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Aid for trade can help exports but needs better design

11 March 2013

Although the increase in ‘aid for trade’ has helped to increase export capacity, the example of the Kenyan horticulture sector shows that donor approaches need to change, according to research reported on the Business Fights Poverty website in January.  The report claims that this is because of the changing context created by the emergence of global value chains (GVCs) and production networks, and considers that what is required is “a shift in donor focus to look beyond providing support to individual firms and covering the costs of compliance, towards better supporting the organisations and institutions that represent firms”. This is to help smaller enterprises (such as small-scale Kenyan farmers) enter into remunerative relationships with the dominant GVCs that control the trade.

‘Aid for trade’ now constitutes up to one-third of all official development assistance (ODA), with annual commitments standing at over US$32 billion in 2010.  But does it work and provide donors with “value for money”? This was a question addressed at an OECD Policy Dialogue on ‘aid for trade’ on 16 January 2013. According to a background paper prepared by ODI, “the evidence on the effectiveness of different types of AfT flows is mixed…. The benefits from AfT tend to increase with more targeted flows. Further, trade facilitation and aid to trade-related infrastructure have significant positive impacts on recipient countries’ trade costs.”

The value of helping trade facilitation was underlined by Commissioner Karel De Gucht in his speech to the OECD Policy Dialogue. “There is strong empirical evidence to suggest”, he said, “that aid that helps goods to cross borders may generate the largest welfare gains. The reason is obvious: the potential for improvement is vast.”

The WTO Director-General, Pascal Lamy, also speaking to the Policy Dialogue, argued that “Aid for trade is not charity. In an ever more interconnected global trading system…improving the trade capacity of developing countries is in everyone’s interest.”  This is partly because the import content of exports has been increasing fast. “Even on a conservative basis”, he claimed, it had risen “from 20 per cent to 40 per cent and much more for export-oriented emerging countries”.  

Editorial comment

There has been an agricultural parallel to the substantial changes in the pattern of trade in manufactures observed over recent decades (with an explosion of intra-industry trade in components). The gains to be made by exporting many agricultural goods onto undifferentiated world markets has fallen substantially; the smart money is in exporting niche (usually high and consistent quality) products through GVCs that have a strong presence in the most attractive markets.

The GVCs of which a producer can be part, and the producer’s relations with the dominant members of that chain, will tend to determine the profitability of production. And intra-GVC relations are determined by power: how important is producer ‘X’ to the gains that other members of GVC ‘Y’ can obtain and, the other side of the coin, how important is ‘Y’ to ‘X’?

‘Aid for trade’ can play a part in helping ACP (and other developing country) farmers improve their bargaining power with GVCs. But it will achieve maximum effect only if it specifically targets those farmers who have the potential to produce high-quality output, but are prevented by barriers (such as the cost of certification) from realising this potential. 


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