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Where to Spend the Next Million? Applying Impact Evaluation to Trade Assistance

October 25, 2011—In recent years, the international development community has been galvanized by a new “aid-for-trade” mantra. The goal is to reduce trade costs and promote exports in developing countries by helping governments improve customs and ports and firms meet standards and market their products in foreign markets. Across all donors, aid-for-trade commitments reached nearly $40 billion in 2009, a 60 percent increase from the average levels in 2002-2005. The World Bank, which is playing a leading role, more than doubled its own trade-related lending over the period.

But there is a problem. Surprisingly, little is known about how those projects fare. According to a new book by World Bank researchers, Where to Spend the Next Million? Applying Impact Evaluation to Trade Assistance, only five out of the 85 recent World Bank trade-related projects reviewed by the authors went through rigorous evaluation. Even those few evaluations relied on rather general before-and-after comparisons, which can be easily challenged because of the confounding influence of external factors.

The Bank isn’t alone. Evaluations are hard to come by for other trade-related projects as well, the authors say. That’s partly because aid-for-trade projects are hard to evaluate. But researchers haven’t shifted gear, either: tariffs, whose average levels have declined dramatically since the 1990s and are no longer the trade instrument of choice, continue to dominate trade-policy research.

“In times of fiscal austerity, taxpayers and donors want to know their money is being well-spent,” says Aaditya Mattoo, the book’s co-editor and manager of trade research in the World Bank’s Development Research Group. “The development community must respond to their demand for results and accountability, and researchers must help by developing credible methods. It’s not easy, but it can be done.”

The book discusses the tools available to evaluate aid-for-trade projects, along with several successful cases of evaluation. The so-called ex-post, or retrospective, evaluation is helpful when information is available on firms that benefited from the trade project, along with a large sample of control firms that did not. In that case, researchers can compare the before-and-after performance of firms who received assistance to the before-and-after performance of similar firms that did not.

One study did just that, drawing on firm-level data sets from six countries in Latin America. It shows that export-promotion programs benefited small and inexperienced companies more than larger and established ones. In addition, the programs helped open up new export markets and products, rather than boosting sales of existing products to existing markets.

Another study focused on the evaluation of an export-promotion program in Tunisia and shows that the World Bank-financed project boosted exports over a four-year period, with the average annual growth rate 39% higher among program beneficiaries than among the control group. Interestingly, service firms benefited more than manufacturing firms from the assistance.

In another study, researchers found unintended consequences after the Philippine government eliminated a pre-shipping loophole, which had led importers to slice shipments into smaller ones to avoid inspection. Importers quickly found an alternative to avoid paying any duties – by relocating to an export-processing zone. However, in the end, the government wasn’t better off, and importers ended up paying higher fixed costs to set up facilities in those special zones.

“These types of evaluations help us understand what works and what doesn’t,” says Ana M. Fernandes, co-editor and senior economist in the Bank’s Development Research Group. “Ultimately, they also begin to uncover the most effective ways to design and carry out aid-for-trade projects.”

There are other ways to conduct impact evaluation. The gold standard, randomized control trials, can be used when researchers team up early on with operational teams to implement aid-for-trade projects – and when governments are on board. The book describes a preliminary project, which is implementing a randomized control trial to help microenterprises in the handloom weaving sector in Egypt enter export markets. Another candidate for a randomized control trial is a customs border-post modernization project at the border between the Democratic Republic of Congo and Rwanda, where petty traders on foot, mostly women, are regularly exposed to corruption and harassment.

To be sure, it’s expensive to collect data for rigorous evaluations, and most projects don’t yet include that element in their design and budget. But the book’s authors say the costs can be managed, either through collaboration with client governments or by tackling the issue early on.

The Development Research Group is offering a helping hand. For the first time ever, Mattoo’s trade and integration team is building a large database of customs transactions, covering exporters’ characteristics and behavior by country, industry and destination market. The team has obtained data from 20 countries in Africa, Asia, Eastern Europe and Latin America, and negotiations are ongoing with 25 more countries. That may help with conducting impact evaluation of trade-related interventions in the next few years.

“This initiative is more about learning from interventions than about monitoring projects ,” Mattoo says.

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