Enhancing the Regional Dimensions of Aid for Trade

Regional Aid for Trade is increasing, but unclear definitions and data hamper any assessment. Addressing challenges in regional coordination and implementation will better enable AfT to drive productivity and trade growth.

The regional dimension of AfT must be enhanced

After emerging at the WTO Hong Kong Ministerial Meeting in 2005, the Aid for Trade (AfT) initiative is now a mainstreamed credo of the international trading system. Despite some early scepticism about whether or not it would bring ‘added value’, it is broadly considered to have at least helped focus aid and donor attention to building the capacity to benefit from trade. Moreover, evidence suggests that the AfT initiative has succeeded in mobilising donor resources for a range of trade-related activities while generally improving the quality of aid in terms of the ownership and design of programmes and policies (1). Overall, AfT accounts for more than one-third of all Official Development Assistance (ODA) delivered by traditional donors.

But as with aid more generally, it has been difficult to gauge the effectiveness of AfT. This relates in part to the wide range of areas covered by AfT, from network infrastructure and sector-level programmes (for example in agriculture, tourism, or microfinance), to support for regional integration and policy reforms. Projects also vary widely in size, delivery and implementation mechanisms. This makes it difficult to explain and assess AfT as a coherent category of aid, requiring a range of approaches, from cross-country statistical comparisons to project-level case study assessments. 

Since AfT relates to international trade, the concept bears an inherent regional and cross-border dimension that has been recognised from the outset (2). While donors have traditionally focused their development cooperation at the country level, regional trade-related projects have increased in recent years. One key driver is the desire in sub-Saharan African countries to pursue a deeper level of regional integration. Arguably, the negotiations on Economic Partnership Agreements (EPAs) between the EU and various regional groupings have also played a role, while the stalled WTO Doha Round also underlined regionalism as an attractive alternative.

Particularly in Africa, regionalism is increasingly being addressed through a ‘corridors approach’, using AfT to promote regional supply chains and integration into global production networks. This approach emphasises tackling regional barriers to trade in an integrated and coherent manner, complementing liberalisation commitments with a combination of physical and ‘soft’ infrastructure investments. Increasingly this approach goes beyond infrastructures to promote investment and clustering in sectors such as agriculture.

Regional Aid for Trade Effectiveness: Concepts and Issues

In theory regional AfT allows partners to pool resources and coordinate activities, leading to a rationalisation of implementation mechanisms and reduced transaction costs. Regional projects can therefore benefit from the ability to replicate best practice at the regional level and the economies of scale that come from working in several countries across larger markets. Most crucially, there is a strong overarching rationale for regional-level responses where there is a need for harmonising policies and ‘unlocking’ key cross-border bottlenecks that would otherwise persist in preventing opportunities for trade. 

Although there is an inherent logic to promoting regional Aid for Trade, ‘regional AfT’ itself is not well defined. The distinction between national and regional AfT can be blurred since nationally implemented AfT projects can have regional impacts. Similarly, regionally focused projects (including for example the construction of connecting roads) are commonly implemented by national authorities since this is where capacity, responsibilities and legal mandates lie. As a result, there is a tension between where financing is channelled and how and by whom AfT projects are implemented. 

This problem carries over to the data on regional AfT, including the official data gathered through the OECD-DAC Creditor Reporting System (CRS) on overall levels of regional AfT. These are unable to distinguish between national projects that are a part of a broader regional package or even AfT provided to a regional economic grouping, making assessments of regional AfT flows difficult, never mind their impacts. 

In this context, and given the challenge of defining “aid effectiveness”, how does one define the effectiveness of AfT at a regional level? And from whose perspective should one measure its effectiveness? While donors are under increasing pressure to show AfT effectiveness through evaluations and impact measurement, regional programmes suffer from the same limitations as national projects but with additional complications. Perhaps more importantly, AfT effectiveness depends on its ability to support regionally-owned integration efforts and adhere to the underlying principles and rationale of the AfT initiative, as well as the international dialogue on how to improve aid effectiveness as a whole. 

A recent study (3) carried out by ECDPM suggests the following findings.

AfT Flows

The data on AfT is not designed or suited to analysing regional AfT flows. As the discussion below makes clear, the OECD-DAC CRS database on AfT flows only provides aggregate data on Africa, therefore not allowing any analysis or comparison of AfT flows at the level where regional integration is taking place. As such, while serving as a donor database, it is of limited use for analysing impact or for policy-making and only allows broad conclusions to be drawn. 

From what the data does say, AfT remains an important and growing category of donor support to developing countries increasing regional flows, particularly in Sub-Saharan Africa. According to the same data and caveats, regional AfT represents a small share of overall AfT disbursements, suggesting the continuing dominance of national over regional AfT. This nonetheless includes projects that are regional in nature and aspirations, again underlining the need to improve data collection and reporting with regards projects with a regional objective if this aspect of AfT is to be given the analytical attention it deserves.

The data problem gives rise to a broader tension between AfT as a “donor” agenda, and AfT as a support mechanism for regionally-owned strategies. While Aid for Trade has helped to focus donors and the aid discussion on promoting productive capacity, it is at heart focused on aid inputs rather than outcomes. This is in contrast to the broader aid agenda. A key concerns therefore is not simply to mobilise additional aid, but to foster better approaches to regional development and ultimately to promote greater capacity for the private sector to produce and trade within and across regions. Numerous African regional groupings are increasingly designing Aid for Trade Strategies to potentially address this.

Institutions

While regional Aid for Trade strategies offer a means to fix regional priorities for donor alignment, strategies often duplicate aspects of existing sectoral strategies. This suggests a need to move away from a focus on aid mobilisation for AfT strategies, to garnering support for existing regional development strategies. This would be in line with the declining importance of donor aid and the growing importance of private sector finance and investment and other approaches to address development problems. 

Regional AfT faces the same institutional challenges that face regional integration more broadly. These stem from the broader range of stakeholders in regional initiatives; the often limited implementation capacity, legitimacy and mandate of regional economic communities; and the greater distance between aid decision-makers, implementers and final beneficiaries on the ground. The political economy of national-regional relations often leads to grand aspirations with large “implementation deficits”, pointing to the importance of finding a regional-national balance in responsibilities for implementing strategies related to Aid for Trade. 

Some of these challenges can be addressed through a more narrowly focused corridors approach, thereby boosting regional Aid for Trade effectiveness. Through a holistic approach focused on a limited geographical area, this combines attention to improve hard infrastructures and soft accompanying measures with private sector engagement and clustering. As such, the corridors approach represents a form of compromise between the tensions that arise in formulating and implementing region-wide strategies. Although also facing some challenges such as the broader business environment, it may also serve as a model for broader reforms to promote greater effectiveness of AfT at a regional level, and to further regional integration itself.

Productive Capacities

The small size of most developing country economies suggests potentially large gains from regional integration through economies of scale on production and larger market size. In this regard, Aid for Trade targeted at regional initiatives makes sense, helping to promote both regional linkages between firms and producers in regional value chains, and linking their combined production into wider international markets. 

While corridor approaches can help reduce transport times and costs, thus addressing a major constraint to regional and international trade, recent examples have yet to prove their broader impact at the local or regional level. While road improvements and improved borders do cut processing and transport times, these do not necessarily translate into lower prices and knock-on effects. The fact that corridors are increasingly driven by international investors also leads sceptics to question the likely development impact in the face of commercial interest. Nonetheless, the private sector need for regional markets for commercial viability may also bring needed momentum to reforms, further underlining the importance of a regional approach and the potential for channelling these efforts through a corridors approach. 

Overall, while a regional approach seems appropriate to improving AfT effectiveness, the practicalities of regional coordination, prioritisation and implementation mean that major challenges remain. A corridors approach may be one way of narrowing the focus and gathering more limited stakeholders around identifiable constraints, potentially offering a means to maximise AfT effectiveness while promoting regional goals and aspirations. 

Bruce Byiers is Policy Officer Trade and Economic Governance, ECDPM, Dan Lui is Programme Associate, ECDPM.

Footnotes
1. OECD-WTO (2009), Aid for Trade at a Glance 2009: Maintaining Momentum, www.wto.org/english/res_e/publications_e/aid4trade09_e.htm
2. WTO (2006) Recommendations of the Task Force on Aid for Trade (WTO/AFT/1) recognised regional constraints and the role of regional organisations in addressing them 
3. Byiers and Lui (2013) “Regional Aid for Trade Effectiveness and Corridors”, www.ecdpm.org

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