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Changing the debate on effectiveness of aid for trade

Written by Massimiliano Cali

The trade and aid policies of donor countries have a profound impact on the economic progress of developing countries. ODI’s work on this issue identifies trade and aid strategies that can promote economic growth.

As part of this work, the Trade programme has carried out the first systematic analysis of the impact of Aid for Trade (AfT) on trade performance.  The research findings have helped to spur (and have contributed to) the discussion on what works and what doesn’t in AfT. They have been part of the argument used to advocate against the neglect of AfT within the aid industry.

The challenge

In December 2005, the World Trade Organization (WTO) pledged its support for the concept of Aid for Trade (AfT). This raised high expectations, but there has been little agreement on how to operationalise the AfT initiative, map out its resources, its purpose or, crucially, understand its actual and potential impact.

The WTO initiative helped the AfT concept to gain rapid popularity among aid donors and recipients. Despite this, the relatively little evidence about its actual impact on trade-related performance, or on the effectiveness of different types of AfT, stifled the progress in translating the broad support around AfT into a more operational agenda for action.  

The response

With funding primarily from the Commonwealth Secretariat, ODI’s Trade programme has analysed the actual impact of AfT on trade performance, particularly on the all important costs of trading and on exports.

The findings from a series of three studies, using data on more than 100 developing countries, have demonstrated that support for AfT reduces the cost of trading, measured as the cost of getting goods from a factory to a ship, loading them on to the ship, and sending it on its way – a key issue for landlocked countries, in particular. Similarly, the cost of bringing goods in – the nuts and bolts of getting products to where they need to be – is reduced. These positive effects were shown to be particularly high in the case of sub-Saharan Africa and in the case of small and vulnerable developing economies.

In addition, by using a novel empirical approach, the studies have revealed that among the broad components of aid, support for economic infrastructure (roads, ports, telecommunications and financial services) significantly increases exports, while aid for productive capacity has no discernible impact on exports. The findings also show that the latter type of aid tends to be provided disproportionately to export sectors that are already  performing well.

‘What is more,’ says ODI researcher Massimiliano Calì, ‘all of these trends are more pronounced in sub-Saharan Africa. There, the impact on exports is higher than elsewhere, and the impact of aid to the productive sector is lower.’

The impact

The findings are being published, in part, in World Development, the top academic journal on international development, in the Commonwealth Economic Paper Series, a technical publication series, as well as in the Trade Hot Topic, a periodic publication by the Commonwealth Secretariat with a wide distribution among policy-makers and development practitioners. In addition, the findings have been presented in fora such as the WTO in Geneva, the Commonwealth Parliamentary Association in Arusha, as well as to the UN Economic Commission for Africa in Addis Ababa.

This research has become an important reference in the AfT debate, widely quoted by the World Bank, the International Monetary Fund, OECD, WTO and other bodies interested in the operationalisation of the AfT initiative.

Next steps

The research has sparked widespread interest in what specific activities should be prioritized for AfT, and how best to spend this money effectively. The next step for ODI would be to dig into this issue in more detail, to take a closer look at why certain activities have more impact than others. This would require more detailed case studies.