Aid for trade in developing countries : complex linkages for real effectiveness

This working paper presents the various aid-for-trade (AfT) categories. It analyses the linkages between foreign direct investment, AfT and development. It also presents a typology of trade-related needs for a panel of countries, to assist formulating aid supply strategies.

The paper states that mere trade preferences are not enough to help developing countries (DCs) at the present. It notes that trade integration should be an accompaniment to national development rather than vice versa. Consequently, AfT serves as a developmental tool and as a financial support to the efforts to build trade capacity in (DCs). Nevertheless, AfT programmes are usually designed by bilateral donors. Hence, this paper presents a method for helping donors in defining the correct strategies.

The absence of a strategic framework for granting AfT can be attributed to the risks that such programmes entail for donors. Donors should set their priorities according to:

• the AfT needs of beneficiary countries

• the activities of other donors

• the comparative advantages of each donor

• a comparison between the needs of beneficiaries and the available supply of aid
  

Special attention is given to the Foreign Direct Investment (FDI) in the paper. FDI affects both overall demand and production capacity. However, data shows that FDI flows are primarily directed towards the developed countries. The paper shows that integration into the world trading system is a costly process. DCs have inadequate capacity for trade policy analysis. FDI, however, can help companies to acquire the capacity to meet market standards in developed countries.

To pinpoint individual countries’ trade-related needs, the paper selects a number of indicators relating to the categories used in the AfT nomenclature. Steps in use are as follows:

• for each variable selected, countries are scored according to their need for AfT

• variables represent categories of the AfT nomenclature

• some variables are selected for the analysis of support for trade-oriented production

• proper variables are involved where support for integration into the world trading system is concerned

The conducted typology figures out the following results:

• there are disparities of AfT needs across countries and regions, particularly within the regions of West and Southern Africa

• AfT needs are greatest in West and East Africa, and concentrated in the trade-related infrastructure

• expanding intra-regional trade is an important issue that requires rethinking of donors’ traditional tools, which are too geared towards the national level