Foreign Aid and Trade Capacity Development Recent Evidence from Uganda

Alex Thomas Ijjo,Isaac M B Shinyekwa

doi:10.5539/jsd.v9n3p39

Alex Thomas Ijjo, Isaac M B Shinyekwa

Open Access

https://doi.org/10.5539/jsd.v9n3p39

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Abstract

Endemic supply side constraints including fluctuating output levels, deficient trade infrastructure, rampant non-tariff barriers and incapacity to ensure international quality standards continue to thwart the gainful participation of many Least Developed Countries (LDCs) in an increasingly liberal global trade environment. At its 2005 Hong Kong Ministerial Conference, the World Trade Organization launched its Aid for Trade (AFT) initiative aimed at coordinating global financial support for strengthening trade capacity in Least Developed Countries (LDCs). This paper examined the effect of foreign aid, particularly Official Development Assistance, on Uganda’s external trade and its AFT component in strengthening the country’s trade capacity. Using time series Error Correction Modelling and the World Bank’s World Development Indicators and official national statistics, the paper finds small but positive aid influence on Uganda’s exports and imports and generally close alignment between aid and national priorities. However, given general aid volatility but more especially following the anti-homosexuality legislation and gross corruption allegations in the case of Uganda, the paper advises that external aid be treated as a supplement rather than a substitute for domestic financial resource mobilization in trade capacity development.

Highlights

Trade liberalization is instrumental in enhancing trade between countries
This study partly aims to examine the role of aid in the strengthening of Least Developed Countries (LDCs) trade capacity looking at the case of Uganda
The Augmented Dickey-Fuller (ADF) and PP unit root tests confirm that all the variables are stationary only after first difference and I(1) at 5 percent

Summary

Introduction

Trade liberalization is instrumental in enhancing trade between countries. It has been on the agenda at the multilateral level for nearly eight decades initially in the framework of the General Agreements on Tariffs andTrade (GATT) but under that of World Trade Organisation (WTO). In the last four to five decades, many countries have implemented World Bank (WB) and International Monetary Fund (IMF) sponsored trade liberalization reforms to boost the role of market forces in their economies. It immediately became clear, that many Least Developed Countries (LDCs) lacked the capacity to gainfully participate in liberalized global trade due to a wide range of supply-related constraints in their respective economies. That many Least Developed Countries (LDCs) lacked the capacity to gainfully participate in liberalized global trade due to a wide range of supply-related constraints in their respective economies These constraints include variable productive capacities, inadequate trade infrastructure and inability to meet international quality and standards (WTO 2005, Rudaheranwa 2005). Knowledge of the supply related bottlenecks in LDCs is not new; as far back as its formation in 1964, the United Nations Conference on Trade and Development (UNCTAD) has provided trade-related capacity development support to LDCs to help facilitate their integration into the global trading system (UNCTAD 2008)

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