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Rethinking Aid for Trade in the Context of Innovative Financing

Discussion Paper 127

May 2012

Lui, D., B. Byiers, and Jeske van Seters. 2012. Rethinking Aid for Trade in the context of innovative financing. (ECDPM Discussion Paper 127).

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Background

Aid for Trade (AfT) emerged as an aid agenda six years ago at the World Trade Organisation (WTO) Hong Kong Ministerial Meeting of December 2005.

While the ideas behind AfT were not necessarily new, the significance of the initiative was that it represented a general recognition and agreement from WTO members that in order to take advantage of improved market access, developing countries needed increased aid resources for investments in infrastructure, improved trade policy, and boosting productivity in key export sectors.

The AfT agenda emerged not long after the Paris Declaration on Aid Effectiveness, which defined a set of principles for improving aid and better coordination amongst donors. As such, AfT could be seen as an important ‘test case’ for donors – including the EU and its member states to demonstrate the credibility of their commitments to the Paris Declaration and subsequent Accra Agenda for Action.

Key Purpose of ECDPM Study

In reality, the very nature of AfT has always raised questions around how aid resources can best be used to support investments that contribute to greater private sector activity, growth and employment, all with the ultimate aim of contributing to poverty reduction.

This study seeks to examine the policy implications of the increasing shift towards ‘innovative’ forms of development finance in comparison with more ‘traditional’ forms of aid, encapsulated by the Aid for Trade (AfT) initiative.

Key Findings of ECDPM

  • AfT has been increasing in quantity and (to some extent) quality over the last few years. There has been much emphasis on definitions to measure progress towards meeting commitments on AfT and its effects.
  • More recently, ‘innovative finance’ or ‘innovative aid’ has emerged as a broad agenda which covers the sources of aid financing, innovative mechanisms to deliver existing aid, and new ways to leverage other sources of finance for development and a positive driver for a new approach is the renewed interest of the private sector to operate in developing countries.
  • While donors face ever greater calls for transparency and are subject to commitments aimed at improving the efficiency of their assistance, the private sector is seldom subject to the same level of scrutiny – although this is changing.

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Economic Transformation and TradeAid for TradeDevelopment Finance and TaxationDiscussion Papers (series)ResearchAfrica