Does aid for trade diversify the export structure of recipient countries?

• Date: 01 September 2019
• Author: Yu Ri Kim
• Published date: 01 September 2019
• DOI: http://doi.org/10.1111/twec.12845

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wileyonlinelibrary.com/journal/twec World Econ. 2019;42:2684–2722.

© 2019 John Wiley & Sons Ltd

Received: 27 July 2016

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Revised: 7 June 2019

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Accepted: 25 June 2019

DOI: 10.1111/twec.12845

ORIGINAL ARTICLE

Does aid for trade diversify the export structure of

recipient countries?

Yu RiKim

Graduate School of Frontier Sciences,The University of Tokyo, Kashiwa, Japan

Funding information

Japan Society for the Promotion of Science, Grant/Award Number: JP25101003

KEYWORDS

aid effectiveness, aid for trade, export concentration, export diversification, export sophistication, official development

assistance

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INTRODUCTION

Aid for trade is a type of official development assistance that is intended to support the efforts of

developing countries to develop and expand their trade. Although aid for trade has formed part of

development assistance for decades, its origin as a formal initiative by the World Trade Organization

(WTO) to recognise the role of international trade in development goes back to the 2005 Hong Kong

Ministerial Meeting of the Doha Round. The objective of aid for trade is to support developing coun-

tries, especially least developed countries (LDCs), to “build the supply‐side capacity and trade‐related

infrastructure that they need to assist them to implement and benefit from WTO Agreements and more

broadly expand their trade” (WTO, 2005, p.57).

Are financial resources put forward for aid for trade yielding returns in developing world? To

maximise its usage, a key concept to improve the management of aid resources that has been receiving

much attention is aid effectiveness. Aid effectiveness measures the extent to which an aid activity

attains its goals and has been included as one of the key criteria for the evaluation of development

assistance by the Development Assistance Committee (DAC) of the OECD since 2000. As a result,

there is active empirical research on aid effectiveness at a macroeconomic level conducted both in

academia and relevant institutions (Bourguignon & Sundberg, 2007; Rajan & Subramanian, 2008; and

Hansen & Tarp, 2000). Aid for trade also falls inside the scope of aid effectiveness discourse. There

are numerous studies and concerns over how effective aid for trade is in terms of trade enhancement

of developing countries.

By definition, the degree of aid effectiveness varies depending on what is chosen as the policy ob-

jectives of the aid programme. For example, aid can be regarded as effective by donors, while the re-

cipients regard it as a failure if what they want to achieve with aid is different. In this regard, the OECD

emphasises the issue of “ownership” and “alignment” in recipient countries for finding an appropriate

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objective measure for aid effectiveness. Ownership refers to the extent to which a country's leadership

is fully committed to development and aid initiatives set by itself. Meanwhile, alignment refers to how

much “the donors base their overall support on partner countries” national development strategies,

institutions and procedures' (OECD, 2008, p.3). Considering these two principles of aid effectiveness

set by the OECD, which is a forum covering a vast majority of important donors and recipients, it is

clear that both parties agree that it is more appropriate to give more weight to policy objectives set

from the recipient's perspective when assessing the effectiveness of aid for trade.

Against this background, the results of a survey conducted jointly by the WTO and the OECD

in 2011 are instructive. While both donor and recipient countries all agreed that aid for trade should

realise both trade and development objectives, what recipients picked as the most wanted outcome

of aid for trade is export diversification. As shown in Figure 1, about 60% (51 out of 84 countries

that responded) chose diversified exports more important than increased exports and increased trade

(OECD/WTO, 2011b).

One reason that developing countries value export diversification is that many of them face severe

export concentration. As shown in Figure 2, in many low‐income countries the top three commodities

make up a major share of their total exports. While the world average is a little below 50%, the export

structure of many low‐income countries is highly concentrated. For some countries, the situation is

so severe that the top three commodities make up more than 90% of their total exports. Even though

many governments have put a high priority on diversifying exports, a substantial number of develop-

ing countries continue to rely on only a few export commodities (OECD/WTO, 2011a). Given such

relatively concentrated export structures, many developing countries face substantial risks such as a

deterioration in their terms of trade and exchange rate shocks. Export diversification therefore is one

of the most crucial components in measuring the effectiveness of aid for trade from the viewpoint of

recipient countries.

Export diversification, for which a diversification of production is a necessary condition, forms an

essential part of economic development, since it implies that productivity in a variety of industries is

increasing (Feenstra & Kee, 2004). In other words, recipient countries regard export diversification

as one of the most important objectives since it is linked to almost all other development goals such

FIGURE 1 Main goals recipients want to achieve through aid for trade.

Source: Aid for trade at a glance 2011: Showing results, OECD/WTO, 2011b, p.94. The original question recipients

were asked is: “How do you define the success of aid for trade in your country?” [Colour figure can be viewed at

wileyonlinelibrary.com]

51

45

45

43

41

39

38

36

34

20

10

9

21

26

25

25

32

29

35

33

38

42

50

3

5

6

5

9

4

8

4

7

5

14

15

0

1

2

2

1

1

0

1

1

0

2

3

1

6

5

7

6

6

8

6

7

7

6

6

71

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Diversified exports

Increased exports

Increased economig growth

Reduced poverty

Increased profile of trade in development strategy

Increased aid-for-trade resources

Increased trade

More harmonised and aligned aid-for-trade projects and programmes

Enhanced understanding of trade

Greater environmental sustainability

Greater gender equality

Other

Most important Important Less important Not important No answer

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as increased exports, economic growth and poverty reduction (Cadot, Carrère, & Strauss‐Kahn, 2011;

Feenstra & Kee, 2008; Herzer & Nowak‐Lehmann, 2004; Hesse, 2008; Hummels & Klenow, 2005;

Imbs & Wacziarg, 2003; Lall, Weiss, & Zhang, 2006; Mejía, 2011; Newfarmer, Shaw, & Walkenhorst,

2009; Parteka & Tamberi, 2013).

For this reason, the present study focuses explicitly on assessing the effectiveness of aid for trade

on export diversification. To be more precise, the study empirically investigates the link between aid

for trade and measures related to export diversification. The analysis of export diversification focuses

on two aspects: the degree of trade concentration and the degree of trade diversity. To gauge the de-

gree of trade concentration level, the Herfindahl–Hirschman Index (HHI) for exports is used, while

the number of exported products is used as a proxy for export diversification. Alternative variables

are used for robustness checks. The study includes in the analysis all aid recipients for which data are

available. Specifically, the dataset includes 133 countries that received aid for trade and covers the

period from 1996 to 2013.

The results of the analysis can be summarised as follows. The system generalised method of mo-

ments (GMM) estimation suggests that aid for trade as a whole appears to have a significant effect

on export structure in the short run. In particular, some categories, such as aid for trade targeting

production capacity building, aid for trade policy and regulations reduce the level of export concen-

tration. These results are based on annual data, and to consider the long‐term effects, the same GMM

regressions are performed using the three‐year average of the HHI. The results suggest that in this

case, overall aid for trade does not have a significant positive impact on reducing export concentration.

In contrast to the results using the annual data, this time, only aid for building productive capacity

remains effective, while aid targeting trade policy and regulations loses significance.

FIGURE 2 Share of top three exports in total exports, low‐income countries (2012).

Note: Shares are calculated using 6‐digit HS 1992 mirror data. Low‐income countries are countries with a per capita

GDP of less than US$1,000 [Colour figure can be viewed at wileyonlinelibrary.com]

0% 10%20% 30%40% 50%60% 70%80% 90%100%

Cambodia

Nepal

Madagascar

Tanzania

Afghanistan

Togo

Bangladesh

World Average

Uganda

Zimbabwe

Liberia

Benin

Dem. Rep. of the Congo

Mozambique

Haiti

Gambia

Rwanda

Malawi

Ethiopia

Sierra Leone

Tajikistan

Guinea

Central African Rep.

Burkina Faso

Burundi

Mali

Comoros

Niger

Guinea-Bissau

Eritrea

South Sudan