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Trade Promises Path Out of Poverty

September 17, 2010

  • Global financial crisis underscores need to help poorest countries connect to global and regional markets.
  • ‘Aid for trade’ helps developing countries, where poor-quality transportation increases the cost and time of exporting and importing goods.
  • Aid includes financing of transportation and logistics infrastructure, assistance to help firms conform to product standards, and capacity building for border management.

September 17, 2010 – Global trade is credited with helping countries grow, and alleviate poverty. In the wake of the financial crisis, the recovery in trade is helping the world emerge from deep recession.

But the crisis has heightened the need to help the poorest countries connect to global and regional markets, say World Bank economists Bernard Hoekman and John S. Wilson.

“Trade is a powerful mechanism to help countries overcome the shock of the crisis,” says Hoekman, Director of the Trade Department in the Bank's Poverty Reduction and Economic Management Vice-Presidency.

“The current post-crisis environment—and fragile economic recovery—increases the importance of aid for trade. As economic activity and demand recovers, consumers and enterprises in importing countries can be expected to be even more sensitive to prices of the goods and services they buy than before. Aid for trade that supports measures to improve the competitiveness of countries with weak trade capacity is therefore important.”

Aid for trade helps developing countries, where poor-quality roads and transportation systems increase the cost, time and difficulty of exporting and importing goods. Tariff and non-tariff barriers and other costs, including corruption, make it hard for them to compete in the global economy, or even within their own region.

Of the 49 developing countries recognized by the United Nations Conference on Trade and Development (UNCTAD), 31 are landlocked – a geographical factor that adds to the cost of trade and subjects them to logistical factors outside their borders. The World Bank’s Fund for the Poorest provides assistance to these countries through interest-free credits and grants.

Fifteen landlocked countries are in Africa, where an estimated additional 7 to 10 million people may have been thrown into poverty as a result of the crisis.

Trade Critical to Other Millennium Development Goals

The plight of these countries is one reason why aid for trade, along with increasing the share of world trade for developing countries, are key parts of Millennium Development Goal 8: Develop a Global Partnership for Development.

“Trade has been a fundamental part of helping to drive global economic development, GDP growth, and information transfer,” says Wilson, lead economist for trade and international integration in the Bank's Development Research Group.

“It helps to bind—in a good way—the international community together. Without providing the type of opportunity that trade allows, it will be more difficult to achieve the MDG goals on health, nutrition and education, among others. Those types of investments by the donor community would be much less effective, and yield a much lower return in a world without an open and vibrant trading system.”

Market access of developing economies has improved over the last decade, with developed economies granting free-of-duty access to developing markets for up to 79% of their products, compared to 55% in 1997.

Aid for trade is partly intended to help developing countries take advantage of these opportunities. Assistance of about $39 billion came from Organization for Economic Cooperation and Development (OECD) countries in 2008.

Such aid can include financing of transportation and logistics infrastructure, assistance to help firms conform to international product standards, capacity building in border management, and implementation of projects that connect rural producers to markets.

“More than 90% of total aid-for-trade commitments, however, are channeled toward infrastructure and trade development,” says Wilson. “We need to focus on ensuring commitments are met and transfer into concrete projects on the ground—while also addressing the relatively limited funds targeted at policy and regulatory reform agendas.”

Aid for trade also spans measures to assist workers, producers and communities in adjusting to changes in trade policies or the terms of trade, for instance, as a result of trade preference programs.

Reforms Yield High Returns

A recent World Bank study found that relatively small amounts of aid targeted at policy and regulatory reforms greatly increase trade flows. In fact, the rate of return on a dollar of this type of aid translates into about $697 in additional trade, says Wilson.

“This suggests that economic growth could be effectively stimulated through a targeted aid for trade agenda that emphasizes lowering trade costs – specifically reforms associated with trade policy and regulation,” he says. “This would complement the large investments in infrastructure already being made.”

Examples of these kinds of reforms include amending regulations to allow competition in the trucking sector, streamlining export/import services at borders, and removing technical barriers to trade on goods and agricultural products, for example.

In FY 2010, the World Bank Group provided a total of $1.8 billion in trade-related lending to help developing countries achieve their trade-reform objectives, representing a three-fold increase from FY03 levels.

On another front, public-private partnerships can also harness the private sector as a source of knowledge, capital and information, says Wilson.

The Bank is collaborating with a number of business partners and associations to develop ways to improve trade logistics and border management to complement investments in infrastructure. The Bank is also looking at new ways to draw on private sector expertise in producing real-time trade performance data, which may be used to encourage policy-oriented trade facilitation reform.

Such measures, along with a successful conclusion of the World Trade Organization (WTO) negotiations in the Doha round of global trade talks, could help speed progress toward achieving the goal of an open, predictable and nondiscriminatory trading and financial system, says Wilson.

“Trade relates very directly to poverty reduction and helping to lift the poor out of poverty. If one looks back over the last 30 or 40 years, one of the most important engines of poverty reduction has been opening up trade opportunities to developing nations."

“Looking ahead in the MDG process, I think we can build on the progress of the last number of decades and be better, faster and more efficient at helping developing countries enter global markets,” he says.

Land-Locked Countries: Challenges to Growth

Land-locked developing countries are widely dispersed around the globe: 15 are located in Africa, 12 in Asia, two in Latin America and two in Central and Eastern Europe. These countries, as a group, are among the most disadvantaged countries. They face severe challenges to growth and development due to a wide range of factors, including:

  • A poor physical infrastructure.
  • Weak institutional and productive capacities.
  • Small domestic markets.
  • Remoteness from world markets.
  • A high vulnerability to external shocks.