IE_SecA_Group 5

AID FOR TRADE Implication for export promotion

SEC A, GROUP 511A, 26A, 29A, 39A, 48A

Foreword

Trade can be a powerful engine for economic growth and poverty reduction, but harnessing its power is difficult for many developing countries.

WHY ?

InformationInformation PoliciesPolicies ProceduresProcedures

InstitutionsInstitutions InfrastructureInfrastructure

Unable to integrate and compete effectively in global markets

Lack of capacity in terms of

Call for more and better aid for trade

What is Aid for Trade

“Aid for trade is about assisting developing countries to increase exports of goods and services, to integrate into the multilateral trading system, and to benefit from liberalized trade and increased market access.”

Launched at the World Trade Organization’s (WTO) Hong Kong Ministerial Conference in December 2005, Aid for Trade has become embedded in ITC’s work

Three strategic objectives - Make national policy environments friendlier for export business; Strengthening national and regional institutes; Helping enterprises to become more competitive

Trade policy and regulations

Trade policy and regulations

Trade development

Trade development

Building productive

capacity

Building productive

capacityTrade related adjustment

Trade related adjustment

Trade related infrastructure

Trade related infrastructure

Aid for Trade agenda

How much Aid For Trade is there (1/2)

Aid for Trade by region

USD 174 billion in aid for trade was disbursed since 2006 Annual disbursements increased by 53 percent between 2006 and 2011 Ten countries received 35 % of these disbursements, dominated by Asia routinely

been the largest regional recipient of commitments India is the largest recipient with USD 11 billion (6.4 % of the total)

Source : OECD Creditor reporting system

How much Aid For Trade is there (2/2)

Aid for Trade commitments

Reflecting the increasing priority that donors attach to private sector development, aid dedicated to building capacity increased in 2011 by USD 171 million to reach USD 18.2 billion

In one of the largest projects reported in 2011 the World Bank committed USD 1 billion in loans to India for agricultural development through national rural livelihood project


Measuring Aid for Trade

Aid for Trade comprises of following categories :

Technical assistance for trade policy and regulations (e.g. helping countries to develop trade strategies, negotiate trade agreements, and implement their outcomes)

Trade-related infrastructure (e.g. building roads, ports, and telecommunications networks to connect domestic markets to the global economy)

Productive capacity building, including trade development (e.g. supporting the private sector to exploit their comparative advantages and diversify their exports)

Trade-related adjustment (e.g. helping developing countries with the costs associated with trade liberalization, such as tariff reductions, preference erosion, or declining terms of trade)

Other trade-related needs, if identified as trade-related development priorities in partner countries' national development strategies

Aid for Trade & Development Finance

Increased trade and foreign direct investment (FDI), combined with complementary policies, can boost economic growth and provide a significant source of employment

To address trade related constraints, a variety of financial instruments are used – Loans, Grants, Pooled Funds, Trust Funds

While Aid for Trade has been defined in terms of ODA, other sources of finance can help build trade capacities

Renewed attention is being given to ways to finance development beyond traditional aid

Development finance flows in middle income countriesSource : OECD Creditor reporting system

Monitoring Aid for Trade

The OECD and the WTO established an aid-for-trade monitoring framework based on the recommendation by the WTO Task Force on Aid for Trade of establishing two accountability mechanisms, which help track progress in the implementation and enhance the credibility of the Aid for Trade Initiative:

At the local level, to foster genuine local ownership and ensure that trade needs are integrated into national development strategies and adequately addressed

At the global level, to increase transparency about what is happening, what is not, and where improvements are required

The Logical Framework

Demand Response Outcome Impact

Mainstreaming and prioritizing trade

Trade related Projects and

Programs

Enhance capacity to Trade

Improved Trade performance and reduced poverty

Who are donors

Bilateral donors still provide the majority of aid of trade, accounting for 60 percent of total support in 2011. However, the total amount they provided in that year fell from 65 percent in 2010

Top 10 Aid for Trade donors


AFT disbursements by sector

Source : OECD, DAC-CRS Aid Activities Database

How is AFT delivered

Aid for trade is part and parcel of regular ODA, which is composed of grants and loans meeting certain conditions (i.e. transactions that are concessional in character and convey a grant element of at least 25 percent)

Half of aid for trade is in grant form and half in the form of concessional loans. This distribution has been more or less consistent in recent years

Poorer countries tend to benefit from more concessional forms of finance. Of the support received by LDCs, 60 percent is in grant form while UMICs receive only 23.8 percent of their aid for trade as grants

Nevertheless, the choice of the finance instrument used tends to be more dependent on the project type. Almost all (97 percent) trade policy and regulations projects are funded with grants, compared to just 36.5 percent of economic infrastructure projects. For building productive capacity, 60 percent of the aid provided is in grant form and 40 percent in the form of loans. Trade-related adjustment remains small, but is also dominated by grants (83 percent)

Loans & Grants for AFT


Other Official Flows

It is not just concessional loans which are provided by the official sector. Other Official Flows (OOF) provided by the official sector are transactions that do not meet the eligibility conditions for ODA, mainly because they have a grant element of less than 25 percent (i.e. they are low concessional loans).


Evaluating the effectiveness of AFT (1/2)

Key Questions

Is aid for trade effective in increasing trade, thus fostering more rapid economic growth and sharper reductions in poverty, and if so, under what circumstances is aid most effective?

As global and regional value chains become a central feature of the trade landscape, what changes does this imply for aid for trade, and has past aid for trade contributed to effective participation in global and regional production chains?

Do management systems of governments, in partnership with donors, improve the effectiveness of aid for trade?

Much like all development assistance, aid for trade has as its ultimate objective raising standards of living and reducing poverty through its effects on economic growth. As described by the OECD (2011b), three generalized propositions link the transmission of aid for trade to growth and poverty reduction: • Aid for trade leads to more rapid

growth of exports and imports. • More rapid growth of trade

raises productivity and income growth

• Incomes rising with growth lift people out of poverty.

Evaluating the effectiveness of AFT (2/2)

Aggregate Cross

Country

Sectoral and

Programme

Program Level

Evaluation Techniques

One way to approach the analysis of the effect of aid for trade on trade growth is to apply econometric techniques to multi-country panel data.5 These typically attempt to solve the attribution problem by isolating aid for trade from other probable determinants of trade (or trade costs) performance.

The Commonwealth Secretariat reports suggest that a doubling of aid for trade to economic infrastructure would raise merchandise exports by 3.5 percent, while a doubling of aid to trade facilitation would lower import costs by 5 percent

Similarly, econometric studies of Africa by the UN Economic Commission for Africa (UNECA) show that a 10 percent rise in aid for trade correlates with a 0.4 percent increase in an index of economic diversification (OECD)

Aid, Trade & Development Indicators (1/4)

India’s Top Donors Japan has a USD 376 million project to

promote energy saving in SMEs in India Other projects included a USD 232

million loan from Japan to India for the Madhya Pradesh Transmission System Modernization Project and a USD 232 million loan to enhance high voltage distribution systems in rural areas

In 2010 aid provided for rail infrastructure, rail equipment, locomotives, light rail (tram) and underground systems amounted to over USD 4.2 billion, including USD 2.5 billion in loans from Japan to India to construct a dedicated freight corridor, extend the Delhi Mass Rapid Transit system and construct other transportation systems

Japan provided USD 249 million to support construction of the Bangalore Metro in India

Source : OECD, DAC-CRS Aid Activities Database


Investment and Financing (Inputs)

Trade Performance(Outputs)

AFT in sectors such as transport and communications have resulted in significant increase in trade volumes in these sectors

Source : OECD, DAC-CRS Aid Activities Database, World Bank, World Development Indicators, International Debt Statistics


Trade Indicators(Outcomes)

Development Indicators(Impacts)


India’s contribution in AFT India often delivers aid as part of a larger package of investments and trade deals.

Hence, commercial considerations can be an integral component of its development co-operation programme. India is also engaged in infrastructure development through concessional lending and technical assistance

In 2010 its export finance institution, the Exim Bank, extended a USD 3 billion new line of credit, of which USD 1 billion was for Bangladesh alone, the highest one-off amount to any country from India

In 2011 the Exim Bank approved 12 new lines of credit worth USD 473.30 million to ten countries to finance various projects, ranging from agriculture and agro-industry (sugar industry, cassava plantation, milk processing), mining (limestone) and energy (rural electrification, solar energy, bio-diesel, power generation) to construction of broadcasting facilities and a multi-specialty hospital

The 2013 Confederation of Indian Industry (CII) India-Africa Project Partnership Conclave discussed emerging opportunities to boost bilateral investment co-operation. The essence of the Conclave was to encourage Indian exporters to access African countries and to increase their presence in the region – the target is to top USD 100 billion by 2015


Conclusions (1/2)

Aid for trade does have a significant and positive association with greater exports. The results suggest that a 10 percent increase in the amount of bilateral aid for trade committed to developing countries would increase their exports by about 0.3 percent. While these amounts may appear small, they indicate that an increase in aid for trade of 10 percent (or about USD 1 billion) would increase exports of developing countries by about USD 9 billion in recent years

Expected increase in total exports associated with total Aids for Trade

Conclusions (2/2)

“Aid for trade is effective…but requires a supportive environment”

According to the OECD report 2013:

While evidence is mixed for different types of aid flows, it appears that those targeted to specific trade-related activities – such as trade facilitation and infrastructure – are most effective in promoting exports.

• Some evidence suggests that aid to infrastructure, particularly transport infrastructure, is more effective in low income countries, while aid flows to the business sectors are more effective in higher income developing countries.

• Evidence suggests that Sub-Saharan Africa is one of the regions most likely to benefit from aid for trade

Aid for trade can promote regional and global value chains Improving in-country management systems can contribute to better aid-for-trade

effectiveness One corollary is important: complementary policies essential for successful aid for

trade need not – indeed could not – be included in every aid-for-trade project. Often issues of job creation, education, environment and social protection (all important complements of trade) require separate policies distinct from aid for trade

Thank You !!

IE_SecA_Group 5

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