Foreign Aid as Soft Power and Intra-African Trade: Evidence from Ghana Using Instrumental-Variable Gravity Models

Africa’s intra-regional trade remains the weakest among global trading blocs, accounting for less than 18% of total trade, despite decades of integration efforts and the establishment of the African Continental Free Trade Area (AfCFTA). While structural factors are often cited, the role of foreign aid as a form of soft power in shaping trade orientation remains underexplored. This study examines whether donor aid facilitates or constrains intra-African trade, focusing on Ghana as a strategic hub. Conceptually, trade is framed as a strategic coordination problem using a Prisoner’s Dilemma lens, where states weigh cooperation with regional partners against alignment with external donors. Empirically, we employ an extended gravity model with instrumental-variable estimation (2SLS and IV-GMM) on bilateral trade flows between Ghana and 34 African aid-recipient countries from 1996 to 2020. Results reveal that, when aid is directed toward trade-relevant public goods such as infrastructure, logistics, and customs modernization, it enhances intra-African trade intensity. Conversely, aid narrowly aligned with donor-market interests does not yield similar gains. These findings refine prevailing narratives that aid undermines African regional integration, highlighting its conditional and context-specific effects. Policy implications emphasize the alignment of donor financing with regional trade facilitation objectives to strengthen AfCFTA implementation and promote sustainable, coordinated intra-African trade.