Why Aid for Trade? Interview with Uri Dadush
WASHINGTON, July 3, 2008: Industrialized nations have pledged billions of dollars in “aid for trade” by 2010 to help developing countries become more competitive and leverage the world economy. The World Bank is also increasing its aid for trade activities as a way of promoting sustainable and inclusive development.
Uri Dadush, Director of the International Trade Department and a World Bank expert on global development, answers questions about the purpose and hoped-for impact of aid for trade.
WHY is it important for developing countries – including countries struggling to recover from past conflicts – to receive aid targeted at improving their ability to trade?
– We are in a world that is globalizing, or integrating, at a very rapid rate. Typically the countries that are most successful integrating into the global economy grow the fastest. They are able to grow their exports, import cheaper and more efficient inputs, join global production chains, and attract foreign direct investment.
– In fact, many people consider that a country cannot really grow durably in todays world if it does not establish a strong export base. Benefits from global integration come importantly from access to, and transfer and diffusion of knowledge and technology simply unavailable in domestic economies.
WHAT would be the main use of aid for trade?
– Aid for trade would help developing countries reap the benefits of existing and future market access opportunities. Liberalization is not enough. While not formally part of the Doha negotiations, aid for trade remains an essential complement to a successful Doha Round toward a more open multilateral trading system.
– Aid for trade is likely to go into trade infrastructure – the building of ports and roads that connect production areas to markets. Aid for trade would also fund training, capacity building and support for institutional reforms, such as customs improvements or improvements in the ability to meet international standards. Some money, whether it is called aid for trade or not, is likely to go into temporary trade adjustment assistance.
IS infrastructure support as important as other kinds of assistance, such as for education and health?
– Obviously education and health spending are important features of development assistance, and in fact absolutely essential ones. At the same time, there is a growing awareness that the only way you can sustain large expenditures for hospitals and schools, for example, is if you grow your incomes and you grow the economy.
– Aid for trade is an important part of what we would call growth-enhancing policies – establishing, in other words, the preconditions so that incomes can rise and the country can actually spend on basic infrastructure, such as schools and hospitals, in the long term. Both are important, but hopefully aid for trade will help establish those preconditions.
WHY should developing countries connect to the global economy? What about trading with their neighbors?
– A very large developing country, such as Brazil or India, can achieve quite a lot of growth and progress by relying on its domestic market. But history suggests this only works for a while. Eventually, the fact that there is a much bigger market out there becomes important for even a large countrys development prospects.
– We have observed that when countries rely primarily on their domestic markets, their economy becomes less efficient over time and their industries tend to lose their competitive edge.
SO to be cut off from the world economy eventually is going to send a country into a lower echelon?
– That is typically the case. The voluntary exchange of goods, services, and ideas more generally is almost by definition welfare enhancing. And therefore the more opportunities to exchange the better.
– Any country that has not done this effectively finds eventually that its economy underperforms. When it is forced to open up – and history suggests the pressures to open up become very strong after a while – it suffers large adjustment costs, as happened in the case of the eastern, centrally planned economies.
– It seems ironic that about double the amount of trade aid flows to countries that have the potential for doing the best, rather than the ones that need it the most.
– Indeed, the larger part of aid for trade goes to countries in Asia and other countries that seem to do relatively well. Bear in mind that these countries are much much bigger than the Sub-Saharan African countries, both in terms of population and also GDP-economic output.
– If you look at aid for trade as a share of economic output, it is much larger in Sub-Saharan Africa than it is in Asia. In a proportional sense, the effort on aid for trade is therefore much greater in the poorest countries today than in the middle-income countries. The numbers are misleading because these economies are so different in size.
IS a more open trading system one solution to high food prices, currently a problem in many countries?
– High food prices are the result of a complex set of factors. A lot has to do with the high price of energy, because that is raising the price of fertilizer and also encouraging a lot of governments to favor the development of biofuels, which is taking land away from production for food.
– The solution to higher food prices is therefore not straightforward, because the underlying causes are deep and the effects vary across groups, even among the poor. Some poor people produce food, so they are actually benefiting from high food prices. But many of the urban poor spend the little they have on food and fuel, so there are very large pressures there.
– Many of these countries could help themselves by reducing the impediments to the importation of food, such as tariffs and logistics costs. Some of the most recent statistics on the barriers to agricultural trade reveal that in most developing regions, impediments to the importation of agricultural products are twice as high as are the impediments to importing manufactured goods.
SO are you saying that tariffs on agricultural products are twice as high as tariffs on manufactured products?
– In most developed and developing countries that is the case, by and large.
IS that to encourage local production? What is the reason?
– Generally, all over the world, but particularly in industrialized countries, agriculture is more protected than manufactured products. Whatever the rationale, the fact is right now prices are very high and poor people need food. Why would you want to protect producers that are getting absolutely record prices at this point when poor people do not have food?
ARE these tariffs being rethought, then?
– Absolutely. There are a large number of developing countries where this is part of the solution. I was just in Ethiopia, where they were considering reducing the tariff on importation of palm oil, for example.
– The conclusion of a Doha agreement along current negotiating lines would help reduce distortions in the agriculture market for WTO members. It would lock in unilateral reforms already undertaken, collapse some tariff peaks, eliminate all export subsidies, and place much stricter ceilings on other trade-distorting subsidies in agriculture. It would also provide new market access in both agriculture and industrial goods.
– A successful Doha deal would contribute to a more efficient and productive global agriculture sector in the long run though some food importing poor countries may face higher international food prices and need help.
– For these reasons, I welcome the recent news that WTO Director General Lamy called for a mini-ministerial meeting on July 21. The next few weeks will be critical in raising the chances of success of the Doha round.
HOW much is the World Bank increasing aid for trade?
– The Bank has not set an aid-for-trade target. The reason is our assistance is country-delivered, and so how much aid for trade we do, as in the case in education or health, will depend on what country authorities want.
– We are stepping up our effort to provide these services and to encourage countries to adopt competitiveness as a central element of their development strategy. With the increased resources that have been dedicated, we expect countries to do a lot more and to demand more in this area in coming years.
Kilde: www.worldbank.org
