT can be

attributed to the presence, if any, and the degree of complementarity arising from conscious coordi-

nation and/or the natural synergy of efforts employed in the implementation of the initiative.

3

Our results obtained from estimation of a multilevel mixed-effects model using data on AFT

inflows and ad valorem tariff equivalent comprehensive estimates of bilateral trade costs spanning

the time period 2002–10 lend support to the hypothesis that the returns to AFT inflows from bilat-

eral (multilateral) sources measured by a fall in trade costs facing the recipients strongly correl ate

with the magnitude of AFT inflows originating from the respective sources. Building on Ray’s

(2000) notion that complementarities among economic sectors may result in negative (self-reinfor-

cing), or positive (self-fulfilling) outcomes, our work also serves as an exposition of the age-old

works of Rosenstein-Rodan (1943) problems of industrialisation and Hirschman’s (1958) strategies

of development via industrialisation. Hence, we argue that AFT from bilateral and multilateral

sources can be less effective, when they are poorly coordinated.

The remainder of the paper is organised as follows. Section 2 provides a survey of the extant

literature on the effectiveness of aid for trade. In Section 3, we discuss the empirical model, data,

the variable of interest and control variables. The results, interpretations and the robustness checks

of our findings are presented in Section 4. Section 5 summarises the results, draws conclusions

based on the results and makes some policy inferences.

2

|

THE LITERATURE

A careful examination of the literature on the flow, functioning and effectiveness of the overseas

development assistance (ODA) originating from both bilateral and multilateral sources provides the

premise for our research hypothesis.

4

Powell and Bobba (2006) indicate that donors rely on

2126

|

TADESSE ET AL.