How Can Aid for Trade Help Advance the Sustainable Development Goals?

10 July 2017

The 2030 Agenda for Sustainable Development calls for increasing aid-for-trade support for developing countries, in particular least developed countries. How can this type of funding be fully leveraged in the implementation of the Sustainable Development Goals?


Meeting at a special Summit at the United Nations in September 2015, world leaders committed to an ambitious global agenda, entitled Transforming our World: The 2030 Agenda for Sustainable Development. The agenda is a plan of action for people, planet, prosperity, peace and partnership, with the Sustainable Development Goals (SDGs) at its core. There is no specific trade goal in the SDGs, although some 20 targets in different SDGs relate directly to international trade, while many more of the 149 other targets depend on an open, rules-based trading system for their achievement. These trade-related targets follow two main tracks: one addressing the institutional framework, i.e. the multilateral trade rules under the World Trade Organization (WTO), and the other dealing with trade in its functional form, i.e. trading goods and services across borders. Both tracks recognise international trade as a key transmitter of goods and services, technology, knowledge, and behaviour and, thus, an enabler for realising the SDGs.

Successive rounds of multilateral trade liberalisation, increasing numbers of preferential market access schemes and regional free trade agreements, as well as expanding South-South trade have already created many trading opportunities for developing countries. But too many firms in developing economies are priced out of international markets because of the high trade costs they face. These are caused by obsolete or ill-adapted infrastructure, limited access to finance, cumbersome and time-consuming border procedures, and the need to meet an ever-broader array of public and private standards. Exploiting the full potential of trade requires that developing countries prioritise market access issues in their development strategies. In addition, some of them, and least developed countries in particular, may need technical and financial assistance to connect to and compete in international markets, and make trade a tool for poverty reduction for women and men. This is the core objective of the Aid for Trade Initiative launched in 2006.
 

Promoting sustainable economic growth

Aid for trade is explicitly included in SDG 8, which aims at promoting sustained, inclusive and sustainable economic growth, full and productive employment, and decent work for all. Target 8.a calls to “increase aid-for-trade support for developing countries, in particular least developed countries, including through the Enhanced Integrated Framework.” This is in line with the Addis Ababa Action Agenda adopted at the Third International Conference on Financing for Development, which emphasises that “Aid for Trade can play a major role” and underlines that it is important “to allocate an increasing proportion going to least developed countries, provided according to development cooperation effectiveness principles.”

A key lesson from the Millennium Development Goals (MDGs) is that sustained change cannot be achieved through one-dimensional or single-sector goals. The SDGs, with their broader focus, require a response which incorporates multidimensionality into policy design. This involves identifying complementarities, trade-offs, and unintended consequences of policy choices to improve and better target policy advice. It also involves a more sophisticated approach to policy design which recognises that systemic spillovers can be beneficial as well as damaging. The compartmentalised approach that has limited the effectiveness of both aid and trade policies thus needs to be replaced by collaboration and coherence in solving integrated problems.

The development community has long recognised that the vicious circle of underdevelopment –in which high population growth, poverty, malnutrition, illiteracy, and environmental degradation are linked – can only be broken through comprehensive and broadly-supported policies. Such policies should integrate the objectives of promoting economic growth; enabling broad participation in the production processes; sharing the benefits of economic activity more equitably; and ensuring environmental sustainability. Thus, while aid for trade should continue to contribute to the economic objectives of developing countries by expanding trade, it should at the same time pay particular attention to achieving social objectives by reducing poverty and inequalities as well as environmental objectives such as climate mitigation and adaptation. In addition, aid for trade should help developing countries build resilience and adjust to shocks that can cascade through international markets.

Aid for trade support for the SDGs
 
The contribution of aid for trade

There is now abundant evidence to suggest that aid for trade helps to boost economic growth and, depending on its pace and distribution pattern, reduces poverty. But trade liberalisation is not the magic wand by which developing countries are guaranteed economic prosperity. Whilst trade generates growth, turning market access opportunities into trade flows depends critically on having the soft and hard infrastructure in place for connecting a vibrant private sector to markets[1]. This is what aid for trade tries to do.

Since the start of the initiative aid-for-trade commitments have more than doubled and now stand at US$54 billion a year, with cumulative disbursements reaching almost US$300 billion. More than three quarters of total disbursements have financed projects in four sectors: transport and storage (28.6 percent), energy generation and supply (21.6 percent), agriculture (18.3 percent), and banking and financial services (11.1 percent). In addition, US$245 billion in other official flows (OOF) was also spent on improving the trade capacities of developing countries: US$117 billion to finance economic infrastructure programmes; US$63 billion for transport and storage projects, and US$52 billion for energy projects (figures 1 and 2).[2]


Figure 1: Aid-for-trade commitments and disbursements by category

Aid-for-trade commitments and disbursements by category 


Figure 2: Trade-related OOF commitments and disbursements by category

Trade-related OOF commitments and disbursements by category

Source: OECD-DAC CRS, aid activity database (2017)


The way forward: engaging the private sector and…

The vision underpinning the 2030 Agenda for Sustainable Development is broad and ambitious. The Third International Conference on Financing for Development and the Addis Ababa Action Agenda stressed the need for a significant additional development finance contribution from the private sector. The pivotal role of the private sector has always been recognised in the Aid for Trade Initiative, and since 2006, considerable progress in engaging the private sector has already been made.

A new generation of programmes is emerging, involving donors, partner countries, and private firms both in developing and donor countries. Some of these programmes focus on human capacity building. Others are focused on transfers of technology, know-how, and efforts to improve the business environment, such as access to finance for suppliers. The results of these trade-related capacity building programmes driven by the private sector have been judged as largely positive: they have helped firms develop new products, increase their exports, and save costs. In addition, the results are aligned with the objectives of the development community, such as enhanced workers’ skills, better working conditions, job creation, poverty alleviation, and improved environmental performance.

Strengthening private sector engagement could be further achieved by creating shared multi-stakeholder value and building platforms for project-based collaboration. Such reinforced partnerships could be forged by scaling up and systematically including the private sector in the four different stages of the project life cycle. In the first place, the views of the private sector could be solicited to provide information about obstacles to be removed or incentives to be improved. Second, private sector actors could share the best practices they have observed in other donor programmes or in programmes they have implemented themselves. Third, governments, donors, and private companies could join forces to scale up their actions and maximise the impact. Finally, the private sector could provide evidence of success or failure.
 

…using regional approaches

Given the relatively small market size in many developing countries, it is clear that sustained economic growth depends in part on creating larger, more viable markets. Deepening economic integration via regional cooperation has thus emerged as a key priority in the reform strategies of many developing economies, particularly in Africa. Regional aid for trade is contributing to this integration process and around US$45 billion has been disbursed to support this type of programmes since the start of the initiative.

However, as underlined in some previous OECD work, regional aid for trade is hampered by many practical complications, from technical standards to financing issues, while negotiations can be bogged down by poor inter-governmental communications and sometimes by a lack of trust across negotiating parties.[2] Moreover, implementing regional strategies is complicated by problems such as overlapping memberships in regional organisations; lack of implementation of regional agreements; poor articulation of regional priorities within national strategies; and national and regional capacity constraints. This creates major challenges in terms of ownership, as well as in mainstreaming and aligning national strategies around regional aid-for-trade priorities.

New approaches have emerged, including multi-donor programmes or regional initiatives based around trade and transport corridors and hubs, with active outreach to public and private investors. In addition, challenges surrounding regional programmes can be tackled through the following strategies: involving an “honest broker”, such as regional development banks, which offer institutional mechanisms to better coordinate regional and sub-regional programmes among countries; offering financial incentives such as a higher concessionality level in financing regional programmes than for purely national programmes; building institutional and human capacities to respond to a wide variety of technical assistance needs covering a range of disciplines, including trade policy, customs, transport, and enterprise development; and harmonising regulations, which constitutes both a challenge and an opportunity to boost regional integration.

In conclusion, the substantial achievements of the Aid for Trade Initiative could be further strengthened through engaging the private sector and focusing more on regional programmes. These two priorities could go a long way in strengthening the role of trade as tool to deliver on the 2030 Agenda for Sustainable Development.
 

This article is adapted from a longer study published by the OECD. The author would like to thank Frans Lammersen and William Hynes for their substantial contribution to this article.

Author: Jorge Moreira da Silva, Director, OECD Development Co-operation Directorate


[1] On aid for trade's potential in terms of inclusivity through digital connectivity, see Moreira da Silva, Jorge. "Aid for Trade’s 2.0 upgrade." OECD Insights. http://oecdinsights.org/2017/07/12/aid-for-trade-upgrade/

[2] Other official flows (OOF) are transactions that do not meet the conditions for official development assistance (ODA) eligibility, either because they are not primarily aimed at development or because they have a grant element of less than 25 percent.

[3] Lammersen, Frans, and William Hynes. “Aid for Trade and the Sustainable Development Agenda: Strengthening Synergies.” OECD Development Policy Papers No. 5. September 2016.

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