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Aid for Trade in a World of Shifting Tectonic Plates

John Wilson's picture

Last week, President Zoellick gave a speech at George Washington University in which he outlined his vision of how the aid agenda should adapt to what he described as “shifting tectonic plates,” which has seen the world change dramatically since 1944 when the Bretton Woods system was established. This shift has created a world in which developing countries are now the drivers of the world economy while the developed world is facing severe economic headwinds.

In Zoellick’s vision of a “world beyond aid,” international assistance would be “integrated with—and connected to—global growth strategies, fundamentally driven by investment and entrepreneurship. The goal would not be charity, but mutual interest in building more poles of growth.”

Aid for trade—which is aimed at helping developing countries, especially low income ones, integrate into the economy and spur growth— is a key component of building a world beyond aid. Trade matters because it’s an engine for growth and poverty alleviation.  It increases economic opportunities for households, firms, and farmers. Integration into the world economy creates scope for economies of scale and allows transfers of ideas and technology, which in turn boost competiveness, investment and entrepreneurship.

In his speech, Zoellick also argued that in a world in which budgets in donor countries are strained, demonstrating the effectiveness and value for money of aid is more important than ever.

However, rigorously evaluating aid for trade projects can be challenging, mainly because the nature of trade makes it almost impossible to conduct randomized control trials. We have nonetheless been developing innovative ways to evaluate trade projects in order to discern measures with the highest rate of return.

For example, we analyzed aid to the services sectors (Ferro, Portugal, Wilson) – such as financial services, ICT, and energy – to gauge the impact on exports of manufactured goods using these services as inputs. We found that aid to the transportation and energy sectors are most effective in increasing exports of manufactured goods. Interestingly though, the effectiveness of aid targeted at the transportation industry on downstream exports decreases as countries move up the income ladder, while support to the energy and business sectors is more effective in relatively higher income developing countries.

We also analyzed data from the World Bank Enterprise Survey Database and the OECD to determine to what extent past aid has targeted areas that firms themselves have identified as obstacles to their competitiveness (Ferro and Wilson). Businesses are on the front lines and have a better understanding than anyone of the bottlenecks they face. Although we found that donors have done a decent job of addressing important impediments to competiveness, there is plenty of scope for improvement. Doing a better job of engaging the private sector could ensure aid is directed where it is needed most, and by extension, where it will be most effective.

This brings me to the last of Zoellick’s points I want to highlight, namely the need to leverage additional resources by involving more stakeholders through innovative approaches. Moving forward, we hope to engage the private sector and other stakeholders (such as private philanthropies) in public private partnerships and other forms of cooperation. The private sector not only has the best understanding of the needs on the ground, but it could also be a rich source of data (which can improve evaluations) and funds (with corporate foundations and private philanthropies giving bilateral donors a run for their money).

Aid for trade is an indispensable vehicle to help developing countries grow their way out of poverty.  In this world of shifting tectonic plates, the Bank should use its comparative advantage in research and convening power to assist policy makers in designing the most effective aid for trade projects.