ABSTRACT
This chapter develops a general framework in which to approach the relationships between aid and trade policies, and to show how the framework can be utilised in the context of the concepts of policy coherence adopted in this volume (as set out in Chapter 1). Various approaches to aid and trade policy linkages exist in the (limited) literature, but the major ones are implicitly rooted in the two-gap model for aid. One approach starts from the assumption that a principal objective of aid is to bridge a foreign exchange gap in recipient countries. Such a gap could be bridged, or reduced, either by aid (as balance-of-payments support) or by the recipient implementing policies to expand exports. If the manner in which aid is delivered is inconsistent with a recipient export-oriented strategy, then an argument can be made that aid policy conflicts with (recipient) trade policy [Morrissey and White, 1996 ]; this acts against the achievement of donor-recipient coherence. The alternative, within the dual-gap model, assumes that aid is to bridge a savings gap, or more explicitly aid is a source of productive investment. If trade interests encourage donors to link aid to the provision of products that are costly (relative to world market prices) or technologically inappropriate, aid represents a less than optimal investment; hence, (donor) aid and trade policies are in conflict, in the sense that achieving objectives of one undermines achieving the objectives of the other [Morrissey, 1993]; this acts against coherence of the South policies (or what Hoebink refers to as external coherence).
