Effect of the DFQF Market Access Initiative on Domestic Investment in Least Developed Countries

S K Gnangnon

Economic Issues Journal Articles, 2024, vol. 29, issue 1, 133-167

Abstract: Trade Ministers of the World Trade Organisation adopted in 2005 an important Decision, namely the Duty-Free-Quota-Free Market Access Decision ("DFQF Decision") that aimed to provide DFQF access for products originating from least developed countries (LDCs). The present analysis investigates the effect of the DFQF Decision on domestic investment in LDCs by comparing the domestic investment performance of LDCs to that of similar countries that are not beneficiaries of the DFQF market access initiative. The analysis covers a panel dataset of 40 LDCs (the treatment group) and 15 low-income countries (designated as such by the International Monetary Fund) in the control group (which is the main control group), over the period 1996 to 2019. For robustness check analysis, an alternative control group has been used that contains countries not in the LDC category and would not have met the criteria for graduating from this category if they were included in the category. Results based on the two-step system generalised method of moments suggest that the intensity of adverse environmental and exogenous shocks that affect LDC economies is an important factor that prevented them from expanding domestic investment further to the DFQF market access initiative. At the same time, the DFQF Decision led to the expansion of domestic investment in LDCs that enjoyed higher development aid flows, with the magnitude of this positive effect increasing as the amounts of development aid rose. These outcomes, therefore, underline the importance of not only helping LDCs cope with the adverse effects of environmental and external shocks on their economies, but also enhancing incentives for both LDC governments and private firms to expand domestic investment, which is key for exports, economic growth and development.

Keywords: DFQF market access; Domestic investment; Least developed countries; World Trade Organisation (search for similar items in EconPapers)
JEL-codes: E22 F13 F14 (search for similar items in EconPapers)
Date: 2024
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