Aid for Trade: Helping to end poverty and realise sustainable development

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

One dollar in aid for trade generates eight dollars in extra trade for all developing countries and 20 dollars for low-income countries according to OECD calculations. These are impressive returns on investment. But these numbers do not tell the uplifting stories about the lives of men and women that have been bettered by Aid for Trade programmes, the employment generated because of trade creation and diversification, or the additional domestic and foreign investment that countries attracted.

What these stories also show is that removing the obstacles to trade and reducing trade costs allows firms in low-income countries to link up to Global Value Chains (GVCs). On the one hand, the fragmentation of production has created new opportunities for SMEs to enter global markets as components or services suppliers, without having to build a product’s entire value chain. On the other hand, SMEs participation and upgrading in GVCs is far from automatic. Opportunities for SMEs are large, but so are the barriers they must overcome.

The fifth Global Review of Aid for Trade takes place at a watershed moment. Before the end of the year we need to define and agree on the post-2015 development agenda. The scope and ambition of the emerging Sustainable Development Goals (SDGs) offer a unique opportunity for ending poverty, protecting our environment, and realising sustainable development for all.

Trade costs matter for development

International trade is an important enabler to achieve the SDGs, but high trade costs prevent a large number of developing countries from fully exploiting the opportunities that the global market offers. Consequently, they fall short of realising the employment, development and growth potential from trade.

The joint OECD/WTO report Aid for Trade at a Glance 2015 presented today at the Global Review of Aid for Trade clearly shows that while producers in low-income countries are often competitive at the farm and factory gate, they are priced out of the international market because of cumbersome border procedures, poor infrastructure, lack of finance and complex standards. High trade costs have detrimental effects on comparative advantage, especially for small and medium-sized enterprises in general and those in low-income developing countries in particular.

Facilitating trade

The WTO Trade Facilitation Agreement creates a significant opportunity to reduce trade costs and enhance participation in the global value chains that increasingly characterise international trade today. Improvements in trade facilitation is one of the policy areas with the highest estimated impact on foreign input sourcing decisions.

We calculated that the implementation of the Trade Facilitation Agreement (TFA) could reduce worldwide trade costs by between 12.5% and 17.5%. And for those that do more, the benefits are even greater: countries which implement the TFA in full will reduce their trade costs by between 1.4 and 3.9 percentage points more than those that do only the minimum that the TFA requires. The opportunities for the biggest cost reductions are greatest for low and lower middle-income countries.

What is needed now is the ratification of the Agreement to ensure that these potential benefits become a reality. The OECD has put in place a tool that allows countries to monitor and benchmark their trade facilitation performance, prioritise areas for action and mobilise technical assistance and capacity building in a targeted way.

Development finance for building trade capacities

Furthermore, substantial resources are available to assist countries implement the TFA. Donors that report to the OECD have already disbursed some $1.9 billion in Aid for trade facilitation since 2005. Commitments now stand at $668 million, an eight-fold increase in donor support. According to an OECD/WTO survey, even more is support is forthcoming. At today’s meeting the OECD will present more country-specific data on the benefits of Trade Facilitation as well as on transparency of donor support.

More generally, since the start of the Initiative, donors have disbursed $264.5 billion for financing Aid for Trade programmes, with commitments doubling and now standing at $55 billion. In addition, $190 billion in trade-related other official flows was disbursed. Furthermore, providers of South-South trade-related support are also helping developing countries reduce high trade costs.

Joining forces to achieve more

Designing effective solutions for cutting trade costs requires close collaboration between the public and the private sector, including to identify the most distorting trade costs, how best to reduce them, and how to use the different development finance instruments offered by a wide range of providers effectively.

Reducing trade costs for inclusive, sustainable growth is an agenda where the private sector has much to offer and the development community much to learn. Collaboration between the public and the private sector in developed and developing countries will maximise the contribution of trade in delivering the sustainable development outcomes that are envisaged in the emerging SDGs.

Well-designed Aid for Trade interventions can be effective in reducing trade costs in areas that partner countries and donors prioritise, such as infrastructure, trade facilitation and non-tariff measures like product standards. Furthermore, this need not contradict overarching green growth objectives; on the contrary aid for trade may actually promote these objectives.

Developing countries and their partners are taking the reduction of trade costs seriously. Action in this area builds on solid practical and theoretical foundations and, most importantly, will help achieve the proposed SDGs.

Download the 30 page pocket edition of Aid for Trade at a Glance 2015: Reducing Trade Costs for Inclusive, Sustainable Growth.

OECD work on Aid for Trade

Visualise well-being and win a trip to Mexico!

BLI InitiativeWikiprogress is running an infographic and data visualisation contest, with the prize of a paid trip to Guadalajara, Mexico to attend the 5th OECD World Forum on the 13-15 October 2015 for the top 3 winning entries. The winners will be awarded with a certificate of recognition during a special session of the Forum. The competition is open to all individuals, both amateurs and professionals. We especially would like to encourage the participation of young people and one of the prizes will be reserved for entries from under 26-year olds.

The aim of the contest is to encourage participants to use well-being measurement in innovative ways to show how data on well-being give a more meaningful picture of the progress of societies than more traditional growth-oriented approaches; and to use their creativity to communicate key ideas about well-being to a broad audience.

Contestants are asked to create an infographic or data visualisation that addresses one or more of the following questions:

  • How do well-being levels vary between countries, or within countries?
  • How do well-being levels vary for different population groups (e.g. for young people, the elderly, by gender, etc.)?
  • Why is it important to look beyond purely economic indicators (such as GDP) for a better picture of people’s current or future well-being?
  • How can the multi-dimensionality of well-being be effectively communicated to the general public?

Deadline for Submissions: 24 August, 2015

For more information on the contest and how to send your entry, click here.

Useful links

OECD Better Life Index

OECD Better Life Initiative

OECD Regional Well-Being

Map of well-being initiatives

Investing in infrastructure

Infrastructure investmentWilliam Topaz McGonagall is universally acknowledged as the worst poet who ever wrote in the English language, but that didn’t stop him having an intuitive grasp of the economics of infrastructure investment. As he argued in “The Newport Railway” published to celebrate the Tay Bridge and the trains it carried to Dundee, “the thrifty housewives of Newport/To Dundee will often resort/Which will be to them profit and sport/By bringing cheap tea, bread, and jam/And also some of Lipton’s ham/Which will make their hearts feel light and gay/And cause them to bless the opening day/Of the Newport Railway. It was a win-win for people on both sides: And if the people of Dundee/Should feel inclined to have a spree/I am sure ’twill fill their hearts with glee/By crossing o’er to Newport/And there they can have excellent sport”.

At the OECD, we’re more into free verse than rhyming, so we talk about investing “to meet social needs and support more rapid economic growth”. The social needs and benefits can be vast in developing countries in particular. Take sanitation for example. In many urban areas, infrastructure hasn’t expanded as much as population, leaving millions of citizens with no access to piped water and modern sanitation, or forced to live near open sewers carrying household and industrial waste. Water-related diseases kill more than 3.4 million people every year, making this the leading cause of disease and death around the world according to the WHO.

According to the OECD’s Fostering Investment in Infrastructure, it’s going to cost a lot to keep the thrifty housewives across the globe happy over the next 15 years: $71 trillion, or about 3.5% of annual world GDP from 2007 to 2030 for transport, electricity, water, and telecommunications. The Newport railway was privately financed, as was practically all railway construction in Britain at the time, but in the 20th century, governments gradually took the leading role in infrastructure projects. In the 21st century, given the massive sums involved and the state of public finances after the crisis, the only way to get the trillions needed is to call on private funds.

There are several advantages to attracting private capital for governments, apart from the money. Knowledgeable investors bring skills and experience in designing, building and running projects. But will fund managers be willing to commit to investments with long life cycles when their shareholders are demanding quick returns and high yields?

The opportunities are there, but the infrastructure sector presents specific risks to private investors, and since private participation in infrastructure delivery is relatively recent in many countries, governments do not necessarily have the experience and capacity needed to effectively manage these risks. Fostering Investment in Infrastructure brings together the lessons (both positive and negative) learned from the OECD’s Investment Policy Review series, and lists the most useful policy takeaways for the various components of the investment environment, such as regulation or restrictions on foreign ownership, based on the actual experiences of a wide range of countries.

Some of the advice sounds like no more than common sense, but given the difficulties many infrastructure projects get into, it seems that many governments fail to take what the report calls a “holistic” view before signing deals. For example, the report warns governments to make sure that arbitration procedures are clear and coherent so that disputes that can be settled quickly and don’t end up as lengthy, costly cases before international tribunals.

Likewise, given that most infrastructures are built on or under land, you’d think it wasn’t necessary to insist on having a “clear and well-implemented land policy”. Experience shows otherwise. For example, the US newspaper The Oklahoman describes how in its home state plans to develop wind farms met opposition from the oil and gas industry over access to the surface in the early 2000s, and that now, as development moves closer to suburban areas, there are calls for tighter regulation from property owners.

As the OECD report points out, investors are going to be unwilling to commit funds if they think policy regarding the basics is likely to change over the life-cycle of the project, and even less willing when policy changes within the term of a single administration.

Apart from the discussion on core conditions, there is a detailed look at investing in low-carbon infrastructure, such as wind farms. It makes sense to look at this separately because the business model of the sector is so different from traditional energy production and distribution. For electricity generation for instance, highly centralised power stations serving a wide area are replaced by small-scale distributed generators that may only serve a single building. Feed-in tariffs are a popular means of encouraging low-carbon renewables – paying producers for extra energy they feed into the main grid via a Power Purchasing Agreement (PPA). But awarding PPA purely on a least-cost criterion can tip the balance away from renewables in favour of incumbent producers, as happened in Tanzania.

The lessons then are a mix of useful checklist and interesting insights. In a poem written not long after the one quoted above, our man McGonagall describes how if you get it wrong, you may not live to regret it: “the cry rang out all o’er the town/Good Heavens! the Tay Bridge is blown down”.

Useful links

OECD work on investment

The Impact of Mega-Ships

Ship-size

Olaf Merk, Ports and Shipping expert at the International Transport Forum (ITF), OECD. We are co-publishing this post with the ITF’s Transport Policy Matters blog

Ever bigger container ships inspire awe and fascination, and are one of the hottest topics in maritime transport. They are also a headache for ports and terminals – mainly because of their vast size.

A new publication by the International Transport Forum (ITF) at the OECD assesses the impacts of these giant container ships. First of all, let’s get a hook on how big these ships really are. They are big! Mega-big! These are true giants, bigger than houses, bigger than apartment buildings and bigger than skyscrapers. They are bigger indeed than whole urban neighbourhoods. Now at up to 400 metres long, these ships are longer than Eiffel Tower (301 metres).

This size increase has been exponential; ships doubled in volume in 20 years between 1975 and 1995, and then almost doubled again in the following decade, doubling yet again between 2005 and 2015. And it ain’t over yet! Plans are afoot to continue increase size to 21 100 TEU* by 2017. (TEU: twenty foot equivalent unit – a small transport container – is a standard volumetric transport measurement.)

When is big too big?

Although economies of scale allow vessel costs per volume transported to decrease with bigger ships, the on-land costs of handling those volumes increase. Together, these two costs determine the total costs for the transport chain. At a certain point increasing ship size becomes sub-optimal as cost savings become marginal. While a doubling of container ship size reduces costs by a third (vessel costs per TEU), making sea transport cheaper, the savings decrease with increased size.

To find out where we are on the cost curve, we tried a thought experiment. Imagine that instead of ordering 19 000 TEU ships, shipping companies had ordered 14 000 TEU ships giving the same total fleet capacity. In that scenario, land-side costs would have been approximately $50 lower per transported container. This might seem little, but it is actually substantial when compared to freight rates for transporting a container from Shanghai to Rotterdam – now at less than $400 and the thousands of containers ships can carry. Hence, as ship sizes continue to increase we find ourselves heading towards overall increasing costs.

Do we really need this capacity?

Our research casts serious doubts over whether this capacity can in fact be filled. We found a disconnect between what is going on in the boardrooms of shipping lines and the real world. The growth of containerised seaborne trade is no longer in line with the growth of the world container fleet. And shipping companies have created alliances (only four in total worldwide) which dominate container shipping. So the little guys can get to the big toys, but this has also leads to overcapacity.

There are also several supply chain costs and risks related to mega-ships. There are adaptations needed to infrastructure and equipment: the ships are longer, wider and deeper which has consequences for cranes, quays, access channels and all that. Mega-ships stay on average 20% longer in ports – quite an achievement for most ports as this requires massive efforts to accommodate these longer-stay guests. The higher risks associated with mega-ships are linked to difficulties in insuring and salvaging in case of accidents. Furthermore, mega-ships mean that more cargo is concentrated on a single ship, leading to lower service frequencies and lower supply chain resilience – all your eggs in one basket.

Mega-ships have redefined the meaning of the word “peak”. Massive truck movements, train movements and yard occupancy are all related to the arrival of a mega-ship. There is a requirement to manage this huge capacity on arrival which may lead to more port congestion.

Where are we heading?

We looked at three scenarios: one in line with market demand growth projections, two others above these growth projections, one with 50, another with 100 ships with a 24 000 TEU capacity (and a length of 430 metres), which currently do not exist or have not been ordered – but that could be operational by 2020. The results are pretty scary. We could see 24 000 TEU ships in Europe – both in Northern Europe and the Mediterranean. All other regions would be impacted as ships what used to be the biggest ships serving Europe are reassigned to other routes. So we might see 19,000 TEU ships being introduced in North America, and 14,000 TEU ships in South America and Africa in a few years. Whatever the scenario, mega-ships will be the new normal in Northern Europe very soon. In just a few years 19,000 TEU ships will be seen every day in major ports. One thing is sure – this will lead us to a decade of port gridlock if nothing is done.

What needs to be done?

Mega-ships are a fact of life, so there should be policy support to use them effectively: for innovation, for more labour flexibility, optimisation of existing infrastructure (spreading use over day and night), releasing peaks (e.g. by “dry ports” – inland transshipment centres), and upsizing of hinterland transport units (larger trains, trucks and barges).

On a more fundamental level, decision-making by ports and countries should be more balanced. Many public policies stimulate mega-ship use, but public benefits are limited whereas public costs can be high. This should change, first by aligning incentives to public interests. For example, not to have port tariffs that cross-subsidise mega-ships, to clarify state aid rules for ports, increase their financial transparency and possibly link state aid for shipping companies to commitments to share in certain costs (e.g. dredging).

Another way would be to increase collaboration at regional level, between countries, ports and regulators. This might include coordination of port development and investment, possibly port mergers and more national or supra-national planning and focus. For example, the number of core ports in EU trans-Europe transport network (TEN-T) corridor networks could be reduced.

Finally, there should be a clear discussion on what the future direction should be. A forum for liners, terminals, ports and other transport actors should be facilitated to discuss about the desirable container ship size in the future. The International Transport Forum (ITF) at the OECD is there and willing to facilitate such a discussion.

Useful links

ITF work on maritime transport

Triple- and quadruple-play bundles of communication services: Towards “all-in-one” packages?

Expect teething problems
Choose your bundle

Agustín Díaz-Pinés was a policy analyst in the OECD’s Science, Technology and Innovation Directorate until earlier this month. We wish him every success in his new job at the European Commission and hope to see him back on Insights soon.

Bundles of services or products are part of our daily lives: having a set menu in a restaurant (starter, main dish and dessert), opening a bank account with a set of financial services (credit cards, cheques, deposit), or buying a laptop with a number of pre-installed software applications. Communication services are not an exception. Most communication bundles today are a combination of the following services: fixed telephony, fixed broadband, pay-television and mobile services (already a bundle of mobile telephony, SMS and data). Most popular bundles in OECD countries are double-play (typically fixed telephony and broadband), triple-play (usually fixed telephony, fixed broadband and pay-television) and quadruple-play (triple-play plus mobile services).

A 2011 OECD study Broadband bundling: trends and policy implications compared prices for basic triple-play bundles. A new report, Triple and quadruple-play bundles of communication services, goes further and compares prices in twelve large OECD economies, not only for “basic” but also for “premium” bundles (those including more advanced services such as premium pay-television channels) by extending OECD price basket methodology. Quadruple-play bundles are increasingly important as some operators are using them to offer discounted prices in exchange for increased customer retention, such as in Australia, France, Poland, Portugal and Spain where, in April 2014, all three fixed broadband operators provided fixed-mobile convergent offers.

In April 2014, the prices of “basic” triple-play bundles varied from $30 to $80 and those of “premium” triple-play bundles were between $50 and $195. Quadruple-play bundles, which include entry-level (“basic”) or unlimited (“premium”) mobile services, could be purchased from $35 to $120 (“basic”) or from $80 to $250 (“premium”). The addition of premium television channels or of unlimited mobile minutes may affect prices significantly.

Operators are also using bundles to introduce innovative services together with traditional communication services, in an attempt to test consumers and try new partnerships and services. Some examples are home monitoring services such as video surveillance services or heating and energy controls; e-learning applications; computer security; cloud storage services; and others resulting from partnerships with over-the-top (OTT) providers (e.g. Spotify, Netflix, Deezer).

While bundles provide significant benefits for consumers (simplified billing, new services or discounted prices) and producers (ability to spread fixed costs across a set of services), competition analysis for bundles faces significant challenges and needs more sophisticated tools and data, such as detailed information to determine whether bundles should be included in relevant markets or whether standalone services continue to be the reference. New competitive bottlenecks, such as premium television content (Hollywood blockbusters or premium sports), to date unknown to communication regulators, may need to be included in competitive assessments and, more importantly, may require new powers that some regulators currently lack.

Imagine a world where customers only purchase bundles, say fixed and mobile services together. If some communication providers are not able to provide all services (e.g. become a mobile network operator), they would be forced to exit the market and thus competition may be diminished. Therefore, regulators should remain vigilant that increased bundling does not undermine competition.

Finally, bundles raise many regulatory and policy issues, in particular in relation to convergence, i.e. services that used to be provided by different networks are now IP-based and provided over the Internet. Convergence creates tensions in the transition from legacy to “converged” policy and regulatory frameworks, which will be one of the topics discussed at the upcoming OECD Ministerial meeting in 2016 on the Digital Economy in Mexico.

Useful links

OECD work on the Internet economy

Assessing corporate respect for human rights is powerful but challenging

RBC ForumDamiano de Felice, Strategic Adviser to the CEO of the Access to Medicine Foundation, co-director of the Measuring Business & Human Rights project and member of the World Economic Forum Global Agenda Council on Human Rights. The views expressed here are solely those of the author in his private capacity.

According to the United Nations Guiding Principles on Business and Human Rights (UNGPs), business enterprises are expected to act with due diligence to avoid infringing on the rights of others and to address adverse impacts with which they are involved. Since 2011, key elements of this corporate responsibility to respect human rights have diffused across international organizations, standard-setting bodies, governments, civil society organizations and companies themselves.

To mention a couple of examples within the context of the Organisation for Economic Co-operation and Development (OECD), the Guidelines for Multinational Enterprises now include a specific chapter on human rights that explicitly draws on the UNGPs. The Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence instruct OECD export credit agencies to “encourage protection and respect for human rights”.

This unprecedented convergence around a common set of standards has spurred widespread interest in how to measure whether and how much corporations are meeting their responsibility to respect human rights. It comes as no surprise, then, that ratings, reporting frameworks, certification schemes and impact assessment tools have taken center stage as some of the most promising developments in the business and human rights field.

For instance, today the OECD Global Forum on Responsible Business Conduct hosts a lunchtime session on the role of indicators and public benchmarks organized by the Corporate Human Rights Benchmark and the Danish Institute for Human Rights.

There is little doubt regarding the enormous potential of most of these initiatives. Measurement, assessment and reporting tools can be fundamental for:

  • companies that want to manage their human rights risks and track their progress in the implementation of the GPs;
  • investors and consumers who wish to compare the human rights performance of different corporations;
  • governments willing to adopt evidence-based protective measures;
  • local communities and human rights advocates who are concerned about the human rights footprint of corporate actors; and
  • researchers interested in exploring the drivers of responsible business conduct.

Notwithstanding these promises, it is also important to recognize that measuring human rights is not an easy task. In a peer-reviewed article recently published by Human Rights Quarterly, I reviewed more than 80 business and human rights initiatives, and emphasized two main challenges: validity and emancipation.

Validity

A valid indicator is an indicator that measures what it purports to measure. By simplifying and standardizing complex but partial data, business and human rights indicators risk depicting misleading pictures of corporate performance.

To start with, indicators often fail to take into account important factors that can affect the “score” of a company. For example, without contextual information, it is impossible to say whether the low number of adverse impacts reported through a company’s grievance mechanisms is a positive result. The absence of incidents can be the consequence of several dynamics: previous (unjustified) arrests of community leaders, intimidation that prevents local communities from protesting and registering complaints, lack of legitimacy of the complaint mechanism itself, etc.

The human rights community calls this situation the “paradox of human rights statistics”: less information on rights violations may imply the existence of more violations. This is why it is great that the newly-launched UNGP Reporting Framework does not impose metrics but offers a set of meaningful questions.

In addition, assessment tools have to rely on partial information, mainly limited to corporate self-reporting and third-party documentation.

The problems with corporate self-reporting lie in its scope and trustworthiness. Companies still disclose little information on their human rights due diligence procedures and almost nothing on impacts. Self-reported data is also difficult to verify.

Third party reports are not perfect either. Information is frequently expressed in narrative form, which is difficult to aggregate for comparative purposes. Independent accounts also fail to cover all corporate operations. Their findings can therefore reflect the exception (an extraordinary rosy or gloomy picture) rather than the rule.

Emancipation

Conceptual clarity is a fundamental prerequisite for meaningful measurement. Unfortunately, while the GPs offer initial guidance on what business and human rights indicators should look like, they also leave many questions unanswered. According to their own text, the UNGPs “are not intended as a tool kit, simply to be taken off the shelf and plugged in”.

What this means in practice is that the production of numerous business and human rights indicators is not a merely technical exercise, but an implicit normative process in which new standards are actually created. As highlighted by Navy Pillay, “devising a policy or statistical indicator is not a norm or value-neutral exercise”.

The consequence is that the production of ratings, reporting frameworks and human rights impact assessment tools can disempower human rights victims and legitimate centers of power (such as the Human Rights Council, national Parliaments, local councils) at the expenses of distant Economic, Social and Governance (ESG) experts. Innovative mechanisms, such as the community-based human rights impacts assessment tool advocated by Oxfam and FIDH and the multi-stakeholder process at the basis of the Access to Medicine Index, are welcomed to avoid this risk.

Another problem related to emancipation is that the mere “language” of indicators, with its seemingly objective aspect, may make it more difficult for human rights abusers to be held accountable.

First, using indicators introduces a risk of condoning a low level of human rights abuses. From a human rights perspective, every adverse human rights impact is one too many; there is no need to count and measure. What business and human rights indicators often do, in contrast, is give the false impression that a “good” score (for instance, a 2 in a scale from 1 to 5) equates to “good” behavior.

Second, using indicators introduces a risk of making the contestation of misleading information more difficult. While scores and ratings are the outcome of controversial normative and methodological decisions, as seen above, they are often incorrectly presumed to be – or are presented as – scientifically objective. When companies proudly announce their inclusion in sustainability benchmarks, the underlying subjective choices of the raters are rarely discussed.

Business and human rights benchmarks, reporting frameworks and impact assessment tools have enormous potential. Their production should therefore be encouraged. However, the business and human rights community should not fall victim of the erroneous “article of faith” that any data is better than no data.

We do not need whatever measurement initiatives. We need good measurement initiatives.

In the end, indicators are only tools, not ends in themselves. They can be compared to crutches. If not proportioned to the needs of the users, crutches can hinder rather than help.

Useful links

Measuring Business & Human Rights is a research project that aims to advance the capacity of business managers and corporate stakeholders to assess the extent to which companies meet their responsibility to respect human rights. For more information about the project, see http://blogs.lse.ac.uk/businesshumanrights. Here is a link to the article at the basis of the blogpost.

World Bank Group’s IFC and Levi Strauss incentivize responsible garment suppliers

RBC ForumOlaf Schmidt, Global Sector Lead of Retail, Real Estate & Hotel Investments at IFC, a member of the World Bank Group. IFC is the largest global development institution focused exclusively on the private sector in emerging markets. Working with private enterprises in about 100 countries, IFC uses its capital, expertise, and influence to help eliminate extreme poverty and boost shared prosperity.

The garment and textile industry employs 60 million people around the world, according to estimates of the International Labor Organization (ILO). Many of them are young women with few opportunities to earn their own income and be independent. IFC has been investing in the garment industry because it provides formal jobs for low-skilled workers, thus contributing to the World Bank Group’s twin goals of ending extreme poverty and boosting shared prosperity.

To achieve these goals, investments must be sustainable in terms of financial profitability and have a strong environmental and social performance. This can be a challenge in places where laws and governance are weak, which are exactly those places where poverty is widespread and investment and jobs are most needed. It is particularly a challenge in the garment industry, where intense competition leads some suppliers to disregard basic safety standards and worker rights.

Recent factory disasters, like the Tazreen fire and the Rana Plaza collapse that together took the lives of 1,200 people, have prompted us to identify innovative ways – beyond our existing engagements – in which we could further support the garment sector in emerging markets. While we realize that audits and supervision are important to ensure environmental and social compliance, we think that there is a real need to assist suppliers in emerging markets on two main fronts, namely providing them with affordable sources of financing, which can be invested in factory upgrades; and creating the right financial incentives to encourage them to make such investments.

In an effort to address these gaps, we partnered with Levi Strauss and Co (LS&Co) – one of the world’s largest brand name apparel companies as well as an industry leader in promoting suppliers’ environmental and social compliance – to roll out a new kind of supplier financing product.

For the very first time, we are offering a direct financial incentive to improve environmental and social standards in the ready-made garment industry through IFC’s $500 million Global Trade Supplier Finance program. This program provides short-term finance to emerging-market suppliers and small- and mid-sized exporters. IFC offers lower interest rates to suppliers who score better under LS&Co’s sophisticated evaluation system for labor, health, safety, and environmental performance. Specifically, the program will work on a sliding scale. As suppliers improve their environmental and social performance against LS&Co’s evaluation system, they will be rewarded with lower interest rates on this working capital type product provided by IFC. In a nutshell, the higher the supplier’s evaluation score, the more they will save.

Through this innovative partnership, LS&Co’s suppliers have access to cheaper capital than they would otherwise in their home country. And the benefits for suppliers go beyond monetary savings. In fact, suppliers can differentiate themselves from competitors through positive environmental and social scores. This partnership with LS&Co represents a win-win solution for all parties involved, including international buyers who have been under increasing pressure to improve safety and working conditions in their supply chains.

Scale is crucial for IFC to realize its goals for development. We hope that other major international apparel brands will follow the lead of LS&Co, and work with us to offer reduced cost financing as a reward to suppliers with top standards compliance.

In addition to this innovative partnership with LS&Co, IFC has been spearheading a number of partnerships to make positive transformational changes in the textile and garment sector’s supply chain. For example, in 2007, IFC and ILO Launched the Better Work Program, which seeks to improve labor standards compliance in global supply chains, both to protect workers’ rights and to help enterprises become more competitive. The program, which is currently active in 8 countries, focuses on scalable and sustainable solutions that build cooperation between governments, employers and workers’ organizations and international buyers.

Specifically in Bangladesh – where the garment and textile sector accounts for 80 percent of total export earnings and employs 4.2 million workers in more than 4,500 factories – IFC and ILO launched the Better Work program in November 2013. The objective of the program is to provide assessments of factory compliance with national law and international core labor standards, publish transparent public reporting on findings, and provide advisory support for factories to make necessary improvements. The program was launched following an18-month collaboration with the government to implement changes to the national labor law and develop the government’s Framework for Continuous Improvement. This partnership between government, employers, unions, buyers, and other industry stakeholders will focus on promoting sustainable change in the sector by helping factories address working conditions, and to build factory-level capacity for labor administration and worker-management relations.

Useful links

Rethinking due diligence practices in the apparel supply chain by Jennifer Schappert of the OECD’s Responsible Business Conduct Unit (@J_Schappert)