Since the adoption of the WTO-led Aid for Trade (AfT) initiative in 2005, there has been a steady increase in trade related aid around the world. The share of AfT in total official development assistance (ODA) reached to 31% in 2012. Along with the increase in AfT, there has a slight controversy regarding the impact of AfT on reduction of trade costs and/or expert competitiveness of recipient countries.
The Korea’s volume of ODA has been increasing, with Korea becoming the 8th largest AfT donor country among DAC member countries; Korean ODA comprised 40% of the AfT itself. Interest regarding AfT, however, has mostly been concerned with the volume of AfT and there was relatively less attention toward its effectiveness. Our study, rather, is focused on the qualitative aspect of AfT; we would like to answer the questions on whether Korea’s AfT had positive impacts on recipient countries’ trade capacity - meaning our investigations would concern how the AfT contributed to their economic growth and what will be its impact on the trade between Korea and recipient countries.
We selected three Southeast Asian countries, Vietnam, Cambodia and Lao PDR, who are late-comers among ASEAN (Association of South East Asian Nations) members and also transition countries with a high economic growth. In order to investigate the relationship between AfT and trade capacity of the recipient country, we conducted an empirical estimation. Dividing the AfT by sub-categories and sorting recipient countries according to income level and geographical factors, the empirical results allow us to elicit in-depth and realistic policy implications.
We find that AfT, overall, has a positive impact on export performance of a recipient country. Among the sub-categories of AfT, AfT for economic infrastructure and production capacity were identified as having strong impact on export promotion. When recipient countries are sub-divided by income level, AfT has a positive impact on export promotion for low-middle and upper-middle income countries, whereas for low income countries, AfT turns out to have a negative impact. It is noteworthy that AfT for economic infrastructure and production capacity, which accounts for more than 90% of total AfT, did not have an appreciable impact on promotion of exports among low income countries.
On the other hand, AfT for trade policy and regulation has a significant and positive impact. When the recipient countries are divided geographically, AfT for economic infrastructure and production capacity show a positive impact on their export promotion for Asia and Europe in which countries have a relatively high income level, whereas we fail to find significant impact for the African country group.
From the study and empirical results, we can provide implications for Korea’s AfT policy. First of all, as we have noticed in our empirical estimation, AfT without considering country specific factors would not be an efficient way to enhance the trade capacity of recipient countries. Especially, AfT for economic infrastructure and production capacity did not have an impact regarding promotion of exports for low income countries.
It was rather AfT for trade policy and regulation which actually had a meaningful impact. Considering that about 96% of total AfT is allocated for economic infrastructure and productivity capacity, converting AfT support currently concentrated toward ‘hardware’ to ‘software’ based allocation would improve the effectiveness of AfT for these low income countries. It also implies that in order for AfT for economic infrastructure and production capacity to have significant impacts, it must be preceded by improvement of economic structure and regulation of recipient countries. Improving the effectiveness of aid would also entail taking into consideration the recipient country’s specific factors, including income level, trade structure and/or trade related regulations, followed by determination which supporting field of AfT would have priority.
Secondly, AfT should be treated as a cross-cutting issue in the process of establishment and implementation of Korea’s ODA policy. That is, AfT should be central in consideration for all types of Korean ODA projects. AfT will be a core topic in discussions around the world on how to increase ODA, how to promote its efficiency, and what type of policy project is needed to achieve the new development goal. To take a leading role in this process, Korea needs to take AfT as a core agenda in Korea’s international development model. For this purpose, we have to take an approach to AfT from a more integrated perspective; and development projects should be actively promoted and implemented to achieve comprehensive and sustainable economic development.
Thirdly, the results show that Korean ODA also suffers from excessive segmentalization. Overcoming this problem would require active bilateral and multilateral cooperation. In addition, creation of a permanent discussion channel between donor and recipient states will also enhance international cooperation. Inviting recipient countries into the permanent discussion channel accords with principles of harmonization of aid and aid ownership of recipient country, which was adopted in the Paris Declaration. If participation of the recipient country makes it possible to deliver assistant projects which coincide with its own visions for development, it will satisfy the accordance principle between development vision of recipient country and assistance of donor country. Also, such cooperation will strengthen the sense of mutual responsibility of donor and recipient countries, thus improving the efficiency of assistance.
Fourthly, the results show that assistance on economic infrastructure and productivity capacity failed to have significant impact on exports for low income countries, whereas aid on trade policy and regulation had positive and significant impacts. However, Korean AfT is highly concentrated on economic infrastructure and productivity capacity, in stark opposition to our empirical results. What we suggest for AfT for Vietnam, Cambodia and Lao PDR is that assistant projects to improve the trade system and trade-related regulation needs to come before improvement of economic infrastructure. Assistance in these fields can have significant impact on the improvement of trade capacity for these countries and based on that, assistance regarding economic infrastructure and/or production capacity can have meaningful results in the future. In this regard, reallocation among the field of AfT for these countries should be considered.
Lastly, to improve the efficiency of AfT assistance, a proper understanding about recipient country’s situation and intensive assistance should be achieved. As mentioned already, Korea’s AfT to Vietnam, Cambodia and Lao PDR shows excessive bias towards “hardware fields” of trade, such as economic infrastructure. On the other hand, what is needed and would prove more efficient for these countries is the “software fields” of trade capacity. Given that Korea has advanced software related to cross-border trade, Korea’s experience and technology could have immediate and practical help for these countries. For example, Korea’s UNI-PASS which is designed for automated electric customs procedure and/or consulting service regarding customs procedure and the related systems, can be an effective form of assistance.