Binding Constraints to Trade Expansion AID FOR TRADE OBJECTIVES AND DIAGNOSTICS TOOLS

Trade can be a powerful engine for economic growth, poverty reduction, and development. However, harnessing the power of trade is often difficult for developing countries, particularly the least developed countries, because of supply-side domestic constraints (lack of trade-related infrastructure and capacity). The Aid for Trade Initiative was launched to address these constraints. This paper sets forth strategies to identify the most binding constraints to trade expansion so countries and donors can channel resources toward reforms and projects that have the largest effect. It shows that the four most common objectives of aid-for-trade projects (increasing trade, diversifying exports, maximizing the linkages with the domestic economy, and increasing adjustment capacity) have the potential to boost growth and reduce poverty in developing countries. However, the potential of trade may not be realized as developing countries often face binding constraints that prevent them from turning trade opportunities into trade, and trade into growth. First, they face difficulties turning trade opportunities into trade flows because of capacity constraints and lack of adequate trade-related infrastructure. Second, some domestic constraints choke the impact of trade expansion on economic growth. The paper focuses on the first set of constraints and presents various diagnostic tools available to identify them. These tools often pinpoint a long list of constraints. As all constraints cannot be addressed simultaneously, there is a need to identify the most binding ones in order to prioritize reforms. The paper suggests combining the different diagnostic tools in an appropriate framework to achieve this prioritization. An adaptation of the growth diagnostics— originally developed by Hausmann et al. (2005) for guiding growth strategies—can be such a framework. By shifting the focus from growth to trade, this framework can be readily adapted by local authorities and development practitioners. ACKNOWLEDGEMENTS This study has been prepared by Jean-Jacques Hallaert and Laura Munro under the supervision of Douglas Lippoldt and Raed Safadi. Martina Garcia provided substantive input at the outset of this project and Jonathan Senft provided excellent editorial comments. Frans Lammersen, William Hynes, and Masato Hayashikawa (all DCD) provided valuable comments. The final report benefitted from discussions at the OECD joint Development Assistance Committee-Working Party of the Trade Committee meeting on Aid for Trade. At this meeting, it was agreed to make the study more widely available through declassification.