# **3. Does Supply of Aid for Trade Match Demand?**

The distribution of aid for trade is as important as overall amounts. There are a number of different perspectives on the question of whether the supply of aid for trade aligns with the demand and need for aid. One approach is to focus on analysis of poverty reduction strategy papers (PRSPs) to evaluate whether and how countries are integrating trade policy and institutional reforms into development plans. A United Nations Development Program (UNDP) study that reviewed 72 PRSPs found that 85 percent included one or more components devoted to trade (Kosack, 2008). This marks a significant increase from previous analyses – a 2000 study found only about 25 percent of completed PRSPs had a section relating to trade. Moreover, 52 of the 72 PRSPs included in the latest UNDP study related trade policies to poverty profiles. This development, among other more specific differences across various iterations of PRSPs, suggests that countries are increasingly considering linkages between trade and poverty reduction. The same can be inferred from the survey of World Bank Country Assistance Strategies mentioned earlier.

One of the first attempts to evaluate the balance between supply and demand based on empirical evidence and data was undertaken by Gamberoni and Newfarmer (2009). They find that supply of aid for trade has responded to demand in the sense that countries that are most in need of aid for trade – as measured by trade capacity and performance – tend to receive relatively more assistance. Subsequent analysis that builds on and extends the methodology developed by Gamberoni and Newfarmer has focused on the relative impact of hard versus soft infrastructure investments, aiming to obtain a better understanding where aid for trade funds may be best spent in advancing capacity building goals. For example, Portugal-Pérez and Wilson (2010a) construct indicators of trade capacity from a set of primary variables that measure the availability and quality of trade-related infrastructure and regulation (e.g., the fixed line network, quality and capacity of ports, airports, rail, and roads, governance and corruption, costs and time to clear trade consignments, various indicators of the business and investment climate, etc.). Using factor analysis, these variables are condensed into four specific factors that capture distinct features of the trade environment. Two of these indicators are related to the “hard dimension” of trade capacity – Information and Communications Technology (ICT) and Physical Infrastructure – and the other two are measures of the “soft” dimension of trade capacity: a Business Environment Trade Indicator and a Border Management and Customs Efficiency Indicator.

Martinez and Wilson (2010) use these four factors to create a measure of the demand (need) for aid for trade. The authors regress actual supply of aid for trade against this measure and find that most of the countries that have the greatest need are close or above the predicted line, indicating an approximate match between supply and demand (Figure 4). Moreover, the results are consistent in the sense that countries with the lowest scores on the trade capacity indicator (associated with higher values of the Index), receive higher levels of aid for trade. However, it is also clear that there is a lot of variance around the trend, and that many countries are receiving less support than these various indicators of need suggest would be appropriate.

9