Aid for Trade and Import Product Diversification: To What Extent Does Export Product Diversification Matter?

Abstract

The literature on the effect of Aid for Trade (AfT) has shown that AfT flows can be associated with greater export product diversification in recipient-countries. However, the import product diversification effect of AfT interventions hasreceived scant attention in this literature. The present article aims to fill this gap by examining whether AfT flows affect import product diversification when countries diversify their export product baskets. The empirical results suggest that AfT flows are associated with greater import product diversification in countries that diversify their export product baskets. This finding applies both to total AfT flows and its three major components, namely AfT flows for economic infrastructure, AfT flows for productive capacity, and AfT flows dedicated to trade policy and regulation. Additionally, the magnitude of the positive effect of total AfT flows on import product diversification increases as recipient-countries enjoy a convergence of their export product structure towards the world’s export product structure. On another note, the empirical analysis reveals that AfT flows induce greater import product diversification in countries that further liberalise their trade policies. These results have important policy implications for both donors and recipient-countries.