Trade Negotiations Insights • Volume 8 • Number 9 • November 2009

From Market Access to Accessing the Market: Aid for Trade and the Program of the World Bank

by Elisa Gamberoni and Richard Newfarmer

Discuss this articleShare your views with other visitors, and read what they have to say

In the early 1990s, traffic along Lao PDR’s gravel-surfaced Road 13-the backbone of country’s road system-crawled at about 35 km per hour. Other provincial roads were also in disrepair, with road maintenance only rarely undertaken across the network. The government, working with the World Bank Group in successive International Development Association (IDA) projects, built or repaired some 200 kilometers of roads, introduced regular maintenance using competitive bidding, and sought to improve the government’s capacity to better manage its national road assets. Other donors joined the effort.

Today, the upgraded section of Road 13 now provides all-weather access to important agricultural areas in southern Lao PDR. Travel time for transportation of key commodities to markets has decreased from an average of five hours to less than three, which has boosted local economic activity. Savings in vehicle operating costs have been estimated at US$39 million a year. Moreover, the project has helped create sustainable road-maintenance practices that now service about 23,000 km of road across the country.

Why Aid for Trade?

This is just an example of what aid for trade can do to propel trade and economic growth. The recent financial crisis and global recession has, if anything, made aid for trade more urgent. Trade worldwide contracted in 2009, and it was a main channel through which recessionary impulses from the United States and Europe were transmitted to developing countries. Now, with the beginnings of global recovery, those processes are set to reverse and trade is likely to be a leading sector. Helping countries to take full advantage of the global recovery by harnessing the potential of international trade is a key priority for rekindling growth-as well as for sustaining rising incomes into the future.

Overcoming obstacles to countries’ ability to export and import involves improvements in three critical areas: infrastructure, institutions, and incentives. According to one study, improving transport and communication infrastructure from the median score on surveys to the highest 25th percentile would lower transport costs by 12 percentage points and increase trade volumes by 28 percent. Institutions also matter. The time required for exporting is generally a good indicator of the quality of trade-related institutions. Delays in getting goods back and forth through customs constrain firms from participating in time-sensitive off-shoring of production and production chains. An additional day required for exporting is equivalent to being 70 km farther away from the trade partner. Finally, setting incentives embedded in the trade regime so as to guide private investment into exports or efficient import-substitution industries makes a major difference in a country’s competitiveness. Import tariffs create an incentive for firms to invest in activities that serve the domestic market rather than to invest in exports; if tariffs are high, reducing them can lead to productivity gains. A 10 percent fall in an output tariff is associated with a productivity gain of 1 percent. Moreover, reductions of tariffs on imported inputs leads to even bigger productivity gains: a reduction in the input tariff of 10 percentage points leads to an 11 percent productivity gain for importing firms. These internal barriers can be as important as market access barriers in foreign markets in shackling exports from developing countries.

Aid for Trade: Toward A Comprehensive View

The aid-for-trade program of the World Bank Group, as with other donors, is multifaceted. One measure is the aid-for-trade definition used by the OECD-WTO monitoring effort, which includes only concessional development assistance, and by this measure in absolute terms, aid for trade is increasing. While this is good news, it should be pointed out that as a share of total development assistance, aid for trade has declined-which the World Trade Organization (WTO) has taken to indicate that aid for trade is not displacing other important development priorities.

In fact, aid for trade goes beyond concessional lending commitments to low-income countries and should include lending to middle-income countries on nonconcessional terms for trade-related activities. Public discussions, whether in the WTO-sponsored regional conferences, in the WTO Global Reviews of Aid for Trade, or in the press, have explicitly incorporated these activities. For example, the Asian Development Bank (ADB) and the Inter-American Development Bank (IDB) have been leading actors in aid for trade, even though their concessional financing programs are quite limited because they operate in the middle-income parts of the developing world. The same is true of the European Bank for Reconstruction and Development (EBRD). The International Monetary Fund (IMF) provides virtually no aid for trade-in the narrow sense of concessional long-term finance measured by the OECD-WTO-yet it provides balance of payments support that can offset terms of trade or other trade-related shocks.

There is another reason to report non-concessional trade-related assistance. Middle-income countries have direct linkage effects on neighboring low-income countries. For example, Brazil’s growth creates export opportunities for Bolivia; Kenya’s economic performance affects neighbors throughout the East African Community; and Thailand is an important market for the Lao People’s Democratic Republic and Cambodia. Resource-scarce landlocked countries piggybacked on the growth of their neighbors-for example, one study found that if middle-income countries grew by an additional 1 percent, fully 0.4 percent was added to the growth of neighboring low-income countries and even 0.7 percent in the case of one landlocked neighbor-and this occurs primarily through trade linkages.

Similarly, public discussions invariably highlight the role of private sector activities, most recently on improving access to trade finance. But here, too, measuring only concessional flows does not include multilateral and bilateral donors’ investments in private activities or in expanding trade finance. Finally, and perhaps most importantly, focusing solely on concessional aid flows misses the important role of technical assistance. Certainly trust funds like the Enhanced Integrated Framework for Least Developed Countries (EIF) can play a key role in achieving the objectives of aid for trade. Similarly, the abundant technical assistance provided by bilateral and multilateral donors-including the International Trade Center (ITC), UNCTAD, UNDP, or the United Nations Industrial Development Organization (UNIDO)-is no less important. Such assistance, rendered through economic studies, technical assistance programs in trade facilitation or infrastructure management, or policy analysis of incentive regimes that affect private investment and trading decisions, demonstrates that aid for trade is multifaceted.

The Aid for Trade Program of the World Bank Group

The World Bank Group has extensive programs in aid for trade across the spectrum of concessional lending to low income countries through the IDA, non-concessional lending to middle-income countries through the IBRD, and private investments through the International Finance Corporation, the World Bank’s private sector arm. In 2008, resources transferred through these three channels amounted to some US$22 billion, more than double the annual average in 2002-2005. Increasingly, governments are requesting aid for trade from the World Bank-today nearly 70 percent of country programs agreed with the governments have trade-related activities. These programs focus predominantly on infrastructure and building productive capacity, but they also include trade facilitation and trade policy. Among low-income countries, Africa is the largest beneficiary.

Mauritius is one example of the ways the World Bank Group can support a government wishing to harness the global economy for faster growth. In February 2006, the government asked the World Bank Group to work with it on aid for trade. A mission in April delivered a report in the field and discussed it with the minister of finance. In June, the minister announced a new reform program, with key elements to improve competitiveness. The program has reduced trade barriers, made the investment board less discretionary and more efficient, aligned price incentives to export with the government’s objectives for export and employment growth, and established an empowerment program to help low-income unemployed workers, SMEs, and women entrepreneurs. The government then requested Bank support with lending for this new program, which resulted in the first in a series of programmatic loans, disbursed in December 2006. This was co-financed by France’s Agency for International Development. Each loan in the three-year program has changed in tandem with the government’s institutional reforms priorities. The program was rewarded with more rapid export and economic growth-at least until the advent of the global recession.

Aid for trade is generally effective, but the future is not certain

Efforts to promote aid for trade, though perhaps taking a different course than the one foreseen by negotiators at the 2005 WTO Ministerial Conference in Hong Kong, are paying dividends. Countries are requesting more aid for trade, donors are supplying it, and countries that need it are, in general, getting it. And some early evidence suggests that aid for trade is making a difference. Within the World Bank Group, a review of project completion reports finds that about 90 percent of aid for trade projects were rated by governments and staff as having been satisfactory or better (panel 6)-higher ratings overall than for non-trade related projects.

These favorable developments, however, are not cause for complacency. The financial crisis and global recession will undoubtedly put pressure on aid for trade, from both the supply side, as donors turn their attention to paring back expanded deficits in coming years, and from the demand side, as countries cope with multiple demands on scarce development assistance, including much-needed assistance for maintaining social expenditures.

If aid for trade is to continue to grow, two issues are critical. First, the multilateral development banks-collectively the largest source of aid for trade-are bumping up against capital constraints and may soon see their lending effectively capped. This is the result of the substantial expansion of their emergency lending to countries during the financial crisis. The World Bank Group, for example, tripled its non-concessional lending to US$35 billion in FY09. As with the Asian Development Bank, the World Bank Group has asked donors to increase its capital base so it can expand its overall lending. Without the capital increase, countries wishing to invest more in infrastructure will be forced to reduce their borrowings for health, education or other sectors.

Similarly, the Bank, along with other donors, has sought to make available increased resources through its concessional window, the International Development Agency. These funds originate with periodic replenishments from donor countries, and parliaments around the world will be asked to increase their donations at exactly the time when many will be moving to reduce their overall budget deficits. Nonetheless, because of the exhaustion of the last replenishment (IDA-15), the World Bank Group will begin requesting donors fulfill past pledges for IDA-16 early in 2010. If both the development and trade communities around the world make their voices heard in support for increased development assistance, the chances that aid for trade will increase would be markedly enhanced.

Authors: Elisa Gamberoni is an economist at the World Bank. Richard Newfarmer is the World Bank’s Special Representative to the United Nations and World Trade Organization. This note is the sole responsibility of the authors and does not necessarily reflect the official view of the World Bank Group or its Executive Directors.

References

Collier, Paul (2007) The Bottom Billion New York: Oxford University Press

OECD/WTO (2009) Aid for Trade at a Glance, 2009: Maintaining Momentum Paris: OECD

World Bank, (2009) Unlocking Global Opportunities: The Aid for Trade Program of the World Bank Group Group Washington: World Bank

Limao, N. and Venables, A. J. (1999), “Infrastructure, geographical disadvantage, and transport costs”, Policy Research Working Paper Series 2257, The World Bank

Collier, P. (2007), “The Bottom Billion: Why the Poorest Countries are failing and what can be done about it”, New York: Oxford University Press