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Increasing the effectiveness of Aid for Trade: the circumstances under which it works best

Working paper

Written by Yurendra Basnett, Jane Kennan, Isabella Massa, Dirk Willem te Velde

Working paper

The empirical literature tends to confirm that Aid for Trade has been effective in raising exports and improving the investment climate; the econometric evidence therefore paints a rather positive picture on the impact of Aid for Trade in economic performance.

However, the impact of Aid for Trade tends to vary considerably depending on the type of intervention, the income level and geographical region of the recipient country and the sector to which Aid for Trade flows are directed.

In order to better understand what factors influence the effectiveness of Aid for Trade investment, this Working Paper examines the various stages – from identification of priorities, to design and implementation, to monitoring and evaluation (M&E), and argues that Aid for Trade works best when:

  • It is targeted at reducing the cost of trading, for example through investment in infrastructure, improving trade facilitation and strengthening value chains. These should be driven and guided by support to the capacity of institutions that devise trade policies and regulations. Experience shows that investment in infrastructure, trade facilitation and the strengthening of value chains is most effective when it is integrated into and driven by a country’s broader trade policy and strategy.   
  • It addresses the binding constraint to growth. This will be largely country-specific and, according to traditional growth diagnostics, can relate to factors that affect the availability of finance of an investment project or factors (e.g. infrastructure, skills, transport costs) that affect returns to an investment.  
  • There is effective coordination between donors and recipients around the design, implementation and monitoring of the Aid for Trade programmes, as well as coordination among different donors, within donor agencies themselves (e.g. between country offices and headquarters), between different ministries within a recipient country government and between recipient governments and their regional trading partners.   
  • The selection of instruments and modalities for delivering Aid for Trade are able to address trade-related constraints at the transnational and regional level. Many Aid for Trade projects are targeted towards improving trade for individual countries, when in fact greater gains can be made by focusing on ensuring greater integration of trade within regions.   
  • The M&E of impacts, outcomes and outputs is realistic (the achievement of objectives can be traced along a feasible results chain), based on the collection of baseline data, and lessons contribute to the design of future projects.

It concludes with some ideas for a future research agenda.

Yurendra Basnett, Jakob Engel, Jane Kennan, Christian Kingombe, Isabella Massa and Dirk Willem te Velde