Aid for trade in historical perspective: what to expect from current initiatives

Has ‘Aid for Trade’ been successful in reducing trade transaction costs? If so, what are the expected returns to trade-related investments? The Gravity Model is used to evaluate the trade effects of aid for trade disbursements for the period 1988-2006 across 78 recipient countries. The project takes several approaches with respect to ‘Aid for Trade’ and recipient country aggregations. Estimates reveal that cumulative Aid for Trade has a positive and significant impact on trade flows although significantly less so for geographically remote regions. Disaggregated estimates of trade aid reveal positive and significant findings for investments in trade-related technical assistance and infrastructure, while investments in trade development yield marginal returns at best, the lone exception being emerging market economies. The tentative conclusion is that current ‘aid for trade’ initiatives hold much promise for stimulating trade growth. However, given the potential for adverse economic effects, a more cautious approach is warranted.