Aid for Trade: Matching Demand with Supply WTO Experts Meeting This presentation is based on Elisa Gamberoni and Richard Newfarmer “Aid for Trade: Matching.

Aid for Trade: Aid for Trade: Matching Demand with SupplyMatching Demand with Supply

WTO Experts MeetingWTO Experts Meeting

This presentation is based on Elisa Gamberoni and Richard Newfarmer “Aid for Trade: Matching Potential Demand with Supply” World Bank, Sept 15, 2008

Richard Newfarmer World Bank

Geneva, Sept 15 2008

Key questions:Key questions:

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

Is the Is the supplysupply of aid for trade going to countries that have a of aid for trade going to countries that have a potential demand for it? potential demand for it?

Which countries are receiving below average aid for trade – Which countries are receiving below average aid for trade – relative to their potential demand? relative to their potential demand?

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

Which countries have greatest need…potential demand?Which countries have greatest need…potential demand?

Trade performanceTrade performance Capacity : Infrastructure, Institutions, incentives

Which indicators Which indicators predictpredict trade level? trade level?

Measuring potential demand -- rankings by quintile

Indicator 1 2 3 4 5 6 7 8 9 10 TotalCountry (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 Indicators5 Indicators

5 Indicators5 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…Caveats…

Paper does not analyze Paper does not analyze whywhy a country might receive less aid for a country might receive less aid for tradetrade– It might not need itIt might not need it– It might have higher prioritiesIt might have higher priorities– It might not use it wellIt might not use it well

The effort here is The effort here is notnot to provide answers for individual countries to provide answers for individual countries -- but to provide the big picture and to -- but to provide the big picture and to provoke questionsprovoke questions at the at the national level on competitiveness and aid for trade stategynational level on competitiveness and aid for trade stategy

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

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

Trade performanceTrade performance – Several ways to measure.. – Several ways to measure..1.1. Growth rate of exports of goods and services Growth rate of exports of goods and services2.2. Change in global market share 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 shareDespite export growth, about half of LICs lost market shareLow income countries: Change in market share, 1996-2006

Trade performanceTrade performance – Several ways to measure.. – Several ways to measure..1.1. Growth rate of exports of goods and services Growth rate of exports of goods and services2.2. Change in global market share Change in global market share3.3. Change in competitiveness in existing markets Change in competitiveness in existing markets 4.4. Growth rates of export markets – product and geographic Growth rates of export markets – product and geographic

marketsmarkets

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

Sources of export growth: competitiveness or demand Sources of export growth: competitiveness or demand growth?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 effectCompetitiveness 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.

DemandDemand

Trade performanceTrade performance – Several ways to measure.. – Several ways to measure..1.1. Growth rate of exports of goods and services Growth rate of exports of goods and services2.2. Change in global market share Change in global market share3.3. Change in competitiveness in existing markets Change in competitiveness in existing markets 4.4. Growth rates of export markets – product and geographic Growth rates of export markets – product and geographic

marketsmarkets5.5. Degree of concentration Degree of concentration

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

Besides trade Besides trade performanceperformance, potential demand should , potential demand should include trade include trade capacitycapacity……

Objective: Find capacity Objective: Find capacity indicatorsindicators that predict trade that predict trade levels levels

How?How?Literature: Literature: Infrastructure, Institutions, IncentivesInfrastructure, Institutions, Incentives

But many measures of each of these – how can we But many measures of each of these – how can we select? select?

So we analyzed bilateral trade levels using a “gravity” So we analyzed bilateral trade levels using a “gravity” model to find out which were most powerful of predictors model to find out which were most powerful of predictors trade levelstrade levels

Besides trade Besides trade performanceperformance, potential demand should , potential demand should include trade include trade capacitycapacity……

Objective: Find Objective: Find indicatorsindicators that predict trade levels that predict trade levels – InfrastructureInfrastructure

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

– InstitutionsInstitutions2. 2. Quality of customs – LPI (3) Quality of customs – LPI (3)3. 3. Time to export – Time to export – Doing BusinessDoing Business

– IncentivesIncentives4. 4. Peak tariffs (# of lines 3x average tariff level) Peak tariffs (# of lines 3x average tariff level) 5. 5. Tariff overall restrictiveness index - OTRI Tariff overall restrictiveness index - OTRI

Infrastructure, institutions and incentives influence trade 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

InstitutionsInstitutions

IncentivesIncentives

Control variables

(selected)b

InfrastructureInfrastructure

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 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

InstitutionsInstitutions

IncentivesIncentives

Control variables

(selected)b

InfrastructureInfrastructure

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 Passing from the fourth quintile to the third quintile quintile to the third quintile

raise trade by raise trade by 35%35%

Quantifying “potential demand”… adding it up Quantifying “potential demand”… adding it up

Score every country on 10 Score every country on 10 dimensionsdimensions

1 for highest quintile…to 5 for 1 for highest quintile…to 5 for lowest quintilelowest quintile

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

Trade performanceTrade performance1 Growth of exports1 Growth of exports2 Change in market share2 Change in market share3 Competitiveness in existing markets3 Competitiveness in existing markets4 Demand structure4 Demand structure5 Concentration- diversification5 Concentration- diversification

CapacityCapacity66 InfrastructureInfrastructure77 CustomsCustoms8 Time to export8 Time to export99 Tariff peaksTariff peaks1010 Overall tariff restrictivenessOverall tariff restrictiveness

Potential demand for aid for tradePotential demand for aid for trade

GuyanaSierra Leone

Central AfricanEast Timor

MalawiSamoa

SomaliaBenin

Congo DRJ amaica

UzbekistanNamibia

TajikistanEritreaNepal

FijiM icronesia

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?Does potential demand match supply?

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

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

KGZ

KHM

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 Good news: positive correlationcorrelation

Other news: many Other news: many countries underservedcountries underserved

Conclusions… Aid for trade potential demand outstrips Conclusions… Aid for trade potential demand outstrips current supplycurrent supply

While trade performance of developing countries as a group has While trade performance of developing countries as a group has been strong, many countries are performing below average and been strong, many countries are performing below average and many countries are vulnerable to a slowing global economymany countries are vulnerable to a slowing global economy

Particular at risk are those with poor trade performance – slow Particular at risk are those with poor trade performance – slow growth, declining market shares, and concentrated exports –growth, declining market shares, and concentrated exports –

… …and those with poor infrastructure, institutions and export and those with poor infrastructure, institutions and export incentivesincentives

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

Conclusions… A corollary about indicatorsConclusions… A corollary about indicators

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

Indicators of trade capacity also are available, and several are Indicators of trade capacity also are available, and several are strong predictors of future trade performancestrong predictors of future trade performance– Indicators of Indicators of infrastructureinfrastructure include the infrastructure quality component include the infrastructure quality component

of the Logistics Performance Index (used here), the Limao-Venables of the Logistics Performance Index (used here), the Limao-Venables index, and the communication indexindex, and the communication index

– Indicators of trade-related Indicators of trade-related institutionsinstitutions include the customs component of include the customs component of the LPI and the time to export index of the Doing Business.the LPI and the time to export index of the Doing Business.

– Indicators of Indicators of incentives incentives to exports include the tariff peak index and the to exports include the tariff peak index and the OTRIOTRI

But indicator gaps still remain, particularly on NTBs, But indicator gaps still remain, particularly on NTBs, implementation of FTAs, and services restrictions. The implementation of FTAs, and services restrictions. The international community has to invest more in filling these gaps. 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 ReferencesSelected 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: Aid for Trade: Matching Demand with SupplyMatching Demand with Supply

WTO Experts MeetingWTO Experts Meeting

This presentation is based on Elisa Gamberoni and Richard Newfarmer “Aid for Trade: Matching Potential Demand with Supply” World Bank, Sept 15, 2008

Richard Newfarmer World Bank

Geneva, Sept 15 2008