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

Aid for Trade has emerged as an important vehicle for assisting developing countries to improve their trade capacity and to benefit from the expansion of global markets. But any optimism on the volume of Aid for Trade flows is punctuated by the ongoing global economic crisis, which is likely to have important implications for trade and development.

This working paper seeks to assess the impact of Aid for Trade thus far, and what has worked and what the barriers to improving the impact of Aid for Trade are.

The authors argue 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