Aid for Trade: Complements for Development

1. Aid for Trade: Complements for Development Joseph E. Stiglitz Columbia University, and the Initiative for Policy Dialogue

2. Outline • What is ‘Aid for Trade’? • Principles • Adjustment needs • Capacity Building needs • Establishing a Global Trade Facility

3. 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’

4. 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

5. 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

6. 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

7. Adjustment Costs Developing countries will face greater adjustment costs because: • They are less diversified and more vulnerable to shocks • World trade is more distorted in the goods they specialise in, so reform will impact on them disproportionately • Developing countries have weaker markets and suffer from greater imperfections • Developing countries have weaker social safety nets

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. Summary II • 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