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    Aid for Trade: We Can Do Better


    International Trade Forum - Issue 4/2006, © International Trade Centre

    © Istockphoto/ A. Volodin

    Turning aid recipients into consumers, and enabling them to take charge of the process, will help to make aid for trade more effective.

    "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.