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GREAT insights Magazine

Connecting to Value Chains

The Role of Aid for Trade in Private Sector Development

August 2013

Solheim, E. 2013. Connecting to Value Chains: The Role of Aid for Trade in Private Sector Development. GREAT Insights, Volume 2, Issue 5. July-August 2013. Maastricht: ECDPM

Strengthening the links between aid for trade and private sector development is catalysing greater co-operation and synergies between the public and private sectors to ensure that value chains offer a path to development.

One of my most vivid recollections from visiting Ethiopia a few years back was a meeting with a young woman by the name of Ayana. Having been poor all her life, she had a few years back started working at a site some two hours out of Addis Ababa that was producing cut flowers for export. While still far from rich, her income had almost tripled, and she was looking towards a much brighter future. 

Trade has been a key factor for economic growth in many poor countries. It has allowed cut-flower producers in Ethiopia, mango farmers in Ghana, and light manufacturers in Zambia to realise their potential, and lift themselves out of poverty. Thanks to the opportunities of trade, countless poor people can lead better lives, get a better education for their children and benefit from better health care. 

Aid for trade plays a crucial role in facilitating these opportunities, as a catalyst to overcome insecurity and unpredictability by providing new economic opportunities. It does so by helping firms and producers to raise the quality of their products to meet international standards, access market information. It improves their competitiveness by reducing trade costs and the costs of essential services required to export such as credit and transport. All these are essential aspects to allow especially the poor to share in the gains of trade. This in turn boosts overall economic growth and creates jobs in a virtuous cycle where opportunities breed further opportunity catalysing overall development.

The need for a partnership for development that comprises the private sector is clearly recognized by the Millennium Development Goals. The Busan Partnership for Effective Development Co-operation also recognises the central role of the private sector in “advancing innovation, creating wealth, income and jobs, mobilising domestic resources and in turn contributing to poverty reduction.” The recently issued report of the UN High Level Panel on a Post-2015 Development agenda abounds with references to the need to harness the contribution of the private sector. In spite of this growing recognition, these benefits are often still proving difficult to obtain in practice. 

The Aid for Trade Initiative has always recognized the pivotal role of the private sector. The private sector is important in identifying trade-related problems and bottlenecks, as well as the design, delivery and evaluation of aid for trade programmes. Successive global reviews have put a spotlight on these activities, highlighting examples of partnerships between large corporations such as Walmart and Danone and developing country producers. The emergence of local, regional and global value chains is catalysing greater involvement of the private sector and these forms of collaborative ventures. Investments are growing in number and impact, charting an innovative way forward for business involvement in trade-related capacity building. Case stories collected in preparation of the Third Global Review of Aid for Trade shed some light on the convergence of the public and private sectors’ agendas. 

Global Value Chains and Private Sector Development is the central themes of the 4th Global Review of Aid for Trade, in July 2013. This explores how aid for trade is supporting private sector development activities in developing countries, in the context of expanding global and regional value chains. The forthcoming OECD/WTO report Aid for Trade at a Glance 2013: Connecting to Value Chain provides details of how all stakeholders in trade capacity building are promoting the private sector. Despite a decline in overall aid-for-trade flows, support for building productive capacities has been maintained. The report shows how donors and partner countries are intensifying their dialogue with the privates sector to achieve better results. In partner countries, the private sector is involved in developing national development strategies, sectoral strategies and national trade development strategies. Donors support aim at creating a business friendly environment, through improved governance, and policy, legal and regulatory frameworks. Moreover, development activities also try to address market failures, overcome information asymmetries and provide business development services, for example, research and development, standardisation and certification and the provision of financial services. 

For the first time, the OECD/WTO monitoring solicited directly the views of the private sector with almost 700 firms from 120 countries participating. The purpose was to understand the motives of the private sector to engage in actions to better connect suppliers in developing countries to their value chains. The results show that the main driver was firm’s core business strategy. Other reasons included corporate social responsibility, participation in Business-to-Business schemes (e.g. suppliers’ codes of conduct) and corporate philanthropy. The results also showed that lead firms found that their activities to bring suppliers from developing countries into their value chains were useful to their business: in particular, they helped build new relationships with suppliers and consumers, and contributed to improve their corporate image. 

The OECD/WTO monitoring indicates that there is a clear match between the perception of governments, donors and the private sector on the issues to be addressed. The Global Review on Aid for Trade highlights the progress being made in aligning the incentives of the public and private sectors as well as donors and recipients in ensuring that value chains offer a path to development. While there is still room for improvement in public-private partnerships, we can observe clear progress. Closer co-operation and synergies between the public and private sectors is becoming evident in identifying aid for trade projects, financing their implementation, improving their monitoring and impact assessment, and ultimately increasing the effectiveness of aid in promoting private sector activities that support development goals. 

The idea of trade, and its power as a driver of development, has always been that of an exchange from which all sides benefit. What drives aid for trade is that poor people get their fair share from these benefits. It must help many more Ayanas in many more countries to realize their potential, allowing them to live a better life with a better future for their children thanks to trade. 

Erik Solheim is the Chairman of the OECD DAC. 

This article was published in Great Insights Volume 2, Issue 5 (July-August 2013)

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Economic Transformation and TradeAid for TradeBusiness and DevelopmentPrivate sectorTradeAfrica

External authors

Erik Solheim