Aid for trade in small and vulnerable economies

It is clear that groups of “aid for trade” (AfT) recipient countries differ according to a variety of factors and needs. This discussion paper highlights the rationales for providing AfT to a specific group of developing countries, namely small and vulnerable economies (SVEs), and evaluates the effectiveness of SVEs’ AfT.

The paper clarifies that this SVEs has largely been neglected in the AfT debate, despite the special challenges these countries faced in their integration into the global economy. Further findings encompass:

• the domestic market is limited in SVEs, and these countries need to charge higher prices to stay in business
• SVEs are particularly vulnerable to fluctuations in world prices
• despite their special needs, no donor has specific AfT programmes for SVEs
• a particular category of AfT, that is, aid for trade facilitation, is likely to have a significant cost-reducing effect on the costs of handling exports
• aid to economic infrastructure increases overall exports for SVEs, while aid to productive capacity has heterogeneous effects across sectors

• donors could consider introducing AfT programmes addressing specific trade-related constraints faced by SVEs, including remoteness and isolation
• donors should improve the disbursement rules of AfT; slow disbursement tends to undermine the value of the assistance extended in support of time-sensitive adjustment processes
• it would be desirable that donors programme their trade-related activities for longer time spans and with a more active participation of the recipient SVEs
• donors could consider scaling up the level of aid for trade facilitation as this appears to be a particularly cost-effective investment for SVEs
• it would be worth considering the opportunity of increasing aid to economic infrastructure allocation
• donors should work with recipients to identify those contexts in which there is more need for aid to productive sectors