POVERTY POVERTY THE WORLD BANK REDUCTION REDUCTION AND ECONOMIC MANAGEMENT MANAGEMENT NETWORK (PREM) NETWORK (PREM) Economic Premise AUGUST 2010 · Number 25 JUNE 2010 · Number 18 Aid for Trade: An Action Agenda Looking Forward 56057 Trade and the Competitiveness Agenda Bernard Hoekman and John S. Wilson José Guilherme Reis and Thomas Farole The current postcrisis environment--and fragile economic recovery--increases the importance of aid for trade. Global rebalancing and tightened fiscal budgets in the short to medium term also place renewed emphasis on aid effectiveness. This note identifies four options to enhance the effective- ness of the multilateral aid for trade initiative: (i) expanding market access for least-developed countries (LDCs) through leadership by middle- The global economic creating a forced a major rethinking of in domestic regulation of governments and markets in the income G-20 members; (ii)crisis hasmechanism to identify good practices the respective rolesof service markets and other "behind-the-border" processes of trade and growth. Indeed, industrial policy the private sector to in fashion--or, at least, talking about it (iv) trade-related policies; (iii) leveraging the dynamism and knowledge ofseems to be backimprove trade facilitation and build capacity; and is. But a a concerted effort to expand government in the trade and growth agenda of aid for trade.1 making renewed "activism" by data collection and monitoringand evaluation (M&E) need not mean a return to old-style policies of import substitution and "picking winners." Instead, it may mean a stronger focus on competitiveness by unlocking the constraints to private World Trade Organi- The Hong Kong Ministerial meeting of thesector­led growth. This note discusses the renewed role of government in trade Leveraging investments in infrastructure: the services "software" and growth in 2005 called on members to allocate more de- zation (WTO)policy from the competitiveness angle, and it suggests some priorities for the new competitiveness agenda. agenda velopment assistance to trade-related projects and programs. Infrastructure is the largest category of aid for trade: infrastruc- This reflected a recognition that firms in many developing coun- ture projects account for about 54 percent of the global aid-for- tries are unable to benefit from market access opportunities trade portfolio. While improved infrastructure is clearly a pri- (Njinkeu and Cameron 2008). Poor quality infrastructure and Export-Led Growth, the Crisis, and the End ority the crisis on the investment in infrastructure must be pacts ofin many countries,policy environment regarding trade of trade and highan Era other operating and transaction costs block many accompanied by measures more apparent. costs and addi- and growth were becoming that reduce trade Indeed, inby ap- of the advantages of reduced barriers to trade. By focusing on propriate regulation--for instance, policies that promote com- tion to raising concerns over the global commitment to trade The dramatic expansion in global trade over recent mea- boosting investment in infrastructure and complementary decades petition in the crisis has also led improvements in border liberalization, transport services and to some serious rethink- has to improve access to higher quality, lower cost growth, surescontributed significantly to diversification,public andand management. The quality of public wisdom services can be ing of some of the conventional and privateregarding the poverty reduction for trade" can help countries. This period private services, "aidin many developingcountries to capture an important determinant important result of which is the growth agenda--the most of the size of the payoffs to improve- more of the benefits of existing market access opportunities. of rapid export growth has been enabled by two critical ments in hard infrastructure. In addition, the efficiency, variety likelihood that governments will play a much more activist structural changes in global trade: (1) the vertical and spatial Challenges and Priorities Looking Ahead and the of services inputs are critical for the competitiveness role incosts coming years. There are three principal reasons fragmentation of manufacturing into highly integrated of governments are likely they more actively involved in why firms and farmers becauseto berepresent an important share Since theproduction the overall amounts ofthe for tradeservices "global early 2000s, networks," and (2) aid rise of have of the total costs of production. Being able years. industrial and trade policy in the coming to compete in inter- increased, albeit at a slower"offshoring." Both of these, inas- trade and the growth of pace than official development turn, First, the crisis is increasingly determined by and discred- national marketshas undone faith in markets access to low- sistance flows overall (OECD and WTO 2009), and greater at-and were made possible by major technological revolutions; cost and high-quality producer services such as telecommuni- ited laissez-faire approaches that rely simply on trade policy tention is being given at the national level to identifying trade- they were supported by multilateral trade policy reforms cations, transport, distribution, and and local liberalization. Instead, governmentsfinance. markets have related priorities. In LDCs, this process istrade supported by and broad liberalizations in domestic now and investment "rediscovered." In tend to have more and higher activist been Developing countriesthis sense, the demand for barriers the Enhanced Integrated Framework, through a secretariat in environments worldwide. to international trade andwell beyondin services,markets and government is likely to go investment financial as shown by Geneva, globaldedicated grant funding crashing into the middle The and a economic crisis came mechanism. Although the negative correlation the policy environment product regulation, and it will affect between gross domestic in which of this has been made in delivering on aid-for-trade commit- progresslong-running export-led growth party during 2008 (GDP) industrial strategies are designed. trade andper capita and the restrictiveness of services trade and and 2009. Between the of quarter of 2007 and the can ments, there are a numberlaststrategic areas where action second investment policies as measured in Gootiiz and Mattoo (2009; Second, the crisis has highlighted the critical importance quarter to 2009, global trade contracted by 36 percent. be taken of enhance the effectiveness of aid for trade as an in-But figure 1). Policy (of sectors, revolve around trading partners) of diversification reforms that products, and increasing the con- strument to promote inclusive and sustainable growth.least until as the recovery started to strengthen in 2010 (at reducing of services markets and facilitating new business of in testability the risks of growth volatility. The recent eraen- the clouds began to form over Europe), the longer-term im- globalization contributed to substantial specialization of 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise try and the supply of new service products can be very benefi- countries. However, significant trade barriers remain in many cial to the performance of the national economy. They may also of the dynamic emerging markets. The emphasis in policy fo- be cheap in financial terms--they often do not require massive rums, such as the WTO, has been on developed countries' mar- investments in hardware. An increasing body of research dem- ket access conditions, including achieving duty-free, quota-free onstrates that reforms in services sectors have a positive effect access for the LDCs and addressing key constraints that reduce on the productivity of both foreign- and locally owned manu- the value of preferential access, such as rules of origin. This is facturing firms that use services inputs (see Francois and Hoek- important, but it represents a missed opportunity for low-in- man [2009] for a recent survey of the literature). come developing countries that confront high barriers against A noteworthy feature of the pattern of services trade and in- exports in middle-income countries. vestment policies is that landlocked countries apply more re- Middle-income markets will grow more rapidly than those strictive policies than coastal countries. This appears particularly of high-income countries in the coming years. The emergence true in the air transport and telecom sectors, in which land- of multiple growth poles in the South offers low-income coun- locked countries have no inherent disadvantage (Borchert et al. tries an opportunity to diversify both across markets and prod- 2010). While there are many reasons why being landlocked ucts, mitigating the risk associated with increased market open- might lead to lower availability of services and higher prices, re- ness and trade-led growth, while reducing exposure to possible strictive policies contribute to the poor performance in services prolonged slow-growth markets in Europe, Japan, and the Unit- sectors beyond the handicap imposed by geography. This sug- ed States. gests that supporting policy reforms to enhance the contestabil- If all Organisation for Economic Co-operation and Develop- ity of "backbone" services in landlocked countries could be a ment (OECD) countries were to offer 100 percent duty-free, priority area for aid for trade. To date, however, much of the aid quota-free access to LDCs, their exports could increase by some for trade effort has focused on support for hard infrastructure $2 billion more than they would under the 97 percent scenario and improving productive capacity. Less has been done to im- that was included in the 2005 Hong Kong WTO Ministerial prove the services-related policies and regulations that help de- Declaration (Bouët et al. 2010). But export gains would be sub- termine the efficiency of (cost of using) infrastructure networks. stantially greater if major middle-income countries were also to Expanding south­south integration through trade reform and offer such access to LDCs--by up to $5 billion, reflecting higher market access tariffs in these countries. To be effective, such improved market South­South trade has been growing rapidly in recent years as access would need to be accompanied by liberal rules of origin a result of high rates of economic growth in many developing and related administrative requirements. Figure 1. Services Trade Restrictiveness Index ETH 80 IND ZWE IRN PHI QAT 60 IDN MYS VNM CHN PAN DRC KW T BGD TUN LBN OMN EGY MWN THA NPL YEM JOR BLR LKA SAU NAM DZA VEN TZA BHR 40 MOZ BOL UKR URY BWA KOR FRA LSO KEN CMR CRI UGA MLI CIV NGA MAR MEX ITA CAN DNK RWA HND ALB BRA CHLRUSHUN BEL ZMB KHMUZB ARM TUR PRT GRCDEU AUT ESP SEN PAK PRY ZAF ARG NZL SWE USA GHA COL KAZ JPN CZE AUS GBR MDG GTM PER MUS ROM IRL KGZ TTO FIN NIC MNG DOM BGR POL LTU NLD 20 GEO ECU 0 4 6 8 10 12 log GDP per capita, 2007 Source: Gootiiz and Mattoo 2009. Note: GDP per capita (constant 2000 US$); 102 countries. 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Supporting regional cooperation and integration of markets: tries and sectors. Much more can be done to harness the knowl- capacity building edge and information that exists in the private sector to use as Although much (most) of the aid-for-trade agenda is national both a source of data on constraints to trade and policies or fac- in scope, there has been a recent rise in the demand for assis- tors that needlessly increase costs of trading and as a source of tance to support regional integration. One factor driving this is potential solutions to specific problems. a recognition that key constraints to a country's competitive- Bolstering monitoring and evaluation of the effectiveness of aid ness may lie outside its borders. This is most often the case for for trade landlocked countries. Much of the agenda here revolves around Recent research has begun to assess the impact of different initiatives to lower transactions and operating costs for firms on forms of aid for trade and the complementarities or synergies both sides of the border. between types of aid for trade. For example, Helble, Mann, and Lowering such costs does not give rise to the types of wel- Wilson (2009) analyze the effects of various categories of aid fare-reducing trade diversion that can arise from preferential for trade--trade development assistance (productive capacity reduction of tariffs: lower trade costs benefit all trade partners-- building), trade policy assistance, and infrastructure--on bilat- they facilitate trade with the rest of the world as well as with eral trade. The findings suggest there are high marginal returns neighbors.2 Landlocked developing countries in Africa, in to projects that target trade policy and regulatory reform: US$1 which more than a quarter of the continent's population lives, of aid for trade targeted at trade policy and regulatory reform face a substantial competitive disadvantage due to high trade could increase trade by US$700. While there will be diminish- costs (Arvis, Raballand, and Marteau 2010; Arvis, Carruthers, ing returns, such findings illustrate that the rate of return to and Smith forthcoming). For landlocked countries, domestic some types of aid for trade can be very high. Relatively few such costs are multiplied by problems prevailing in transit/coastal studies have been undertaken, in part as the result of data con- countries. straints. More investment in data collection is needed to enable The need for regional cooperation to facilitate trade is un- rigorous assessments of the impacts of aid for trade and the derstood by all stakeholders. However, the range of available channels through which it affects poverty, welfare, and trade. instruments to support regional projects and cooperation is limited. This results in inadequate financing and assistance for Moving the Agenda Forward multicountry trade-related projects. Weak capacity of existing The fragile economic recovery--combined with the need to regional secretariats and the diffuse nature of the benefits of strengthen the international trading system in support of sus- existing integration mechanisms for the private sector have also tainable and inclusive growth and employment--places the aid resulted in a poor implementation track record. for trade initiative at the forefront of policy importance. In ad- Dedicated funds to support regional cooperation, covering dition to delivering on the commitments to expand aid-for- both software (regulatory institutions, policy changes) and trade flows made in 2005 at the Gleneagles G-8 summit and hardware (infrastructure to support cross-country flows of the WTO Hong Kong Ministerial, the above discussion sug- goods, services, and people) could help to fill the gap that cur- gests four strategic themes that an action agenda on aid for rently exists. A concerted focus on identifying and financing trade might support: regional projects to address the national priorities could also 1. Establish a platform for capacity building and knowledge help overcome resistance to beneficial regional market integra- transfer focused on policies and regulatory options to improve tion (beneficial in the sense of helping to attain the competi- the operation of producer services markets and network infra- tiveness objective). structure. A coordinated program of assistance and knowl- Harnessing the private sector as a source of knowledge, capital, edge exchange that includes active involvement of middle- and information income G-20 countries could do much to increase the rate Given the broad nature of the aid-for-trade agenda--encom- of return on aid-for-trade investments in hard infrastructure passing areas from border management to regulatory reform by creating a mechanism to strengthen capacity to put in and infrastructure investment--there are many stakeholders place the associated complementary "software" inputs--pol- involved from both the public and private sectors. As such, icies, pro-competitive regulation, and so forth--that are criti- there is great scope to make more effective use of public-private cal to both social (equity) objectives and improving the effi- partnerships that capitalize on private sector expertise in pri- ciency of network infrastructure use. oritizing areas for reform, identifying potential solutions, and This is an agenda that goes beyond leveraging invest- monitoring progress. Such initiatives can serve as platforms for ments in infrastructure by encompassing both producer developing national strategies and action plans for reform, in and business services. An important factor that explains addition to providing stakeholders with a mechanism for coor- lack of progress in negotiations aimed at liberalization of dination and harmonization of policy measures across indus- trade and investment in services--whether multilateral or 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise regional--is uncertainty and concerns regarding the possible chored in systematic data collection and research. The im- consequences of making market access commitments. Es- portance of M&E and analysis of trade outcomes and perfor- tablishing a forum for substantive discussion and analysis of mance are widely recognized. The OECD is leading the liberalization impacts and specific regulatory policies and efforts to share the results of M&E by donors and agencies policy changes could enhance understanding of different and so that they can benefit from lessons learned. There is, options and identify where large gains from liberalization however, no dedicated funding to ensure consistent cross- can be realized. country collection of data on trade outcomes and their deter- 2. Complement the financial aid for trade provided by high-in- minants on a comparable basis. come countries with market access reform by middle-income Note G-20 members to lower barriers to exports from poor coun- tries. Extending duty-free, quota-free access for LDCs to all 1. This note draws on Hoekman and Wilson (2010). G-20 members, with minimal exceptions, would constitute 2. As has been discussed extensively in the literature on region- a concrete initiative that would directly promote the trade alism, it is important that policy not target an expansion in in- and development prospects of the poorest countries in the traregional trade as a policy objective; what matters is to reduce world. Such an initiative is completely at the discretion of barriers to trade generally, and regional agreements can help do G-20 members and can be authorized at the stroke of a pen. so--especially for landlocked countries. It would come at very low cost to the G-20 countries in terms of additional imports because the production and trade About the Authors structures of the LDCs and the G-20 countries have little Bernard Hoekman is director of the International Trade Depart- overlap and the LDCs are usually very small suppliers. Any ment at the World Bank, Washington, DC. John S. Wilson is such initiative would need to be accompanied with liberal lead economist in the Development Research Group, Trade and In- rules of origin and rules of cumulation, because, as has been ternational Integration at the World Bank, Washington, DC. documented, extensively restrictive rules of origin can great- ly reduce the effectiveness of preferential access programs. References Concrete solutions to the rules of origin constraint have Arvis, J. F., G. Rabballand, and J. F. Marteau. 2010. The Costs of Being Land- been developed by several importing countries and can be locked: Logistics Costs and Supply Chain Reliability. Directions in Develop- ment. Washington, DC: World Bank. emulated by other G-20 members (see Elliott et al. [2010]). Arvis, J. F., R. Carruthers, and G. Smith. Forthcoming. Connecting Landlocked 3. Create a public-private aid-for-trade partnership to leverage Developing Countries to Markets: Trade Corridors in the 21st Century. Wash- the dynamism in the private sector for strengthening trade ca- ington, DC: World Bank. pacity in the countries that are recipients of aid for trade. Borchert, Ingo, Batshur Gootiiz, Arti Grover, and Aaditya Mattoo. 2010. "Land- locked or Policy Locked? The Effect of Services Policy Restrictiveness on Given the high payoffs from improving trade facilitation-- Service Sector Performance." World Bank, unpublished manuscript. encompassing areas from border management to regulatory Bouët, A., D. Laborde Debucquet, E. Dienesch, and K. Elliott. 2010. "The reform and adoption of modern information and commu- Costs and Benefits of Duty-Free, Quota-Free Market Access for Poor Countries: Who and What Matters?" Center for Global Development nication technologies--such a partnership might focus ini- Working Paper 206, Washington, DC. tially on capitalizing on private sector expertise and infor- Elliott, K., et al. 2010. Open Markets for the Poorest Countries: Trade Preferences mation in identifying potential solutions and monitoring That Work. Report by Center for Global Development Working Group on Global Trade Preference Reform, Washington, DC. progress, while leveraging the coordinating capacities of gov- Francois, J., and B. Hoekman. 2009. "Services Trade and Policy." Center for ernments and/or multilateral donor institutions. The pri- Economic Policy Research Discussion Paper 7616, London. vate sector is already undertaking numerous initiatives to Gootiiz, B., and A. Mattoo. 2009. "Services in Doha: What's on the Table?" World Bank Policy Research Working Paper 4903, Washington, DC. address concrete problems or to leverage ongoing invest- Helble, M., C. Mann, and J. S. Wilson. 2009. "Aid for Trade Facilitation." World ments to enhance development impacts. Greater sharing of Bank Policy Research Working Paper 5064, Washington, DC. information on such initiatives and learning about what Hoekman, B., and J. S. Wilson. 2010. "Aid for Trade: Building on Progress To- day for Tomorrow's Future." World Bank Policy Research Working Paper works and what does not would enhance the visibility of 5361, Washington, DC. such efforts and boost the role of the private sector in the Njinkeu, D., and H. Cameron, eds. 2008. Aid for Trade and Development. New broader aid-for-trade program. York: Cambridge University Press. OECD (Organisation for Economic Co-operation and Development), and 4. Develop a strategic action plan to provide dedicated financial WTO (World Trade Organization). 2009. Aid for Trade at a Glance 2009: support for a targeted program of M&E of aid for trade an- Maintaining Momentum. Geneva/Paris. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise