"Aid for Trade" is the new frontier of development assistance,
whether it means an increment in official development assistance
("additionality") or a significant diversion. The new amounts cited
at WTO's 2005 ministerial meeting in Hong Kong - up to
$10 billion per year from Japan, USA and Europe - would
represent a tripling of trade-related aid and be close to 10% of
total ODA.
Aid for trade used to be a very straightforward concept. Most of
the rich countries provided a significant portion of their ODA as
trade credits, enabling developing countries to purchase goods from
the donor on the never-never. It was classic tied aid, from which
some unpaid debts are only now being forgiven.
Today, aid for trade has a broader definition, although it is
not quite clear how broad. Aid has helped to increase domestic
export supply capacity and enhance enterprise competitivity. That
is clearly aid for trade. But supporting "facilitation" and
"infrastructure" is arguably part of more general development
assistance.
In any case, aid for trade now has the characteristics of other
kinds of aid, and we should apply the familiar criteria of aid
effectiveness. In a recent report on trade-related assistance
(What do recent evaluations tell us?), the Development
Assistance Committee of the Organisation for Economic Co-operation
and Development (OECD/DAC) finds many familiar problems of aid as
it is frequently administered.
The Paris Declaration of 2005 was an attempt to establish some
important ground rules for aid giving and receiving. It was a kind
of compact of behaviour between North and South, attempting to
improve on the past aid record.
It is important, however, to recall the structural, rather than
merely behavioural, circumstances which have detracted from the
effectiveness of aid in the past, and particularly technical
assistance. For example:
- Most aid is administered by a large number of public
bureaucracies - more than 80 multilaterals and bilaterals - each
with complex procedures of their own.
- Many of these organizations offer similar services leading to
frequent duplication.
- The choice of countries which receive aid is governed by the
instincts of Northern politicians and donor interest - resulting in
a rather poor correlation between needy countries and assisted
countries.
- The content and terms of aid are influenced by the needs and
interests of the suppliers rather than the recipients.
- The rules of engagement are stacked in favour of the providers
of aid, whether in terms of global governance, creditor-debtor
relations or trade practices.
Aid is still donor-driven. A certain amount of exhortation can
bring more objectivity, but it is also necessary to tackle the
structural roots of the problem. Some analysts have compared the
current aid system to the "central planning" syndrome of former
socialist countries. Currently, aid (supply) is allocated by
bureaucrats and is not well matched to demand because there are not
enough market signals. The suppliers pay but the consumers often
don't get what they want, because they didn't ask for it. Under
pure market conditions, developing countries would start paying for
what they need, if necessary with the help of new untied funds.
It is an enticing scenario. Technical assistance would become
truly "demand-driven" and "country-owned", as countries - their
governments, private sector, civil and academic institutions -
independently seek out the best providers to meet their needs.
They would not have to accept - nor would they be able to easily
afford - a lot of additional policy baggage if they did not want
it. Governments would not have to put in place a whole public
department to attempt to coordinate the many (solicited and
unsolicited) programmes of technical assistance. They would not
have to learn a complex range of different donor procedures for
writing proposals, hiring staff and procuring goods. These
"consumers" would have their own procedures. They would not be
engaged in the hosting of large numbers of donor missions which
they did not invite, nor putting their names to myriad reports
required by donors (for the donors' accountability). There would be
little duplication and more competition among development
agencies.
How would it happen?
It would begin - indeed it has already begun - among middle-income
countries. Many of those in Latin America and Asia, including China
and India, already pay their way, although not entirely eschewing
aid. Their private enterprises, at which "aid for trade" must
ultimately be aimed, are ready to pay for trade information, advice
and training. Turning recipients into consumers will be helped by
adding new sources of purchasing power.
A common global pooling system, which donors might agree to fund
from part of their aid budgets, has already been mooted. Parties in
developing countries would apply for funds from the pool and use
them to procure development services from the sources of their
choice. Alternatively, the pool could issue vouchers to be
distributed in developing countries, to cash with preferred
partners.
The Enhanced Integrated Framework
Managing such a system poses new challenges, since there would need
to be intermediation mechanisms in place to apportion the
additional resources on the basis of demand. The new Enhanced
Integrated Framework (EIF) mechanism might be a good place to
start.
Funds would be pre-allocated from traditional donors and
supplemented from non-traditional sources. The EIF would be managed
by representatives of the demanding countries. Requests for funds -
many coming from the private sector - would be accompanied by
promises to pay part of the assistance. These requests would be
honoured on the basis of eligibility criteria (e.g., ability to
pay) determined by the management of the EIF.
Making aid more effective is all about turning recipients into
consumers. Let developing countries make their own choices with
more of their own resources. There is much pious talk these days
about "country ownership". But it won't come merely from
exhortation to donors to give more space to "recipients". Central
planning systems can be reformed, but they are no substitute for
the market. Hasn't history taught us that? 
Stephen Browne's latest book, Aid & Influence: Do
Donors Help or Hinder? (Earthscan, 2006), discusses these
proposals in fuller detail.