Export promotion is a central goal of many development assistance
programmes, particularly to countries in Africa. One way of doing this is to
offer preferential market access, but instead donors have tended to provide
large volumes of aid conditional on the recipients removing export taxation
and reducing import barriers.
Research by Christopher Adam and Stephen O’Connell, published in the
January 2004 issue of the Economic Journal, suggests that the strategy of
export promotion would be far more effective if instead of providing assistance
as government-to-government grants and concessional loans, the donor
countries were to improve preferential access for low-income countries to their
own markets.
The research shows that for a ‘typical’ African country, a temporary
reallocation of donor assistance away from grants sufficient to finance a 10%
improvement in trade preferences for manufactured goods for a period of five
years could lead to a permanent increase in consumption per capita of as
much as 5%.
The results are driven by two empirical features of aid and trade:
· First, large foreign exchange inflows tend to produce strong local
currencies and strong currencies undercut the competitiveness of the
export sector. This latter effect, referred to as the ‘Dutch disease’ after
the contraction of the manufacturing sector that accompanied the
discovery of natural gas in Holland in the 1970s, is present regardless
of the source of the inflow – whether from aid or export earnings. But
when assistance is delivered as trade preferences, it is overwhelmed
by the directly export-promoting impact of the expanded preferences. It
follows that grants reduce exports, while trade preferences expand
exports.
· Second, this clearly matters if exports matter for growth. As the Asian
development experience suggests, ‘learning by doing’ is an important
source of long-run productivity gains in the export sector. Recent
evidence suggests that exporting delivers dynamic efficiency gains for
African manufacturing firms as well. It is these gains that generate real
growth and hence permanent increases in GDP and consumption from
the temporary reform of donor practices.
If trade preferences are superior to aid, why are they not employed more
aggressively, particularly when export-led growth is a clear aim of many
development assistance programs? One answer is that the preferences that
matter, those that stimulate the largest potential productivity gains to the
recipient, are in highly sensitive import-competing sectors in developed
countries.
Another answer is that aid accrues to the public sector, where it is spent
according to the priorities of the incumbent government, and export promotion
is only now beginning to achieve the urgency in many low-income countries
that it achieved among the Asian tigers starting in the 1960s. Historically,
therefore, the demand for preferences has been weak, relative to the demand
for aid.
The irony is that just as poor-country governments are becoming convinced of
the benefits of outward orientation, global trade liberalisation is eroding many
of the preference margins they have enjoyed relative to powerful developing
country competitors.
One implication of this study, then, is that the effectiveness of donor
assistance could be enhanced either directly, by explicit use of targeted trade
preferences (as is the case in the United States’ African Growth and
Opportunity Act) or indirectly by recognising the value to the recipient of using
some part of an aid flow to finance temporary production or export subsidies
in order to replicate the effect of donor financed trade preferences and
thereby offset the potentially adverse side-effects of the aid inflow.
ENDS
Notes for Editors: ‘Aid versus Trade Revisited: Donor and Recipient Policies
in the Presence of Learning by Doing’ by Christopher Adam and Stephen
O’Connell is published in the January 2004 issue of the Economic Journal.
Adam is at the University of Oxford; O’Connell is at Swarthmore College,
Pennsylvania.
For Further Information: contact Christopher Adam on 01865-273636
(email: christopher.adam@economics.oxford.ac.uk); or RES Media
Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com).