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    Countries Bring Trade into Development Projects


    International Trade Forum - Issue 1/2007, © International Trade Centre

    © MCC A farmer plants a geranium, Vakinankratra region of Madagascar, February 2007.

    Countries are putting priority on trade-related assistance in this new model for financing development projects, by the Millennium Challenge Corporation.

    Benin: rehabilitating the port of Cotonou. Ghana: building packing and storage facilities for export crops. Madagascar: identifying international market opportunities for small businesses.

    Each of these foreign aid projects was conceived and planned by the country itself to maximize economic development through trade. Each was made possible through an innovative approach to assistance now being pursued by the Millennium Challenge Corporation, or MCC, an agency of the United States Government.

    Set up three years ago to help poor countries that take responsibility for their own development, the assistance is selective. Sizeable, multi-year, untied grants are awarded to poor countries that perform better than their peers on 16 indicators of good governance, social sector investment and economic policy. Developing countries take the lead, identifying their priorities for "reducing poverty through growth" and developing a programme for funding in consultation with business and civil society. The focus is on results with mutually agreed objectives and benchmarks recorded in a "compact". The country implements the compact with MCC funds.

    The early evidence is that countries are putting priority on trade-related assistance. In the 11 country programmes that MCC has agreed to finance, over half of the $3 billion of aid is for projects that will improve the countries' ability to engage in international trade.

    Of the 25 countries worldwide currently eligible, 12 are in Africa. Madagascar was the first to sign a compact in April 2005. Since then, there have been ten more, including Benin, Cape Verde, Ghana and Mali. Five-year compacts have ranged in size from $110 million in Cape Verde to $547 million in Ghana. In Africa, Burkina Faso, Lesotho, Mozambique, Morocco, Namibia, Senegal and Tanzania are developing proposals and investment programmes for assistance.

    Trade indicators

    Among the 16 selection criteria are trade-friendly policies. One trade indicator, developed by the Heritage Foundation, measures a country's openness to international trade based on average tariff rates and non-tariff barriers to trade. Other indicators, such as the International Finance Corporation's "days and cost to start a business" and the World Bank Institute's "regulatory quality", also give countries an incentive to improve weak investment climates to the benefit of domestic and foreign investors.

    Another, smaller programme helps countries that come close to eligibility but fall short on one or two indicators with "threshold assistance" to address specific areas of policy weakness. To date, MCC has approved 13 such programmes, including six in Africa (Burkina Faso, Kenya, Malawi, Tanzania, Uganda and Zambia). Several of these address customs and border management policies. Zambia is using assistance to strengthen sanitary and phytosanitary services, build capacity in modern customs techniques and improve monitoring, standardization and certification of import and export quality. Finally, many programmes focus on fighting corruption, which is a key impediment to business and trade.

    Eligible countries have requested grants for a range of trade-related projects. For instance, Benin will receive $169 million to improve operations and infrastructure at the port of Cotonou, resulting in fewer delays, lower operational costs and a 50% increase in the volume of merchandise traffic through the port.

    The Government of Ghana identified post-harvest handling facilities for fruit and vegetables as a priority for funding.

    Cape Verde will increase port capacity and remove obstacles to global competitiveness in priority sectors. In Mali, better irrigation and an industrial park within Bamako airport are designed to boost agricultural exports.

    Links between trade, aid and strategies to help the economy grow and thus reduce poverty are best illustrated by those who benefit directly from these programmes. In Madagascar, a programme identified geraniums as a high value-added market, formed a cooperative, doubled production capacity by training farmers, assisted the cooperative in accessing credit and negotiated a contract with a buyer, who is using the geraniums to produce essential oils for sale to the European market. When asked if the farmers enjoyed the smell of geraniums, the head of the cooperative replied, "We like the smell of money better." The farmers' income had increased by two-thirds thanks to MCC assistance.

    If experience is any guide, developing countries will continue to put a high priority on trade as a way to reduce poverty and increase economic growth. For the moment, most trade-related projects concentrate on infrastructure - the need for which is clear. Unless they also invest in export-quality goods and services, however, the new roads, ports and warehouses will not be put to use properly. ITC, for one, serves as a partner in helping countries balance out their "aid for trade" projects, so that they address business skills as well as infrastructure.

    MCC, working with other donors, the private sector and governments themselves, can be a major partner in helping developing countries participate effectively in global trade.

    Maureen Harrington is Vice President for Policy and International Relations at theMillennium Challenge Corporation.