Effect of Aid-for-Trade Flows on Investment-Oriented Remittance Flows

Abstract

Despite the voluminous literature on the effect of aid-for-trade (AfT) flows on recipient countries’ trade performance, little is known about the relationship between AfT flows and other capital flows to developing countries. This paper contributes to the literature by exploring the effect of AfT inflows on investment-oriented remittance inflows, notably through the channel of trade costs. Using an unbalanced panel data set of 106 countries over the period 2002–2019 and the two-step system generalized method of moments, the empirical analysis establishes several outcomes. AfT flows exert a positive effect on investment-oriented remittance flows, where the magnitude of this positive effect is higher in least-developed countries and in remittance-dependent countries than in other countries. AfT flows stimulate investment-oriented remittance flows in countries that face higher trade costs. The analysis shows that AfT flows could be important leverages for stimulating investment-oriented remittance flows and could promote the development of the private sector in beneficiary countries.