Access to global digital trade can give the development agenda the boost it needs, writes Jorge Moreira da Silva, Director, OECD Development Co-operation Directorate (DCD)
What does digital connectivity for sustainable development actually look like? Take the case of business owner, Praew from Thailand, who travelled 15 km each day to sell her clothes at the Chiang Mai night bazaar. At first, her attempts to move her small women-led business online to meet customers’ demands met with barriers that prevented access to the global market. In 2015, she learned how to utilise Amazon to ship worldwide and saw her profits grow by 70%, allowing her to employ others in her community. Or consider Clotel, who grew his small perfume shop to be the top online perfume retailer in Cameroon after receiving digital and management skills training. His sales went up fivefold. Chinese entrepreneur Du Qianli is another case in point: he uses his online Taobao shop to sell natural plants gathered from villagers in the Taihang Mountains, helping farmers earn extra income to send their children to school. By harnessing the power of digital connectivity, these entrepreneurs now have the power to help themselves and others in their communities out of poverty.
These are just three of 145 Aid for Trade case studies the OECD collected for the 2017 OECD-WTO Aid for Trade at a Glance. They demonstrate the aim that is at the heart of the financing for development agenda: to ensure that EVERYONE is lifted up by the mobilisation of unprecedented levels of public and private resources. Aid for Trade that supports access to digital markets is in line with the 2030 Sustainable Development Agenda, which calls for a more inclusive and interconnected world.
The joint publication casts a spotlight on how digital and physical connectivity is transforming societies, and contributing to inclusive trade and sustainable growth. Better connectivity offers more business opportunities by making it easier and less costly for business people in micro, small and medium sized enterprises (MSMEs) in developing countries to access markets.
Capitalising on connectivity to bridge the digital divide
Accessible and affordable internet connections are necessary for creating an interconnected global market in which no one is left behind. But they are not enough. To leverage the digital economy for developing countries, digital literacy, identity and financial inclusion also need to be improved.
In developing countries, information and communications technology (ICT) infrastructure continues to lag, which makes it harder to overcome the digital divide not just between developed and developing countries, but between cities and rural areas, women and men, and the educated and uneducated. Some 3.9 billion people remain offline, with only a quarter of people in Africa using the internet and only one in seven in least developed countries.
Since the launch of the Aid for Trade Initiative, a total of USD 155 billion has been disbursed for trade-related infrastructure and energy supply. Both sectors are essential for turning digital opportunities into trade realities. Cumulative disbursements in programmes to improve economic infrastructure, build productive capacity and support capacity-building in trade policies reached almost USD 300 billion since 2006. Aid for Trade commitments have increased annually by more than 10% and now stand at USD 54 billion.
While the imperative of bridging the digital divide has support among development partners, we have yet to see a concomitant rise in concessional financing for ICT projects. Official development assistance (ODA) for digital development has remained relatively stable over the last ten years at an annual average of around USD 600 million. This must change.
This underscores the need for coordination with the private sector. The most active donors work closely with the private sector to focus their support on helping developing countries create a regulatory framework that is conducive to attract private investment in building the physical ICT infrastructure. The Addis Ababa Action Agenda (AAAA) recognises the key role that broader sources of development finance will play in reaching the Sustainable Development Goals (SDGs). More synergy between the public and private sector will be needed to lift resources from billions to trillions in support of the SDGs, and to leverage investment in ways that can truly lead to better lives for all.
The OECD is supporting implementation of the Addis Ababa agreement through transformational financing for development, such as blending aid money with private finance and developing new ways of measuring official support. While discussions about how to do this are ongoing among OECD-DAC members, what is important is that we attract additional investment for sustainable development and work together to mobilise these resources effectively, ensuring financing for development is both “fit-for-purpose” and “fit-for-future.”
References and further reading
OECD/WTO (2017), Aid for Trade at a Glance 2017: Promoting Trade, Inclusiveness and Connectivity for Sustainable Development, WTO, Geneva/OECD Publishing, Paris. http://dx.doi.org/10.1787/aid_glance-2017-en
Alibaba (2012), Alizila News: E-commerce in Rural China, https://www.youtube.com/watch?v=LKSxZZk6y28
Nkoth Bisseck, Candace (2016),Changing traders’ lives via eCommerce in Africa, https://www.youtube.com/watch?v=WsuaeYdSXjQ
Roth, David K. (2016), Aid for Trade–Case Story: Lanna Clothes Design, http://www.oecd.org/aidfortrade/casestories/casestories-2017/CS-88-Amazon-How-a-small-rural-business-in-a-developing-country-was-empowered.pdf
Third International Conference on Financing for Development (2015), Countries reach historic agreement to generate financing for new sustainable development agenda, http://www.un.org/esa/ffd/ffd3/press-release/countries-reach-historic-agreement.html
Noe van Hulst, Ambassador of the Netherlands to the OECD
As we start a year that Ian Bremmer (President Eurasia Group) has coined as entering ‘the geopolitical recession’, it is worth asking what the OECD focus could be in 2017. I see two key issues worth highlighting in this context. First: Escaping the Low-Growth Trap. Escape games are popular nowadays, but this one is of eminent importance to all of us. In the latest Economic Outlook (November 2016) the OECD has aptly demonstrated how we got stuck at 3% per year for the last five years. How can we get out of this low-growth trap? Now that extraordinary accommodative monetary policy has reached its limits, the OECD recommends a more balanced policy set with a much stronger role for collective fiscal action and for more inclusive structural and trade policies.
Although the Economic Outlook makes a passionate case for a more expansionary fiscal stance in many countries, the reality is that this is unlikely to happen. Partly because some countries are cautious in the light of a heavy public debt burden. Partly because they are already growing at or above potential growth, as we heard from Prof. Christoph Schmidt (Chairman of the German Council of Economic Experts) a week after the publication of the Economic Outlook. The reason that potential growth is so low has, of course, everything to do with the productivity slowdown that was – very appropriately – the main topic of the OECD Ministerial Council Meeting in June 2016. Against this background, I think we will find more common OECD ground in 2017 if we focus strongly on boosting smarter structural policies as the main avenue to get out of the low-growth trap.
Let me mention just two concrete examples. The first one is harvesting the great potential of the digital economy, both a priority of the German G20 presidency and a promising new horizontal project within the OECD. The second example is inclusive structural reforms, particularly in product markets potentially delivering short-term benefits in terms of output, investment and employment. Making reforms more inclusive is also about exploiting benefits of complementarities between product and labour market reforms, synergies (growth & equity objectives) and designing policy packages to help vulnerable groups or mitigate trade-offs.The launch of the 2017 OECD Going for Growth publication is an excellent opportunity to highlight this key point. Reinvigorating good-old competition policy will also reinforce stronger and faster diffusion of new (digital) technologies from frontier to laggard firms and hence boost average productivity. Let’s not forget that structural policies are a traditional OECD strength, an area where the OECD holds a strong comparative advantage and rightly enjoys high international credibility.
What about inclusive trade policies? Well, that is my second key issue to focus on in 2017. Global trade growth has been very weak relative to historic norms for five years. The general consensus is that the relationship between trade and GDP growth is undergoing a fundamental shift. In the ‘good old days’ we enjoyed trade growth at a rate of twice global GDP growth and now trade barely makes global output growth. According to OECD analysis this also contributes to the productivity slowdown. So what exactly is going on with trade? Is low trade growth somehow intertwined with the general global growth malaise? To what extent is this due to global value chains contracting, as reflected in OECD analysis? Is the current slowdown in global trade only natural and should not be a major concern? In any case, it is clear that the rise of trade restrictions in G20 countries, still continuing in stunning contradiction to countless G20 communiqués, surely are not helpful. Deeper OECD analysis is required to pin down more precisely how the different factors contribute to the trade slowdown. And how trade impacts labour markets and economic growth in different regions within countries.
Deeper analysis, however, is not enough. We definitely need to ask ourselves some tough questions about where the public backlash against trade and globalisation is coming from and what went wrong. And even more importantly, what we can and should do better. One area is the need to rebalance our trade and investment policies, towards a more fair, sustainable and inclusive system. Making the OECD Guidelines for Multinational Enterprises the centerpiece of trade and investment policies would be a concrete step. Another area is more effective complementary domestic policies to help people deal faster and more successfully with trade-related job losses if and when they occur. Ideally, this entails not only effective ‘safety net’ policies but also so-called “trampoline” policies offering a tangible springboard to new jobs.
In any case, it is obvious that trade and trade policies are politically more under fire now than I can remember – and I am not young. As Martin Wolf wrote in the Financial Times “The era of globalisation under a US-led order is drawing to a close…the question is whether protectionism and conflict will define the next phase”. For very open economies like the Netherlands it is of critical importance how this ‘next phase’ will shape up in 2017 and beyond. At this juncture, the Dutch economy is growing at a solid 2% per year (in 2016 and 2017) with unemployment coming down rapidly to 5%, but the downside risks are all related to where the global economy is heading. Many other OECD member countries have a similarly high exposure to shifts in the global economy. According to Open Market Index data from the International Chamber of Commerce (ICC), more than two-thirds of OECD countries have an above average openness, as measured by observed openness to trade, trade policy, Foreign Direct Investment openness and infrastructure for trade.
The OECD has a crucial role to play, in cooperation with other international organisations, in clearly demonstrating the adverse impact of rising protectionism, in monitoring what’s happening in trade and stimulating policy dialogue on better alternatives that help global growth. In this light it is very fitting that the OECD Ministerial Meeting in June 2017 will focus on the theme of making globalization work for all. Let’s try to come up with concrete policy improvements that can help us preserve a well-functioning open global economy.
Emerging regional economies have proved resilient to the slowdown in both economic growth and international trade seen in recent years. For Central America in particular, the challenge involved sustaining the impact of reduced demand for its products from key partners like the United States and the European Union – in 2015 extra regional trade decreased by 11.2%. Despite this, a growth of 1.5% in intraregional trade in the same period has helped the region maintain healthier levels of growth. In line with UNCTAD’s argument that regional trade is an essential part of developing countries’ inclusive development and poverty reduction, Central America has indeed made strides in developing its industries through increased value-added trade within its members. Taking advantage of specialization and complementarities between the different economies in the isthmus, the region has boosted regional production networks to enhance productivity.
After the United States, Central America is the second market for its own products – 32.7% of its exports remain within the region. And while main export products reaching external markets are commodity-intensive (with top products including coffee, sugar, bananas and plantains, and fruits) agroindustry and industrial products make up 90% of trade within the economies in the region. Industrial products alone make up 65.9% of the total, pointing to the increased value-added of intraregional trade in sectors like medicines; plastic packaging items; food preparations; bakery and pastry products; water, mineral and carbonated; paper containers; insecticides, rat poison and anti-rodents.
As trade within the region is more sophisticated and diverse than trade with external partners, economies in the region could leverage intraregional trade to move away from commodity-based economies. Market forces have indeed supported the development of regional value chains in the Central American market. Examples include Unipharm Group, a pharmaceutical company with presence in all countries in the region and in six other markets in Latin America and the Caribbean. With operations based in Guatemala and Mexico, Unipharm develops, produces and trades over 1,200 pharmaceutical products throughout the region.
Because the development of these chains has been spontaneous, however, most of the opportunities the private sector has focused on remain biased to trade between neighbouring countries. The textile production chain, for instance, developed full-package production capacity in Central America’s northern triangle (Guatemala, Honduras, and El Salvador). And most intraregional trade is carried out between neighboring countries – besides the above, for example, Costa Rica and Panama have more intensive commercial links than do more distant peers (see table).
Central America: Intraregional Exports per Country (2015) Participation rates (%)
|Exporting Country||Destination of exports|
|Costa Rica||El Salvador||Guatemala||Honduras||Nicaragua||Panama||Total|
|Total intraregional trade|
Source: Secretariat for Central American Economic Integration (SIECA)
Taking advantage of cross-border coordination and exploiting the benefits of economies of scale is crucial to advance in this line. Policymakers addressing this issue have focused on initiatives to reduce the time and cost of international freight, strengthen cross-border coordination, and implementing trade facilitation measures. This points in the right direction. As shown by the experience of the Association of Southeast Asian Nations (ASEAN), the consolidation of the intraregional market – which makes up 24% of total trade – has been a vital factor for it to become the world’s fastest-developing economic region.
A combination of tariff reform, a strong emphasis on the facilitation of trade flows, and a focus on services have strengthened ASEAN’s participation in global trade. But it has also supported the development of more sophisticated value chains. Singaporean instant food and beverage firm Super Group has expanded its production to over 300 different items for consumption throughout the region in 3 decades. This example also shows how the diversification and specialization through regional production networks increases and shapes the regional trade. Super developed joint-ventures in the Philippines in 2004, built a production base in Malaysia in 2005-2006 and in China in 2010-2011.
Services, too, have become more relevant in intraregional trade. Indonesian company WIKA expanded its operations and diversified its core business, from electrical supplies and pipe fitting to construction, engineering procurement and investments more broadly.
In fact, we often overlook the opportunities available in the region, and some key industries have the potential to help insert Central America in global trade more actively. But as we move forward, policymakers need to focus on raising productivity and nurturing the development of higher value-added production networks. To do this, Ministers of Trade and Economic Integration are already working on a region-wide agenda to facilitate trade, boost infrastructure investment, and foster the development of regional value chains. And they’re also working in tandem with the private sector to explore hitherto unforeseen opportunities. Adapting policies to accommodate these efforts will prove crucial in years to come, and allow the region to harness a larger market size and boost productive capacity.
 ASEAN, 2015. A blue print for growth ASEAN Economic Community 2015: Progress and Key Achievements. Jakarta: ASEAN.
Decán, M. V. P., 2015. Costa Rica, suelo fértil para los startups. Estrategia y Negocios, 7 Septiembre.
ITC, 2012. International Trade Center. Available at: http://www.intracen.org/news/Interregional-and-intraregional-trade-in-emerging-markets-identified-as-key-to-addressing-global-economic-crisis/
Lincoln, E. J., 2004. East Asian Economic Regionalism. New York: Brookings Institution Press.
Matthews, A., 2003. Regional integration and food security in developing countries. Rome: FAO .
Towards Human Resilience: Sustaining MDG Progress in an Age of Economic Uncertainty , New York: UNDP,2011
UNCTAD, 2015. Policy brief: Strengthening the private sector to boost continental trade and integration in Africa, Geneva: United Nations Publication .
Marten van den Berg, Director-General for Foreign Economic Relations, Ministry of Foreign Affairs, The Netherlands
Today’s economy is unquestionably global. National markets for goods and services have become increasingly integrated. This process of globalisation has taken place over the past centuries. But during the period of 1987-2000 we saw a big leap in globalisation. And we saw a rapid development of Global Value Chains (GVC’s). Many countries have benefitted enormously from this process of globalisation. Not only high income countries, but also hundreds of millions of people in low and middle income countries have been taken out of poverty because of international trade and investment.
International trade and investment generate employment and income. But they are also a channel for knowledge transfer, technology flows and for specialisation according to comparative advantage. Through trade, firms get better access to cheaper and better quality inputs. And cheap imports raise consumer welfare. Openness matters for growth. This is why so many trade agreements have been negotiated between so many countries. Or why now 154 countries are a member of the WTO.
There is substantial evidence that trade agreements have a significant effect on trade and investment relations and therefore on jobs and productivity growth. However we should acknowledge that there are also income and distributional effects. Some sectors will experience significant expansions, other sectors will contract. Productive firms gain from international trade, others will lose. At the same time some workers will see a rise in their wages, others will see their wages stabilise or decrease. The famous “elephant graph” illustrates where there are losers (low-middle income group in US/Europe/Japan) and where we see winners (middle income class in China and India).
The shift in relative importance of different sectors as a consequence of international trade and investment generates labour and capital displacement. This will lead to adjustment costs for those that need to change employment. These adjustment costs have raised questions about the benefits of international trade and investment. But there are also concerns about fairness (unfair competition) and about the relation between international trade and investment regimes and labour and environment standards. And concerns that international regimes limit room for manoeuvre at a national level.
In 2007 the process of rapid globalisation came to an end. Growth in global trade today is less than half the growth during the two decades prior to the global financial crisis. This slowdown is largely the result of the decline in investment, the rebalancing of China and the shortening of the GVCs. But stalled liberalisation in trade and the increase of protectionism are also holding back international trade and investment.
Together with the decline in global trade, we see more and more people standing up against international trade and investment agreements. For example, neither candidate in the US presidential race supports a free trade agenda. In Europe there is a lot of resistance against TTIP. Also among economists we see a more intensive debate about the winners and losers of international trade and investment.
The lack of progress in trade liberalisation and the opposition to international trade and investment agreements is understandable, but still bad news. We should not forget that international trade and investment are important sources for productivity growth. In fact, it is one of the few proven sources of productivity growth in a world that is characterised by low productivity growth. And reducing trade costs in low and middle income countries where the poor live increases the competitiveness of the goods and services traded by poor people in the lower income groups. And in an increasingly digitalised world even start-ups and tiny companies can operate on a global scale (mini-multinationals), making open trade essential for SMEs. But the debate about those agreements is good news. In the past we probably were too much focused on the macro benefits of free trade and investment and did not sufficiently address the concerns among society of international trade and investment. Concerns about unfair elements of the international trade and investment system, about the negative effects of international trade on labor and environment standards, and about the adjustment costs of international trade and investment.
These concerns are genuine. How should we respond? Refusal to acknowledge these concerns undermines international trade and investment relations. So we have to rebalance our trade and investment policies. We have to shift from trying to organise a free trade regime to an architecture of a responsible trade and investment regime. We need to make the international trade and investment system fair and sustainable and inclusive. First we have to address the complexity issue of the system and include new economic and social developments. Secondly we need public discussion and consultation about those international trade and investment agreements. And finally, but perhaps most important, we need effective national policies to adequately complement international trade and investment policies.
Complexity and new issues
Through GVC’s markets and companies, including SMEs, are connected in many ways. Today our international markets are highly complex. It is almost impossible to regulate this complex system in a sustainable and fair way through a spaghetti bowl of regional and bilateral trade and investment agreements. We have to return to a more global architecture of the international trade and investment regime. We need a revival of the multilateral system. Therefore it is good news that we have seen small successes in the WTO negotiations in Bali and Nairobi. But a new success in Buenos Aires is also crucial. Not only on the Doha Development Agenda issues, but also on other issues relevant to international trade and investment. For example digital trade. But also on investment we have to focus more on a global architecture. The outcome of the G20 under Chinese presidency in concluding non-binding principles for investment was a very important step. We should continue on this path and international organisations like the OECD and UNCTAD can and should play a major role in this process. The issue of sustainability should be an integral part of this agenda. Therefore it is good news that among the non-binding principles for investment responsible business conduct is one of them. The OECD guidelines for Multinational Companies are of key importance here.
Get stakeholders involved
Second, it is extremely important that relevant stakeholders are involved in the process of designing and implementing international trade and investment agreements. CETA is a very good step forwards in this respect. Canada and the European Union have committed themselves to a stakeholder consultation process: employers, unions, business organisations and environmental groups are getting a key role in the implementation of CETA. In the future public discussions and stakeholder involvement should be an integral part of our international trade and investment agenda. That’s the way to make trade and investment a “race to the top” in terms of standards.
Complementary national policies
Finally, national policies need to effectively complement international trade and investment policies. More (pro-)active labour market and social security policies are needed to minimise adjustment costs. We need targeted education and skill policies to help vulnerable groups to keep up with the fast changing demands of labour markets. We need stronger tax policies to address the issue of inequality, e.g. implementing the OECD guidance on tackling Base Erosion and Profit Shifting (BEPS). In lower income countries national policies are needed in order to address challenges like lack of infrastructure and education to ensure that lower trade barriers actually benefits the poor.
To conclude, we need to shift from a free trade regime to a sustainable and inclusive trade and investment regime. And we need national policies to make globalisation work for all. I look forward to discuss this in the meeting of the Global Strategy group at the OECD on 28-29 November. These changes are needed and the only way to restore public trust and to build public support for globalisation and for an international trade and investment regime. And we absolutely need this, because international trade and investment are crucial engines for productivity growth, for implementing the SDGs and to abolish poverty.
International trade: Free, fair and open? Patrick Love, OECD Insights
Today’s OECD Interim Economic Outlook warns that trade growth is slowing, contributing to another slowing of global GDP growth in 2016 and with few signs of improvement for 2017. Does it really matter? If we believe the current anti-trade, anti-globalisation rhetoric, we might shrug our shoulders and say “no”. Trade has been so maligned and demonised, some might even be pleased.
But that would be the wrong answer. Open trade and cross-border investment are key vectors for diffusion of new technologies and competition, which are central to achieving productivity gains and improving well-being. New research published today by the OECD in conjunction with the Interim Economic Outlook suggests that a substantial part of the post-crisis slowdown in total factor productivity growth could be reversed if trade intensity were to recover. In short, weak trade is one of the factors that will keep the economy in a “low-growth” trap where sluggish trade and investment lead to diminished growth expectations and rising financial risks.
Over decades, trade has been responsible for drawing hundreds of millions of people out of poverty – and we mean one and two-dollar-a-day poverty – in emerging and developing countries. Trade could perform this same miracle for the many millions still living in abject poverty in poor countries in Asia and Africa, if other conditions are also right of course. Salaries and working conditions are almost always better in companies that trade than in those that do not, and this is true in countries at all levels of development. Households gain hugely from trade because it increases choice and reduces prices.
The prospects of millions of workers in the global economy depend on their participation in global value chains, as highlighted by statistics developed by the OECD with the WTO on Trade in Value-Added (TiVA). The main insight from these data is first, in order to export efficiently, a company has to also import efficiently. A second key insight is the importance of high quality services to support trade and trade-intensive activities. It should be of great concern that there are signs that the development of global value chains appears to have gone into reverse in recent years.
The OECD paper published today looks at the reasons for the trade slowdown and back-tracking in the development of global value chains. Several factors are at play, some of them cyclical in nature, others structural like the changing role of China in the global economy. Increasingly murky protectionism is contributing to the slowdown, as is the failure to implement any really ground-breaking global new trade initiatives for more than a decade. Without entering into a rather futile debate about when the slowdown really started or the exact contribution of structural versus cyclical drivers, let us instead ask what governments can do to reverse it.
The OECD Interim Economic Outlook calls for implementation of a package of measures to boost demand, including through collective fiscal action focussed on raising investment and productive spending, and structural reforms. Removing barriers to trade and creating the conditions for people to reap the potential benefits of trade should be at the heart of the structural reform agenda.
First, governments should put their weight behind efforts to further lower trade barriers and unnecessary trade costs by implementing the Trade Facilitation Agreement, vigorously pursuing the reduction of restrictions on services trade, including by concluding the trade in Services Agreement (TISA), co-operating to reduce costly and unnecessary regulatory differences, concluding the Agreement on Environmental Goods, and by coming to the table to deliver a good result at the 11th WTO Ministerial Conference a little over a year from now. They should reduce remaining barriers to foreign direct investment. There are unilateral, bilateral, plurilateral and multilateral channels available if governments want to provide those growth opportunities that are currently lacking.
Second, governments need to step in to ensure that the benefits of trade are fairly shared. Governments should help those affected by the churn and disruption caused by globalisation. Benefits from trade are diffuse and long-term in nature. Losses tend to be sharp and very concentrated on individuals and regions. The people most affected are sometimes those with the least capacity to adjust. An unemployed steel worker does not take much comfort from knowing that programmers in Silicon Valley are thriving, or that T-shirts and smartphones are cheaper. What he or she needs is a decent job, new training and skills, and a robust social safety net to help through the transition.
Making trade work better for more people is not just about persuading them, although clearer and more honest communication is important. It is about ensuring that the full panoply of structural policies is put to work to ensure that people are able to reap the benefits that more open trade, technology, and investment will bring. This means paying attention to infrastructure, well-functioning financial markets, education and skills, clear and transparent institutions and rule of law – all the things that make an economy nimble Trade policy cannot be made in a vacuum but rather must be part of the fabric of domestic policies. If we are not able to do this, growing public scepticism, particularly in the most advanced economies, may mean that further market opening will be difficult, if not impossible. Such a result would impoverish many across the world.
Central America has an important opportunity over the next few years to build inclusive and sustainable development through deepening regional economic integration, both to further the development of its internal market at sufficient scale, and to present the region as more attractive for investment. At the Secretariat for Central American Economic Integration (SIECA), we view coordinated regional integration as crucial to the implementation of the 2030 Agenda for Sustainable Development and its Sustainable Development Goals (SDGs). Key priorities are facilitating trade, promoting sustainable, resilient infrastructure and ensuring the integration of small-scale enterprises into value chains and markets (SDG 9), as well as promoting gender equality through women’s economic empowerment (SDG 5).
Regional action to support trade
Central America has made considerable progress in fostering trade openness and economic integration. The majority of trade within the region is now conducted under a free trade regime – tariffs apply to only 1.8 percent of originating products. Because of this progress, intraregional trade went from accounting for 16 percent of total exports in 1960 to 32 percent in 2015.
However, the World Bank estimates that around 12 percent of the value of consumer goods in Central American countries is still associated with the burdensome procedures and out-dated infrastructure in borders. It also takes an average of 13 days to export and 14 days to import products, and freight moves at an average speed of only 17 km per hour. Costs associated with road transportation are particularly high in the region. In advanced economies, freight transport prices are as low as 2-5 US cents per ton-kilometre, but they average 17 US cents per ton-kilometre on main Central American routes; prices stand out even against other developing economies. This is why trade facilitation has become one of the region’s priorities.
In addition to taking part in the implementation of the World Trade Organization (WTO)’s Trade Facilitation Agreement (TFA) – El Salvador, Honduras, Nicaragua and Panama have already notified the WTO of its ratification, and the rest of countries are in the process of doing so –, Central America adopted its Strategy for Trade Facilitation and Competitiveness (STFC) in October 2015. The Strategy will involve the implementation of five short-term measures to streamline border management procedures, and a medium and long term plan to consolidate a Coordinated Border Management (CBM) system in Central America, following the guidelines and best practices from the World Customs Organization (WCO). Successful implementation of the Strategy could enable an increase of between 1.4 and 3 percent in the region’s GNP and a surge in exports between 4.2 and 11.9 percent, according to the UN Economic Commission for Latin America and the Caribbean (ECLAC). The STFC, moreover, is conceived only as a step towards deeper economic integration. A roadmap to be implemented from now to 2024 has also been approved with the aim of establishing a Central American Customs Union (CACU).
Besides trade and integration, Central America is seeking to improve its infrastructure. Panama is the most ambitious; having recently invested US$5.58 billion in the expansion of the Panama Canal; they’re also creating a second metro line, and have already announced a third one valued in US$2300 million. Meanwhile, Honduras has focused in infrastructure supportive of trade facilitation, and Guatemala and El Salvador have devoted resources to energy-related projects.
Despite this the region still faces a sizeable investment gap. According to ECLAC estimates, Latin America needs to spend some 6.2 percent of GDP per year on average to fund infrastructure investment needs in transport, energy, telecommunications, and drinking water and sanitation, but spending is currently below 3 percent of GDP in Central America. The region also needs to revamp its existing infrastructure, building resilience to the effects of climate change, and improving adaptive capacity to face climate-related hazards and natural disasters, reflecting the targets under SDG 13 on climate change.
Just as crucial is investment in boosting micro, small and medium enterprises (MSMEs). Around 96 percent of Central America’s companies are MSMEs, which support 54 percent of employment and contribute to 34 percent of the region’s GDP. It is thus crucial to harness the potential of the regional market – which is large, with similar cultural background and a shared language – to offer small firms the opportunity to engage in international trade. SIECA has intervened to bolster MSME participation in value chains for key export products, including bovine meat, natural honey, foliage, cardamom, tilapia and shrimp, through the Regional Programme for Quality Support of Sanitary and Phytosanitary Measures in Central America (PRACAMS), which operates with funds from the European Union.
Moving forward, the region is looking to support MSMEs in other sectors of industry, creating a path for entrepreneurs to join the formal economy, create better jobs, and – because 46 percent of micro enterprises are owned by women – boost women’s participation in regional and global value chains and their economic empowerment. A recent SIECA study shows that the sectors with the most potential for participation in value chains include food preparations, vegetables, cardamom, coffee, and cattle.
Addressing financing gaps
All these efforts require a substantial amount of support. Overall, SIECA managed US$9.3 million in cooperation funds in 2014 and US$11.7 million in 2015, including for the work on MSMEs and GVCs above. As the sustainable development agenda moves forward, however, regional efforts will also require improved monitoring and evaluation mechanisms to ensure effective allocation of funds and an overarching strategy that ensures resources are aligned with the region’s own development goals.
Preventing overlaps or contradictions between each countries’ fund allocation will be crucial. To achieve this, the Council of Ministers of Economic Integration is expected to soon approve the Central American Aid for Trade Programme (AfTP), and later submit it to the Summit of Presidents for its adoption, a systematic investment plan to address regional trade-related investment needs in a coordinated way.
In SIECA’s experience, aid is more effective when there is a close collaboration between countries and donors. Clear communication and feedback mechanisms have helped us enhance the effectiveness of our collective actions. We’ve also learned the importance of coordinating the execution of projects at the regional level, to avoid redundancies and ensure regional efforts are coherent. Instruments to assist leaders in identifying financing gaps and seek investment and funds to cover them are also crucial. Applying these lessons will be crucial for success as Central America moves ahead with the implementation of the 2030 Agenda.
The OECD offers a wealth of data and analysis illustrating that investment and trade can strongly support the competitiveness of our economies, the efficiency of markets for consumers, the potential for innovation, and—yes—the quality of employment. Of course, open markets raise the stakes for companies and their workers in a competitive environment. But policies that enforce rules for multilateral trade and that encourage governments and social partners to invest in education, training, and skills will ultimately enable our economies to trade up, and not down. In fact, OECD research shows that companies that are involved in international trade offer better working conditions, better salaries, and can reduce informality.
We also know that trade and investment are questioned by some, and unfortunately the arguments are increasingly emotional, if not irrational. And in spite of some modest improvements, barriers to market for trade and “foreign” direct investment exist in abundance, with significant adverse effects on growth and productivity. We often forget that trade and investment have pulled hundreds of millions of people out of poverty and are responsible for much of the convergence we see between living standards globally across countries.
Protectionism remains a real threat, and not many understand the severe consequences for productivity if global value chains are or compromised or even interrupted. In fact, the OECD can exactly show this for individual countries and even sectors.
We are all challenged to communicate responsibly on the opportunities that come with open markets. Clearly, it is counterproductive to vilify trade and to use it for campaigns of all sorts. We need both, a strong and reliable multilateral trade regime, and a drive to reap the benefits of regional integration—including TPP and TTIP. If done right, these goals should be compatible and enforce themselves mutually. And the great potential of trade in services is still to be developed, with important tools such as the OECD Trade in Services Restrictiveness Index pointing to the cost of the many barriers in this sector.
One more word on investment: there is a rambling debate on investor protection, and some question if International Investment Agreements—along with Investor State Dispute Settlement schemes—compromise “the right to regulate”. This is another example how an important debate can be hijacked for populism. Of course, states should have the right to regulate, but not expropriate. It should surprise nobody that high-standards for the protection of investors against measures that contradict earlier agreements are essential for a pro-growth policy environment—and in particular for long term investment in infrastructure. It is important that that these discussions are put back on a factual basis and that misinterpretations are effectively addressed. The OECD is in a unique place to explain why international investment agreements matter, and how they contribute to economic prosperity worldwide. Governments and business, with support and evidence from the OECD, must step up in their efforts to explain the virtues of trade and investment more convincingly to the public.
International trade: Free, fair and open? OECD Insights