Where Aid for Trade is failing and why: The example of Malawi

11 October 2011

In 2005 the World Trade Organisation launched the Aid for Trade (AfT) concept in a bid to strengthen the participation of developing countries in the multilateral trading system. AfT is proving to be an effective tool for countries that have recognized the potential of AfT for development and that have internalised trade in their national development plans. Such countries include Cambodia, Vietnam, Rwanda and Ghana.

However it is also proving to be ineffective in countries that have failed to reconcile the trade and development spheres. What should be the response of the trade and development communities in such countries?

Many trade officials, international trade organisations, donors and academics would argue that it is those countries' responsibility to step up to the challenge of reconciling trade with their development efforts. While this is true, many of those engaged in trade promotion and AfT avoid looking at the underlying reasons for why developing countries do not mainstream trade in their development strategy. The problem with this approach is that it can be counter-productive in those developing countries that do not have the human and institutional capacity to mainstream trade in their development strategy. It carries significant risks, both for the development of such countries and also for the effectiveness of AfT. This is because the principle of additionality - one of the core principles on which AfT is based - means that aid is provided to such countries irrespective of their ability to absorb it. What tends to transpire on the ground is that it is not invested in local productive capacity, leading to a distortion of markets, aid dependency, greater income inequality and a lower likelihood that such countries will be able to effectively participate in the global trading system.

The case of Malawi: Why has AfT has not delivered on its promises so far?

AfT has proved to be largely ineffective in Malawi because it has had limited success in developing the local human and institutional capacity required to enable trade. A key contributor to this has been a failure by trade promoters and the donor community to identify where Malawi stands on its development curve. AfT solutions have tended to assume that Malawi is on the same point on its development curve as Cambodia, Vietnam, Ghana or Rwanda. Yet Malawi simply does not have the scale of human capacity that is required to ensure a pro-poor business environment. It lacks the capacity to ensure businesses have affordable access to finance, business development services, inputs, information, markets, labour and technology. It does not have the capacity to provide education services to its rapidly growing population on a necessary scale to allow the majority of its labour force to effectively participate in Malawi's effort to generate value added. The human capacity required to ensure that civil society and government are able to support an institutional and regulatory framework that a pro-poor business enabling environment requires is inadequate. The core problem is that civil society, government and the development community have not adequately recognised the role that private sector development and trade play in their poverty reduction objectives.

A failure to recognise where Malawi stands on its development curve has led to the sub-optimal design of trade-related projects. Despite large AfT flows aimed at addressing areas such as trade promotion and development, projects in this area tend to be piecemeal and fairly uncoordinated while pursuing short term rather than long term goals. Since trade and private sector development is not central to the government's development efforts, such projects are not working within a locally-owned framework that seeks to address all elements of the bigger picture. Instead Aft pursues relatively short-term goals such as road construction or the reduction of the time it takes to obtain trade licenses, at the expense of investment in the institutional capacity of the road and license authorities. Another example is the provision by donors of financing and business development services directly to exporters and potential exporters. Such activities tend to mitigate appropriate, comprehensive and targeted efforts to enable Malawian stakeholders to develop Malawi's financial and business development service sectors by addressing issues such as weak contract law, lack of adequate information on credit history and the conduct of unfair business practices that constrain fair competition.

As a result, although many projects that seek to promote or develop trade tend to meet project targets, there has been a limited overall impact of AfT, notably on Malawi's ability to export. Malawi's trade in goods deficit as a percentage of GDP rose from seven per cent in 2001 to 21 per cent in 2010. The outcome has been aid-dependent growth with little prospect for long-term sustainability. Trade and private sector development remain off the government's agenda. The government argues that Malawi's exporters do not have the capacity to compete in regional and global markets, and therefore its efforts to reduce or alleviate poverty must be based on the development of Malawi's own productive systems without sufficient market exposure.

Which are the areas of AfT success in Malawi?

Fortunately since 2010, Malawi has recognised that it cannot merely focus on poverty reduction and development through increasing production without market linkages. It has acknowledged the importance of a more comprehensive approach to addressing development constraints and has launched a number of sector-wide approaches in areas such as agriculture, health, transport and education. For example in 2010 it launched the Agriculture Sector Wide Approach that is seeking to market Malawi's agriculture sector that has so far been focused on production without sufficient market linkages. In the transport sector, donor prioritisation and government ownership were essential success factors to improving Malawi's infrastructure.

Key recommendation: The necessity to reconcile trade and development thinking and efforts

The AfT initiative is interesting as it brings together two strands of thinking that bear a subtle, but essential difference. On the one hand, there is private sector thinking. This is bottom-line driven, encapsulated in businesses and trade officials in both developing and developed countries. What matters is the best deal that can be obtained for one's own businesses - or country - while taking the regulatory and business environment as a given. The trade community tends to see little benefit in engaging with governments to improve the business environment, because its attempts so far have borne little fruit.

On the other hand, there is the development thinking within the government, local civil society and the donor community. Their approach to trade is that it must be beneficial to a country's efforts to develop and to reduce or alleviate poverty. However, all too often the thinking in key policy circles in developing countries is that if the participation to the multilateral trading system is not beneficial in the short-term, it is better not to expose the economy to it.  Following this reasoning, issues such as crisis management, food security and health become a much higher priority in the policy agenda.

Partner country ownership has emerged as a vital factor in achieving AFT effectiveness but on the ground the reality differs since trade and private sector development continues to be misaligned with Malawi's development agenda. Europe and Asia did not attain their current capacity to participate in the multilateral trading system in five or ten years. Asia had a high level of human capacity prior to the recent rapid rate of development. It was this human capacity that enabled the strength of the institutions that generated the leadership and drive for development. Trade was a key part of that development plan. The key enabling factor was a sufficient level of human capacity that recognised the importance of trade and private sector development to the main national goals, including poverty reduction and the improvement of standards of living.

Therefore if traders, trade officials and international trade organisations are to meet their objectives in Malawi, and in many other countries across Africa, they have to incorporate economic development thinking into their thought process by viewing trade as a subset of private sector development, and viewing human capacity and institutional development as essential for private sector development.  It can then drive local stakeholders and the development community, including the International Monetary Fund, to induce trade and private sector development thinking into their poverty reduction and crisis management thinking. In this way AfT can become effective in countries that currently lack the capacity to transform their own economy by ensuring that civil society, governments, the private sector and the development community have a better understanding of what private sector and trade development requires.

What specific approach should AfT take in countries such as Malawi and why?

In order to boost AfT in Malawi, it must:

  • identify where Malawi stands in its development curve and then comprehensively target the development of human capacity that can make its own case for private sector development and trade;
  • support programmes that assist Malawi in assuming its development responsibility and set human capacity development as the primary goal of AfT;
  • make the case about the importance of trade for economic development;
  • facilitate the development of the capacity of local stakeholders to ensure that the number of people participating in business' efforts to generate value added is maximized;
  • not be too hasty in attempting to meet short-term goals and instead focus on long-term goals; and
  • mainstream trade into development priorities so that the trade and development communities can work towards a common agenda.

Conclusion

It is ultimately local stakeholders that need to recognise that businesses are best placed to generate the value added that is required to meet their poverty reduction objectives. Trade is a key instrument, as well as private sector development, in the policy toolbox to help achieve this goal. It is local stakeholders that are responsible for the enabling environment within which economic development must take place. As happened in all other continents, Malawi's ability to participate in the multilateral trading system will be attained once it finds a development model that works. In order to facilitate this process, AfT needs to address Malawi's capacity to find that development model.

Author : Jonathan Said is senior economist at Imani Development in Malawi. Imani Development is a group of private, employee-owned economic and development consultancy firms, offering a range of services directed towards policy makers as well as the industrial, agricultural and commercial sectors and development agencies.

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