Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: What Is Aid for Trade?
May 23, 2007
- Aid for trade can complement trade reform and market opening
- Capacity building can help developing countries take advantage of trade opportunities
- Aid can also help tackle bottlenecks by improving roads, storage, ports, and distribution
Although trade can be an important engine of growth, many poor countries face considerable infrastructure and other supply-side constraints to participating in global markets.
Farmers unload cotton in Burkina Faso. Many African states need help to boost exports (photo: Issouf Sanogo /AFP)
Doha Trade talks
Recognizing this, the ministerial declaration establishing the Doha Round of trade negotiations in 2001 made technical assistance and capacity building a key component of the development dimension of the talks.
To help poor countries take advantage of new trade opportunities, the international community is working on a package of aid for trade measures. The aid is designed to help developing countries address supply-side bottlenecks and boost their capacity to take advantage of expanded trade opportunities. Aid for trade can be an important complement to trade reform and global market opening. However, the IMF has emphasized that it should not be a substitute for the Doha Round process.
Aid for trade refers both to a subset of development assistance that is seen as promoting international trade and a number of international initiatives to promote trade-related development assistance. As generally defined, aid for trade comprises aid that finances trade-related technical assistance, trade-related infrastructure, and aid to develop productive capacity. These categories of aid accounted for 24 percent of total official development assistance ($23 billion) in 2004. Aid for infrastructure, such as roads and ports, accounted for over half the total, with aid for productive capacity (such as support for industry, agriculture, and tourism) accounted for most of the rest. Trade-related technical assistance accounted for about 10 percent, according to estimates from the OECD's Development Assistance Committee.
"More open trade policies can counteract the negative impact that surges in aid, which can raise real exchange rates, might have on the competitiveness of exports."
Efforts to provide aid for trade, like any other aid, need to take account of countries' absorptive constraints, whether at the project implementation, institutional or macroeconomic level. Nevertheless, both trade reforms and aid for trade can also complement the broader growth in aid: trade reforms and aid for trade can play a role in managing scaled-up aid inflows by encouraging aid absorption and containing or mitigating the consequences of upward pressures on real exchange rates.
For instance, more open trade policies can counteract the negative impact that surges in aid, which can raise real exchange rates, might have on the competitiveness of exports. Lower import tariffs reduce costs for the export sector, both directly by making imported inputs available more cheaply and indirectly by diverting fewer resources into import-competing sectors. And of course, openness spurs competition and learning. Aid for trade, in turn, can tackle bottlenecks hampering supply and productivity in the non-tradable sector—such as roads, storage, ports, and distribution—enabling the sector to expand supply instead of increasing prices, and thus making the tradable sectors more competitive.
Finally, customs reform, and trade facilitation more generally, can reduce transaction costs for trade, thus countering the effects of real exchange rate appreciation.
An important coordinating mechanism for aid for trade is the Integrated Framework (IF), established in 1997 by the IMF and five other international organizations. The IF was transformed into the Enhanced Integrated Framework on May 1, 2007 with the goals of increasing aid for trade and strengthening the capacity to manage and implement aid for trade in recipient countries.
Recent meetings have focused on establishing clear monitoring mechanisms to ensure donor-recipient accountability and on creating adequate definitions of what is covered under aid for trade. Preparations are underway for three regional aid for trade reviews, according to the World Trade Organization.
The first review is scheduled for Lima, Peru on September 5-7 for the Latin America/Caribbean region, the second review will take place in Manila, Philippines on September 19-20 for the Asian region and the third review will take place on September 27-28 in Tanzania for the Africa region. In all these three regional reviews, the respective regional development banks are taking the lead in coordinating the preparations.