Jean-Jacques Hallaert

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.

Can Regional Integration Accelerate Development in Africa? CGE Model Simulations of the Impact of the SADC FTA on the Republic of Madagascar

Madagascar plans to start phasing out its customs tariffs on imports from the Southern African Development Community in 2007. This paper uses a CGE model to evaluate the impact of the SADC FTA on Madagascar economy. The results suggest that the SADC FTA would only have a limited impact on Madagascars real GDP because the liberalization affects only a small share of its total imports. However, Madagascars trade and production pattern would change and benefit the textile and clothing sector. Removing rigidities in the labor and capital market would increase the gains but they would remain limited. Gains from the SADC FTA become substantial only when the regional liberalization is accompanied by a multilateral liberalization.

Increasing the Impact of Trade Expansion on Growth: Lessons from Trade Reforms for the Design of Aid for Trade

In order to reach its objectives, Aid for Trade should not only focus on helping developing countries to turn trade opportunities into trade but also tackle the binding constraints that choke the impact of trade on economic growth. This report shows that although most trade reforms had a positive impact on economic growth, some reforms proved unsustainable and others did not have a meaningful impact on growth. It discusses the various reasons for these outcomes in order to draw the lessons for the design of aid-for-trade projects and programmes and increase their impact on trade performance and on growth. It argues that the scope of activity of aid-for-trade is broad enough to support both the compatible policies that will make a trade reform sustainable and many of the complementary policies that will increase the growth impact of trade expansion. Supporting compatible and complementary policies is about policy coherence and adequate sequencing. As much as possible, proper sequencing and policy coherence should be reflected in the design of aid-for-trade projects and programmes. This cannot be achieved without adequate donor coordination and alignment on country priorities.

How does a domestic tax reform affect protection against imports? The case of the Republic of Madagascar

In 2008, Madagascar reformed its domestic tax system. Because the excise duties and VAT regimes were reformed, the taxation of imports has changed. This paper quantifies how the reform changes the protection against imports and the fiscal revenues from taxation of imports. It shows that, even if the reform has only a limited impact on the average rate of protection, it substantially alters the structure of protection across goods. Moreover, because the reform further increases the already high rate of taxation of imports, it will also boost revenue from taxes on imports and reduce the fiscal losses from the SADC FTA.

Aid for Trade is reaching its limits, so what's next?

The Aid for Trade Initiative has reached its limits and is in a need to be revamped. This article describes the political economy that led to the launch of the Initiative and explains why it focused on the mobilization of financial resources. The mobilization of resources has been impressive but, in the midst of a fiscal crisis and against the background of growing suspicion by developing countries, the Initiative is asked to show results. This proved difficult. As a result, in order to preserve resource mobilization and preserve donors’ interest, the WTO is expanding the scope of the Initiative to new areas only remotely related to the trade and growth nexus. This article argues that this is unlikely to address the main challenge that the initiative faces: building confidence. As confidence is crucial for the future of the Initiative and for the negotiation of a Doha Round agreement, the WTO should rather follow the suggestion of some donors to narrow the scope of the Initiative in order to make it more focus, monitorable, and efficient. The Aid for Trade Initiative was launched in 2005 because the WTO and donors had converging interests. The WTO needed to mobilize resources to address developing countries’ concern about the possible impact of the Doha Round. Donors, needed to scale up aid to meet the Millennium Development Goals (MDGs) while improving aid effectiveness. The objective of the Initiative is to use trade as an engine for development. However, in part because the task of operationalizing the Initiative was given to the WTO, Aid for Trade focused on the mobilization of financial resources. The issue of how best harness trade for development purposes was largely overlooked. The mobilization of financial resources was impressive and became the metrics of the success of the Initiative. However, after six years and in the midst of a fiscal crisis that puts development budgets under pressure, the focus is changing. Aid for Trade is asked to show results. This proved difficult to do convincingly. This article argues that unable to show meaningful results, with bleak prospects of mobilizing more financial resources, and with a monitoring and evaluation framework which, despite

From Containment to Rationalization: Increasing Public Expenditure Efficiency in France

Achieving France’s medium-term fiscal targets will require significant expenditure efforts. This paper identifies areas where there is scope for increasing expenditure efficiency, with a view to achieving higher quality and more sustainable fiscal consolidation. The methodology is based on a triple benchmarking. First, the level of public expenditure in different categories is compared to other European countries. Second, the impact of spending is assessed against other European countries. Third, the input mix is analyzed to understand what components are responsible for the level of spending and for the quality of outcomes This is done for various categories of spending and policies. Based on these results, the paper then provides policy options for expenditure reform in each of these areas, drawing on successful reform episodes in other countries.

Proliferation of Preferential Trade Agreements: A Quantification of Its Impact

Literature has frequently evaluated the proliferation of preferential trade agreement (PTAs) by counting the number of PTAs or the share of international trade covered by these agreements. But these indicators have been recently criticized. In this paper, using a CGE model, we attempt to quantify the economic impact (measured by its welfare effect) of the proliferation of PTAs. Results show that the welfare impact of PTAs is limited and often vanishes quickly because preferences are eroded by the proliferation of PTAs. This contrasts with the gains from non-discriminatory liberalization. Therefore we argue that the proliferation of PTAs is unlikely to continue. This paper also has methodological implications for CGE modeling: ignoring the proliferation of PTAs bias significantly the results; and the bias is not only potentially large but also its direction is a priori uncertain.

Inequality and Poverty across Generations in the European Union

This SDN studies the evolution of inequality across age groups leading up to and since the global financial crisis, as well as implications for fiscal and labor policies. Europe’s population is aging, child and youth poverty are rising, and income support systems are often better equipped to address old-age poverty than the challenges faced by poor children and/or unemployed youth today.

Which Expenditure Saving to Sustain Medium-Term Fiscal Consolidation?

France’s fiscal deficit widened markedly during the crisis (from 2.7 percent of GDP in 2007 to 7.5 percent of GDP in 2009). The fiscal consolidation undertaken since 2010 has heavily relied on tax increases and needs to switch to expenditure containment. The purpose of this paper is to identify the areas of expenditure saving that could sustain medium term fiscal consolidation. The first section discusses the size of the fiscal adjustment needed to meet the objective of a balanced budget. The second section draws lessons from international experience with fiscal consolidation for the design of an expenditure-based consolidation in France. The last section identifies possible areas of expenditure saving.

Estimating the Constraints to Developing Countries Trade - A Taxonomy of the Binding Constraints to Trade Expansion of Landlocked Countries, Small and Vulnerable Economies, and Commodity Exporters

This study identifies the most binding constraints to trade expansion faced by developing countries and estimate their severity for trade and economic growth. This process is crucial to prioritize trade reforms and to guide aid-for-trade resource allocations. The core of the analysis is a cross-country econometric analysis but the insight is complemented by two case studies. We look at the growth impact of both exports and imports (and at the binding constraints they face) for all countries, landlocked countries, small and vulnerable economies, and commodity exporters.