Aid for trade and decomposed productivity components in recipient countries

This study examines the impact of aid-for-trade on decomposed total factor productivity, utilizing a panel of 54 aid recipient countries from 2003 to 2019. The study decomposes total factor productivity into technical progress and technical efficiency change by applying the stochastic frontier approach. Then, the study regresses decomposed productivity components on various measures of aid for trade. Empirical results indicate that aid-for-trade enhances productivity, although the total amount of aid itself does not have a significant impact on it. Regarding productivity components, cumulative aid-for-trade increases both technical progress and technical efficiency change, although yearly aid-for-trade increases only technical progress. Among aid-for-trade types, aid for supporting trade-related infrastructure and aid for building productive capacity boost technical progress. The results support the presumption that aid-for-trade promotes economic development by enhancing trade openness. The novelty of this study lies in revealing the link between aid-for-trade and the decomposed productivity components. In this regard, the study suggests that aid-for-trade enhances productivity growth through technical progress in the short run, which is transmitted to other countries through technical efficiency change in the long run.