Increasing the Impact of Trade Expansion on Growth: Lessons from Trade Reforms for the Design of Aid for Trade

Abstract

The working paper “Binding Constraints to Trade Expansion: Aid for Trade Objectives and Diagnostics Tools” [OECD Trade Policy Working Paper No. 94] showed that the most common objectives of Aid for Trade have the potential to boost economic growth. However, this growth potential may not always be realized. While most trade reforms had a positive impact, some trade reforms proved unsustainable and some trade reforms did not have a meaningful impact on growth. This working paper discusses the various reasons for these outcomes in order to draw the lessons for the design of aid-for-trade projects and programmes and increase their effectiveness. It argues that the scope of activity of aid-for-trade is broad enough to support the compatible that will make the reform sustainable and the complementary policies that will increase its growth impact. Experience shows that an appropriate macroeconomic environment is essential to make a trade reform sustainable. In an unstable macroeconomic environment, aid for trade can support compatible policies that reinforce the stabilization process. In a stable macroeconomic environment, aid for trade can help preventing trade reform from resulting in macro-economic tensions and can foster a rapid export response. The working paper also argues that many complementary policies fall under the scope of activity of aid for trade and shows that aid-for-trade projects and programmes already support some of the key complementary policies. Supporting compatible and complementary policies is about policy coherence and adequate sequencing. In order to reach its objective, Aid for Trade should not only focus on helping developing countries to turn trade opportunities into trade but also tackle the binding constraints that choke the impact of trade on economic growth. Aid for trade has the means to do so but this requires proper sequencing and policy coherence. As much as possible, proper sequencing and policy coherence should be reflected in the design of aid-for-trade projects and programmes. This cannot be achieved without adequate donor coordination and alignment on country priorities.