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Aid For Trade Raises Concerns: Choosing between a Development Round and a Development Face (March 2006)

Rethinking Bretton Woods | Mon, Mar 20, 2006

By Aldo Caliari
The coordination and political convergence among the World Bank, the International Monetary Fund and the World Trade organization was again in evidence last December at the Hong Kong WTO Ministerial. Throughout last year several important official meetings were targeted by activists as opportunities to promote pro-development outcomes on international aid, debt and trade. From Center Focus, Issue 170/March 2006

Aid For Trade Raises Concerns: Choosing between a Development Round and a Development Face


The coordination and political convergence among the World Bank, the International Monetary Fund and the World Trade organization was again in evidence last December at the Hong Kong WTO Ministerial.

Throughout last year several important official meetings were targeted by activists as opportunities to promote pro-development outcomes on international aid, debt and trade.
Among them was the Hong Kong Ministerial, which was a critical venue for the continuation of negotiations on the Doha Round. The Doha Round of trade negotiations was launched at the WTO Ministerial meeting in Doha, 2001. It was called a "Development" round with the purpose of allaying widespread concerns that previous trade rounds had been mere exercises in opening up markets regardless of the development impact of such commitments. Unfortunately, neither at the WTO Ministerial Conference that followed it (Cancun, 2003) nor in the talks that took place since then, including the lead up to the Hong Kong Ministerial, did the Round assume a more development-friendly perspective.

In order to save the "development face" of the Doha Round, leaders of the industrialized world, meeting at the Group of 8 in Gleneagles, Scotland, in mid-2005, mandated the World Bank and the International Monetary Fund to come up with proposals for improving the methods and purposes of Aid for Trade delivered to the poorest countries.

In the lead up to Hong Kong, as development remained absent from every aspect of the negotiations, the concept of Aid for Trade ended up taking a significant portion of the discussions. In quite a number of press and government reports on the negotiations, Aid for Trade was, in fact, visibly equated to the development aspects that the Doha Round had been expected to include. However, there is a sea of difference between placing development at the center of the trading system and "adding development", via aid commitments, to a trading system developmentally flawed.

In fact, a close analysis of the proposals by the international financial institutions and particular donor countries reveals little that would actually help the Doha Round live up to its development ambitions.


THE PROPOSALS

The proposal coming out of the World Bank and the IMF has three main elements:

The first element in the IMF/Bank proposal is scaling up the Integrated Framework. The Integrated framework is an initiative led by the Bank, jointly with the International Monetary Fund and four other international agencies. It was launched originally in 1997, with the aim of helping the Least Developed Countries (that is, the poorest of the poorest)Â use trade in order to grow and reduce poverty. The initiative, which relied on bilateral and multilateral contributions, entailed, as a starting point, the drafting of a map of trade-related needs for each beneficiary country. It disbursed near 30 million dollars distributed across nearly thirty countries. According to the current proposal, the initiative would be scaled up so as to provide $400 million per year and expand, potentially to even some more-developed countries.

However, the hopes of delivery by a reformed Integrated Framework (IF) might be too optimistic. An evaluation by the independent arm of the World Bank carried out in 2000 highlighted a number of problems that made it very unlikely that donors would invest more in the initiative. Some of the problems were structural in nature. Donors and recipients tended to have different perceptions about the role the initiative should play, with donors seeing it more as a "coordinating" initiative while recipients saw it more as a new aid initiative. The studies carried out under the initiative had a low impact on the funding levels of donors. IF was too focused on the trade reforms that could be implemented at the domestic level while conveniently forgetting about the need to reform the international enabling environment where domestic strategies were supposed to bear fruit.

The IF was subsequently re-launched in 2001. A new evaluation from the same World Bank body, produced in 2003, has shown that the same problems remain. While this evidence would seem to call for a deep reform, the Bank is calling for an expansion of what is, basically, the same initiative, hoping that some cosmetic changes will persuade donors to change their hearts. Donors, meanwhile, seem willing to play along, for the sake of showing a concession in the Round, but without a real will to make commitments that could be enforced on a sustained, long term basis.

The second element of the Aid for Trade package is assessing the adequacy of existing mechanisms for addressing regional needs and, in general, all those that concern more than one single country. While a paper produced by trade negotiators in Geneva had called for a fund to finance infrastructure needs on trade, this proposal was rejected by the Bank and Fund. Instead, they decided to explore to what extent those needs are addressed by the current stock of lending instruments. As far as these needs are concerned, this exercise might yield something new but support for any new mechanism, let alone new funding, remains tenuous at best.

Finally, the Aid for Trade package calls for a formalized role for the Fund in assessing adjustment needs emerging in the countries implementing trade liberalization. These adjustment needs relate to the erosion of special access to Northern markets enjoyed by certain countries, the need to make up for fiscal revenue lost as a result of trade liberalization, and the need to help countries that are net importers of food pay for growing import bills that might come as a result of lower subsidies. This is problematic as the Fund has a gloomy track record in forecasting, among other things, debt sustainability, growth, financial crises, and the impact of inflation levels. For instance, in the case of debt sustainability there are several instances where the lack of forecasting capacity can be traced back not merely to a lack of skills, but to perverse incentive the Fund faces by being itself an actor heavily involved in influencing policies and lending to the country in question.

The role of the Fund through the Trade Integration Mechanism also receives attention. The ambiguously named Trade Integration Mechanism, though, is not a lending instrument at the Fund specifically consecrated to trade, but simply a policy to "facilitate" borrowers' access to previously existing funding facilities. Thus, it represents no addition to the spectrum of services already provided by the IMF. The existing services, in turn, have proved unable to ensure access to the countercyclical, rapid type of financing that countries need in order to address trade-related needs. Moreover, the financing that is offered is in terms that, if used, would worsen the debt overhang. Similarly, the financing does not have assured continuity, as the existence of this policy at the Fund could be easily reversed formally or (more likely) informally by a change in sentiment of its major shareholders (the Group of 8). There are no signs that these deep insufficiencies of the IMF mechanism will be addressed in the short term.


TRADE AND AID VS. TRADE AND DEVELOPMENT

While there is certainly a role for aid to support developing countries' involvement in the trade system, the direction the discussion is taking is very worrisome from a development and social justice perspective. First, the Doha Round has failed to place development at the heart of the rules under negotiation. Neither has it addressed rules from previous rounds in need of revision. In areas such as agriculture, services, and industrial products (NAMA), the discussions have narrowed down to a point where developing countries could hardly make significant gains. The danger is that current drawbacks in the international trading system that escaped meaningful debate in this Round may simply be accounted for as issues that financial inputs can magically solve.

Second, Aid for Trade proposals are proving to be a distraction that has, so far, steered the conversation away from substantive issues related to the policy space developing countries need to manage agriculture, services, industrial policy and capital flows.

Finally, in Hong Kong the U.S., Japan and the European Union also unveiled promises of increased aid for trade. However, the promises on new bilateral aid continue to be non-binding and, in any event, there is question whether they will actually add to what donors were already providing or have promised. For example, the G8 promised to ramp up aid to 40 billion per year by 2010, a figure that many already say is politically unreachable. Are new promises of aid additional or will they represent a mere reshuffling of aid budgets? As far as the bilateral offers of aid for trade put forward by donors in Hong Kong, there is increasing evidence that the latter is more accurate.

The only way development can really emerge in the Doha Agenda is through a deep assessment of trade rules already in place and their sustainability at a worldwide level, as a model for promotion of poverty reduction, developmental and environmental goals. The problems and contradictions inherent to the liberalization agenda that developing countries are being required to undertake should come into the fore for an honest assessment. As long as this does not happen, Aid for Trade will continue to mean, in the best case, attempts to patch up the developmental flaws of the international trade system with aid promises.Â

Aldo Caliari is the Director of the Rethinking Bretton Woods Project

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