Aid for Trade in Africa: What Are the Strategic Priorities?

10 July 2017

Taking stock of aid for trade in Africa over the last decade, how can the targeting and delivery of this development assistance be improved to achieve the continent’s structural transformation, regional integration, and poverty reduction agendas?


Aid for trade (AfT) is explicitly addressed in the Sustainable Development Goals (SDGs) under Goal 8: Promotesustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.” For AfT to deliver on the ambitions of this goal in Africa, along with the objectives contained in the African Union’s (AU) long-term development vision and action plan, Agenda 2063, it is important to ensure that it is well-targeted and aligned with the continent’s strategic priority of structural transformation.

This article provides some suggestions on how to achieve this. Many characteristics of AfT flows to Africa have remained relatively unchanged over the last decade. The current picture of AfT in Africa is presented, before recommending three key strategic priorities: (1) refocusing AfT for enhanced intra-African trade, (2) making AfT work for all, and (3) strengthening human and institutional capacities for effective AfT.These proposals are not exhaustive, but they can go a long way towards ensuring that, through AfT, trade is more effectively used as a tool to transform African economies and achieve the 2030 Agenda in Africa.
 

Aid for trade in Africa: A state of play

In 2015, AfT disbursements to African countries reached a record high of US$14.1 billion, representing an increase of over 150 percent from 2006.[1] From the beginning of the Aid for Trade Initiative, Africa – together with Asia – has been one of the key destinations for AfT, with its share of global disbursements fluctuating between 30 and 40 percent. AfT therefore represents a significant and growing channel of aid for African countries, as is evident in Figure 1.
 

Figure 1: Aid for trade disbursements, 2006-2015 (US$ million, constant 2015)

Aid for trade disbursements, 2006-2015 (US$ million, constant 2015)

Source: OECD-Creditor Reporting System Database.

AfT flows to the continent are not evenly distributed, with a number of large economies dominating AfT funding. Since 2010, Egypt, Ethiopia, Kenya, Morocco, and Tanzania have attracted the largest disbursement flows. Together, these five countries have on average accounted for over 35 percent of the annual AfT disbursements to Africa. Both Morocco and Egypt alone have accounted for over 8 percent annually. These countries are also among those with the highest GDP on the continent, and Egypt, Morocco, and Kenya have been classified by the World Bank as lower-middle-income countries. Perhaps as a reflection of their more developed status, AfT represents a larger share of their official development assistance (ODA), up to 52 percent for Morocco, 44 percent for Egypt and 27 percent for Kenya. While the share of AfT in ODA to Africa has been increasing, at a continental level it stood at around only 24 percent in 2015.

Concentration of AfT is also evident at the sectoral level. A large majority of Africa’s AfT has been directed towards projects related to economic infrastructure and productive capacity building. Infrastructure – including transport and storage, energy, and communications – accounted for around 55 percent of AfT funding in 2015. Given the significant infrastructure needs of the continent, this is not surprising. In 2012, it was estimated that US$68 billion was needed by 2020 to complete the priority projects of the Programme for Infrastructure Development in Africa (PIDA).

Productive capacity building is the second largest sectoral recipient of AfT in Africa. The majority – around 54 percent in 2015 – of this funding is directed towards the agricultural sector,[2] which still accounts for around half of Africa’s total employment.[3] Only around 13 percent of productive capacity disbursements went towards industry. This is less than for banking and finance, which accounted for around 16 percent of AfT for productive capacity and 7 per cent of the total in 2015. Trade policy and regulations represented around 3 percent of total AfT, the bulk of which (around 60 percent) was accounted for by trade facilitation.

In terms of the form of aid, the trend over the years has been away from grants towards ODA loans and equity investment. In 2006, 62 percent of AfT to Africa was in grant form, but by 2015, the share had decreased to slightly below 48 percent. A similar share was accounted for by loans, while equity investment was still in minority at 3.8 percent. Multilateral partners, such as the World Bank, the EU, and the African Development Bank are the largest providers of AfT to Africa. At a bilateral level, Germany, Japan, United States, and France are the leading providers. Some new partners have emerged during the decade, including Kuwait, the United Arab Emirates, the Climate Investment Funds, and the OPEC Fund for International Development.
 

Priority 1: Refocusing aid for trade for enhanced intra-African trade

In 2012, African heads of state adopted the decision to fast-track the Continental Free Trade Area (CFTA) and the Boosting Intra-African Trade (BIAT) Action Plan. These twin initiatives are aimed at harnessing the transformative potential of intra-African trade, which is more diversified and industrialised than Africa’s trade with the rest of the world. In 2014, manufactured goods accounted for 41.9 percent of intra-African exports, compared to only 14.8 percent of Africa’s exports outside the continent.[4] The share of intra-African trade in total African trade was only 15.3 percent in 2015, compared to 46.8 percent in America, 61.3 percent in Asia and 66.2 percent in Europe.[5] Intra-African trade is therefore underexploited. Economic modelling conducted by the Economic Commission for Africa indicates that establishing the CFTA would boost intra-African trade by about 50 percent – with the highest estimated increase for industrial products.[6]

The removal of tariff barriers to intra-African trade will go some distance towards boosting and diversifying intra-African trade, but not the full distance needed to transform African economies. This is well recognised in the BIAT Action Plan, which was designed to address the non-tariff constraints to intra-African trade under seven priority clusters – namely, trade policy, trade facilitation, productive capacity, infrastructure, trade finance, trade information, and factor market integration. Economic infrastructure and productive capacity building – the two sectors attracting the most AfT funds in Africa – are reflected in the BIAT clusters. Indeed, data from the regular monitoring and evaluation exercises carried out in the context of global reviews of AfT has suggested that the priorities of the donors and recipients are well aligned. As Africa moves towards deeper integration with the CFTA, it is important that this link is maintained and enhanced. Intra-African trade should be placed at the centre of AfT cooperation.

Central to enhancing alignment will be to increase the share of regional or multi-country projects. In 2015, the share of regional projects in Africa’s AfT was around 12 percent. While this is relatively high compared to other regions, there is room for improvement. For example, only 3 percent of AfT flows towards transport and storage went to regional projects. On the other hand, African countries have successfully attracted AfT for regional projects in other sectors such as industry (48 percent of funding towards regional projects) and banking and financial services (45 percent).

There is scope for AfT to contribute towards the CFTA process. The negotiations on trade in goods and services are being conducted against a tight December 2017 deadline. In the next phase of the negotiations, investment, intellectual property rights, and competition policy will be covered. The implementation and monitoring of the agreement in the 55 countries will be a challenging exercise. The current share of trade policy support in AfT is very small, and in real terms, this support declined between 2013 and 2015. While the low share of trade policy projects can partly be explained by the lower cost of implementation relative to hard infrastructure for example, there is scope to diversify support towards the urgent CFTA agenda.

Diversification of AfT funding should be considered beyond trade policy support. The other BIAT clusters are closely interlinked and have an important place in AfT cooperation. The BIAT Action Plan could act as a useful framework for ensuring that the projects implemented through AfT in these key areas are geared towards boosting intra-African trade, in view of its strong development impacts. A range of initiatives have already been implemented on the BIAT priority clusters by African countries and their partners.
 

Priority 2: Making aid for trade work for all

SDG 8a calls for increased AfT support for developing countries, in particular least developed countries (LDCs), including through the Enhanced Integrated Framework (EIF) for Trade-related Technical Assistance to LDCs. As presented above, many key recipients of AfT in Africa are non-LDCs. Improved targeting of AfT to LDCs is crucial.

More AfT funds could be channelled through the EIF. The first phase (2008-2015) of the EIF programme provided almost US$204 million in support to LDC beneficiary countries. The recently launched second phase of the programme (2016-2022) has secured US$70 million from contribution agreements so far, but would benefit from scaled commitments in the future. Almost three quarters of EIF funds are directed towards Africa, in areas key to inclusive trade – agribusiness, trade facilitation, plant and post-harvest protection, and pest control and fishery development. The EIF could, however, be better targeted on transformative regional projects, including through support to corridor management institutes, regional economic communities (RECs), and the African Union Commission’s (AUC) programmes such as BIAT. Part of the problem is that EIF has a country focus, mirroring AfT. Increasing the share of regional projects should be a priority for both AfT and the EIF.

The targeting of AfT is particularly poor in the area of trade facilitation, a key area for trade policy support and one of the BIAT priority clusters. Disbursements in this area are largely directed at countries closest to the WTO’s Trade Facilitation Agreement (TFA) targets, as captured by the OECD Trade Facilitation Indicators. Recent assessments indicate that a shift in trade facilitation disbursements towards LDCs and landlocked developing countries (LLDCs) would provide the highest returns for AfT funds.[7] The WTO TFA Facility established in 2014 to support developing and LDC members should be used to encourage a shift of AfT to trade facilitation measures centred on the poorest countries.[8]

AfT must also be better targeted within countries. The SDG aspiration is that no one should be left behind. To achieve this, AfT must be underpinned by a strong focus on vulnerable groups – including women, small-scale farmers, informal cross-border traders, and youth – who are often constrained in participating in welfare-enhancing trade. A good example of using AfT to ensure equitable outcomes was the integration of gender into Uganda’s National Export Strategy. The project, supported by the International Trade Centre (ITC), helped 3,150 women entrepreneurs improve their business and enterprise management skills, supported the formalisation of women-owned businesses, promoted women’s access to regional export markets, and ultimately contributed to increased household income.[9]

Small and medium-sized enterprises (SMEs) are key to channelling trade and growth into employment, poverty reduction, and women’s economic empowerment. It is important that AfT contributes towards improving SMEs’ access to export markets and regional and global value chains. In low income countries, seven out of ten new export relationships developed by SMEs fail within two years.[10] AfT projects seek to address the various competitiveness challenges faced by SMEs, but the trade dimension of SME development is often not adequately captured. Access to affordable trade finance and technical assistance on how to comply with cumbersome rules of origin and public and private standards must receive greater attention. South-South partnerships can play an important role, given the similar challenges faced by SMEs in partner countries.
 

Priority 3: Strengthening human and institutional capacities for effective aid for trade

Ownership is a crucial element of effective AfT. For this, strong institutional structures are needed to ensure the effective design, implementation, and monitoring of AfT projects.

AfT activities cut across several policy areas and sectors. It is therefore crucial that national institutions are supported to build the required capacities to exercise ownership. Weak coordination, governance structures, and technical capacities can undermine the efficiency and effective utilisation of AfT resources. This is particularly important given the current emphasis on results, including the use of impact assessments and greater attention to baselines and indicators. Inadequate capacities to meet these demands may partly explain the low share of AfT directed to LDCs. A larger share of AfT should be targeted at enhancing the human and institutional capacities needed to ensure sound management principles are followed.

The institutional and capacity challenges of regional AfT are even greater. An uneven distribution of the costs and benefits of regional projects, and the varying levels of economic development of programme beneficiaries, can make it difficult to align national priorities with regional programmes. Effective regional AfT requires strong coordination between a wide range of regional actors, as well as shared deliverables and indicators to assess results.

As previously argued, there is scope and reason to increase regional AfT in Africa, particularly in certain sectors. Although AfT is demand-driven, the international community’s appetite for regional AfT could be strengthened through building institutional and human capacities at the regional level and involving regional partners to ensure effective coordination.[11] A strong CFTA institutional structure, centred at the AU, but also building on existing strengths and structures of the RECs, would help ensure the effective coordination needed to advance regional AfT efforts. The RECs and other regional agencies, such as corridor management institutions, have already been successful in attracting AfT and aligning their activities to national development plans. AfT support should be scaled up to further support this.
 

Conclusion

AfT flows to African countries continue to be an important source of support for development. The recent trends suggest that the distribution of AfT across priority areas, partners, and countries in the region has remained relatively unchanged in recent years. The key areas of support, economic infrastructure and projects aimed at building productive capacity, can meaningfully contribute to Africa’s structural transformation.

While Africa is one of the main recipients of AfT funds, the targeting of these funds could be improved. Aligning AfT closer to continental frameworks such as the CFTA and BIAT Action Plan would allow African countries and development partners to better capture the transformative potential of intra-African trade. Furthermore, benefits must be felt by all for trade to act as an effective tool for development. To ensure inclusive gains, LDCs and LLDCs should receive a greater share of AfT. At a national level, vulnerable groups and SMEs must also be better supported through AfT. Intra-African trade can offer considerable opportunities to small-scale businesses due to the proximity of markets and lower barriers of entry relative to global markets. Actions taken to boost intra-African trade could therefore benefit smaller operators disproportionately, contributing to reducing inequality and delivering on Agenda 2063 and the SDGs. Finally, regional programmes should receive more attention. In addition to technical projects, AfT should strengthen regional institutions to ensure strong collaboration and effective delivery of AfT.
 

Authors: Lily Sommer, Trade Policy Fellow, African Trade Policy Centre, United Nations Economic Commission for Africa. Heini Suominen, Economic Affairs Officer, African Trade Policy Centre, United Nations Economic Commission for Africa. David Luke, Coordinator, African Trade Policy Centre, United Nations Economic Commission for Africa.


[1] All figures are in constant US$ (2015). Data relating to official development assistance and AfT has been drawn from the OECD-Creditor Reporting System Database, consulted in May 2017. A more extensive description of the trends will be available in the regional report prepared by the Economic Commission for Africa (in collaboration with WTO) for the Sixth Global Review of Aid for Trade.

[2] 23 percent of all AfT.

[3] Economic Commission for Africa (ECA). Economic Report on Africa 2017: Urbanization and Industrialisation for Africa’s transformation. ECA: Addis Ababa, 2017.

[4] Economic Commission for Africa (ECA). Smart industrialization through trade in the context of Africa’s transformation. ECA: Addis Ababa, forthcoming.

[5] ECA calculations using UNCTADStat data.

[6] Economic Commission for Africa (ECA). Assessing Regional Integration in Africa V: Towards an African Continental Free Trade Area. ECA: Addis Ababa, 2012.

[7] de Melo, Jaime, and Laurent Wagner. How the Trade Facilitation Agreement can Help Reduce Trade Costs for LDCs. E15 Expert Group on Trade, Finance and Development. Geneva: International Centre for Trade and Sustainable Development and World Economic Forum, 2016.

[8] Sommer, Lily, and David Luke. “Priority Trade Policy Actions to Support the 2030 Agenda and Transform African Livelihoods. Geneva: International Centre for Trade and Sustainable Development, 2016.

[9] International Trade Centre (ITC). “Case Story on Gender Dimension of Aid for Trade: Integrating Gender into the National Export Strategy – A Case for Uganda.” Geneva: ITC, 2010.

[10] International Trade Centre (ITC) and World Trade Organization (WTO). “SME Competitiveness and Aid for Trade: Connecting Developing Country SMEs to Global Value Chains.” Geneva: ITC and WTO, 2014.

[11] Lammersen, Frans. “Aid for Trade 10 Years On—What’s Next?” E15 Expert Group on Trade, Finance, and Development. Geneva: International Centre for Trade and Sustainable Development and World Economic Forum, 2015.

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