Aid trend is reversing: More money to the poorest

dac oda 2016Erik Solheim, Chair of the OECD Development Assistance Committee

Global development aid reached a record high in 2015. Being inspired to do even better, we should also focus on the main purpose of aid. Is it to be the salt or the oil in the water?

This year’s figures from OECD show that development aid rose again. Despite the huge refugee crisis, the DAC donors spent more money on aid in 2015 than they did in 2014. True, some countries have used big amounts from their aid budgets on refugees in their own countries. But even when we strip out funds spent on refugees at home, overall aid to everything else has increased by almost 2 percent. This means more money to poor countries.

The total amount of aid money reached USD 131.6 billion in 2015. That is a lot of money, and we need to make sure that it is spent well. Which leads me to my initial question: What is the main purpose of aid? As someone said at the UN Development Cooperation Forum in Brussels, is it to be the salt or the oil in the water? More precisely: Should we use aid to blend in with private investments, enforce tax administration and invest in the environment? Or should aid be something separate which goes directly to health, education or building roads?

For the poorest countries, there is no doubt that aid naturally plays a much bigger role than in middle-income countries. As ONE’s Global Policy Director, Eloise Todd writes in her blog: International development is our best long-term bet in foreign policy.

For countries such as Malawi, Tanzania and Mozambique aid is essential for supporting health, education, and the creation of livelihoods – without which, human development and an end to poverty cannot be achieved. Aid supports poor countries’ own plans and paths to development. Thus I believe it is still needed with a drastic increase in countries’ assistance in the years ahead. Education in the Central African Republic cannot be achieved through private investment, it goes without saying. And as Bono said earlier this week after visiting refugee camps in Africa and the Middle East “It is less expensive to invest in stability than to confront instability.”

The OECD has long called for more aid to the least developed countries. Also ONE and many other humanitarian organisations have also focused on the need for more money to the poorest. This year I am happy that we see a reversing trend, and in 2015 the poorest received more money that the years before: a 4 percent increase in bilateral aid and 3 percent increase in core assistance to the least developed countries. And 11 percent increase in humanitarian aid. We need to keep this aid high in the years to come as well.

At the same time we need to think smarter about aid to middle-income countries. The main focus of development has to be on increasing taxes and green growth. Already developing countries are paying for 98 percent of their education expenses themselves. If they increase their tax incomes by only one percent, it will contribute more to their finances than all the development aid they receive.

Aid has an important role, but we will not find the really big investments in development cooperation. Both aid and private investment are needed to move the world, and aid can be a catalyst to make this happen. When solar and hydropower are profitable, then we will also have major investments there. Aid and investment must go hand in hand.

Despite last year’s huge refugee crisis, the OECD countries have given more aid to poor countries and major international organisations. They have shown to be both generous and responsible. And I am optimistic on our way to reach the new and ambitious Sustainable Development Goals which aim for a future of peace, prosperity, and dignity for all.

We have over the two last decades made huge progress reducing poverty and are on track to eradicate extreme poverty by 2030, but success is still elusive. Aid plays a vital role in helping the most vulnerable countries and people. On our way to a better life for the poorest and a greener world, aid needs to be used both as salt and oil in the water. Hopefully we will see even more aid next year.
Useful links

Download ODA figures in Excel

Aid for Trade: Connecting to Value Chains

Click to see the report
Click to see the report

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

Aid for trade: $100 billion well spent

Click to browse Aid for Trade

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

Aid to developing countries

With the crisis still unfolding, can governments meet their agreed development aid targets? Total net official development assistance (ODA) from donor countries in the OECD Development Assistance Committee came to $119.6 billion in 2009, which is a real increase of 0.7% from 2008. If debt forgiveness is excluded, the real increase jumps to 6.8%. In fact, development aid rose by some 30% in real terms between 2004 and 2009, and continued to grow during the crisis, unlike other financial flows to developing countries, which have fallen sharply. Nonetheless, more aid effort is needed.