Binding Constraints to Trade Expansion

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 developedcountries, 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 ofaid-for-trade projects (increasing trade, diversifying exports, maximizing the linkages with the domesticeconomy, and increasing adjustment capacity) have the potential to boost growth and reduce poverty indeveloping countries. However, the potential of trade may not be realized as developing countries oftenface binding constraints that prevent them from turning trade opportunities into trade, and trade intogrowth. First, they face difficulties turning trade opportunities into trade flows because of capacityconstraints and lack of adequate trade-related infrastructure. Second, some domestic constraints choke theimpact of trade expansion on economic growth. The paper focuses on the first set of constraints andpresents various diagnostic tools available to identify them. These tools often pinpoint a long list ofconstraints. As all constraints cannot be addressed simultaneously, there is a need to identify the mostbinding ones in order to prioritize reforms. The paper suggests combining the different diagnostic tools inan 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 anddevelopment practitioners.

OECD Trade Policy Papers

Binding Constraints to Trade Expansion

Aid for Trade Objectives and Diagnostics Tools