Aid for Trade: Future directions

15 November 2013

Eight years later, with the Doha Round in an impasse, and world trade increasingly dominated by global value chains and dented by successive economic crises, it is useful to ask if the AFT initiative is on track, and to learn from its achievements and shortcomings.

According to OECD figures, global Aid for trade disbursements increased significantly since the initiative was launched in 2005, but declined slightly in 2011. Conversely, AFT flows to LDCs have increased consistently since 2005 and have proved resilient to economic crises. LDCs have taken in 27 percent of the cumulative AFT flows since 2005. Given the ambitious goals of the initiative, one wonders if the amount of aid received by LDCs has been proportionate to their needs, and additional.

A flurry of recent research has sought to assess the effectiveness of Aft, with generally mixed results. ICTSD conducted eight country studies, including four in LDCs (Bangladesh, Cambodia, Malawi and Nepal) using a methodology based on the Paris principles of aid effectiveness. The findings from the case studies show that  AFT is likely to be effective when the host country has the appropriate institutions and human resources to utilize aid; when the aid program enjoys broad local ownership, including political ownership; and when donor objectives are aligned with local priorities. To these, the country-direct experiences indicate that it is crucial that AFT flows are additional, and predictable.

Going forward, if the Aid for trade initiative is to make a bigger impact, it must address local capacity constraints and institutional weaknesses in its very design, and tackle problems related to additionality and misalignment. Crucially, the initiative must promote itself and create awareness among key stakeholders about its goals and purposes, and its scope and limitations. Too often, the lack of a proper definition of AFT is the cause of misinformation - even among those in charge of implementing AFT projects - and it frustrates monitoring and evaluation efforts.

A number of recent developments point to the growing role of AFT in the years to come. First, the rise of global value chains presents opportunities for LDCs, but also significant challenges to specializing in ‘tasks'.  The AFT initiative will therefore need to (re)focus on specific constraints at various nodes of the supply chain to enable LDCs integrate effectively into GVCs or to upgrade along the same.

Second, the debate on the LDC services waiver has drawn attention to the role that services exports could play in LDCs' development. However, barriers to service exports are perhaps even more formidable than supply-side constraints to merchandise exports. Addressing those constraints will require a new role to be assigned to the AFT initiative, which has hitherto focused almost exclusively on trade in goods.

Last, but certainly not the least, a Trade Facilitation Agreement (TFA) has been slated as a key deliverable of the Bali Ministerial Conference. However, developing countries have made it clear that they would not be party to an agreement that would commit them to costly reforms without promising adequate technical assistance and aid. This means that if a TFA is to see the day at Bali, it will come with an augmented AFT initiative, providing additional funding for trade facilitation.

All of the above developments suggest that the AFT initiative, far from being scaled back, will actually grow bigger and branch out in several new directions. Perhaps for this reason, it may be useful to revisit the need for an institutional AFT mechanism that could bring all AFT operations under one roof, making it easier to manage, monitor and evaluate AFT programs - a growing wish of the donor community.

Author: Vinaye Ancharaz is Senior Development Economist at ICSTD

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