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Economic development

Globalisation’s opportunities

by Michael Brüntrup, Petra Voionmaa

In depth

Dockers in Cotonou, Benin

Dockers in Cotonou, Benin

The Aid for Trade Initiative (AfT) aims to help developing countries to access the world market to their advantage and become successful players in international trade. Germany is in a good position to become a European front runner in this context. [ By Petra Voionmaa and Michael Brüntrup ]

Trade liberalisation helps a national economy to grow, and growth in turn leads to a reduction in poverty. In practice, however, things are not as simple as in theory. Therefore the World Trade Organisation (WTO) started the Aid for Trade Initiative (AfT). It is based on the perception that, though trade is indeed the best route towards economic growth, development and poverty alleviation, trade liberalisation in itself does not necessarily lead to a developing country’s productive participation in world trade and actual poverty alleviation. Countries concerned therefore need aid
– to overcome obstacles in the production and marketing of goods,
– to develop their infrastructure, and
– to get into a position that will allow them to cushion off negative effects of liberalisation.

The USA and Japan made tangible commitments at the launch of the AfT initiative, and so did the EU, which pledged to raise AfT funding to € 2 billion by 2010. In 2008, the EU afforded € 2,2 billion. In principle, half of the money is provided by the European Commission and half by the member states.

The EU commitment, however, only covers trade-related assistance (TRA). TRA encompasses “trade policy and regulation” and “trade development”. These are the first two of six AfT categories as defined by the WTO. The other four are:
– trade-related infrastructure,
– productive capacities,
– trade-related adjustments, and
– other trade-related needs.
For these AfT categories, the EU merely promised to increase funding in line with general increases of ODA (official development assistance). The EU, moreover, reaffirmed the principles of the Paris Declaration on Aid Effectiveness, which include, for example, donor harmonisation, respect for developing countries’ ownership and alignment to recipient countries’ institutions and procedures.

Comprehensive trade promotion

For the most part, the individual components of AfT are nothing new. They have been on the agenda of development cooperation for a long time. It was innovative, nonetheless, to link these topics in a coherent concept and incorporate them into trade policy. AfT relates immediately to the WTO as well as to the EU’s bilateral negotiations on economic partnership agreements (EPAs) with regional organisations in Africa, the Caribbean and Pacific (ACP).

In contrast to the socio-political focus of the UN Millennium Development Goals (MDGs), AfT emphasises economics. The initiative is about gearing ODA stronger towards support to productive sectors. In these areas, ODA expenditure had fallen since the 1990s. AfT actually raises awkward issues sometimes since donors and recipient countries have quite different trade interests.

AfT means new challenges for the donor community. For example, AfT issues tend to be cross-cutting, with jurisdictions spread over several ministries in recipient countries. Donors, in turn, have often defined some kind of division of labour, according to which different donors assume responsibility for different sectors (such as water, elementary education or administrative reform) in partner countries. Again, meaningful AfT programmes often cut across such sectoral responsibilities.

Potential front runner

Germany is a major provider of AfT funds, ranking first among EU countries and third internationally (behind Japan and the USA) between 2001 and 2006. In 2007, German AfT amounted to approximately € 1.2 billion.

Germany contributed an average annual amount of € 210 million in TRA (the first two AfT categories) between 2005 and 2007, and thus nearly reached its self-defined goal of contributing € 220 million to the EU pledge. However, the amount did vary considerably from year to year. One of the main reasons is that the German Investment and Development Company (DEG), the KfW subsidiary which promotes private-sector companies in developing and transition countries, only started to analyse its portfolio for AfT funding in 2006, and did not contribute to AfT statistics before. It also matters, no doubt, that AfT was regarded more as a by-product of development policy, so there was little strategic planning or direction.

So far, TRA has made up 20 % of Germany’s total AfT funding, the AfT category “productive capacities” constituted a further 45 %, and the remaining 35 % were used for “trade-related infrastructure”. The regional focus of German AfT was Asia (Box), and the most important implementing agencies were the KfW Banking Group and the GTZ.

Case studies done by the German Development Institute have shown that partner countries welcome German AfT efforts because they
– are close to local institutions,
– involve rural regions,
– apply a wide range of instruments, and
– are designed for the long-term, which creates trust.
On top of this, it is well known that Germany is a successful export nation with a wealth of experience in international trade. Finally, potential exporters are interested in Germany’s huge market.

German development policy nonetheless still lacks a consistent strategy for trade promotion. While relevant issues are often tackled in projects for private-sector and agricultural development, programmes hardly cover all of issues of trade promotion. Moreover, the action of various German agencies was not sufficiently co-ordinated in the past. Efficiency suffered accordingly, and there are fewer evident results. Partners often struggle to understand which German agency is in charge of what task. For good reason, the agreement of Germany’s new government stressed the goals of merging technical-cooperation agencies and making them work in closer coordination with KfW Banking Group. These are steps in the right direction.

National and regional AfT measures, moreover, have also been only poorly linked in the past. For instance, the way in which AfT impacts on growth and poverty are monitored needs to be improved.

Outlook

German development policy uses a range of AfT instruments and is experienced in their implementation. This puts Germany in an ideal position to increase its AfT contributions faster than other EU countries and to take over a larger share of the EU pledge. However, any such increase must occur carefully, transparently and in a participative manner. Sensible guidelines would include:
• AfT should not be treated as a stand-alone sector, but should be integrated as a cross-cutting issue the existing matrix of German development efforts. Otherwise there will be risks of fragmentation as well as of narrowing down the broad approach of AfT. Moreover, AfT is not only relevant in sectors linked directly to economic growth, but has a bearing on issues like democracy, public administration or environmental protection too.
• Germany should use AfT to better coordinate instruments and implementing agencies.
• Additional funds should serve sub-Saharan Africa in particular, because this is where levels of regional integration and diversification of trade and commerce are still quite low. Progress on AfT, moreover, could help to speed up the arduous EPA talks.
• In general, AfT measures should become more geared towards regional integration.
• The effects of AfT on poverty should be monitored with clear and convincing indicators. Better donor coordination is needed, and this is particluraly true in regard to the European Union. Greater use should be made of the Enhanced Integrated Framework for trade-related development cooperation, a joint initiative of six multilateral bodies (IWF, ITC, UNCTAD, UNDP, World Bank and WTO).

In the AfT context, it must never be forgotten that poverty reduction is the primary goal and trade is “merely” a method of achieving it, albeit an important one. Accordingly, AfT must be firmly anchored in national and regional strategies for growth and poverty reduction. Under these conditions, AfT will give developing countries opportunities to tap the potential of globalisation and better protect themselves from negative consequences of trade liberalisation.