Aid for trade: $100 billion well spent

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Today’s post comes from Frans Lammersen of the OECD Development Co-operation Directorate

Evidence from a numerous countries, including Korea, Brazil and China, shows that openness to trade is a key ingredient for economic success and improved living standards. By connecting local producers to domestic, regional and global markets, trade helps to fight poverty and enhance the productive capacity of the whole economy. It facilitates the availability of technology, know-how and other services. It helps to make goods cheaper and more widely available. It also weakens the grip of local monopolies. 

But simply opening the economy to international trade is not enough. A trade strategy requires investment in human capital (education, health and nutrition) and rural infrastructure, provision of access to credit, and safety nets and policies to promote economic and political stability. Aid for Trade plays a key role by helping countries strengthen their productive and institutional capacity.

What does this mean in practical terms?

Some African countries, for example, have lower production costs at the factory gate than China, yet they have a very low share of value exports such as clothing. Why? Because in the fashion business, if the clothes are late getting to the shops they don’t sell. Reliable shipments are just as important as low costs.

Better transport infrastructures would help African suppliers expand their sales, as would less complicated administrative procedures. In East Africa, an aid-for-trade programme has helped cut transit times at the border from three days to three hours. The same impressive results were achieved in Central America.

On another front, international trade is governed by a complex set of rules. Countries and firms need considerable knowledge to defend their interests in international negotiations and business deals. Aid-for-trade guidance is helping countries to identify these interests, and to negotiate trade agreements and implement them. 

Aid-for-trade initiatives are also helping to improve local food standards. For developing countries hoping to export, non-tariff barriers – such as the OECD countries’ food safety standards – can be more of an obstacle than import duties and developing country food exporters often find it difficult to conform. Options such as setting up accredited laboratories and training food safety inspectors help local producers sell their products in OECD supermarkets.

Knowledge about distant markets and consumers is often scant among small- and medium-size enterprises in developing countries. By collecting and disseminating this kind of marketing information, aid-for-trade efforts are allowing local producers to become part of global value chains. 

An aid-for-trade focus also allowed a resource-poor small island like Cape Verde make significant social and economic progress, enabling it to become more competitive and graduate from its status as a least developed country.

The OECD and the WTO periodically put a spotlight on aid for trade to examine the results of the almost $100 billion that has been spent between 2006 and 2009. The joint OECD-WTO publication Aid for Trade at a Glance 2011 shows that their Aid for Trade Initiative has achieved considerable progress in a short time.

The publication points to a number of  factors that are critical to delivering the longer-term trade and development objectives: ownership at the highest political level; active engagement of the private sector and civil society; long-term donor commitment;  adequate and reliable funding; leveraging partnerships, including with providers of South–South co-operation; combining public and private investment with technical assistance; supportive macroeconomic and structural adjustment policies; and good governance.

 This is merely the start of a learning process. The OECD publication Strengthening Accountability in Aid for Trade outlines good practice in using aid to achieve trade and development results.  But the challenges of delivering aid for trade effectively are not unique.  Many more follow-up activities are needed to enhance our understanding of aid-for-trade results and their wider applicability. Knowledge-sharing should also look at how to clearly demonstrate that aid for trade is a worthwhile investment that can improve trade performance, generate economic growth and reduce poverty.

Aid for trade is part and parcel of the broader development effectiveness agenda that will be discussed at the Fourth High Level Forum on Aid Effectiveness in Busan, South Korea (29 November to 1 December 2011). Aid for trade offers an example of what can be achieved by applying the Paris Principles on Aid Effectiveness, but also of what remains to be done.

Useful links

OECD work on trade

OECD Insights: International Trade

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