Foreign Aid as Soft Power and the Political Economy of Trade Defection: Evidence from Ghana’s Intra-African Trade.

Purpose : This study investigates the relationship between foreign aid and intra-African trade performance, using Ghana as a policy-relevant case. While foreign aid is traditionally seen as supportive of development, emerging political economy perspectives suggest that aid may influence trade incentives in ways that are misaligned with regional integration goals. Design/methodology/approach: The analysis applies an augmented gravity model of trade and employs instrumental variable-generalized method of moments (IV-GMM) estimators to address endogeneity. The approach examines whether external aid inflows are associated with changes in Ghana’s trade engagement with its African partners. Findings: Empirical results indicate that higher levels of European Union aid are associated with a statistically significant reduction in both Ghana’s exports to and imports from African trading partners. These effects are probabilistic, suggesting that aid could subtly reorient trade incentives toward extra-regional markets rather than directly displacing intra-African trade. Originality/value: The study highlights an aid-induced incentive realignment mechanism, where external financial support can diminish the urgency of deepening regional trade linkages. By linking aid dependence, trade orientation, and regional integration under the African Continental Free Trade Area (AfCFTA), the paper provides novel insights for policymakers seeking to align aid frameworks with Africa’s integration agenda.