Effect of Aid for Trade on Financial Development

Many studies have considered the macroeconomic effects of Aid for Trade (AfT) flows, that is, the part of official development assistance allocated for the development of the trade sector. The present paper aims to expand this literature by investigating the effect AfT flows on financial development. The empirical analysis draws on an unbalanced panel dataset of 121 countries over the period 2002-2019, and uses primarily the two-step system Generalised Method of Moments estimator. Empirical outcomes show that total AfT flows exert a positive effect on financial development. The magnitude of this positive effect is greater, the lower the share of manufactured exports in total merchandise exports, or the lower the level of economic complexity. The magnitude of this positive effect is also greater, the lower the size of real net foreign direct investment inflows in the AfT beneficiary countries. These findings highlight the key role of AfT flows in promoting financial development in beneficiary countries, and therefore, in fostering economic development in these countries.