Aid, Aid-for-Trade, and Nepal
This research examines whether aid that is specifically targeted for trade (referred to in the literature as “Aid‐for‐Trade” or AfT) has helped Nepal in its trade performance. Effectiveness of AfT is examined by analyzing the relationship between infrastructure development and exports. There are two main approaches used in the paper to analyze the effectiveness of AfT: first, whether AfT helps export levels across different sectors and, second, if it favors certain sectors over others. One potential channel explaining uneven gains in exports possibly involves the development of more favorable infrastructure system, enabled by aid, in the relatively more successful sectors. The analysis of export performance from developing countries has drawn an increased attention in the recent years as the aid donating countries have increased the aid amount targeted to improve the trade sector. Donor countries provide foreign aid for many reasons: to directly improve the social, political, and economic situation of the recipient country, and to indirectly improve one or more of these areas in the donor country (Alesina and Dollar, 2000).
Both the donor and recipient countries expect that general foreign aid will have significant impact on the overall economy of the recipient nation. However, scholars have not found significant impact of foreign aid on growth regressions, except under the presence of special conditions like better institutional and policy variables (Burnside and Dollar, 2000). At the same time, the international organizations like WTO and OECD have teamed up to evaluate the effectiveness of AfT by establishing a special task force to monitor the allocation and implementation of projects that qualify as recipient of AfT. The increase in interest from these organizations is due to the realization that trade is a major determinant of economic growth and development of a country. So, it is natural to question if the support lent by richer countries is in fact helping the trade sectors of least developed countries like Nepal. Existing research such as Ghimire, Mukherjee, and Alvi (2013) and Pettersson and Johansson (2011) suggest that AfT may contribute to export promotion across developing countries, though case studies of such research are very limited. So, this study analyzes export performance for the case of Nepal by using the AfT data constructed from Creditor Reporting System and infrastructure development indicators obtained from World Development Indicators, and study their impact on Nepal’s exports based on the data obtained from Trade Analysis Information System.