Aid for trade and the post-Washington confusion

How much should Aid for Trade (AfT) be able to achieve in terms of the scale of the problems that AfT is supposed to remedy? This paper examines some core issues related to aid for trade (AfT), in light of the rapid expansion of such aid in recent years.

It finds that:

• 1/10 of the countries, representing 3% of the world population, have a "problem with trade" in the sense that openness and income are negatively correlated, and growth has been slow
• on the other hand; for 28% of the countries, representing 2/3 of the world population, the relationship between trade openness and income over time is clearly positive

It concludes from this that on average, the relationship between trade and growth is positive even if there is a considerable middle ground where the relationship is not so clear-cut. Therefore Aid for Trade can be most effective in boosting the supply side of developing countries. At the same time, there is no specific AfT that can solve these problems, and aid for supply-side development should therefore be provided on a long-term basis and coordinated with other aid. Such aid could be scaled up gradually.

The author recommends another application of aid for trade, in the form of compensation for preference erosion. AfT may also compensate for loss of tax income in some countries. Above all, the author recommends a "case by case" approach to the planning and distribution of Aft, depending on countries’ needs, and notes that non-WTO countries have greater problems with trade, so may need more tailored assistance.