An aide for Aid for Trade – Early findings and recommendations from country studies

11 October 2011

The World Trade Organisation (WTO) and the OECD have been spearheading the monitoring process regarding Aid for Trade (AfT) ever since its conception. Their commitment to monitoring, which culminates in the Global Review, has contributed in keeping the momentum high. This is clearly reflected through the substantial increases in financial resources dedicated to AfT that reached commitment levels of 40 billion dollars in 2009. (1) However, the WTO and the OECD have restricted their monitoring mainly to the global level and the project level, primarily through ‘case stories', while overlooking AfT effectiveness at the national level, for which there have been many calls by numerous countries and experts. As country specific factors can deeply influence AfT effectiveness in boosting trade related performance, country based assessments become indispensible to fully capture the impact of AfT on development. Thus, to complement the existing monitoring mechanism and address its shortcomings, the International Centre for Trade and Sustainable Development (ICTSD) has embarked on assessing the impact and effectiveness of AfT at the country level. Pilot studies have been launched in six countries (Malawi, Mauritius, Jamaica, Peru, Cambodia and Nepal). This article focuses on the early findings and recommendations from Malawi and Mauritius, while supporting them with observations from Cambodia, Nepal and CARIFORUM countries.

Funds trajectory

A general increase in the commitment of AfT funding has been observed for Mauritius but remains negligible in the case of Malawi. The funds have been predictable in both countries, with Malawi receiving funds primarily in grant forms. For countries like Malawi, Nepal and Cambodia, AfT funding has not been at the expense of other forms of aid, however, the Mauritian government has insisted that AfT resources allocated to Mauritius are not over and above the development aid. This highlights a persistence of the conflict between donors and partners in the perception of AfT funding, where some partner countries feel that AfT has not been additional to official development assistance.

Unlike Mauritius, Malawi has received the highest amount of funding for building trade related infrastructure. Nevertheless, trade development in Malawi has been restricted due to a dearth of human capacity. Thus, many have recommended a change of focus from infrastructure projects towards human capacity building and private sector development as a driver for AfT. It has been stressed that the international focus on short-term results and strong disbursement data might, to a degree, undermine investment in local human capacity and in the development of local institutions.

The sustaining of achievements made through AfT emerges as another challenge that needs to be overcome. While sustainability criteria are built into a project's design itself in some cases, this is not so for all the projects and evidence of partner countries providing sufficient funding to the project after donor funding dries up is limited. For example, the government of Malawi was donated computers by the WTO under the Joint Integrated Technical Assistance Programme for four reference centres; however, further funding was not allocated for the maintenance of these computers once funding from the WTO ended. As a consequence of this, the reference centres are currently not in operation.

Ownership

As anticipated, ownership by the partner country has emerged as a vital factor in achieving AfT effectiveness. Mauritius, which has mainstreamed trade in a systematic manner and integrated it in its development agenda, is benefiting considerably from AfT. Consequently, AfT has been successful in creating a strong base for export development while also providing new opportunities for export diversification during the periods of reduced demand for traditional exports. The example of Mauritius can be compared with the one of Cambodia where increasing sectoral diversification in the sugar industry and the rice sector, respectively, have contributed towards an improved business climate, gains in competiveness and increased flows of FDI.

In other countries, while trade has been mainstreamed in national development plans, there is still a lack of clear understanding among key stakeholders on how trade objectives can be realised through specific activities at the programme level.  Moreover, there is little evidence that trade is mainstreamed in other ministries. In Malawi, for the past five years the Ministry of Agriculture and Food Security has focused on maize production primarily with regards to food security, thereby neglecting areas such as export value addition and diversification. The objective was to first develop productive capacity and then to find markets at a later stage. As a result, some agriculture projects that did mainstream trade in their plans had a limited impact (as it was not a priority for the ministry) on raising living conditions for farmers. Due to the current large maize surplus, the government is now realising that trade is important, and has hence started to move beyond focusing on food security alone.

The Caribbean Aid for Trade Regional Integration Trust Fund (CARTFund), which was designed to assist CARIFORUM countries in boosting growth through trade and regional integration suffered from a similar drawback, as the region lacked a strategic framework for the use of funds. Therefore, while ownership can be seen as indispensible for the effectiveness of AfT and to maximise its impact, AfT also needs to take into consideration that developing efficient ownership in countries which lack institutional capacities falls within the ambit of AfT measures.

Alignment

When there is a high degree of alignment between the donors' and the partner countries' development agenda, the benefits of AfT are the greatest. Mauritius is a shining example of this point. Aid delivery, in the case of Mauritius, is in complete harmony with the country systems. Funds are transferred through direct budget support to the National Treasury, blended with domestic resources and are spent across-the-board. On the other hand, in countries like Malawi and Nepal, the use of country systems is limited. Malawi presents an interesting case as donor alignment is restricted to Malawi's priorities, which at this juncture, do not focus heavily on trade, thereby retarding the alignment prospects between the donors' and Malawi's priorities due to insufficient ownership. This entails donors largely dominating project design, staff recruitment as well as procurement. Such an approach to aid restricts the capacities of the partner country and in turn facilitates dependence on the donor expertise -- an issue that needs to be combated from both the donors and the partners ends.

Donor Coordination

AfT has also a more pronounced impact on partner countries in a scenario where there is efficient coordination amongst donors and hence, projects are not repetitive. Donor coordination has improved significantly in Malawi, largely due to the Ministry of Finance's Division of Labour Matrix, the establishment of Sector Working Groups, Common Approach to Budget Support and informal donor discussion forums. However, it has remained limited in the field of ‘Trade Development' and almost negligible in ‘Trade Policy and Regulation'. Mauritius, on the other hand, displays efficient donor coordination, where donors carry out shared diagnosis and analytical work as well as joint implementation, monitoring, evaluations and reviews. Inefficient donor coordination, which can be attributed to lack of information among donors and/or simply because the government does not make efforts to prevent donors from duplicating efforts, can restrict the effectiveness of AfT.

South-South Cooperation

South-South cooperation is furthering the effectiveness of AfT in all the countries where the studies were conducted. Local stakeholders in Malawi have highlighted that Southern donors seem to fund projects that DAC donors do not. However, it should be noted that Southern donors do not function within the sphere of the Paris Declaration and thus do not apply its principles; this in turn runs the risk of limited aid effectiveness while at the same time curtails the scope of enhanced cooperation with other donors

Absorptive Capacities

One of the major challenges that AfT needs to overcome is restrictive local absorptive capacity. It emerges as a strong bottleneck in achieving AfT development goals as it invariably delays an efficient utilisation process of AfT funds. Absorptive capacities remain weak in all the countries studied except Mauritius. This highlights the need for human resources development to be undertaken through formal training courses, coaching and mentoring by advisers, on-the-job training and learning by doing. It is particularly crucial for key ministries to establish a permanent group of dedicated project teams who are trained as technical and managerial staff.  The CARTFund example has highlighted that project design and technical skills can only be learned through long-term exposure and direct involvement in project management in all phases. In particular, donors need pursue a strong strategy for developing absorptive capacities of the partner countries for an efficient use of their tax-payer's money.

Impact

While AfT is not the only factor responsible for increasing exports in a country, it certainly has a potential to deeply influence trade performance. This is thus a central indicator for measuring the impact of AfT. The country studies have highlighted that the impact of AfT on trade performance has been extremely varied. For instance, in Malawi, the positive impacts of AfT projects on export levels have not been large enough to allow Malawi to reduce its ballooning trade deficit. The experience of Mauritius tells a different story : while its exports are suffering due to external constraints such as changes in global demand patterns, AfT has nevertheless been successful in improving the export performance and the business climate, particularly through the sugar sector reforms.

Cambodia shares a similar success story of export base diversification with other sectors like pulp of wood/paper, mineral products, plastics and prepared foods growing alongside garments.   However, in Nepal, while infrastructure projects have helped reduce transaction costs and positively influenced trade performance, AfT has not successfully addressed supply-side constraints to increase trade capacity at the macro level.

A general overview of the studies reveals that while impact of AfT for some countries, particularly Malawi, has been limited and insufficient to spur trade and development, AfT has introduced certain positive aspects and institutions which are guiding such countries towards recognising the importance of trade in development.

Conclusion

AfT has a strong potential in contributing to the trade performance of a country, which in turn can foster its development. The case of Mauritius has illuminated this point; however, AfT is yet to prove beneficial for other countries like Malawi. Across-the-board, it can be concluded that some countries have a stronger need to develop ownership, while some need AfT for private sector development and local capacity building; others may benefit through economic diversification. In this regard, alignment between the donors and the partner country to assess the true development requirements plays a vital role.

Author: Rishabh Kumar Dhir is a Development Research Assistant at ICTSD and a PhD candidate in Development Studies at IHEID, Geneva

Notes:

1 OECD

2 See for more information. An alternative methodology to assess the effectiveness and development impact of Aid for Trade at national level, Ratnakar Adhikari and Paolo Ghisu (2011), Trade Negotiations Insights. Vol.10, No.2, April 2011

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