Trade Has a Place in Canada’s Foreign Aid Policy

Yesterday’s federal budget produced a major surprise when the government  revealed that Canada’s foreign aid agency would be cut and merged with the foreign affairs and trade department. This reorganization – although unexpected – is entirely in line with the Harper government’s new emphasis on trade being part of this country’s development agenda. 

Critics of the government’s international aid approach are concerned that this change will de-emphasize Canadian policies to reduce poverty in the developing world. But bringing together trade, aid, and foreign affairs need not be at odds with a poverty reduction agenda.

Foreign aid is perceived as the main way for rich countries such as Canada to help poor ones. Aid can reduce poverty (see Esther Duflo and Abhijit Banerjee’s book Poor Economics for some modest examples), but its record over more than half a century has been mixed. Aid will and should continue to play a key role in Canada’s development policy, and we should make it as effective as possible.  However, even if Canada’s aid funding increased by a significant percentage, it would continue to be a relatively small donor by international standards.

In reality, private funds flowing from rich to poor countries dwarf official development aid in value, as I’ve written about in Effective Aid and Beyond. Private funds include trade, remittances, investment, and those from private foundations, and while imperfect, can be effective in reducing poverty.

For example, buying goods made in developing countries raises poor country incomes, and helps provide better-paying jobs, particularly for women. Last week’s UNDP Human Development Report attributed the lifting of hundreds of millions of people from poverty at least in part to openness to trade. The UNDP report notes that developing countries nearly doubled their share of world merchandise trade from one quarter to almost half between 1980 and 2010.

Similarly, investment in the developing world – while it can have downsides – has raised government revenues, employment, productivity, and, in turn, living standards in developing countries.

Canada’s policies related to poverty reduction will now presumably be filtered through a foreign affairs and trade lens. At the same time, efforts to boost trade – even if they just focus on how Canadians will benefit from lower prices – benefit poor countries. For example, a 2004 study by William Cline for the Institute for International Economics found that eliminating all rich country trade barriers would result in income gains to developing countries double that of global foreign aid.

The concept and practice of official development aid emerged more than half a century ago.  In that time, the global economy has changed dramatically.  Canada’s leaders need to align their policies on foreign affairs, trade, and poverty reduction with these new realities. And broadening our development policies beyond aid gives Canada more ways to benefit the poor in the developing world.