Aid for trade unpredictability and trade-related government expenditure in recipient-countries

Unpredictability of development aid has been a key concern for the international community, which has committed, in the Paris declaration on Aid effectiveness, to making development aid more predictable for recipient-countries. At the same time, the international trade community has committed to help developing countries, and in particular Least developed countries (LDCs) better integrate into the multilateral trading system through the provision of higher amounts of Aid for Trade (AfT). The current article investigates the effect of AfT unpredictability on trade-related government expenditure in recipient-countries. The analysis covers an unbalanced panel dataset of 58 countries over the period 2009−2016. Empirical results are primarily obtained using the two-step system Generalized Methods of Moments (GMM) estimator. The findings indicate that over the full sample, unpredictability of total AfT, as well as both positive and negative unpredictability of total AfT exert a negative and significant effect on total trade-related government expenditure. Results show mixed evidence concerning the effect of unpredictability of AfT components on relevant trade-related government expenditure, including in LDCs and NonLDCs (countries that are not LDCs). Finally, there may be a non-linear relationship between AfT unpredictability and trade-related government expenditure. Overall, these findings shed light on the importance for donors and recipient-countries to coordinate efforts so as to make AfT more predictable.