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AID for TRADE: BUILDING PRODUCTIVE and TRADE CAPACITIES in Ldcs by José Antonio Alonso

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AID for TRADE: BUILDING PRODUCTIVE and TRADE CAPACITIES in Ldcs by José Antonio Alonso United Nations CDP Policy Review No. 1 CDP Committee for Development Policy October 2016 CDP Policy Review Series AID FOR TRADE: BUILDING PRODUCTIVE AND TRADE CAPACITIES IN LDCs by José Antonio Alonso The CDP Policy Review Series is a collection of research outputs prepared by members of the Committee for Development Policy and its Secretariat. The publications focus on sus- tainable development policy issues dealt with by the CDP in its discussions for preparing its reports to ECOSOC. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the CDP nor the United Nations Secretariat. The designa- tions and terminology employed may not conform to United Nations practice and do not imply the expression of any opinion whatsoever on the part of the Organization. 1 CDP POLICY REVIEW NO. 1 1 Origin and purpose that trade can be a powerful engine for en- hancing economic development (Winters et al., 2004; Wacziarg and Welch, 2008)), but The origin of Aid for Trade (AfT) is relatively recent: that evidence is also consistent with the claim it was formalized at the Hong Kong Ministerial Con- that poor countries have not benefited in an ference, in 2005. In article 57 the Declaration called equitable way from globalization (Brun et al., for support for developing countries, particularly 2005) LDCs, to expand their trade capacity and to allow them to benefit from the various multilateral trade • Secondly, as direct border restrictions (such as agreements. In 2005, the WTO created a Task Force tariffs) have fallen in recent decades, integra- for developing this initiative whose final report was tion in the world economy increasingly de- presented in 2006. The Task Force stated that: “Aid pends on whether countries can reduce “be- for Trade is about assisting developing countries to in- hind the border” and “at the border” barriers crease exports of goods and services, to integrate into (including infrastructure and administrative the multilateral trading system”. procedures, as well as on building productive and competitive capacities). The AfT was created in the context of the Doha Round • Thirdly, Least Developed Countries (LDCs) process, but the lack of progress made in the Doha and some other low-income countries suffer Round has meant that AfT has become increasingly from a lack of capacity to integrate and com- disconnected from its genesis. Now it is an autono- pete in global markets (in terms of informa- mous component of development cooperation policy tion, policies, procedures, institutions and in which the WTO and the OECD are involved. As infrastructure). a consequence of the agreement on trade facilitation reached in the Ministerial Conference held in Bali in In short, the creation of AfT is an implicit acknowl- 2013, the AfT has gotten new impetus. edgement that, in the absence of sufficient supply-side investment and complementary policies, trade liber- The purpose of the AfT initiative is to provide support alization on its own is unlikely to benefit poor people (through ODA and other official funds) to develop- and poor countries. Additionally, AfT assumes that ing countries to help them develop their capacity to those countries whose preferences have been eroded trade. The objectives are for countries to reduce trade by the process of trade liberalization (particularly, costs, improve rules and administrative procedures, through Free Trade Agreements) need compensation build infrastructure and enhance the productivity of through adjustment measures. In terms of interna- their companies. There may be other initiatives and tional aid policy, AfT confirms the need for a shift mechanisms aimed at the same purpose (such as the in ODA allocation priorities to give more relevance EC Trade Related Assistance or the Enhanced Inte- to economic sectors than previously and to rebalance grated Framework for trade-related technical assis- social and economic aid purposes. Finally, AfT can be tance to LDCs), but this initiative was designed to also considered as a potential mechanism that com- address the trade-related problems facing developing pensates the adverse effect of ODA on recipient coun- countries through “visible, unconditional, coordinat- tries’ competitiveness (the “Dutch disease” generated ed and predictable” funding. by inflows of aid, Rajan and Subramanian, 2011). Helping developing countries to benefit from open It is important to underline the fact that AfT is not global markets should be an important component of a new development fund nor a new aid category, but strategy to promote development and reduce poverty. rather a way to put various aid components into a Of all the assumptions underpinning the initiative, single framework. In fact, AfT is supplied through three seem particularly relevant: existing country-based allocation mechanisms from bilateral donors and multilateral agencies. Some con- • Firstly, empirical literature has demonstrated sider this to be the correct approach since it is a way AID FOR TRADE: BUILDING PRODUCTIVE AND TRADE CAPACITIES IN LDCS 2 to focus official funds towards economic and trans- others argue this is an advantage because it is a way formative purposes in recipient countries without to include some projects as AfT that do not seem to creating new structures and bureaucracies; however, be related to trade but which really have an impor- others believe this to be just a reclassification of aid tant impact on trade (particularly through non-tariff flows with limited added value. barriers, for example, some health regulations). The DAC identifies five types of activities to AfT that In order to overcome this problem a narrower con- are linked to one or more specific codes in the Cred- cept has been defined named Trade-Related Assis- itor Reporting System through which donors report tance (TRA) that includes only those AfT compo- on all their ODA (Box 1). In general terms, ODA nents with clearer trade-related purposes. To make is considered as AfT when projects and programs operational this criterion a trade development mark- “have been identified as trade-related development er was defined by the DAC and applied to some AfT priorities in the recipient country’s national strate- activities (again Box 1). Even though this procedure gies”. This is a very vague definition of AfT’s remit, may be an improvement, a lot of ambiguities remain which is the subject of controversy: critics consider in the way donors identify and register these com- that with this criterion, almost all economic com- ponents. ponents of ODA could be deemed part of AfT; and Box1: AfT categories The DAC identifies five types of activities to AfT: • Technical assistance for trade policy and regulations (e.g. helping countries to develop trade strategies, negotiate trade agreements, and implement their outcomes) • Trade-related infrastructure (e.g. building roads, storage, ports, and telecommunications net- works) • Building productive capacity, including trade development (e.g. supporting the private sector to exploit its comparative advantages and to diversify exports) • Trade-related adjustment (e.g. helping developing countries with the costs associated with trade liberalization: for example reduced tax collection); and • Other trade-related needs (if identified as trade-related development priorities in partner coun- tries’ national development strategies). On the other hand, TRA is composed of three categories: i) trade policy and regulation; ii) trade de- velopment, a sub-category of “building productive capacity”; and iii) other trade-related needs. The trade development category is defined through the application of a “marker” to activities recorded in the “building productive capacities” category. The trade development marker is applied when the initiative is designed to enable the recipient country to: i) formulate and implement a trade devel- opment strategy and create an enabling environment for trade; ii) stimulate the trade of domestic firms and encourage. Investment in trade-oriented industries. Source: DAC (OECD) (2007) 3 CDP POLICY REVIEW NO. 1 2 Resources allocation In regional terms, most AfT resources during the pe- riod 2006-2013 were assigned to Asia and Africa (41 % and 38%, respectively). Both Latin America and ODA resources channeled as AfT have increased in Europe receive a similar share, around 9% of the to- the last decade, from 23 billion dollars in 2006/08, tal. If we look at country income levels, most AfT when the initiative was created, to more than 41 bil- went to MICs: 44% to lower middle-income coun- lion, in 2013; the share of these resources as a propor- tries and 22% to upper middle-income countries. tion of total allocated ODA has also increased from 1 LDCs absorbed 31% of ODA-registered AfT. The 28% to 35% . Therefore, both the amount of resourc- share targeted at MICs is even higher (close to 96% es mobilized and the relative ratio of these resources 2 of total resources) when we take into account Other on ODA have increased . Even so, the fact that there Official Flows instead of ODA (that is, those official is not visible change in the 2002-2013 trend of AfT flows with low levels of concessionality). would support the opinion that the launch of this ini- tiative (in 2006) has not implied a substantive mod- Even though the DAC defines five categories, the ification in the pattern of disbursements followed by bulk of AfT resources falls into two categories. Thus, most of donors (figure 1). economic infrastructure absorbs 53% of 2006-2013 disbursements, and building productive capacity con- centrates 43% of those funds (figure 2). The share of 1 This data refers to net disbursements; in terms of commit- trade policy and regulations was significantly lower, ments the volume of resources is larger. at no more than 3% of the total; and trade-related 2 The trend of this share would be flat if we consider the weight of AfT on total (allocable and not allocable) ODA.
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