Effect of Development Aid on Productive Capacities

The international policy discourse, for example by the World Trade Organization and the United Nations, has emphasized the critical role of productive capacities for promoting sustainable development and building economic resilience in developing countries. This paper examines whether ODA contributes to enhancing productive capacities in recipient countries. It considers two main components of the total official development assistance (ODA), namely, Aid for Trade (AfT) and Non-AfT, where the latter is part of total ODA allocated to other than trade-related sectors. The analysis relies on the index of the overall productive capacities developed recently by the United Nations Conference on Trade and Development (UNCTAD), and covers 111 countries over the period 2002-2018. Findings indicate that development aid, including its two main components, contributes to fostering productive capacities in recipient countries, with AfT flows exerting a larger positive effect on productive capacities than Non-AfT flows. Moreover, in least developed countries (LDCs), the positive effect of ODA on productive capacities reflects the key role of both AfT and NonAfT flows in contributing to the development of productive capacities. In contrast, in NonLDCs (other countries than LDCs in the full sample), only AfT flows matter positively for the strengthening of productive capacities, as Non-AfT flows do not appear to exert a significant effect on productive capacities. These outcomes highlight the criticality of development aid for enhancing productive capacities in developing countries, in particular in LDCs.