What is next for the Aid for Trade initiative?

26 October 2015

Ten years ago, Pascal Lamy lamented the absence of a magic wand to conclude the Doha Development Agenda. Nonetheless, the launch of the Aid for Trade (AFT) initiative at the Hong Kong WTO Ministerial Conference was magic. Ten years on, what is next for the AFT initiative?  The WTO Ministerial Conference in Nairobi offers an excellent opportunity to agree on how AFT can best contribute to the delivery of the Sustainable Development Goals (SDGs).

The WTO Global Review of Aid for Trade and the accompanying joint OECD/WTO Aid for Trade at a Glance reports have shown that the initiative has raised awareness about the positive role that trade can play in promoting economic growth and development. Moreover, developing countries, notably the least developed with the help of the Enhance Integrated Framework, are getting much better at articulating, mainstreaming, and communicating their trade-related objectives and strategies. This, in turn, has resulted in donors aligning their financial support with cumulative AFT disbursements reaching a total of US$245 billion and an additional US$190 billion in other official flows since the start of the initiative in 2006.

Figure 1. Total Aid for trade Disbursements (2006-13)

Total Aid for trade Disbursements (2006-13)
Source: OECD/DAC CRS aid activity data base

 

Figure 2. Total Trade-related Other Official Flows (2006-13)

Total Trade-related Other Official Flows (2006-13)
Source: OECD/DAC CRS aid activity data base

 

Most of this aid is effective at both the micro and macro level according to economic literature. Moreover, OECD research found that one dollar invested in AFT leads to nearly 8 additional dollars in exports from all developing countries – and 20 dollars for the poorest countries. Results, however, vary considerably depending on the type of AFT intervention, the sector at which the support is directed, the income level, and the geographic region of the recipient country.

AFT case stories buttress this evidence. The sheer quantity of activities illustrated in these case stories suggest that AFT is becoming central to development strategies and has taken root across a wide spectrum of countries. Although not always easy to attribute cause and effect, the stories show tangible evidence of how AFT is helping countries build the human, institutional, and infrastructural capacities for turning trade opportunities into trade flows offering men and women a more decent living.

How can we further strengthen AFT?

Building capacity for trade is an ongoing process. The continued need for AFT is obvious; tackling trade-related binding constraints requires persistent efforts in a globalised world where connectivity is essential for economic success.

The role of the private sector in this process is pivotal. Although much progress has already been made, further engagement could be strengthened by creating shared multi-stakeholder value and by scaling up and systematically including the private sector in the different stages of the AFT project cycle.

South-south providers are significant sources of trade-related assistance in Asia, Latin America, and especially in Africa. Although some of these providers are transparent about their support, increased comparability and cooperation with Development Assistance Committee (DAC) donors would help reduce capacity constraints and facilitate coordination at the local level.

Regional programmes could result in a bigger bang for the buck. Deepening economic integration via regional cooperation is a key priority in the reform strategies of most developing economies. These programmes can be made more effective by involving an honest broker, such as a Regional Development Bank; offering financial incentives, such as higher grant elements; building human and institutional capacities; and harmonising regulations.

New forms of aid delivery such as payments for performance might further help achieve better results. Increasing the focus of the AFT initiative on quantifiable targets for improving connectivity and reducing trade costs would allow for the introduction of more results-focused approaches, such as budget support.

Prioritising improving connectivity through the reduction of trade costs would provide an operational focal point for action among a broad coalition of stakeholders, including the providers of South-south cooperation and the private sector. The advantages of such targets are that they are neutral; they would benefit not only exporters but importers and households as well.

Sustainable development

Expanding the initiative to include sustainable investment would acknowledge changing production patterns and the concomitant increased trade and investment links. The initial emphasis could be on trade in services, with a focus on those sectors that are central to promoting sustainable development. This could tackle a range of issues such as transparency and attract donor support for capacity building.

AFT could play a catalytic role in promoting green growth by supporting sustainable agriculture, building climate-resilient infrastructure, and strengthening the supply chains of low-carbon technologies and environmental goods and services. The consistent application of environmental impact assessments should safeguard against possible negative environmental impacts of AFT projects.

As stated in the Addis Ababa Action Agenda “aid for trade can play a major [role in] (…) the promotion of sustainable development”. The SDGs highlight that “(…) increasing aid-for-trade support for developing countries, in particular least developed countries (…)” would help to “(…) promote sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all.”

In response to the changing nature of the world economy, particularly its rising complexity and shifting patterns of trade and investment flows, new approaches are required to better understand the trade-offs and complementarities between different policy objectives and deal with these interlinkages. In the face of the sluggish trade growth since the 2000s, there is still considerable scope to enhance the international division of labour by further integrating countries that have heretofore remained marginally engaged in trade in general and in regional and global value chains in particular.

The Nairobi WTO Ministerial Conference can contribute to these efforts by agreeing to focus the AFT initiative on improving connectivity, boosting sustainable investment, promoting green growth, and, thus, contribute to the delivery of the SDGs.

Frans Lammersen is a member of the E15 Expert Group on Finance and Development. He is Principal Administrator at the Organisation for Economic Co-operation and Development (OECD).

This commentary is based on Aid for Trade 10 Years On – What’s Next?, originally written for the E15Initiative.