Aid for trade

Enhancing trade capacity in poor countries

Free access to markets will benefit developing countries as a group. Some large developing countries such as Brazil, China and India have the capacity to exploit opportunities arising from global trade reforms. However, the poorest countries may not gain much even from an ambitious Doha Round. Improving trade integration of poor countries could accelerate growth and poverty reduction.

Many of the poorest developing countries are ill-equipped to take full advantage of trade opportunities, due to the poor investment and business environments they provide. Improved market access without the ability to supply export markets competitively is not useful.

These countries need an environment that allows labour and capital mobility and facilitates investment in new sectors of activity. This requires, among other things, an efficient financial system and good transport/logistics services. Also, to gain from liberalising their own trade policies, countries depending heavily on tariff revenues for monetary resources will need to reform tax systems to maintain social expenditures and government services. Inevitably most poor countries will need to make complementary reforms prior to their own trade reforms and in conjunction with those of other countries.

Two types of assistance are, therefore, needed to:

• address adjustment costs, including from the erosion of preferences
• improve the environment for trade, such as improving infrastructure broadly defined to include measures discussed by Brambilla.

The communiqués of recent meetings of the IMF/World Bank (April, 2005), G7 Finance Ministers and the G8 (Summer 2005) all stressed the need for aid for trade. They also asked the International Financial Institutions (IFIs) to work with other donors to prepare proposals for 'additional assistance to countries to develop their trade and ease adjustment in their economies', and to 'take advantage of the new opportunities to trade which will result from a positive conclusion of the Doha trade round'.

Multilateral trade liberalisation will yield greater economic benefits to high-income countries than to developing countries, in absolute terms. Some of the additional aid that high-income countries have agreed to provide could be used for encouraging trade, in effect redistributing the increased gains from liberalisation, to help developing countries strengthen their trade capacity. Increasing aid to support trade integration can also help to realise many aims of the Doha Round. It could help to gradually eliminate the current system of highly discriminatory trade preferences.

An effective support mechanism

Although, the procedures for administering, allocating and monitoring additional aid need to be resolved, the basic principles that an aid-for-trade integration mechanism should satisfy are simple:

• Support should take the form of grants.
• Credibility and predictability of funding is important.
• More countries than just the least developed ones should be covered.
• A process of identifying trade capacity needs that is truly country-driven and owned is key.
• Processes and outcomes of the new mechanism must be independently monitored.

Donors must provide adequate support and enable developing countries to respond to the new opportunities from trade liberalisation and integration. 'Best endeavour' promises (which were non-binding) made in previous trade negotiations to provide assistance have not been realised. Making more promises does not assure low-income countries that their concerns will be addressed. Past experience shows the need for a mechanism that provides dedicated funding to overcome trade constraints and to offset the adjustment costs of reform.

Aid for trade development has to address priority areas as defined in national development plans and strategies. Dedicated and additional funding can help only when trade competitiveness and integration are aligned with country policies and programmes.

Susan Prowse
UK Department for International Development
1 Palace Street
London SW1E 5HE
UK
T +44 (0)207 0230862
F +44 207023 0470
S-Prowse@dfid.gov.uk

See also

Economic policy responses to preference erosion: from trade as aid to aid for trade,World Bank Policy Research Paper 3721 by Bernard Hoekman and Susan Prowse, 2005
http://econ.worldbank.org/programs/trade

Aid for trade - increasing support for trade adjustment and integration - a proposal by Susan Prowse, 2005
www.ycsg.yale.edu/focus/gta/aid_for_trade.pdf

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