NON-EDITED. History of the AfT initiative

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1 Annex 8 Evaluation context NON-EDITED History of the AfT initiative Although trade can be a prominent mechanism for economic growth, poverty reduction, and development, developing countries continue to struggle to obtain trade power. Capacity and structural constraints are often barriers to competing in a global market, especially for least developed countries (Hallaert J-J, Lammersen F & Roberts M 2010). In order to address the problems related to information, policies, and infrastructure, the WTO (World Trade Organisation) began negotiations and in 2005 the Aid for Trade Initiative gained prominence during the Hong Kong ministerial meeting (Turner 2008). AfT aims to increase the volume and value of products exported by developing nations, promote integration into the multilateral trading system, and provide benefits to countries through liberalised markets. Donor agencies support development assistance programmes which seek to build a productive capacity, invest in economic infrastructure, support improved trade policy and regulatory systems and support trade development. The Aid for Trade Initiative has already stimulated economics in the short run with promise for long-term positive growth by creating trade opportunities for developing countries. However, to maintain the progress of the Aid for Trade initiative and help countries develop, partnerships between governments, regional organisations, and private sectors must be maintained and strengthened (Hallaert et al. 2010). Recent global events, challenges to global trade As the world globalises, internationally traded goods continue to gain prominence in all business markets. Reductions in trade barriers and supply side constraints have resulted in countries becoming both more interdependent and interconnected in the global market. Although developing countries help to drive this global trade, the benefits of an opened economy do not often reach those countries most in need of an economic boost (World Bank 2011). Efficient internal policy, low costs, and high accessibility to resources are necessary for countries to be successful in a competing market (World Bank 2011). Both regional level organisations and global organisations like the WTO seek to enable trade. Recently, the Doha Round of the WTO negotiations sought to remove constraints to trade and provide developing countries with greater economic opportunities. The Doha Round negotiations stressed the importance of reductions in trade barriers to support an efficient exchange of goods between countries, which would encourage economic growth (Fergusson 2008). Although negotiations continue, controversy has emerged around certain topics. One source of disagreement has been agriculture. The Doha Ministerial Declaration outlined the three pillars of agricultural support: negotiations for improvements in market access, reductions and phasing out of export subsidies and reductions in trade distorting support (Fergusson 2008). Disagreement 188 Aid for Trade

2 has emerged, with some members of the negotiations unwilling to accept all three pillars. The European Union (EU) has addressed the pillar related to domestic support by reform of the Common Agriculture Policy, which distorted trade, but matters related to the second pillar, market access, are still at the centre of debate. The EU and Japan want flexibility in tariffs, while the United States and the Cairns Group want a level tariff peak or high rate (Fergusson 2008). A failure to come to agreement across these three pillars has frustrated many, because of the importance of agriculture for the economies of many developing nations. Subsides are a major challenge to developing countries, with economically powerful trading partners like the United States and the EU generating large surpluses at low prices, undercutting market opportunities for a number of developing nations. Although there was no settlement in the 2005 Hong Kong Ministerial to address issues related to developing countries, members in the negotiations did agree to eliminate export subsidies and export measures that have a similar effect (Fergusson 2008). Trade agreements must also be able to integrate goods and services, and span a wide variety of policy areas. In response, the World Bank Group (WBG) has created a trade strategy that focuses on costs, access, and the impacts of poverty on trade (World Bank 2011). Research by the WBG has shown that improving connectivity is essential, coordination between actors must be increased, and the service industry is increasingly important. Also, the WBG is placing emphasis on both the country and global level of trade analysis, which has resulted in reformed policies and strategies to help developing countries. The launch of the Aid for Trade initiative in 2005 has created a stronger focus on trade and a stronger attempt to ensure that trade policies and assistance are coherent. Although the Aid for Trade initiative has generated economic growth for developing countries, the global financial crisis in 2008 slowed progress. Due to the integrated global market, the effects of the economic decline were felt worldwide, both in the developing and developed countries markets. The economic downturn resulted in Foreign Direct Investment (FDI) falling dramatically, declines throughout many trade sectors, low-income countries experiencing stress in the banking sector, reserves in countries becoming dangerously low, and losses in employment (te Velde 2010). The differential nature of the impacts of the economic decline was also influenced by the main source a country s revenue. Both low-income countries that depend primarily on agriculture and those that depend primarily on oil and minerals faced losses in the economic downturn. However, the difference was that the oil and mineral producers accumulated large reserves because of high prices whereas the agricultural producers saw their reserves depleted. Agriculture income losses resulted in weakened food security and in increased malnutrition in poor countries (Wiggins et al. 2009). During the economic decline, the price of food was pushed down because of lower global demand, which resulted in a decrease in income for farmers (Wiggins et al, 2009). Aid for Trade 189

3 The consequences of the economic downturn were further translated into a reduction in savings and a decrease in public spending in areas that include health care. (Wiggins et al. 2009). Fortunately for low-income countries, emerging markets were able to help provide additional aid during the crisis as they were less severely affected by the consequences of the global financial crisis than developed markets. Also, policy responses were well designed and implemented in developing countries, which limited the negative effects of shocks reverberating through the interconnected global market (te Velde 2010). As a result of the global financial crisis, the promotion of crisis-resilient growth has been stressed to protect against future disasters. This approach includes good macroeconomic management along with responsive institutions and a diversification of capital flows in production and investment (te Velde 2010). Looking forwards, by implementing policy to reduce the negative effects of integration, developing countries can expect to receive the benefits of being included in a global market without facing the significant risks of contagion from shocks elsewhere in the global financial and trade system that might be detrimental to growth, development or well-being. Cooperation at the EU level In 2007, the EU Council adopted the EU AfT Strategy, which is a joint EU policy initiative. The AfT Strategy focuses on both securing more resources for AfT as well as monitoring the impact of AfT on development, particularly its impact on poverty reduction. The five key activities of the strategy are: 1 scaling-up total EU AfT as well as increasing the proportion going to Trade Related Assistance (to reach 2 billion annually by 2010, with 1 billion coming from the EC, 1 billion from the EU MS); 2 enhancing the impact and pro-poor focus of EU AfT; 3 increasing the capacity of donors (EU-wide and Member States) in line with globally agreed aid 4 effectiveness principles; 5 supporting the ACP regional integration process; 6 ensuring an effective monitoring and reporting to sustain the process of implementing. Finland is committed to fulfil the collective pledge by EU Member States to increase trade-related assistance to 1 billion Euros per year by The Cotonou Agreement signed in June 2000, established the basis for a new trading regime between the EU and African, Caribbean and Pacific (ACP) countries, including concluding reciprocal trade agreements - Economic Partnership Agreements (EPAs). The main objectives of the EPAs are: Reciprocity: a gradual elimination of trade restrictions between ACP-EC countries 190 Aid for Trade

4 Development-orientation: the promotion of sustainable development and poverty reduction by supporting the own regional economic integration. Regionally-based: strengthening regional integration Differentiated: allowing for sufficient flexibility, provide special and differential treatment to take the different levels of development of the contracting parties into account. The negotiation processes were initially to be concluded by 31st December 2007, but none of the regions met this deadline. One full EPA was signed with CARIFORUM in October Interim EPAs have been signed for example with Ghana and Cote d Ivoire, but the other EPAs are still to be concluded. Challenges in addressing behind the border constraints Trade success is determined not only by the import tariffs of trading partners, but also by behind the border factors in the exporting country, such as the transmission of price signals from key international markets through the value chain to producers and entrepreneurs, the efficiency of internal transactions, the friction of distance between producer areas and export hubs (distance x time), the cost of transport and factors determining the productive capacity of key sectors, including the accessibility to inputs. This means that if a country is to increase the volume and value of its international trade, progress has to be made in areas outside the traditional domain of trade ministries, so regulatory agencies must also be included in addressing the internal economic constraints of developing countries. Trade must also be considered when designing AfT-related policy and programmes because the opportunity for benefits is limited when trade is not mainstreamed throughout the intervention design (World Bank 2011). Also, as trade spans multiple sectors, coordination is a key effectiveness issue. Unfortunately, coordination across Ministries and sectors is complex and transaction-heavy and in many developing countries there is a lack of policy coherence and an overlap in activities and reflecting differing policy views and goals. Another problem lies in communication between actors involved in aiding developing countries. In order to properly facilitate internal transactions there has to be communication between all those involved in both policy and action. However, agencies still tend to share only limited information (even internally), despite working on complementary topics (World Bank 2011). To maximise the beneficial effects of AfT investments improved coordination and communication and a greater focus on enabling trade is required. Enabling environment for PSD and agro-business Building an effective enabling environment for private sector development (PSD) and agro-business is a core element of the AfT agenda (under the AfT category of Building Productive Capacity ). In this section of the report we briefly review the Aid for Trade 191

5 approach taken by the UK s Department for International Development (DFID) to enabling PSD. DFID is seeking to reduce the costs of administrative procedures that are required to start a business and reduce the amount of time it takes for government clearance of business projects (DFID 2011). This contributes to economic progress by reducing the costs faced by those companies engaging in trade and thus increasing their turnover, and hopefully profit. DFID s engagement in this area seeks to support policy reforms that will reduce both transport costs and times, through better management and streamlining through improved infrastructure (ibid.). Agro-businesses face similar constraints to PSD. Commonly, agro-business is identified as an element of rural and agricultural development, whereas PSD is viewed through a markets and urban lens. Many of the constraints faced by agro-businesses and other elements of the private sector are similar and the lack of a systems approach limits the identification of synergies and the identification of higher level binding constraints. Poor infrastructure, for instance, impedes agro-business and the private sector more widely and private sector investments, which neglect rural areas dependent on agriculture weaken the ability of many low income developing countries to engage beneficially in trade. Also related to infrastructure, are the water and power constraints that agricultural and other rural enterprises face throughout their value chains (from production through processing and the cool chain). Water is a necessary resource, so it is important that an infrastructure system be created to increase collection, storage, treatment, distribution, and then disposal or recycling of the water in agro-business regions (Yumkella et al. 2011). Also important, is access to technology and improved management within the agro-business enterprises. This includes a focus on dependable energy and environmentally friendly practices. These tools help enable businesses to continue growing and progressing, so competition on a global market is possible (Yumkella et al. 2011). References Department for International Development 2011 The engine of development: The private sector and prosperity for poor people. Department for International Development Fergusson I F 2008 World Trade Organization Negotiations: The Doha Development Agenda. CRS Report for Congress Hallaert J-J, Lammersen F & Roberts M 2010 Aid for Trade: Is it Working? OECD, World Trade Organization. Turner L 2008 Quantifying Aid for Trade. Overseas Development Institute. Wiggins S, Sharada K & Vigneri M 2009 Impact of the global financial and economic situation on agricultural markets and food security. Overseas Development Institute. 192 Aid for Trade

6 te Velde D W 2010 The global financial crisis and developing countries: what happened, and what have we learned? Overseas Development Institute. World Bank 2011 Leveraging Trade for Development and Inclusive Growth The World Bank Group Trade Strategy, The World Bank Group. Yumkella K K, Kormawa P M, Roepstorff T M & Hawkins A M 2011 Agribusiness for Africa s Prosperity. United Nations Industrial Development Organization. Aid for Trade 193