Trade for growth and poverty reduction : how aid for trade can help

94 Pages·2011·1.22 MB·English

by  OECD

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The Development Dimension D
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v The Development Dimension
Trade for Growth and Poverty Reduction e
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m Trade for Growth
HOW AID FOR TRADE CAN HELP
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Trade promotes economic growth, alleviates poverty and helps countries reach their t D and Poverty Reduction
development goals. However, developing countries – in particular the least developed – face im
diffi culties in making trade happen and turning trade into economic growth. The Aid for Trade e
n HOW AID FOR TRADE CAN HELP
Initiative – launched at the 2005 World Trade Organisation conference in Hong Kong – aims s
at helping these countries to take advantage of trade opportunities and to reap the benefi ts io
n
of their integration into the world economy.
Trade for Growth and Poverty Reduction: How Aid for Trade Can Help explains how aid for
trade can foster economic growth and reduce poverty, and why it is an important instrument
for a development strategy that actively supports poverty alleviation. Unlocking this potential
requires carefully designed and sequenced trade reforms. While developing countries have
many trade-related needs, but fi nancial resources and political capital for reforms are limited,
it is an important priority to tackle the most binding constraints to trade expansion. This
report describes the diagnostic tools available, evaluates their strengths and weaknesses,
and suggests a dynamic framework to guide the sequencing of reform and donor support.
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Please cite this publication as: u
c
OECD (2011), Trade for Growth and Poverty Reduction: How Aid for Trade Can Help, tio
The Development Dimension, OECD Publishing. n
http://dx.doi.org/10.1787/10.1787/9789264098978-en
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The Development Dimension
Trade for Growth
and Poverty Reduction
HOW AID FOR TRADE CAN HELP
This work is published on the responsibility of the Secretary-General of the OECD.
The opinions expressed and arguments employed herein do not necessarily reflect
the official views of the Organisation or of the governments of its member countries.
Please cite this publication as:
OECD (2011), Trade for Growth and Poverty Reduction: How Aid for Trade Can Help, The
Development Dimension, OECD Publishing.
http://dx.doi.org/10.1787/9789264098978-en
ISBN 978-92-64-10105-0 (print)
ISBN 978-92-64-09897-8 (PDF)
Series: The Development Dimension
ISSN 1990-1380 (print)
ISSN 1990-1372 (online)
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© OECD 2011
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FOREWORD –

FOREWORD
History has shown that trade can be a powerful engine for economic
growth and, depending on its pace and pattern, reduce poverty. Trade can
therefore be an important tool to help countries reach their development
goals. However, particularly in the case of the least developed countries,
harnessing the power of trade often remains challenging.
Although access to OECD and other markets could be further improved,
successive rounds of multilateral trade liberalisation, regional free trade
agreements and various preferential agreements provide developing
countries with better trading opportunities. Nonetheless, where there are
capacity constraints or trade-related infrastructure is lacking, it can be
difficult for these countries to turn trade opportunities into trade flows.
Moreover, some domestic constraints often choke the impact of trade
expansion on economic growth and poverty. The Aid for Trade Initiative
was launched to address these problems. It has succeeded in raising
awareness among partners and donor countries concerning the positive role
trade can play in promoting economic development. Furthermore, increasing
resources (both concessional and non-concessional) are being devoted to
address binding constraints on trade and to making trade more pro-poor.
Since the advent of this Initiative, the OECD has actively contributed to
the global Aid for Trade debate. The Development Assistance Committee
(DAC) and the Trade Committee (TC) have worked jointly to provide
analytical input to the World Trade Organization (WTO) Task Force on Aid
for Trade. OECD outputs have helped to shape the Geneva debate on how to
operationalise Aid for Trade.
Joint DAC-TC work on Aid for Trade builds on the comparative
advantages of the two policy communities. It has allowed the OECD to
develop a very constructive collaboration with the WTO on Aid for Trade.
The focus of this joint work is on implementing the Aid for Trade Initiative,
in order to enable partner countries to use trade effectively to promote
economic growth and achieve their poverty reduction objectives.
Trade for Growth and Poverty Reduction: How Aid for Trade Can Help
is an outcome of this joint work. It highlights experiences showing that
TRADE FOR GROWTH AND POVERTY REDUCTION: HOW AID FOR TRADE CAN HELP – © OECD 2011
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– FOREWORD

aid-for-trade programmes and projects have strong potential to foster growth
and reduce poverty. Unlocking that potential requires carefully designed and
sequenced trade reforms.
This report sets forth strategies to identify the most binding constraints
on trade expansion. Use of these strategies can allow partner countries and
donors to focus their efforts on those reforms with the greatest impact. The
report describes various diagnostic tools available to policy makers and
development practitioners to establish a list of trade-related needs.
Unfortunately, needs are usually plentiful while funds are limited. To
prioritise reforms, it is necessary to identify the most pressing needs.
Focusing on binding constraints can maximise the impact and effectiveness
of Aid for Trade. This report suggests a framework within which this can be
done.

Brian Atwood Fernando de Mateo
Chair of the Development Chair of the Trade Committee
Assistance Committee

TRADE FOR GROWTH AND POVERTY REDUCTION: HOW AID FOR TRADE CAN HELP – © OECD 2011
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ACKNOWLEDGEMENTS –

ACKNOWLEDGEMENTS
This report was written by Jean-Jacques Hallaert
([email protected]) of the OECD Trade and Agriculture
Directorate and Masato Hayashikawa ([email protected]) of
the OECD Development Co-operation Directorate, under the supervision of
Doug Lippoldt and Bill Nicol. It was commented by the joint meeting of the
OECD Development Assistance Committee and the Working Party of the
Trade Committee. The authors are grateful to John Smith for editing the
report, to William Hynes, Gimin Kang, Frans Lammersen, Laura Munro,
and the participants of the Fourth China-ASEAN Forum on Free Trade and
Poverty Reduction in Guilin, China, for their valuable inputs and comments
on earlier drafts, and to Isabel Huber for editing support. Valuable assistance
was provided by Jacqueline Maher of the OECD Trade and Agriculture
Directorate, and by Sandra Hassine and Susan Hodgson of the OECD
Development Co-operation Directorate.

TRADE FOR GROWTH AND POVERTY REDUCTION: HOW AID FOR TRADE CAN HELP – © OECD 2011

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TABLE OF CONTENTS –

Table of Contents
Executive Summary ............................................................................................ 9
1. Background ............................................................................................ 13
Background ..................................................................................................... 14
Trade for growth ............................................................................................. 14
The Aid for Trade Initiative ............................................................................ 15
Notes ................................................................................................................... 16
References ........................................................................................................... 17
2. Trade objectives of the Aid for Trade Initiative ................................. 19
Trade Objectives of the Aid for Trade Initiative ............................................. 20
Increasing trade ............................................................................................... 21
Diversifying exports ........................................................................................ 25
Maximising linkages with the domestic economy .......................................... 28
Increasing adjustment capacity ....................................................................... 30
Notes ................................................................................................................... 32
References ........................................................................................................... 35
3. Increasing the benefits of trade for the poor ....................................... 45
Trade, growth and poverty: the role of Aid for Trade ..................................... 46
Connecting the poor to markets ...................................................................... 49
Trade and inequality ........................................................................................ 51
Mitigating the costs of adjustments ................................................................. 54
Global approaches, local solutions .................................................................. 56
Notes ................................................................................................................... 58
References ........................................................................................................... 59
4. Constraints on expanding trade ........................................................... 63
Binding constraints on trade expansion........................................................... 64
Available diagnostic tools and methods .......................................................... 67
The growth diagnostics framework adjusted for trade .................................... 75
TRADE FOR GROWTH AND POVERTY REDUCTION: HOW AID FOR TRADE CAN HELP – © OECD 2011
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– EXECUTIVE SUMMARY

Notes ................................................................................................................... 81
References ........................................................................................................... 83
5. Conclusion .............................................................................................. 87

Tables
Table 2.1. Results of selected studies linking exports and economic
growth .......................................................................................... 22
Table 2.2. Results of selected empirical studies linking trade and economic
growth .......................................................................................... 23

Figures
Figure 4.1. Causality chain in Aid for Trade and binding constraints ........... 65
Figure 4.2. Growth diagnostics framework ................................................... 77
Figure 4.3. Growth diagnostics framework adjusted for trade ...................... 78

Boxes
Box 3.1. Trade, growth and poverty reduction: empirical evidence ............. 47
Box 3.2. The case of the Zambian agro-processing sector ............................ 51
Box 3.3. Women and trade: the case of the Cambodian garment industry ... 53
Box 3.4. The case of social cash transfers in South Africa ........................... 55
Box 4.1. The Millennium Challenge Corporation’s Constraints Analysis .... 80

TRADE FOR GROWTH AND POVERTY REDUCTION: HOW AID FOR TRADE CAN HELP – © OECD 2011
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EXECUTIVE SUMMARY –

Executive Summary
Trade can be a powerful engine for economic growth, poverty reduction
and development. Although debated, this is the main conclusion of a large
body of empirical literature on trade and growth. Harnessing the power of
trade is often difficult for developing countries, particularly the least
developed ones, because of supply-side domestic constraints. The Aid for
Trade Initiative launched in 2005 at the Hong Kong WTO Ministerial
Conference addresses these constraints.
Aid for Trade interlocks aid and trade in a broader pro-growth strategy
whose overall objective is to raise living standards and reduce poverty in
developing countries. To increase the impact of trade on poverty reduction,
the international community has acknowledged that trade integration is an
important element in achieving sustained economic growth, and that Aid for
Trade provides an important framework to support this process by
addressing constraints in developing countries that keep them from taking
advantage of new economic opportunities arising from expanding regional
and global markets.
The background of this report on Trade for Growth and Poverty
Reduction: How Aid for Trade Can Help is presented in Chapter 1.
Chapter 2 shows that achieving the four most common objectives of
aid-for-trade programmes and projects has the potential to boost growth in
developing countries and to reduce poverty. These four aid-for-trade
objectives are: (i) increasing trade; (ii) diversifying exports; (iii) maximising
linkages with the domestic economy; and (iv) increasing adjustment
capacity. The literature provides ample evidence to support this.
Trade is a means to an end, not an end in itself. As discussed in Chapter
3, the end is the achievement of sustainable growth and, through appropriate
complementary policies, poverty reduction – as well as more equitable
distribution of global benefits across and within developing countries. The
impacts of trade reform and expansion on the poor are context-specific,
depending on consumption patterns and on whether trade-induced growth
occurs in areas and sectors where the poor live and are economically active.
Consequently, strengthening the contribution of trade to pro-poor growth
TRADE FOR GROWTH AND POVERTY REDUCTION: HOW AID FOR TRADE CAN HELP – © OECD 2011