The aid for trade initiative was launched in Hong Kong in 2005 and is now worth $40 billion per year. The UK provides around $1.4 billion of support per year. Figures released for this Review revealed that $1 of aid for trade funding is associated with an $8 increase in developing country exports. For LDCs this could be as high as $22.
Connecting the ‘least connected countries’ to value chains
Global value chains increasingly dominate world trade with an estimated 60% of all trade now passing through them. Joining them is a faster and more realistic route to economic growth and jobs than attempting to develop an entire sector from scratch. But countries need to be competitive – sound infrastructure, an enabling business environment and strong skills base – to attract trade and investment.
- Tourism: provides jobs and improves infrastructure, but value add can be very low, with most operators, airlines and hotels foreign-owned. To move past ‘commodity tourism’ developing countries must reduce visa requirements and border waiting times and improve travel/accommodation to meet international standards.
- ICT: Companies cannot operate without strong ICT. Specific challenges to integrating into value chains include skills shortage, infrastructure weakness, regulatory barriers and reputational weakness. Innovation and country-appropriate solutions are key.
- Agribusiness: Challenges include skills shortages, weak infrastructure, land tenure and inadequate cooperatives. More processing needs to be done to add value – eg Africa produces 40% of the world’s cashew nuts but processes just 15% of them.
- Transport and logistics: Transport costs make up 18-40% of the final cost of goods in developing countries compared to 8% in OECD countries. The International Road Transport Union suggested that $1 lost in transport equates to $2 lost in growth in the developed world; the figure could be as high as $40-50 in the developing world.
- Textiles and apparel: a growing realisation that investing in social upgrading such as safe and proper working conditions, and skills leads to long-term competitiveness.
The importance of trade facilitation
Regional and global value chains cannot work without efficient borders. The UK issued a joint statement with 27 countries and international organisations calling for a deal on Trade Facilitation at the WTO Ministerial in December and outlining the substantial support already in place to help make these reforms that would reduce global trade costs.
Since 2005, aid for trade has successfully cut down trade costs: the time it takes to export a 20ft container from an LDC, on average, has come down by 8 days. Pascal Lamy pointed out that this is still 14 days more than the OECD average and the situation is worse for landlocked countries. Frank Matsaert of TradeMark East Africa said that trade costs in the region are still prohibitively high – approximately 3 times higher than in the EU.
Increasing engagement with the private sector
David Croft of Waitrose spoke of the business case for firms to invest in improving productivity and working conditions – not as a CSR issue, but in the interest of sustaining their supply chains and their long term profitability. Donors were encouraged to engage with the private sector beyond their own country, particularly with developing country SMEs and help them to meet the standards needed to enter GVCs.
Regional trade as stepping stone to global trade
There is much scope for boosting regional trade, particularly in Africa where it only accounts for around 12% of total trade. Partly this is due to barriers such as weak infrastructure and lack of industrial clusters, but Carlos Lopes of UNECA pointed to a branding problem: Africa’s conflicts and instabilities are seen as pervasive in a way that does not happen in Asia.
OECD Secretary General Angel Gurría spoke of the potential of bilateral and regional trade deals, so long as they are seen as building rather than stumbling blocks to multilateral trade. EU Commissioner de Gucht advocated a stepping stone approach: countries should integrate into regional value chains and boost intra-regional trade, then look to GVCs and markets.
The growth potential of services
Services are crucial to the effective functioning of value chains. For many developing countries they are also a huge growth area in themselves e.g. ICT exports from Bangladesh currently valued at $200 million with an annual growth rate of 40%. Universal education and technical and managerial skills are vital. Regional integration is important to assist in the export of services and the sharing of knowledge capital, as is the contribution of the diaspora community in helping to develop business in their respective locations.
80% of global trade requires trade finance to mitigate the risk of doing cross border trade. Trade finance fell by 20% in the 2008-09 crisis and affected fragile and conflict-affected countries disproportionally. SMEs face particular challenges because loans to them are smaller and more costly for banks to facilitate, and they have less capacity to apply and maintain the sort of financial systems that satisfy commercial banks.
Aid for trade effectiveness
Development effectiveness is about doing the right thing the right way. At a time of fiscal budget pressure, aid for trade needs to become more efficient in order to keep delivering impact and to leverage/combine with other sources of finance including the private sector.
The aid for trade initiative was launched in Hong Kong in 2005 and is now worth $40 billion per year. The UK provides around $1.4 billion of support per year. Figures released for this Review revealed that $1 of aid for trade funding is associated with an $8 increase in developing country exports. For LDCs this could be as high as $22. Since 2005, aid for trade has successfully cut down trade costs: the time it takes to export a 20ft container from an LDC, on average, has come down by 8 days, but this is still 14 days more than the OECD average. Here is a quick summary of the main points raised in Geneva last week.