Development Co-operation Directorate (DCD-DAC)

Aid, Trade and Additionality: some thoughts - from DAC Chair Richard Manning - ahead of Hong Kong (DACNews Nov-Dec 2005)

 

As we approach the Hong Kong Trade Ministerial, aid is getting a surprisingly high profile. What is going on?

In my opinion, four rather different stories underlie the interest in the role of aid.

The first is that developing countries need to be able to play a full part in the negotiation and in implementing the results. This takes resources. Countries need access to good expertise and analysis. Many issues in the negotiations are complex and technical. To take an active part in negotiations on trade facilitation, for example, or to assess the consequences of different choices on issues of market opening, developing countries may need external assistance to boost their capacity. As the figures in the 2005 joint WTO/OECD Report on Trade-Related Technical Assistance and Capacity Building (report to be released on 14 December 2005) show, donors are rightly investing significant sums (over $800 million in 2004) in the area of trade policy and regulation.

The second is that it is clear many of the costs borne by the exporters in developing countries are nothing to do with tariffs, quotas or rules of origin, important as all these issues are. The costs start at home: setting up a business, getting a reliable supply of electricity, moving goods over bad roads, getting through red tape and restrictive practices at ports, and so on. These combine to impose a heavy tax on the productive sector of most developing countries, and are particularly acute for landlocked countries or small remote countries away from main international transport arteries. I was just a few days ago in the Solomon Islands, for example, where, even on the same island as the country’s capital, there are areas so remote that no-one knows when a boat may next arrive to collect copra.

There is reasonable concern that too little attention has been given by donors to helping developing countries tackle these “behind the border” costs. Poverty Reduction Strategies seem to have given them low priority. Aid for infrastructure has been falling for a decade. Now, a strong sense is developing that more investment in helping the productive sector work is necessary. The World Bank is building its infrastructure portfolio after years of decline. OECD DAC figures show an increase in aid for essential infrastructure of $800 million in 2003, to a total of $9.3 billion. The Commission for Africa gave the issue a lot of attention. And OECD DAC’s Poverty Network is well advanced in setting out a positive agenda for donors which will also learn the lessons of failed investments in infrastructure in the past.

This needs to be matched by more attention to helping the development of competent institutions in developing countries – for example effective customs authorities, more accountable policing, more efficient port authorities. Success also depends on strong commitment by the countries themselves to tackle often difficult issues of vested interests and corruption. What price a new highway if it is still full of unauthorised roadblocks?

The third story is rather different. The world is coming to terms with the fact that the World Trade Organisation is a body which requires consensus and one where developing countries are much better organised than hitherto. There is concern that some developing countries – particularly those whose exports will not gain much improved access to other markets, or where the erosion of preferences may produce at least short-term costs – have little to gain from the Doha Round, and may therefore be reluctant to move to agreements. From this point of view a package of fresh aid, linked in some way to the Round, could seem a way of securing consensus in an outcome that at world level may constitute a “global public good”.

The fourth story may at first sight look like the third, but is in fact different again. What if a country is going to be severely disadvantaged by the results of trade concessions (eg because it is one of the relatively few countries where the loss of existing preferential arrangements will imperil important sectors of the economy)? Surely, the development community has some obligation to help deal with the resulting loss of income.

The first story  - boosting capacity - sees aid as facilitating trade negotiations; the second  - the cost of setting up in business - as complementary to them; the third – a packet of fresh aid linked to the Round -  risks  appearing to be an alternative to them; the fourth  - addressing the loss of income - sees it as a necessary response to them.

In my view, it is very important that the world stays focussed on the first, second and fourth stories and steers clear of the risks inherent in the third. Pascal Lamy’s article in this edition of DAC News makes the point eloquently.

The other issue that needs clarifying is the “additionality” of any aid offered in the context of trade negotiations.  A British academic once wrote a seminal book called “Seven Types of Ambiguity”. Let me offer instead a mere “Two Types of Additionality”.

The first type (Type One) is additionality to what would otherwise have taken place, bearing in mind the current scenario for aid to rise significantly over the period to 2010 and beyond.  The second type (Type Two) is additionality to what is currently being provided now in the area of aid-for-trade.

Each can be considered, at three levels: global, country and sector.

At global level, the first type of additionality is very unlikely. Most DAC members have already made commitments to levels of total aid to at least the year 2010, mostly linked to ODA/GNI targets. The United States is virtually the only DAC member without some form of medium-term ODA target. With the possible exception of the United States therefore, it is more or less excluded that any DAC member’s overall aid programme will rise beyond what is currently planned, at least to 2010, however large a commitment is made to aid-for-trade facilities (or indeed for any other new international initiative).

On the other hand, at global level the position is much more positive on the second type of additionality. DAC projections suggest that if all DAC members deliver on their promises, aid will rise by about 60% between 2004 and 2010, and by 100% for Africa. There is therefore plenty of scope for donors in aggregate to step up aid-for-trade.

If we turn now to the country level, it is in general hard to demonstrate Type One additionality (ie countries receiving more than they otherwise would), if only because few countries know what their future volume of aid receipts will be in much detail. On the other hand, the global picture shows that many developing countries are likely to benefit from Type Two additionality (ie rising aid receipts).  A greater focus on aid-for-trade may objectively mean disproportionately large aid investments in countries with major behind-the-border costs, or, in particular, those where preference erosion is a genuine problem. Such countries might therefore receive additional aid- for-trade beyond the general rise in aid, and indeed there is a good argument that they should. So some at least may benefit from additionality in both senses.

Finally, at sector level within countries: will more be spent on trade-related items than would otherwise be the case (Type One) and will more be spent than now (Type Two)? This is where arguments for special funding arrangements come in. Do we leave countries themselves to determine how much to spend on activities that promote the productive sector, or do we ring-fence funds, for example as donors have done for AIDS, TB and Malaria in the Global Fund? There is concern expressed that Finance Ministries are too little willing to prioritise aid that promotes the productive sector, even though almost every sector in most developing countries would also like more resources.

In general, most donors tend to argue that special ring-fenced funds should be set up in very limited circumstances – but there are often political circumstances that favour such funds, which explains why so many exist. I have even heard it said that the absence of an aid-for-trade fund will guarantee that the sector will lose out. The Integrated Framework for Trade Related Technical Assistance to the Least Developed Countries is itself a test of the logic of a ring-fenced fund, and has the advantage that it forces a degree of common analytical work, of the kind that the Paris Declaration on Aid Effectiveness, agreed by very many donors and recipients at the High Level Forum last March calls for. Stepping this up looks to be sound policy, if governance issues can be addressed.

There is a strong case for some greater collaboration by donors to support the institutions that facilitate trade. It is disappointing that these institutions seem seldom to benefit from the kind of structured joint investments that donors have been making in support of recipients’ strategies for education and health through sector-wide approaches and the like. The call in the Paris Declaration for coordinated capacity-building is highly relevant in this area.

The World Bank and the IMF have been mandated to consider also if regional investments need some particular support: if they conclude that this is the case, it will be a sorry comment on the lack of attention to regional issues in development planning. However, the case which is sometimes argued for ring-fencing major infrastructure investments is in my view very weak: these are typically major investment items whose capital and recurrent costs should be addressed through normal priority-setting arrangements.

It is clear to both the aid and the trade communities that a scaling up of aid by 2010 will have a limited effect if  the capacity of developing countries to benefit from trade  does not also ‘scale up’. We can take some comfort in the WTO/OECD survey on donor’s trade related aid, which shows that government aid agencies have become more active in the last few years in the area of trade. I should like in particular to see more progress in coordinated donor support for those developing countries putting in place the often difficult policy and institutional arrangements that will give their productive sectors a better chance. With rising aid programmes, there is a real opportunity here.

 

Related Documents

 

DAC chair: Mr. Richard Manning

to be changed

DACNews from the OECD Development Assistance Committee

 

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