AID FOR TRADE FLOWS AND POVERTY REDUCTION

Abstract

The effectiveness of Aid for Trade (AfT) interventions, including with respect to recipient countries’ trade performance, has now been well explored in the literature. However, in spite of the voluminous literature on the poverty effect of the total official development aid, the effect of AfT flows on poverty has received little attention on the empirical front. This paper aims to contribute to the policy debate on this matter by investigating the effect of AfT flows on poverty in recipient countries. In particular, the analysis explores whether this effect translates through countries’ level of export product concentration, as the latter can influence income inequality, and hence the transformation of economic growth into poverty reduction in recipient countries. The empirical analysis, based on 100[Formula: see text]AfT recipient countries, has shown that AfT interventions are associated with poverty reduction in countries that diversify their export products, including toward manufacturing products. Additionally, AfT flows dampen the positive poverty effect of income inequality, and lead to greater poverty reduction in countries with a great extent of fiscal redistribution. Finally, the analysis has shown that AfT interventions mitigate the positive poverty effect of import product concentration. These results have important policy implications.