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Further trade liberalization in these areas particularly, by both industrial and developing countries, would help the poorest escape from extreme poverty while also benefiting the industrial countries themselves. Integration into the world economy has proven a powerful means for countries to promote economic growth, development, and poverty reduction.

Over the past 20 years, the growth of world trade has averaged 6 percent per year, twice as fast as world output. But trade has been an engine of growth for much longer. Since , when the General Agreement on Tariffs and Trade GATT was created, the world trading system has benefited from eight rounds of multilateral trade liberalization, as well as from unilateral and regional liberalization. Indeed, the last of these eight rounds the so-called "Uruguay Round" completed in led to the establishment of the World Trade Organization to help administer the growing body of multilateral trade agreements.

The resulting integration of the world economy has raised living standards around the world. Most developing countries have shared in this prosperity; in some, incomes have risen dramatically. As a group, developing countries have become much more important in world trade—they now account for one-third of world trade, up from about a quarter in the early s.

Many developing countries have substantially increased their exports of manufactures and services relative to traditional commodity exports: manufactures have risen to 80 percent of developing country exports. Moreover, trade between developing countries has grown rapidly, with 40 percent of their exports now going to other developing countries.

How Trade and Aid Can Help Deliver Sustainable Development Goals

However, the progress of integration has been uneven in recent decades. Progress has been very impressive for a number of developing countries in Asia and, to a lesser extent, in Latin America. These countries have become successful because they chose to participate in global trade, helping them to attract the bulk of foreign direct investment in developing countries. This is true of China and India since they embraced trade liberalization and other market-oriented reforms, and also of higher-income countries in Asia—like Korea and Singapore—that were themselves poor up to the s. But progress has been less rapid for many other countries, particularly in Africa and the Middle East.


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The poorest countries have seen their share of world trade decline substantially, and without lowering their own barriers to trade, they risk further marginalization. About 75 developing and transition economies, including virtually all of the least developed countries, fit this description. In contrast to the successful integrators, they depend disproportionately on production and exports of traditional commodities. The reasons for their marginalization are complex, including deep-seated structural problems, weak policy frameworks and institutions, and protection at home and abroad.

Policies that make an economy open to trade and investment with the rest of the world are needed for sustained economic growth. The evidence on this is clear.

No country in recent decades has achieved economic success, in terms of substantial increases in living standards for its people, without being open to the rest of the world. In contrast, trade opening along with opening to foreign direct investment has been an important element in the economic success of East Asia, where the average import tariff has fallen from 30 percent to 10 percent over the past 20 years.

Opening up their economies to the global economy has been essential in enabling many developing countries to develop competitive advantages in the manufacture of certain products. In these countries, defined by the World Bank as the "new globalizers," the number of people in absolute poverty declined by over million 14 percent between and There is considerable evidence that more outward-oriented countries tend consistently to grow faster than ones that are inward-looking.

Freeing trade frequently benefits the poor especially. Developing countries can ill-afford the large implicit subsidies, often channeled to narrow privileged interests, that trade protection provides. Moreover, the increased growth that results from freer trade itself tends to increase the incomes of the poor in roughly the same proportion as those of the population as a whole.

Committed to connecting the world

Overall, inequality among countries has been on the decline since , reflecting more rapid economic growth in developing countries, in part the result of trade liberalization. The potential gains from eliminating remaining trade barriers are considerable.


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About two-thirds of these gains would accrue to industrial countries. But the amount accruing to developing countries would still be more than twice the level of aid they currently receive.

Breadcrumb

Moreover, developing countries would gain more from global trade liberalization as a percentage of their GDP than industrial countries, because their economies are more highly protected and because they face higher barriers. Although there are benefits from improved access to other countries' markets, countries benefit most from liberalizing their own markets. The main benefits for industrial countries would come from the liberalization of their agricultural markets.

Trade is a link in development

Developing countries would gain about equally from liberalization of manufacturing and agriculture. The group of low-income countries, however, would gain most from agricultural liberalization in industrial countries because of the greater relative importance of agriculture in their economies.

These considerations point to the need to liberalize trade further. Although protection has declined substantially over the past three decades, it remains significant in both industrial and developing countries, particularly in areas such as agriculture products or labor-intensive manufactures and services e.

Industrial countries maintain high protection in agriculture through an array of very high tariffs, including tariff peaks tariffs above 15 percent , tariff escalation tariffs that increase with the level of processing , and restrictive tariff quotas limits on the amount that can be imported at a lower tariff rate. Such policies should integrate the objectives of promoting economic growth; enabling broad participation in the production processes; sharing the benefits of economic activity more equitably; and ensuring environmental sustainability.

Thus, while aid for trade should continue to contribute to the economic objectives of developing countries by expanding trade, it should at the same time pay particular attention to achieving social objectives by reducing poverty and inequalities as well as environmental objectives such as climate mitigation and adaptation. In addition, aid for trade should help developing countries build resilience and adjust to shocks that can cascade through international markets.

The contribution of aid for trade. There is now abundant evidence to suggest that aid for trade helps to boost economic growth and, depending on its pace and distribution pattern, reduces poverty. But trade liberalisation is not the magic wand by which developing countries are guaranteed economic prosperity.

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The Role of Trade in Ending Poverty

Whilst trade generates growth, turning market access opportunities into trade flows depends critically on having the soft and hard infrastructure in place for connecting a vibrant private sector to markets[1]. This is what aid for trade tries to do. More than three quarters of total disbursements have financed projects in four sectors: transport and storage Figure 1: Aid-for-trade commitments and disbursements by category.

Figure 2: Trade-related OOF commitments and disbursements by category. The vision underpinning the Agenda for Sustainable Development is broad and ambitious. The Third International Conference on Financing for Development and the Addis Ababa Action Agenda stressed the need for a significant additional development finance contribution from the private sector. The pivotal role of the private sector has always been recognised in the Aid for Trade Initiative, and since , considerable progress in engaging the private sector has already been made. A new generation of programmes is emerging, involving donors, partner countries, and private firms both in developing and donor countries.

Some of these programmes focus on human capacity building. Others are focused on transfers of technology, know-how, and efforts to improve the business environment, such as access to finance for suppliers. The results of these trade-related capacity building programmes driven by the private sector have been judged as largely positive: they have helped firms develop new products, increase their exports, and save costs. Strengthening private sector engagement could be further achieved by creating shared multi-stakeholder value and building platforms for project-based collaboration.

Such reinforced partnerships could be forged by scaling up and systematically including the private sector in the four different stages of the project life cycle. In the first place, the views of the private sector could be solicited to provide information about obstacles to be removed or incentives to be improved. Second, private sector actors could share the best practices they have observed in other donor programmes or in programmes they have implemented themselves. Third, governments, donors, and private companies could join forces to scale up their actions and maximise the impact.

Finally, the private sector could provide evidence of success or failure. Given the relatively small market size in many developing countries, it is clear that sustained economic growth depends in part on creating larger, more viable markets. Deepening economic integration via regional cooperation has thus emerged as a key priority in the reform strategies of many developing economies, particularly in Africa.

Trade and Development

However, as underlined in some previous OECD work, regional aid for trade is hampered by many practical complications, from technical standards to financing issues, while negotiations can be bogged down by poor inter-governmental communications and sometimes by a lack of trust across negotiating parties. This creates major challenges in terms of ownership, as well as in mainstreaming and aligning national strategies around regional aid-for-trade priorities.

New approaches have emerged, including multi-donor programmes or regional initiatives based around trade and transport corridors and hubs, with active outreach to public and private investors. In conclusion, the substantial achievements of the Aid for Trade Initiative could be further strengthened through engaging the private sector and focusing more on regional programmes. These two priorities could go a long way in strengthening the role of trade as tool to deliver on the Agenda for Sustainable Development.

This article is adapted from a longer study published by the OECD. The author would like to thank Frans Lammersen and William Hynes for their substantial contribution to this article. September Skip to main content.