Aid for Trade: Connecting to Value Chains

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Today’s post is from OECD Secretary-General Angel Gurría

Since the Aid-for-Trade Initiative was launched in 2005, much has changed in the trade and development landscape. The Initiative continues to mobilise a range of actors, adapt to new realities, and succeed in building trade capacities for shared prosperity.

Increasingly, the global economy is characterised by geographically fragmented production. This creates networks of interlocking value chains where different stages of production take place in different regions, countries or even continents.  The emergence of these value chains creates an enormous growth opportunity for developed and developing countries alike. They allow countries to maximise competitive advantages and optimise resources. They also allow firms and economies to use intermediate goods and services to focus on, and be competitive in, one “link” of the value chain without having to develop a whole industry.

Motivated by the success of a number of emerging-market economies, developing countries are aiming to become more integrated into international production networks, or what we call Global Value Chains (GVCs). But despite their advantages in terms of competitive labour costs and abundance in natural resources, developing countries are disadvantaged in other aspects. High trade and transport costs, excessive red tape, poor infrastructure, credit constraints, skills shortages and challeneging business environments all serve to undermine competitiveness. Firms in developing countries require support and governments need assistance to overcome these supply-side constraints.

Judging by their national development strategies, many developing countries recognise the potential promised by emerging value chains. But they require assistance to train trade negotiators, build trade-related infrastructure, and improve the business environment to take full advantage. Increasingly, this is being recognised, leading partner countries to mainstream trade in their development strategies and give a higher priority to trade-capacity building in their dialogues with donors.

In Aid for Trade at a Glance 2013, the OECD and WTO demonstrate how aid for trade can play an important role in connecting developing countries to value chains. Three quarters of the 700 firms which contributed to the 2013 OECD-WTO monitoring survey were from developing countries. Their responses give us a good picture of the constraints facing companies and are presented in sector studies for agrifood, textiles, transport and logistics, information and communication technology and tourism.. These studies found that development assistance plays a crucial role in facilitating new trading opportunities by helping firms and producers raise the quality of their products to international standards and access market information. Development assistance can also improve firms’ competitiveness by reducing tariff and non-tariff barriers and bringing down the cost of essential services required to export, such as credit, insurance and transport.

Data from the OECD-DAC Creditor Reporting System tells us that $174 billion in aid for trade has been disbursed since 2006, while annual commitments reached $41.5 billion in 2011, 57% above the 2002-05 average baseline. Complementing these efforts, providers of South-South co-operation such as India and China have scaled up their own contributions.  Furthermore, aid for private sector development programmes has continued to grow and amounted to $18 billion in 2011.

Through successive rounds of monitoring aid for trade, the OECD and WTO have collected abundant evidence that these sums are well spent and result in lower trade costs and improved trade performance. For instance, our analysis found that $1 in aid-for-trade increases exports from the poorest countries by $20 and $8 for richer developing countries. These findings are even higher for exports of parts and components, underscoring the benefits that value chains offer to developing countries.

These results are substantiated by the 269 aid-for-trade case stories published in Aid for Trade in Action that were submitted in the context of the last Global Review. The stories probe more deeply into the objectives, challenges and processes of trade-related assistance to better understand what works in the provision of aid for trade, what the key ingredients of success were, and what governments and practitioners could learn from experience.

Success was reported for programmes in trade expansion, improved infrastructure, new linkages to value chains, employment creation, mobilisation of foreign and domestic investment, gender empowerment, and poverty reduction. The analysis concludes that aid for trade works best when it is focused on improving infrastructure, facilitating trade, and supporting the private sector. Such programmes are especially effective when developing countries have a supportive business environment, including stable macroeconomic policies and an investment climate that encourages private investments.

While these findings are encouraging, there remains a need to strengthen the management of limited aid resources to ensure that trade objectives are being met. The OECD has produced Aid for Trade and Development Results – A Management Framework based on national monitoring frameworks in Bangladesh, Colombia, Ghana, Rwanda, the Solomon Islands and Vietnam. The Framework provides a tool to help design frameworks for results-based management of aid for trade and is based on a menu of trade-related targets, as well as indicators to measure their performance. This provides a powerful system to ensure that aid for trade contributes to meeting ambitious development objectives, where links between inputs, outputs, outcomes and impacts depend on many factors beyond programme reach.

Aid for trade works. It is making a difference, has mobilised regional and national efforts and has proved to be a good investment. We must maintain momentum, continue to show results, and demonstrate that aid for trade helps to connect developing countries to value chains.

OECD’s Frans Lammersen discusses Aid for Trade with journalist Larry Speer


Useful Links

Interconnected Economies: Benefiting from Global Value Chains