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Aid for Trade: Complements for Development

Joseph E. Stiglitz

Columbia University, and the Initiative for Policy Dialogue

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Outline

• What is ‘Aid for Trade’?

• Principles

• Adjustment needs

• Capacity Building needs

• Establishing a Global Trade Facility

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Four Motives for Aid for Trade

1. A ‘negotiating side payment’ - Rich countries offer aid as a sweetener to keep developing countries at the bargaining table

2. ‘Compensation’ - for losses in the Doha Round - e.g. preference erosion, adjustment costs

3. ‘Fairness’- Aid as ‘redistribution’ of the gains from trade

4. ‘Complement to market access’- Aid to overcome ‘internal trade barriers’

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Aid for trade principles

1. Additionality– Aid for trade should complement not replace existing efforts – A ‘Maintenance of Effort Commitment’– Must not include debt write-offs, post-war reconstruction, or military

assistance

2. Predictability– In the Uruguay Round, promises of assistance never materialised– Aid for trade must be quantified and committed to within the Doha

Agreements– And subsequently enforceable within the WTO

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Aid for trade principles (II)

3. Country Ownership– Determined by local priorities – No conditionality– Integrated into local development plans

4. Coherence– So far, the Integrated Framework has attempted to coordinate

donors– But there is greater need for coherence

– more research into the needs

– a single Global Trade Fund to disburse aid for trade

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Aid for trade principles (III)

5. Private Sector– Programs should attempt to build productive capacity rather than

increase consumption – Focus should be on

• Public investments which increase private returns• Enterprise development • Improving business environment

6. Grants vs. Loans– Both grants and loans will be used in different circumstances– Instruments should vary depending on the type of project and the

recipient country

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Adjustment Costs

Developing countries will face greater adjustment costs because:

1. They are less diversified and more vulnerable to shocks

2. World trade is more distorted in the goods they specialise in, so reform will impact on them disproportionately

3. Developing countries have weaker markets and suffer from greater imperfections

4. Developing countries have weaker social safety nets

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Adjustment Costs (II)

1. Fiscal losses– Trade liberalisation reduces tariff revenue– Tariff revenue is around 1% of government budgets in rich

countries, and around 30% in LDCs– Shifting to VATs will have adjustment costs

• And may be administratively inefficient• May increase economic distortions• And have regressive distributional impacts

2. Net Food Importing Countries– Will suffer as the world price of food rises following the

elimination of export subsidies– Urban poor people (net consumers of food) will be the hardest

affected

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Adjustment Costs (III)

3. Preference Erosion– Net losses from MFN liberalisation for preference recipients

depend on the difference between lost trade diversion, and gained trade creation as global tariffs come down

– Will severely affect a small number of industries in a small number of products

4. Implementation Costs– For poor countries, trade liberalisation involves large costs

which should be weighed among other development expenditure priorities

– The Uruguay Round imposed large implementation costs on developing countries

– New trade facilitation regimes will be expensive

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Capacity Building

Market access is not enough– The failure of EBA (and to a lesser extent AGOA) has shown

that market access is not enough to increase exports from LDCs

– Despite increasingly ‘generous’ preferences, LDC’s share of world exports have fallen over the past 20 years

– For LDCs tariffs are not the binding constraint. Exports are constrained by• Weak infrastructure• High product standards• Poor access to credit• Unfavorable business environment

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Capacity Building (II)

Assistance is needed with:1. Policy Frameworks and Institutional

development– Negotiating within the WTO– Designing domestic trade policies– Building regional coordination mechanisms– Policy research and identification of constraints

2. Enterprise Development– Inadequate finance/knowledge/technology– Including assistance in meeting standards

3. Infrastructure– Weak infrastructure is an ‘internal barrier’ to trade

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A Global Trade Facility (GTF)

A new facility should:

1. Transform the existing IF into a more consolidated management structure

– Bring it inside a single multilateral organization– Rather than being jointly managed by 6 institutions

2. Receive a stream of funding additional to existing commitments

– Agreed to as part of a binding Doha Agreement– Subsequently enforceable within the WTO

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A Global Trade Facility (GTF) (II)

A new facility should:

3. Be housed within the World Bank– Much as the Global Environment Fund is– Taking advantage of existing institutional structures, in-

country presence, and experience

4. Be governed by both developed and developing countries

– For example a board of 24, with 8 seats for each of Developed, low income and middle income countries

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Summary I

Aid for trade should be broadly interpreted to cover a wide range of trade-related needs

Developing countries face - Much larger adjustment costs than rich countries- Greater supply capacities

Developing countries will need assistance - to deal with these costs, and make the necessary investments to take advantage of new market access opportunities

A new Global Trade Facility can provide predictable, additional finance to developing countries

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• Only if trade liberalization is accompanied by an effective aid-for-trade program is it likely that any development round will be able to deliver on its promise

• It is essential to enhance opportunity

• It is also essential to enhance developing countries’ ability to take advantage of those opportunities

Summary II