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Aid for Trade: Opening the Black Box

Olivier Cattaneo's picture
Olivier Cattaneo
December 2013

Olivier Cattaneo argues that we need to take a closer look at Aid for Trade as a result of the changing context in which it operates, otherwise it will remain a statistical illusion and a political hoax. Olivier is Adjunct Professor and Research Associate at SciencesPo, Paris. This blog is part of a mini-series on how Aid for Trade contributes to progress in development.

At a time of economic and financial stress, aid budgets in main donor countries are under pressure. Aid for Trade (AfT) will not be spared, as shown by the decline in AFT spending in 2011 – the first ever decline since the launch of the AfT Initiative back in 2005. To maintain any momentum, AfT’s supporters need to show results and value for money. And to do that, they must develop a culture of evaluation.

The question then becomes: what is AfT trying to achieve? This question has not been raised for years, at least not in terms that allowed any proper monitoring of results or measurement of the aid effectiveness of AfT against agreed performance indicators.

In fact, the AfT Initiative has been, for the most part, a vast operation of aid repackaging, with old projects re-labeled as AfT when they happened to have trade-related aspects. No surprise, then, that a 2011 meta-evaluation of AfT revealed that objectives assigned to AfT projects were often only remotely – if at all – related to trade.

For example, 97% of total AfT spending since the 2005 launch of the Initiative (around $200 billion) went to economic infrastructure (53%) and building productive capacities (44%) – in other words, traditional aid projects that happened to have an impact on trade. Only 3% went to trade policy and regulations and trade-related adjustment. It seems that donors had been ‘doing’ AfT before 2005 without even knowing it and, while real (a 57% increase in AfT commitments), the AfT success has been, very largely, the result of a statistical fine-tuning.

This does not mean that the AfT Initiative has been useless: it is important to assess the trade, as well as, say, the environmental or gender dimensions of aid. The AfT concept is also crucial for advocacy, for mainstreaming trade in country development strategies, and for resource mobilisation. So if the case for AfT has to be made in the competition for shrinking aid budgets, donors should agree on the objectives of the Initiative and be able to measure its impact.

This is not an easy task. For instance, trade agreements are often used as foreign policy instruments to promote peace among nations (for example, the construction of Europe, which started with a trade agreement on coal and steel to make another war between France and Germany impossible). It is often hard to measure their impact in pure economic terms.

International trade patterns have also changed. With the prevalence of global value chains (GVCs) in business strategies, it appears that the development of fully-integrated domestic industries is no longer the best path to trade integration, and that developing countries should make every effort to join major GVCs and capture as much of the value-added as possible along these chains.

This means that AfT should not be all about promoting exports anymore, but about creating a business environment conducive to attracting segments of GVCs and moving up value chains. In a context full of GVCs, a country cannot become a competitive exporter unless it is an efficient importer. Trade facilitation has become the key to success, and an easy start for consensus, benefiting both importers and exporters.

Ultimately, what matters is not so much the value of trade, but rather the value for trade, i.e. what’s left in the country once the trade transaction has taken place. Trade and development strategies should facilitate intra-chain transfers (capital, technology, know-how, knowledge, etc.), and build up domestic backward and forward linkages that trigger socio-economic upgrading.

Who better than those who ‘do’ trade every day – the private sector – to determine the objectives of AfT and help to measure the impact of AfT projects? A first step in the right direction was made at the 4th Global AfT Review in July, when private companies were asked about the major incentives and obstacles to investment and sourcing in developing countries. The good news is that AfT priorities often match those of the private sector on, for example, trade facilitation (reduction of transport costs and customs delays or burdens), trade finance, or standard compliance.

However, some factors, such as business environment, governance (corruption), and skills, to name a few, often fall outside the scope and ambit of AfT. More efforts should be made to link the private sector to trade capacity-building efforts. Some lead firms already contribute to these efforts through intra-chain transfers, but there is a need for further synergy to maximise the spillover effects of foreign investment and trade integration.

At the same time, the prevalence of GVCs in business strategies presents new risks for developing countries (e.g. diffusion of private standards, higher trade volatility, vertical anticompetitive practices, land grab, etc.) that are also challenges to be addressed by public authorities, potentially with the aid of donors in the context of AfT.

A convenient political concept and bargaining chip in the negotiations for a reciprocal opening of markets, AfT is now passing the truth test: it will need to adjust to the reality of changing trade patterns in GVCs, and to the reality of shrinking aid budgets and increased demand for accountability. It will not be enough to continue looking backward at how the aid money was spent – countries now need to identify clear targets and objectives. Otherwise, AfT will remain a pure statistical illusion and political hoax.

Read other blogs in this series from Jean-Luc DemartyMarie-Agnès Jouanjean and Dirk Willem te Velde.