Political Risk and the ODA Definition

TrocaireToday’s post is by Dr Lorna Gold, Head of Policy and Advocacy, Trócaire, the Irish Catholic Agency for World Development and the Irish member of CIDSE and Caritas Internationalis. It is followed by a reply from Erik Solheim, Chair of the OECD Development Assistance Committee, the body that oversees ODA.

Official Development Assistance (ODA) as we know it would appear to be rapidly going out of fashion. Just over ten years ago there was a massive push on to deliver the MDGs and to increase aid levels dramatically to meet those goals. Only three years ago donors gave $136.7 billion in ODA, amounting to 0.32% of their collective Gross National Income. Just three years later, as discussions around the Post-2105 development framework are progressing, aid is falling and many major donors and institutions are now talking as if ODA is history – the future is now to be found in other types of finance.

The complex challenges the world is now facing, it is argued, require a radically different financing model – one which requires a comprehensive approach to financing, embracing all sources of public and private finance available to developing countries. ODA represents a very small percentage of overall financial resources available, amounting to a mere 2.7% of all public and private financial resources available to developing countries in 2010.

The merits of this comprehensive financing discussion are obvious. Civil society has been at the forefront of such a debate for more than a decade through calls for debt cancellation, fair trade and tax justice. It provides a space to discuss the unfair nature of the global financial system and the need to stem illicit flows through money laundering, tax evasion, reforming institutional mechanisms to bring forth information, recovery of stolen assets and so on. As the focus shifts to the domestic tax base, moreover, such a debate means that the inter-connected nature of global investment finance incentivises rich countries to address commensurate measures. For example, a large part of the agenda around domestic resource mobilisation requires the EU to put in place full country-by-country reporting requirements on public record along the lines of the requirements for the banking industry and beyond those for extractive and timber companies.

Whilst this debate is welcome, we cannot afford to lose sight of the ongoing importance of ODA as a key means of addressing extreme poverty. ODA may well represent a very small proportion of overall financial resources available to developing countries, but it still accounts for the largest proportion of public international finance available (58%). Moreover, ODA remains a critical source of funding for the Low Income Countries, many of which are fragile states, amounting to 10% of their GDP. It is a critical financial flow for the most vulnerable countries which are unable to readily generate alternative financial flows.

The timing of the emerging discussions around the redefinition of ODA within the OECD-DAC is particularly concerning. Whilst there are certainly technical merits to tidying up the concept and modernising it, one needs to step back and ask whom the move to change the definition is designed to benefit and what the risks are of opening such a debate up at this global juncture?

The main beneficiaries, so far as I can see, are the growing number of OECD donors who are failing to meet their 0.7% commitment to ODA through enabling them to save face. It may come as a surprise that the vast majority of EU citizens actually want their governments to meet their ODA commitments! Despite austerity measures which have led to severe cut backs on domestic public spending, support for ODA on the whole has remained consistently high between 2007 and 2012, with 83% in favour.  The same governments, however, are facing massive fiscal problems and very unlikely to keep their promise on reaching the UN target without significant sacrifices. There is potentially a political prize to be gained by widening the DAC criteria on technical grounds. It would enable donors to meet the 0.7% target with virtually zero additional finance.

Opening the debate around the definition of ODA, however, entails a number of serious risks at this political juncture. First and foremost, the move to change criteria amongst donor countries will do nothing to engender trust in already fractious multi-lateral processes.  On the contrary, it will only serve to undermine them further. The repeated failure to honour promises on ODA in the context of the Financing for Development process – but now trying to change the goalposts behind closed doors – will be seen as a cynical move on the part of the OECD donors. A debate about redefining criteria is inappropriate until all donors are meeting their current commitment to 0.7% as currently defined.

Secondly, opening the discussion at this point, where vested interests are so dominant, risks undermining the integrity of ODA as a set of financial instruments which have poverty eradication as their primary objective. Certainly ODA is not perfect, but it has specific characteristics which reflect its principal goal in addressing poverty through durable development impacts which go beyond financial transfers. The most disadvantaged LICs who rely on ODA and have limited access to other funding streams would be most at risk of any change.

Thirdly, the broadening of the DAC criteria could significantly undermine public support for development cooperation within OECD countries. ODA is by and large regarded as something which has credibility. In Ireland, this has been a hard won fight which risks being undermined if the criteria are changed to allow for the inclusion of non-poverty related expenditure.

Finally, and perhaps most importantly, engaging in a divisive debate about criteria is a distraction. It diverts energy from the real issues of finding additional sources of finance, potentially creating a false illusion that more is being done on the basis of creative accounting.

There are valid arguments for discussing all the elements of international finance which need to be harnessed in the context of a comprehensive financing framework to meet the post-2015 framework. The imperative to find new sources of finance and address systemic issues, however, should not be used as a means for OECD donors to shirk their responsibility to their ODA commitments. The attempts to change the definition of ODA must be avoided if the critical multilateral processes over the next two years are to have a future.

REPLY FROM ERIK SOLHEIM

Lorna, I could not agree with you more! Development assistance has been a great historical success. It has contributed to the fantastic development success of the last decades, bringing 1 % of humanity out of extreme poverty every year since 1990.

ODA works well and there is no point trying to fix what is not broken. We need more ODA, not less. We should promote the examples of nations who are in the lead. UK reaching 0,7 % this year. Sweden stable at 1 % over many years. Turkey with the biggest increase in development spending in the OECD.

The most important thing is that ODA promotes poverty reduction in the countries that need it the most, and reflect the spirit of the 0.7% target made by donor countries. It may very well be that the definition needs a tidying up.

In this spirit a debate is not dangerous, it is necessary. We may possibly decide to set stricter targets for ODA reaching the least developed countries. We may be better in using ODA catalytically in increasing other sources of development resources. Domestic resource mobilization through taxes can be helped by initiatives like Tax for development.

More importantly, we are working on modernising the way in which we measure and monitor wider development flows than ODA. Everyone acknowledge the importance of private sector flows as well as peace keeping. All development efforts should somehow be accounted for, acknowledged and encouraged. They should be added to ODA, not replace ODA.

We know that designing development programmes to fit the ODA definition can lead to poor outcomes, particularly when it comes to maximising the flow of finance. We must have a system that allows for innovation and the maximisation of funds and that does much better at leveraging additional money out of the private sector. One way to do this is to have broader, transparent measures of development finance from the perspectives of both what effort the donor is making and what the benefit is to the recipient. These would be new measures, separate to ODA.

The DAC will be working on these through 2014 and once we have a more substantive idea of what they look like, we can have a look at whether we need to tidy up ODA.

The rise of the south is probably the most important development in the world over the last couple of decades. It has transformed the power, the politics, the economics, the development.  One result is an increase in south-South cooperation which has changed the world of development finance. We have to have open doors and consult with all relevant partners.  We are working with the UN to produce measures that are not just for DAC donors, but that can support the post-2015 targets.

My view is that the OECD has an a lot to offer in terms of providing robust statistical systems and has an obligation to support the wider international community by making them available. Beyond this, I and many members of the DAC and its Secretariat are out on the road talking with providers of South-South cooperation, China, the Arab donor community, partner countries, civil society and private sector about this project.

We’re also heavily involved in the Global Partnership for Effective Development Co-operation. This forum and the high level meeting in Mexico will be crucial in making the international development system more effective. We’re also working with an Expert Reference Group and sharing our work and many papers on line. Nothing will be behind closed doors!

I will be happy to continue the dialogue – in Dublin or in Paris. Thanks again for your blog!

Erik Solheim

 

Yes, it is time to revisit the concept of Official Development Assistance

Aid recipients?
Aid recipients?

Following this article in The Guardian criticising the way OECD measures aid, today’s post is from Jon Lomoy, Director of the OECD Development Co-operation Directorate (DCD-DAC)

ODA – official development assistance – is an important concept and an important measure. It is, to date, the only systematic means we have of assessing the efforts the ‘traditional’ donors make to support development. But the world is changing, and development finance is changing. In this light, do we need to look at the ODA concept again? I think we agree that the answer is yes.

There are several criticisms of the ODA concept.

Some say that it includes too much – that it counts much more than the money that actually flows into developing country budgets (donor administrative costs, refugee costs, etc.) This is why the OECD has introduced the concept of ‘country programmable aid’, which enables us to identify just how much is directly usable by countries to fund their priorities and programmes.

On the other hand, some feel that ODA cash-flow-based measurement includes too little. Countries make efforts that are not counted as ODA – guarantees, callable capital etc. – that could mobilise significant investment for development by mitigating risk. This is of particular concern today when an increasing number of developing countries need loans, guarantees and equity – rather than grant funding – to boost infrastructure and finance economic growth.

Finally, the ODA concept does not capture the complex and continually evolving interaction between public efforts and the use of market mechanisms.

All this gives rise to tensions between ODA as a measure of development effort by donors, and flows available to developing countries to reduce poverty and promote growth. This is why the Ministers of our DAC member development agencies – when they met in London in December 2012 – gave the OECD-DAC the mandate to take a fresh look at the broader financing concept, as well the concept and role of ODA per se.

This includes, of course, the issue of loans, which is the subject of much debate at the moment – both within the DAC and in the public arena. Loans have always been an important part of development financing – both concessional loans, such as the ones provided by the World Bank’s International Development Association (IDA), and non-concessional loans provided by many bi-lateral and multi-lateral donors, for instance the World Bank’s International Bank for Reconstruction and Development (IBRD).

Today, there is a growing demand for loans from the developing countries. The good news is that countries are growing – and this means they need and can afford to borrow money to fuel their continuing economic growth. This is one reason why this debate has risen to the top of the agenda.

Recently it has also become evident that our members follow different approaches in determining what makes a loan concessional. Some members follow the approach of the multilateral development banks – where only loans that have been subsidized are reported as concessional. Others emphasize the recipients’ perspective, arguing that loans given on more beneficial terms than developing countries could otherwise attain on the market could be considered concessional. As former OECD-DAC Chair Richard Manning pointed out in his 9 April letter to the Financial Times, there is a need to revisit these calculations to ensure that they reflect the current markets terms. It is also important to keep in mind the importance of the public guarantees for institutions providing loans, which address the high-risk factor of some development investments.

As the discussions continue, it is important that these differences – and the data behind them – continue to be publicly known and available for scrutiny. This will stimulate – as we already can see – a welcome and healthy debate. It is fundamental that we continue and deepen these discussions if we’re going to get in place an effective strategy for how to finance the new set of international development goals that will take over from the Millennium Development Goals after 2015.

But with the increasing complexity of development financing, the broadening of the development agenda and the growing diversity among developing countries, that debate needs to be about aid and other sources of financing for development. It is not – and cannot be – a question of either/or. That said, we need to be able to discuss other sources of financing without that discussion being used as – or perceived as – an excuse for donors to walk away from their aid commitments.

There is full agreement among DAC members that as we move towards 2015, we need to settle this debate, prioritizing innovative means to measure and promote development finance. At OECD, we will continue to work with our members and with other key stakeholders – including developing countries, as well as the United Nations, the World Bank, the International Monetary Fund (IMF) and other international financial institutions – to ensure that we have a robust measurement system for development finance in place by 2015.

In this way, we will also ensure that the OECD DAC continues to be a key source of reliable and transparent data on development financing.

Useful links

OECD Aid Statistics

OECD Insights: From Aid to Development

Aid falls for second year in a row

Aid from rich to poor countries fell by 4% in real terms last year, the second decline in two years, according to the OECD’s Development Assistance Committee (DAC), which brings together 24 of the world’s leading aid donors. In 2011, aid spending fell by 2%.

The falls reflect the continuing budget pressure on developed countries, many of which are cutting spending across the board, including on aid. Several of the European countries that have been hardest hit by the euro zone crisis made notable cuts in aid in 2012 – by just over 49% in Spain, just over 34% in Italy and 17% in Greece.

This is the first time since 1996-1997 that aid from the major donors has fallen in two successive years, and it now means that aid is down by 6% in real terms since peaking in 2010. However, there is some hope that the worst may be over: Major donors supply forecasts for their aid spending to the OECD every year, and these suggest that 2013 should see a moderate recovery.

Despite the falls, some of the DAC’s member countries did manage to increase their air spending last year: Korea’s total rose by almost 18%, Australia’s by just over 9% and Iceland’s by almost 6%. Turkey, which is not a member of the DAC, reported a rise in its aid spending of almost 99%, largely in response to the refugee crisis in Syria and the need to support countries in North Africa in the wake of the Arab Spring.

The latest aid figures also show aid is shifting away from the world’s poorest countries, including in Sub-Saharan Africa, and towards middle-income countries, such as India, China and Vietnam. That’s a worrying trend, as OECD Secretary-General Angel Gurría noted: “I hope that the trend in aid away from the poorest countries will be reversed. This is essential if aid is to play its part in helping achieve the [Millennium Development] Goals.”

The fall in aid was criticised by a number of international agencies. “This cut in aid is going to cost lives,” said Oxfam International’s Jeremy Hobbs. “This is not the time for rich countries to drop long-standing commitments.” Several contributors to a live Tweetchat following the release of the data were also critical of the performance of the world’s wealthiest countries. “For 2nd yr official aid data show rich countries fail to do all they can to fight poverty,” wrote Nicole Metz.

Useful links

OECD Aid Statistics

OECD Insights: From Aid to Development

 

Aid for Trade: Integrating global value chains

Today’s post from Gunnar Oom, State Secretary to Sweden’s Minister for Trade Ewa Björling, is the last in a series published to coincide with the 2013 Dialogue on Aid for Trade taking place at the OECD on January 16-17, in collaboration with the Government of Sweden and the Overseas Development Institute, with the support of the European Commission.

Sweden has a vision of an international trading system that embraces all nations of the world, not only those that are already well-off. That is why free trade coupled with trade-related development cooperation is a priority for the Swedish Government. This is also why I, as State Secretary to the Swedish Minister for Trade, am pleased that Sweden is co-arranging this Policy Dialogue on Aid for Trade in Paris on 16–17 January.

Economic growth, including trade and market development assistance, continues to be a priority for Swedish development cooperation. Economic growth is a prerequisite for combating poverty, and so trade, leading to increased growth, can be a powerful tool for reducing poverty.

The overall target of Swedish Aid for Trade is to strengthen the least developed countries’ integration in world trade and their ability to take advantage of the opportunities of the multilateral trading system. Swedish Aid for Trade also aims to support and promote responsible business practices in accordance with the UN Guiding Principles on Business and Human Rights, the principles of UN Global Compact and the OECD Guidelines for Multinational Enterprises. There is a connection between trade and social and environmental concerns. Responsible business practices, with companies that follow international guidelines and the principles of corporate social responsibility, CSR, can increase the impact of Aid for Trade.

This is also why the engagement of the private sector in the Aid for Trade framework is crucial. It is essentially companies, not governments or countries, that trade with each other. It is firms that know what challenges they face when it comes to market access and integration in global production networks. Access to export markets is essential for low- and middle-income countries to develop their trade and make use of the potential for increased growth that trade can offer.

Sweden’s own vision of Aid for Trade has been bold since the adoption of the Aid for Trade recommendations. Between 2010 and 2011, Sweden almost doubled its Aid for Trade disbursements to trade-related assistance, from SEK 592 million to SEK 1.1 billion. We have scaled up and stepped up, and will continue to be an ambitious free trade nation.

The Swedish International Development Cooperation Agency (Sida) is instrumental in transforming our ambitions on Aid for Trade into action. It bases its work on the demands and needs of partner countries and Sweden’s comparative advantages.

The Swedish National Board of Trade is another important Swedish actor in Aid for Trade. As the Swedish expert authority, the National Board of Trade builds capacity in trade-related areas such as rules of origin, trade facilitation, technical barriers to trade and WTO matters. The National Board of Trade hosts Open Trade Gate Sweden, a one-stop information centre for exporters in developing countries.

Looking ahead, it is important to focus on the quality of Aid for Trade in order to ensure that resources are used efficiently. Global efforts on Aid for Trade must be efficiently monitored and evaluated.

The principles of ownership and donor coordination in the Paris Declaration are central. Sweden is increasingly moving towards joint integrated trade programmes, channelling funds through co-funded programmes with other bilateral donors, multilateral organisations, regional development banks, research networks and universities, and Swedish trade support agencies and institutions.

We also need to become better at linking our efforts to reality on the ground – to the possibilities and constraints faced by poor women and men. Understanding the long- and short-term linkages between trade and poverty as well as the gender dynamics behind these linkages will help us address the challenge of making trade a powerful engine for poverty reduction.

A large part of trade today takes part within value chains. This means that the production of goods and services is fragmented and separated in different parts of the world. Value chains underline the need and importance of open markets, not least the importance of imports. Though not a new phenomenon, value chains have become increasingly visible. Reduced costs for trade, transport, international standards and new communication and technology solutions have fostered international production networks and increased specialisation.

Value chains offer opportunities for low- and middle-income countries to access global markets and integrate with the world economy. They have decreased the importance of access to raw materials and a large domestic market. I believe this is how we need to see value chains in the Aid for Trade context: value chains can attract investment in low- and middle-income countries, competitiveness can be highlighted, production can be advanced and specialisation can be promoted.

At the same time, value chains impose increased demands for smooth cross-border trade, so that goods do not get stuck at borders. Integration in the value chain means meeting increased quality-related demands such as certification requirements, as well as requiring well-functioning institutions and infrastructure.

Moreover, value chains highlight the need for services, the glue of the value chain. Services such as research and development, commercial services and marketing, transports, logistics etc. are central. These requirements are likely to have positive effects throughout the economy, leading to increased growth in low- and middle-income countries.

So Aid for Trade should be used to oil the process of integration in the global economy, to address the obstacles to integration in the value chain faced by low- and middle-income countries.

Important challenges lie ahead in ensuring the efficiency of Aid for Trade. May the OECD Policy Dialogue be an inspiration to us to continue to discuss and shed light on how results can best be achieved and evaluated. Input from our partner countries as well as the private sector is crucial. Sweden will continue to make every effort to ensure that Aid for Trade is a driving force for development!

Useful links

Sweden provides a voluntary contribution to the OECD project on aid for trade, global value chains and trade facilitation, which will published a two-page brief on Trade Policy Implications of Global Value Chains to coincide with the launch of a new Trade in Value Added database later today.

Sweden also supports the following initiatives:

Trade Facilitation Implementation Guide

World Bank Trade Facilitation

Trade Policy Training Centre in Africa (Trapca)

Trade Law Centre for Southern Africa (Tralac)

WTO Doha Development Agenda Global Trust Fund (DDAGTF)

UN Global Compact Trust Fund

 

Aid for Trade: Continued Success in a Rapidly Evolving Environment

Today’s post from OECD Secretary-General Angel Gurría is published to coincide with the 2013 Dialogue on Aid for Trade taking place at the OECD on January 16-17, in collaboration with the Government of Sweden and the Overseas Development Institute, with the support of the European Commission.

Aid for Trade” has galvanised broad engagement from the international community to support developing countries to make the most of international trade.

Successive Global Reviews have provided clear evidence that the Initiative has lead to an integration of trade policies in national development strategies, to an inclusion of trade considerations in planning frameworks and consultations with national stakeholders and dialogues with donors. The Initiative is also associated with an increase in commitments ($45 billion in 2010) to tackle bottlenecks that undermine the ability of local producers to access regional and global markets.

So, Aid for Trade has contributed to better lives for many people in developing countries. It is particularly encouraging that about a third of the funds went to least developed countries (LDCs) and that the funds provided have been over and above aid flows to other important sectors, such as education and health.

“Aid for Trade” provides us with a number of encouraging success stories. In Zimbabwe, for example, support and commitment at the highest political levels was mobilised for the implementation of the Chirundu One Stop Border. The Cameroon Customs Reform project provides another successful example of stakeholder involvement as it involved local customs inspectors in the design of performance contracts that would be used to evaluate their performance. An aid for trade project in Senegal has helped to support the competitiveness and the sustainability of the agricultural sector, contributing to increasing exports of certain agricultural products by almost 80% between 2005 and 2009 and creating 85 new businesses. In Vietnam an aid for trade programme helped increase the level of exports to the United States from USD 1.1 billion in 2001 to USD 8.6 billion in 2006, and the level of imports from the United States from USD 460 million to USD 1.1 billion.

On top of such best practice examples, an important growth and employment narrative has emerged around Aid for Trade. The impacts of such programmes range from increased export volumes to higher employment, notably of women, faster customs clearance and border transit times, and poverty reduction. Many of these achievements are being made by the LDCs. Enhanced transparency and strengthened accountability provided through OECD and WTO monitoring have helped in making that progress possible.

The Aid for Trade Initiative has been gaining momentum over the past years and its global monitoring mechanisms are improving considerably. But it operates in a rapidly evolving environment. Since the launch of the Initiative in 2005, there have been fundamental changes in trade patterns, including increased south-south cooperation or the emergence of global value chains.

The Global Partnership for Effective Development Co-operation, launched in 2012 as a follow-up to the 2011 Busan Forum on Aid Effectiveness, provides a new framework for strengthening efforts to help developing countries in leveraging and improving the results of diverse forms of development finance and ensuring that all these have a catalytic effect on trade and development.

Certain contextual factors, such as an efficient infrastructure connecting local producers to markets and a good regulatory environment, are key for countries to reap the full benefits of a liberalised trade regime. Aid for Trade can be a catalyst for such an environment and in helping to attract domestic and foreign investment in developing countries, so as to stimulate economic growth and advance poverty alleviation.

Cape Verde for example has successfully managed its economic transformation and become a globally competitive economy. It has made significant progress on the Millennium Development Goals (MDGs) and in 2007 managed to graduate out of the LDC status (only two other countries have managed that transition, Maldives in 2011 and Botswana 1994). Aid for trade policies and the WTO accession of Cape Verde have played a catalytic role in supporting the country’s economic growth strategy.

It is against this backdrop that we are hosting a Policy Dialogue on Aid for Trade on 16 and 17 January 2013 at the OECD in Paris. This dialogue will focus on how the international community can continue to deliver results on aid for trade in today’s quickly evolving global context of trade and development. The discussions among trade and development experts, providers of South-South co-operation, and representatives from the private sector, think tanks, civil society and academia will focus on several issues. They include the delivery and management of aid for trade and development results, options for easing constraints to trade, promotion of regional aid for trade programmes, reduction of the costs of importing and exporting (the so called ‘thickness’ of borders), the link to value chains and engagement of  the private sector.

We hope that the outcomes of this dialogue will provide valuable inputs to the Fourth Global Review of Aid for Trade, “Connecting to Value Chains”, to be hosted by the World Trade Organization in July 2013. Now let’s have a meaningful dialogue for better trade policies for better lives!

Useful links

Aid for Trade Policy Dialogue 2013

OECD / WTO: Papers and publications on Aid for Trade

Government of Sweden

Overseas Development Institute

European Commission, DG Trade

 

Aid for Trade: Helping developing countries trade their way out of poverty

Today’s post from EU Trade Commissioner Karel De Gucht is the second in a series published to coincide with the 2013 Dialogue on Aid for Trade taking place at the OECD on January 16-17, in collaboration with the Government of Sweden and the Overseas Development Institute, with the support of the European Commission.

One thing is for sure: No country has ever lifted itself out of poverty without international trade. Trade is key to help countries develop. So we need to make sure that people in the world’s poorest countries have access to markets, to create jobs and encourage growth as a result. But trade needs the right conditions to flourish. Bottlenecks and inefficiencies – whether at border crossings, or in the way the economy is regulated, or even within the private sector – get in the way of progress and prosperity.

That’s where  Aid for Trade comes in: as financial assistance to build new infrastructure, improve ports or customs facilities in developing countries – in short: we want to help developing countries “trade” their way out of poverty.

Today, the EU and its Member States provide more trade-related development assistance than the rest of the world put together. We contributed a third of world-wide Aid for Trade assistance, or €10.7 bn, in 2010 – that’s a quarter of our own total official development assistance (ODA) budget. And the results speak for themselves:  a 10% increase in Aid for Trade spending on infrastructure has been shown to lead to a 6.5% increase in goods exports.

However, what really counts in the current crisis, with ODA shrinking, is that we continue to support developing countries’ integration into the global economy – and make the most of our aid budgets for this purpose.

How do we do this?

The starting point is of course that we use the resources available effectively. This means we need to target Aid for Trade right and prioritise especially Least Developed Countries (LDCs).

Also, the most effective Aid for Trade projects involve multiple countries – like those focused on key regional trade corridors, for example. So we need to count on cross-border and regional programmes.

That is why I believe Economic Partnership Agreements (EPAs) can make an important contribution to the development of ACP countries. World tariffs have never been this low and the EU already offers very favourable market access to poor countries. So where EPAs can make a real difference are non-tariff issues or so-called ‘behind the border issues’ – standards, services, intellectual property rights, public procurement, technical, social and environmental rules, infrastructure and packaging facilities. We have already gone this far with developing countries in Latin America and aim to do the same with partners in South-East Asia.

Today’s modern trading environment is dominated by the way manufacturers build up, assemble or even improve a product at different stages in the production chain. With two-thirds of world trade now involving intermediary inputs, it is vital to address these ‘behind the border issues’ so that developing countries can really be part of this process and integrate into global value chains.

Eventually, we need to involve the private sector better. If companies are not integrated in the design of Aid for Trade projects – by identifying the constraints that most need to be tackled for example – then they are unlikely to make use of the results. Aid for Trade can empower companies in developing countries to boost their trade to the EU, making the best of the EU’s generous tariff preferences.

At the same time, the success of Aid for Trade of course depends on requests from our partner countries, as we always encourage them to take the lead. Aid for Trade works best when governments are aware of the role that openness to trade plays in development. They need to include trade policy in their national development strategies to create a business-friendly environment to attract foreign direct investment.

There are some who say that these arguments are all very well for developed countries but that infant industries in developing countries need protection. I disagree entirely with this: if there is one thing that is not lacking in developing countries, it is entrepreneurship and the will to compete. What entrepreneurs need are opportunities – opportunities that trade can provide. Just look at the practice – in China, India, Brazil, South Africa and all across the emerging world. The economies that have opened up have reaped the rewards.

Finally, a WTO deal on trade facilitation will be an important factor to make trade work for developing countries. Improving custom procedures by computerisation, cutting red tape, and simplifying rules and documents makes doing business more predictable and helps goods move faster across borders.  Studies suggest that the cost of doing so would not be more than €10 million per country.  But in Sub-Saharan Africa alone, an average 5% reduction in time spent at the border could achieve a 10% increase in intra-regional exports.  In some African countries, revenue losses from inefficient border procedures even exceed 5% of GDP. If an exporter cannot say for certain when his products are going to get to customers then he is going to lose business. Lack of transparency – especially with respect to fees – creates high transaction costs.

With this in mind, the EU is actively working with other partners to secure a WTO Trade Facilitation Agreement for the WTO Ministerial meeting in Bali in December this year. We need everyone to get behind such a deal. Because Aid for Trade will work so much better if all WTO Members commit to making the necessary policy reforms. At the same time, any deal on trade facilitation will be impossible to implement on the ground without the right financial support – so this is also an opportunity to make the case for continuing support to Aid for Trade.

But we know that the story doesn’t end there. If we want to see further results we need to be there as partners for development over the long haul. It is only through a collective effort to deliver a well-funded, effective policy that we will achieve our objective: to see developing countries, particularly the poorest amongst them, make the most of globalisation. As far as the European Union is concerned, that means at both Member State and European level we must therefore do our very best to maintain these levels of commitment. I certainly am ready to do so.

Useful links

Aid for Trade Policy Dialogue 2013

OECD / WTO: Papers and publications on Aid for Trade

Government of Sweden

Overseas Development Institute

European Commission, DG Trade

Aid for Trade: Renewing the impetus

Today’s post from Pascal Lamy, Director General of the WTO, is the first in a series published to coincide with the 2013 Dialogue on Aid for Trade taking place at the OECD on January 16-17, in collaboration with the Government of Sweden and the Overseas Development Institute, with the support of the European Commission.

Aid-for-Trade is as relevant today as it was when the Initiative was launched at the Hong Kong Ministerial Conference in 2005. Developing countries, and in particular Least-Developed Countries (LDCs), have made measurable progress in their participation in the global trading system.  But for many, this participation still remains too narrowly focused on a limited range of exports (often primary commodities). And prospects for further integration into the global economy continue to be hampered by a range of supply-side and trade-related infrastructure constraints.

But there have been some bright spots.  Annualized over the period 2005-2011, the volume of world merchandise trade grew by some 3.7 per cent – albeit with a sharp downturn in 2009.  For many developing countries, growth rates over this period have been much higher. For example, LDCs merchandise exports grew by 4.6% annually. By contributing to mobilise the potential of developing countries to participate into world trade, Aid-for-Trade can reasonably claim to have played a part in this expansion, and in particular for LDCs.

Examples cited at the Third WTO Global Review in July 2011 illustrate how Aid for Trade can be effective in building infrastructure, addressing supply-side constraints and putting in place the necessary regulatory systems that developing countries need to facilitate their participation in the global trading system.  The range of activities profiled were substantial across a wide spectrum of countries and sectors.

Successive monitoring exercises since 2007 have also highlighted progress in promoting coherence between trade and development objectives.  This has two components: “mainstreaming” trade into the national and sectoral development strategies of developing countries – and galvanizing support from development partners to help address trade-related development objectives identified by countries themselves. The initiative has also sought to highlight the importance of effective monitoring and evaluation of the outputs and impacts of Aid for Trade assistance.

Since the Aid-for-Trade Initiative was launched in 2005, over $200 billion has been mobilized in funding to help developing countries participate in the global trading system. Figures from the OECD highlight that the annual Aid-for-Trade funding envelope has grown by 80% in real terms since 2005.  This figure would increase further if the trade- related assistance offered by South-South partners was included. 

Particularly gratifying has been that some $60 billion has been directed to the world’s poorest countries.  They have been one of the notable beneficiaries of increased Aid for Trade funding.  Between 2005-2010, Aid-for-Trade funding to them doubled from $6.8 billion in 2005 to $ 13.6 billion annually.  

Yet the job is far from complete.  For example, despite their recent impressive growth, the 49 LDCs still only account for 1.12% of global trade. And many other developing countries continue to need assistance to overcome their supply-side constraints; small and landlocked economies are particular cases in point.

We also need to understand how Aid for Trade can best contribute to enhancing developing countries’ growth prospects in a global economy increasingly characterized by complex production networks in which production of goods and services has been unbundled into many different component parts.  A global division of labour based on comparative advantage in trade in tasks has complex trade and development policy implications. One such policy consideration is the under-recognized role of services, not just in the global economy, but also in development more generally.

WTO is actively collaborating with the OECD to explore the policy questions raised by value chains.  This will be the central theme for the Fourth Global Review of Aid for Trade: Connecting to Value Chains, on 8-10 July 2013.  The Fourth Global Review will be informed by research work on value chains and a monitoring exercise that for the first time is being extended to the private sector.

Fiscal pressures are mounting among key donors.  The funding outlook for development assistance (of which Aid for Trade is part) is muted. As part of their Multiyear Action Plan on Development, G-20 leaders committed to maintain Aid-for-Trade expenditure at 2006-2008 levels.  Notwithstanding this pledge, we need to make the case for continued Aid-for-Trade funding – not just from traditional donors, but also from South-South partners and explore how to bring the private sector into the picture.

The OECD’s Policy Dialogue on 16-17 January is an important opportunity for the Aid for Trade community to gather and discuss the way ahead.  To identify how best to address the on-going challenge facing many developing, and in particular LDCs, on how to integrate into the multilateral trading system and to benefit from liberalized trade and increased market access.  

I hope the OECD Policy Dialogue will give renewed impetus; impetus for the Fourth Global Review of Aid for Trade and a strong mandate to continue the Aid-for-Trade Initiative when WTO Ministers meet at the Bali Ministerial on 3-6 December 2013. It should also give renewed impetus to ensure that Aid for Trade continues to positively impact the trade and development prospects of developing countries in the most effective manner.

Useful links

Aid for Trade Policy Dialogue 2013

OECD / WTO: Papers and publications on Aid for Trade

Government of Sweden

Overseas Development Institute

European Commission, DG Trade