Aid for Trade: Ensuring That the Most Needy Get It

This presentation is based on Elisa Gamberoni and Richard Newfarmer “Aid for Trade: Matching Potential Demand with Supply” World Bank Policy Research Paper 4991 and Elisa Gamberoni and Richard Newfarmer, “Aid for Trade: Do the Most Needy Get It?” draft 2011

Richard Newfarmer International Growth Centre

Paris, March 28, 2011

Key questions: Which countries might have a potential demand for aid for trade, either because of poor trade performance or because of capacity constraints that hamper trade?

Is the supply of aid for trade going to countries that have a potential demand for it? Which countries are receiving below average aid for trade – relative to their potential demand?

Corollary: Which indicators seem most useful for monitoring aid for trade because of their predictive effects on trade performance?

Globalization risky? What do you mean?

Why do we care about aid for trade?

Which countries have greatest need…potential demand?

Trade performance Capacity : Infrastructure, Institutions, incentives

Which indicators predict trade level?

Measuring potential demand -- rankings by quintile

Indicator 1 2 3 4 5 6 7 8 9 10 Total Country (highest) 1 1 1 1 1 1 1 1 1 1 = 10

Country (lowest) 5 5 5 5 5 5 5 5 5 5 = 50

Aid for Trade / GDP Income p.c., aid effectiveness demand

5 Indicators

5 Indicators

:

Does supply of aid go to countries with the higest demand?

Which countries have less aid for trade than they might demand?

Google map to our logic….

Caveats…

Paper does not analyze why a country might receive less aid for trade – It might not need it – It might have higher priorities – It might not use it well

The effort here is not to provide answers for individual countries -- but to provide the big picture and to provoke questions at the national level on competitiveness and aid for trade stategy

Trade performance – Several ways to measure.. 1. Growth rate of exports of goods and services

Potential demand arises from poor trade performance and weak trade capacity …

-15 -10 -5 0 5 10 15

MalawiGuyanaGuinea

Yemen, Rep.Senegal

ZimbabweBeninEritrea

DjiboutiC. African.Republic

Kyrgyz RepublicSamoa

St. LuciaNigeriaKenya

UzbekistanHonduras

MadagascarCameroon

NigerSierra LeoneGambia, The

Congo, Rep.TajikistanSri Lanka

Côte d'IvoireTanzaniaPakistan

NepalBolivia

Burkina FasoMoldova

GhanaMauritania

Congo, DR.AngolaUganda

NicaraguaHaiti

GeorgiaMali

BangladeshBhutan

IndiaLesothoArmeniaEthiopiaGrenada

AzerbaijanBurundi

MyanmarCape Verde

Guinea-BissauLao PDR

CambodiaMozambique

VietnamRwandaZambiaBosnia

Trade performance varies…but 29 low income countries figure in the bottom two quintiles

Source: Authors calculation. World Bank,WTI Note: Quintile scale are from the entire sample of low and middle income countries

3rd quintile

4th quintile

5th quintile

2nd quintile

1st quintile

Potential demand arises from poor trade performance and weak trade capacity …

Trade performance – Several ways to measure.. 1. Growth rate of exports of goods and services 2. Change in global market share

PakistanPapua New

Sri LankaCôte d'Ivoire

NepalUzbekistanCongo DR

GuineaSenegalGuyanaMalawi

BeninKenya

MoldovaHonduras

EritreaGambia

Central AfricanUganda

MadagascarNiger

Saint LuciaDominicaMaldivesDjibouti

Burkina FasoKyrgyzstan

ComorosBurundi

MauritaniaGuinea-Bissau

Sierra LeoneRwanda

LaosTanzaniaLesotho

HaitiCape Verde

MaliEthiopia

CameroonArmenia

NicaraguaMongolia

GhanaBoliviaCongo

GeorgiaMozambique

ZambiaMyanmar

YemenChad

BangladeshCambodia

SudanEquatorial Guinea

AzerbaijanAngolaNigeria

Viet NamIndia

Source: Authors calculation. Wolrd Bank,WTI Note: Quintile scale are from the entire sample of low and middle income countries

1st quintile

2nd quintile

3rd quintile

4th quintile

5th quintile

Despite export growth, about half of LICs lost market share Low income countries: Change in market share, 1996-2006

Trade performance – Several ways to measure.. 1. Growth rate of exports of goods and services 2. Change in global market share 3. Change in competitiveness in existing markets 4. Growth rates of export markets – product and geographic

markets

Potential demand arises from poor trade performance and weak trade capacity …

Sources of export growth: competitiveness or demand growth?

-- Burundi, Cameroon, Central Afr. Rep., Côte d'Ivoire, Congo D. R., Dominica Eritrea, Ethiopia, Gambia, Grenada, Guinea, Guinea-Bissau, Guyana, Honduras, Liberia, Madagascar, Malawi, Maldives, Moldova, Nepal, Nicaragua, Pakistan, Papua New Guinea, Saint Lucia, Saint Vincent, Sao Tome and P., Senegal, Somalia, Sudan, Tanzania, Tonga, Uganda, Zambia, Zimbabwe.

Competitiveness effect

Source: Authors calculations based on International Trade Center, Trade Performance indicator

Gaining competitiveness in slow growing markets

Gaining competitiveness in fast growing markets

Losing competitiveness in fast growing markets

Losing competitiveness in slow growing markets

+- Kyrgyzstan, Mongolia, Niger, Nigeria, Yemen.

+ - Azerbaijan, Bangladesh, Benin, Bhutan, Bolivia, Bosnia and Herzegovina, Burkina Faso, Cambodia, Chad, Comoros, Djibouti, Ghana, Haiti, India, Kenya, Kiribati, Laos, Mali, Mauritania, Mozambique, Rwanda, Samoa, Sierra Leone, Solomon Is, Sri Lanka, Tajikistan, Togo, Uzbekistan, Vanuatu, Viet Nam.

++ Angola, Armenia, Cape Verde, Congo, Equatorial Guinea, Georgia, Myanmar.

Demand

Trade performance – Several ways to measure.. 1. Growth rate of exports of goods and services 2. Change in global market share 3. Change in competitiveness in existing markets 4. Growth rates of export markets – product and geographic

markets 5. Degree of export concentration

Potential demand arises from poor trade performance and weak trade capacity …

0

5

10

15

20

25

30

0 10 20 30 40 50 60 70 80 90 100

Concentration Index

Terms of trade volatility

Developing Countries: Terms of trade volatility (1996-2006)

Source: Authors calculation based on World Bank, Wolrd Development Indicators and World Trade Indicators

Dependence on a few exports exposes countries to terms of trade shocks

0 20 40 60 80 100

NigeriaAngola

Sao Tome and PrincipeYemen

Equatorial GuineaCongo

ComorosSierra Leone

BurundiMali

MauritaniaSamoa

Guinea-BissauBurkina Faso

KiribatiSolomon IsAzerbaijan

BeninGuineaSudan

MalawiZambia

Democratic Republic of the CongoTajikistan

TongaCentral African Republic

EthiopiaRwanda

Saint LuciaVanuatu

HaitiMozambique

CameroonMaldives

Cape VerdeNiger

DominicaGhana

LesothoPapua New Guinea

East TimorBangladesh

Saint Vincent and the GrenadinesMongolia

GambiaCambodia

EritreaUzbekistan

UgandaBhutan

Côte d'IvoireGuyana

GrenadaKyrgyzstan

ArmeniaLao People's Democratic Republic

TogoMyanmar

Tanzania, United Rep. ofZimbabweHonduras

KenyaNepal

SenegalBolivia

Moldova, Rep.ofNicaragua

MadagascarSri LankaPakistan

Viet NamGeorgiaDjibouti

Bosnia and HerzegovinaIndia

Concentration Index – average 1996-2006 Low income countries

Source: Authors calculation. Wolrd Bank,WTI Note: Quintile scale are from the entire sample of low and middle income countries

5th quintile

4th quintile

3rd quintile

2nd quintile

1st quintile

Besides trade performance, potential demand should include trade capacity…

Objective: Find capacity indicators that predict trade levels How?

Literature: Infrastructure, Institutions, Incentives But many measures of each of these – how can we select? So we analyzed bilateral trade levels using a “gravity” model to find out which were most powerful of predictors trade levels

What capacity indicators influence bilateral trade?

Trade = 200

Trade = 100

Trade = 50 K

U

S

T

Controls? GDP of home country GDP of partner Distance FTA, WTO membership

Capacity indicators? Infrastructure Institutions Incentives

A gravity model permits us to hold other factors constant

Besides trade performance, potential demand should include trade capacity…

Objective: Find indicators that predict trade levels – Infrastructure

1. Quality of infrastructure and information technology –LPI (2)

– Institutions 2. Quality of customs – LPI (3) 3. Time to export – Doing Business

– Incentives 4. Peak tariffs (# of lines 3x average tariff level) 5. Tariff overall restrictiveness index - OTRI

Infrastructure, institutions and incentives influence trade

Change in exports %

Effects of 1% change in infrastructure, institution, and incentive on exports

Note: Marginal effects calculates at the average of the sample. a represents the change passing from zero to one. The rest of the variables refers to change of 1 percentage point. bOther control variables are listed in the Annex.

0

Institutions

Incentives

Control variables

(selected)b

Infrastructure

a

a

-3

GDP of importer

Distance

FTA

WTO

Tariff peak

Trade restictions

Customs efficiency

Time to export

Transport and IT

Infrastructure, institutions and incentives influence trade

Change in exports %

Effects of 1% change in infrastructure, institution, and incentive on exports

Note: Marginal effects calculates at the average of the sample. a represents the change passing from zero to one. The rest of the variables refers to change of 1 percentage point. bOther control variables are listed in the Annex.

0

Institutions

Incentives

Control variables

(selected)b

Infrastructure

a

a

-3 -2 -1 0 1 2 3 4 5

GDP of importer

Distance

FTA

WTO

Tariff peak

Trade restictions

Customs efficiency

Time to export

Transport and IT

0%

20%

40%

60%

80%

100%

LDC Other low income Middle Income

About 60% of LDCs figure in the bottom two quintiles of infrastructure rankings for all developing countries

Source: Authors calculation based on World Bank, LPI Indicators

Passing from the fourth quintile to the third quintile raise trade by 35%

Quantifying “potential demand”… adding it up

Score every country on 10 dimensions

1 for highest quintile…to 5 for lowest quintile

Least demand (best score) = 10…. to highest need for aid for trade = 50

Trade performance 1 Growth of exports 2 Change in market share 3 Competitiveness in existing markets 4 Demand structure 5 Concentration- diversification Capacity

6 Infrastructure 7 Customs 8 Time to export 9 Tariff peaks 10 Overall tariff restrictiveness

Potential demand for aid for trade

GuyanaSierra Leone

Central AfricanEast Timor

MalawiSamoa

SomaliaBenin

Congo DRJamaica

UzbekistanNamibia

TajikistanEritreaNepal

FijiMicronesia

MadagascarNiger

Papua New GuineaRwanda

ComorosSyrian Arab Republic

YemenSolomon Is

Burkina FasoEthiopia

GuineaMali

ParaguayBurundi

Sao Tome and PrincipeSaint Vincent and the

KyrgyzstanMauritius

SudanUgandaZambiaGambia

HaitiLaos

VanuatuColombia

GabonMoldovaTanzaniaLesothoCongo

Source: Authors calculation based on data from ITC and World Bank.

Countries in the bottom two quintiles

Does potential demand match supply?

Aid for trade (GDP) is determined by potential demand, p.c. income, and aid effectiveness…

Source: Authors calculation based on 2006 cross section regression

Potential demand for aid for trade

Supply of aid for trade /GDP

AGO

ARM

AZE

BDI

BEN

BFA

BGD

BIH

BOL

BTN

CAF

CIV

CMR

COGCOMCPV

DJI

DMA

ERI

ETH

GEO

GHA

GIN

GMB

GNB

GNQ

GRD

GUY

HND

HTI

IND

KEN

KGZKHM

KIR

LAO

LBR

LCA

LKA

LSO

MDA

MDG

MDV

MLI

MNG

MOZ

MRT

MWI

NERNGA

NIC

NPL

PAK

PNG

RWA

SDN

SEN

SLB

SLE

STP

TCDTGO

TJK

TMP

TON

TZA

UGA

UZB

VNM

VUT

YEM

ZAR

ZMBGood news: positive correlation

Other news: many countries underserved

Conclusions… Aid for trade potential demand outstrips current supply

While trade performance of developing countries as a group has been strong, many countries are performing below average and many countries are vulnerable to a slowing global economy Particular at risk are those with poor trade performance – slow growth, declining market shares, and concentrated exports – …and those with poor infrastructure, institutions and export incentives

While aid for trade supply is broadly correlated with potential demand, still, several countries that have the highest potential demand are receiving less- than- average levels of aid for trade.

Conclusions… A corollary about indicators

Several indicators of trade performance are readily available from the World Trade Indicators, the International Trade Center, and the WTO’s Trade Profiles

Indicators of trade capacity also are available, and several are strong predictors of future trade performance – Infrastructure -- Logistics Performance Index (used here), the Limao-

Venables index, and the communication index – Trade-related institutions -- customs component of the LPI and the time

to export index of the Doing Business. – Incentives to exports include the tariff peak index and the OTRI

But indicator gaps still remain, particularly on NTBs, implementation of FTAs, and services restrictions. The international community has to invest more in filling these gaps.

Collier, P. and D. Dollar (2002),“Aid allocation and poverty reduction”, European Economic Review, Vol. 46 (8), pp. 1475-1500. Djankov, S., Freund, C. and S. Pham Cong (2006), “Trading on time”, Policy Research Working Paper 3909, The World Bank. Francois J. and M. Manchin (2007), “Institutions, Infrastructure, and Trade”, IIDE Discussion Papers 2007-401, Institute for International and Development Economics. Hoekman B. and A. Nicita (2008), “Trade Policy, Trade Costs and Developing Country Trade”. Jansen, M. (2004), “Income volatility in small and developing economies: export concentration matters”, World Trade Organization Publication. Limao, N. and Venables, A. J. (1999), “Infrastructure, geographical disadvantage, and transport costs”, Policy Research Working Paper 2257, The World Bank. Nordas, H. and R. Piermartini (2004),“Infrastructure and Trade”, WTO Staff Working Paper, World Trade Organization. Turnovsky, S.J. and P. Chattopadhyay (2003), "Volatility and Growth in Developing Economies: Some Numerical Results and Empirical Evidence", Journal of International Economics 59. Wilson, J. S., Mann, C. L. and T. Otsuki (2004), “Assessing the potential benefit of trade facilitation: A global perspective”, Policy Research Working Paper 3224, The World Bank.

Selected References For details to this presentation, see Elisa Gamberoni and Richard Newfarmer “Aid for Trade: Matching Potential Demand with Supply” World Bank, Sept 15, 2008

Aid for Trade: Ensuring That the Most Needy Get It

This presentation is based on Elisa Gamberoni and Richard Newfarmer “Aid for Trade: Matching Potential Demand with Supply” World Bank Policy Research Paper 4991 and Elisa Gamberoni and Richard Newfarmer, “Aid for Trade: Do the Most Needy Get It?” draft 2011

Richard Newfarmer International Growth Centre

Paris, March 28, 2011