Economic diversification and empowerment are essential for achieving the Sustainable Development Goals. Both objectives also embody the rationale behind the Aid for Trade Initiative. Economic diversification offers a pathway for empowerment, while empowement allows women, youth and micro, small and medium sized enterprises to engage in trade. Growth in agriculture, manufacture and services offers entrepreneurial opportunities and generates productive jobs. In turn, this economic diversification contributes to rising incomes and human development more generally. We have seen this pattern of progress in many developing countries bringing substantive reductions in extreme poverty.

The 2019 aid-for-trade monitoring and evaluation exercise shows that economic diversification and empowerment are core objectives of the trade and development strategies and policies of WTO Members and observers. Many of the 133 respondents to the exercise highlight how economic diversification is a gateway for economic empowerment. What also emerges from the replies is that the link between diversification and empowerment runs in the opposite direction too. Empowerment through skills and training is essential for economic diversification, particularly when it enables youth, women and micro, small and medium sized enterprises (MSMEs) to engage in international trade. Progress is cited in the responses, but it is not uniform, with least-developed, landlocked, and Small Island Developing States facing particular challenges. This is also the case in fragile and conflict afflicted states. For these countries and others, economic diversification is inextricably linked with the achievement of higher levels of productivity resulting from the reallocation of economic resources within and between economic sectors.

Economic diversification and economic empowerment embody the rationale for the Aid for Trade Initiative. This chapter discusses insights emerging from the joint OECD-WTO monitoring and evaluation (M&E) exercise which in 2019 focused on surveying these two themes. The starting point for the analysis is the divergence in the number of merchandise products and services exported by countries at different levels of development, at different levels of income and in different geographical circumstances. Against this background, economic and export diversification emerges from the M&E exercise as a core objective of the trade and development policies of partner countries, particularly least developed countries (LDCs) and landlocked developing countries (LLDCs).

Since the start of the Aid for Trade Initative, donors have disbursed USD 409 billion in official development assistance to help developing countries build trade capacities. In addition, USD 346 billion in low concessional loans was disbursed. In 2017, aid-for–trade commitments reached USD 57.7 billion, one and a half times the base line average. Empirical findings and evaluations show that this support has helped developing countries improve their competitiveness, expand and diversify their trade, attract foreign direct investment, and create employment for men and women. Despite these positive results, many developing countries continue to specialise in activities with low value added. This means that aid programmes need to focus more explicitly on helping them diversify their economy and create more opportunities for empowering women and youth.

This chapter analyses production capabilities – an essential component for the Aid for Trade Initiative to be effective. Past growth in manufacturing and related services sectors has absorbed large numbers of workers into productive jobs and increased the prosperity of their families and communities. Industrialisation and structural transformation remain at the core of many national and regional economic development strategies. In view of greater automation and digitisation, this chapter also discusses the implications of the changing nature of industrialisation and the production process for the future of manufacturing development. Policy lessons are drawn to address “supply side constraints” in manufacturing through aid for trade, which in turn contributes to structural transformation. One theme that re-emerges throughout the chapter is the opportunities industrial policy offers for inclusive and sustainable development. Relevant environmental aspects, like green technologies and energy efficiency, are also considered in the context of economic competitiveness and sustained growth.

The least developed countries face the greatest challenges in realizing the full potential of economic diversification with all the benefits that it can bring for economic growth, development and poverty reduction. While trade flows remain vital for LDC economies, their share in world trade is still below 1%. LDC merchandise exports are highly concentrated in few products. Primary commodities account for over 60% of the LDC exports making these countries very vulnerable to the external shocks. These trends are even more pronounced in the LDCs which identified themselves as fragile under g7+ initiative. In those countries top three export products represent at least 40% of their merchandise exports.

Economic diversification remains a challenge for most developing countries and is arguably greatest for countries with the lowest incomes as well as for those whose economies are small, landlocked and/or dominated by primary commodity dependence. For such countries, economic diversification is inextricably linked with the structural transformation of their economies and the achievement of higher levels of productivity resulting from the movement of economic resources within and between economic sectors. Rooted in examples of World Bank Group support, this chapter traces the boundaries of any discussion of economic diversification by advancing a definition that encompasses two related dimensions of diversification: (i) trade diversification (i.e. exporting new or better products, or to new markets) and (ii) domestic production diversification (i.e. cross-sectoral rebalancing of output, driving the reallocation of resources across industries and within industries between firms to increase total factor productivity). The chapter raises awareness on the complexity of the diversification process and the state of knowledge surrounding economic diversification. While the current global environment creates challenges for poor, small, landlocked and/or resource-dependent countries, a range of new diversification routes can be followed. This however requires that policy attention be paid to four key determinants of successful diversification strategies, which development partners and International Organisations can support through targeted Aid for Trade interventions. These are: (i) the supply of appropriate incentive frameworks; (ii) investments and policy reforms targeted at reducing trade costs; (iii) effective policies to support adjustment and the reallocation of resources towards new activities; and (iv) government interventions directed at specific market, policy and institutional failures.

Two years after the entry into force of the WTO Trade Facilitation Agreement, it is time for an initial stock-taking. The experience of the World Bank Group Trade Facilitation Support Program (TFSP) and the UNCTAD Trade Facilitation Program, both major providers of trade-related assistance, as well as OECD’s analytical work provides relevant insights.

Export diversification remains an important development objective of many commoditydependent developing countries. Today’s global economic trends, however, suggest that the world may be entering a period of “slowbalisation”, signified by slower growth of trade, foreign direct investment and capital flows. Growing environmental concerns also raise questions over the viability of repeating the pattern of massive export growth enjoyed by some developing countries in the past several decades. Shifting patterns of economic growth call for a new focus in developing countries’ export diversification strategies. This chapter discusses that two areas - services trade and South-South trade – can provide developing countries with untapped potential for continuing export diversification. The chapter then discusses how South-South regional regulatory cooperation could enhance services trade and reduce the trade-distorting impact of non-tariff measures. To conclude, the chapter explores the role of Aid for Trade in enhancing export diversification through regional cooperation.

Youth economic empowerment is tied to the future of small and medium-sized enterprises (SMEs). This chapter looks at the role of internationally competitive SMEs in providing jobs for young people and examines how improved youth skills and innovation promote the export capacity of SMEs. Firmlevel data show that access to finance is more of a challenge for youth-led firms than firms with older leaders. The chapter finds that Aid for Trade programmes which improve access to financial services for youth entrepreneurs, and improve the skills of young people, promote SME competitiveness for trade while helping young people find gainful employment.

This chapter examines how donors are taking into account gender perspectives in aid for trade, as women’s economic empowerment is one of the key drivers of sustainable development. It introduces data showing that donors have been increasing gender-responsive aid for trade. At the same time, there is scope for improvement, particularly in sectors such as transport, energy, finance and business, mining and industry, where the proportion of gender-responsive aid is low. Good examples by a few donors are therefore highlighted to provide lessons to others that are facing challenges in taking account of gender perspectives in these areas. They reveal that many projects entail training of women as government officials or as project beneficiaries, particularly for income generation. Other activities include studies or development of project designs that are gender-responsive in the particular area. Given the Joint Declaration on Trade and Women’s Economic Empowerment, donors need to build the evidence base, establish an adequate monitoring and evaluation system, and ensure accountability towards women’s economic empowerment.