Addressing sustainable development knowledge gaps in regional Aid for Trade strategies

26 May 2015

This article reviews some of the advantages of regional approaches towards reducing trade costs and achieving sustainable development objectives. In view of some of the tensions outlined, it argues that certain knowledge gaps should be addressed in view of inclusive sustainable development objectives.

Regional approaches have become the preferred mechanisms of disbursing aid for trade (AfT) for some of the major donors. Regional AfT strategies, created by regional economic integration units and supported by AfT disbursement agencies, invariably include the reduction of trade costs as an objective. After all, investing in trade capacity building and trade facilitation helps in reducing the costs of trading for business. After briefly outlining some of the main advantages of leveraging regional AfT strategies to reduce trade costs, this article draws attention to some important knowledge gaps in view of the achievement of inclusive sustainable development objectives.

Advantages 

Some of the main advantages of regional approaches to AfT disbursement include those related to economies of scale and scope: the ability to leverage large scale investments in hard infrastructure, and benefit from economies of scope in relation to disbursement mechanisms at the regional level.

Regional forms of disbursement are often considered an effective vehicle for hard infrastructure investments. This is because of the public good element of such investments and resultant positive externalities which can operate as network effects; since the value of investments increases with the numbers using it, there may also be spatial redistributive effects. Because of these positive externalities, regional investments in infrastructure are important for small land-locked and small island economies.

Mechanisms of donor disbursements may entail the creation of a new regional architecture, which may be coterminous with existing regional integration apparatus. Such approaches should serve to reinforce rather than undermine existing regional integration processes. Of course, regional corridor approaches can also help to reduce transaction costs for donors through economies of scale and the pooling of scarce resources.

Although the economic rationale for regional AfT mechanisms to reduce trade costs is often clearly articulated, there are some conceptual difficulties given the very real forces of convergence and divergence which operate in view of economic geography considerations. These issues should not be shied away from, as in fact they assume a particular importance in view of the practical realities of AfT disbursement, including at the regional level.

Knowledge gaps

Although there is a somewhat elaborate system of reviewing and monitoring progress in meeting the AfT goals, including the Global Review progress, so far the level of AfT disbursed to Least Developed Countries (LDCs) and other small states has been somewhat underwhelming. Moreover, there remain challenges in terms of disentangling AfT disbursements from the implementation of trade agreements and new trade-related adjustment costs. There also remain some very real challenges in terms of developing appropriate monitoring and evaluation frameworks at the country level. These challenges are part of a much bigger problem: a lack of monitoring frameworks linked to trade impact assessments more broadly. Social accounting matrices underpinning trade impact assessments are absent in many developing countries and environmental indicators remain weakly defined. Because of these knowledge gaps, it is fair to say that challenges related to country-specific AfT evaluations may become amplified at the regional level.

In view of the absence of adequate baseline information, it is not too surprising there are few rigorous approaches towards assessing regional Aid for Trade (AfT) disbursements. Much less is known regarding the effectiveness of these disbursement mechanisms compared to other more direct forms, particularly in view of the achievement of sustainable inclusive growth objectives. The ability to monitor AfT disbursements in terms of their effectiveness can become complicated as regional rather than bilateral approaches become favoured by donors: country-level AfT evaluations are already rather tricky in view of different donor classifications. The adoption of regional approaches by donors may further weaken accountability linkages. That is, unless, carefully designed, anchored and managed by recipient regional institutions.

Dealing with donors    

It is often the case that development partners utilise different methodologies and standards with respect to the implementation of specific measures. For example, as related to trade facilitation resources (a component of AfT), while the text of the WTO Trade Facilitation Agreement links implementation to the provision of adequate support for measures scheduled under Category C (implementation contingent on the delivery of technical assistance and support), the onus remains on developing countries, including Small States to request and negotiate the required support. This obviously takes time, costs, and may be a rather cumbersome procedure given the lack of standardisation of donor procedures (Fevrier, 2015 forthcoming). This may mean that a regional approach could become a necessary requirement in order to effectively access funds, particularly for capacity constrained small-states. This is obviously easier where such institutions and governance capabilities exist.

Governance capabilities

In a recent review of the challenges of Least Developed Countries (LDCs) such as Cambodia and Nepal in accessing Global Value Chains (GVCs), which have also utilised AfT to do so, it was argued that it is financially impossible for Nepal, a resource-poor country, to address all production-related infrastructure challenges simultaneously (Keane and Basnett, 2015). In the case of Cambodia, a step change in its approach towards managing trade, and donors, has become apparent as simply responding to private sector demands in a facilitative way has begun to reach its limits.

The existence of effective dialogue mechanisms between private sector actors at the country-level is often taken as given by donors, but for many LDCs remains in more experimental and design phases.

Existing constraints to Nepal’s industrial growth and ability to participate in regional value chains are not new. They remain unaddressed due to a failure to coordinate policy formulation and implementation. As a result, policies are partially implemented and public goods underprovided (Basnett et al. 2014). The need to develop government capabilities prior to the design of interventions is obviously clear in this instance.

Considering trade costs and capabilities 

The process of trade-induced economic development is not necessarily inclusive and needs to be managed carefully. Over time, regions with better international market access may diverge away from others with less. With specific regards to analysis of South African economies, Moore (2015) finds that growth spillovers due to improvements in International Market Access (IMA) are not entirely inclusive: some regions are invariably better placed to take advantage of growth spillovers than others. Improvements in IMA may result from reductions in trade costs themselves, as well as through an increase in the responsiveness of trade to cost reductions. 

Although some countries benefit from increases in growth in neighbouring countries, countries further away benefit less; this is simply because the increase in demand is lower, as trade costs are higher. Hence some regions may begin to converge, whilst those regions located further away will begin to diverge, given spatial spillover effects.

With specific regard to small island states (SIDS), Moore (2015) notes that since both output and population are clustered around airports this supports the importance of market access for an area’s development. With specific regards to Grenada, Samoa and Fiji, he notes that whilst remote provinces are now growing rapidly, this largely reflects a catch-up process: both output and population density are far higher in capital provinces and those containing an airport.

Conclusion 

It is recognised that the global trend toward supply chain rationalisation poses big challenges to smaller countries, and firms, which face substantial scale and purchasing power limitations (Gereffi and Luo, 2014). Given the remoteness of many SIDS to the main global hubs of economic activity (US, EU, and Asia) an emphasis on trade costs alone is likely to be inadequate to induce global value chain (GVC) participation which advances sustainable inclusive growth objectives.  

This therefore raises the question as to which trade costs - related to international, regional or domestic market access - matter most in view of inclusive, sustainable development objectives.  Obviously in order to address these questions, knowledge and information gaps need to be addressed at the country and then subsequently regional level. Doing so may in turn bolster governance capabilities and the ability to really tackle inclusive sustainable development objectives.  

Author: Jodie Keane, Economic Adviser, Trade Division, Commonwealth Secretariat

The views expressed in this article are those of the author and do not necessarily represent those of the Commonwealth Secretariat.

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