Dr Fahmida Khatun, Research Director, CPD writes on “Aid for trade: How to Improve its Effectiveness,” published in The Daily Star, on Thursday, 24 October 2013.
Readymade garments constitute more than 75 percent of total exports of Bangladesh.
Aid for trade: How to Improve its Effectiveness
Fahmida Khatun
In just over two decades, Bangladesh has evolved from an aid-dependent country to a vibrant outward-oriented economy. This can be attributed to domestic policies such as market-oriented reforms, tariff liberalisation and pursuance of an export-oriented growth strategy in general. Despite commendable export growth backed by supportive policy measures, the export basket has not been diversified.
The range of exports is disproportionately dependent on garments, which constitute more than 75 percent of total exports. The country has not been able to realise its full export potential because of serious lacunae in areas such as institutional, technological and human capabilities. The most problematic factors for doing business have been inadequate infrastructure and inefficient governance.
There have been various trade-related technical assistance and capacity building initiatives in Bangladesh to expedite the growth of the export sector. However, the contribution of those initiatives has been limited. The shortcomings of those programmes led to the launch of the Aid for Trade (AfT) initiative at the Sixth Ministerial Conference of the World Trade Organisation in Hong Kong in December 2005 to help the developing countries, and especially least developed countries, overcome supply-side constraints and improve their trade capacity.
A WTO Task Force on AfT recommends that the initiative shall cover six broad categories. These are: (i) trade policy and regulation, (ii) trade development, (iii) trade-related infrastructure, (iv) building productive capacity, (v) trade-related adjustment, and (vi) other trade-related needs. AfT is a sub-set of official development assistance (ODA).
Since the launch of the AfT initiative, four global reviews have been conducted by the WTO and the Organisation for Economic Co-operation and Development (OECD) for the monitoring and evaluation of AfT. The main findings of these reviews indicate that there has been a significant increase in resource mobilisation for trade-related development assistance since 2005. However, results vary across countries.
In order to scrutinise how far AfT has been able to live up to the expectation at the country level, a research has been undertaken by the Centre for Policy Dialogue in collaboration with the International Centre for Trade and Sustainable Development (ICTSD), Geneva.
In Bangladesh, AfT has addressed some key areas of trade-related needs. Both the government and donors have succeeded in implementing a number of trade-related projects that helped address some of its supply-side constraints. For example, AfT for capacity building through research, training and workshops helped policymakers understand the dynamism and emerging issues related to trade at global level. Similarly, AfT for ensuring social and environmental compliance has been useful to improve the quality of products. However, the contribution of such support towards improving its export performance is yet to be observed.
The analysis based on the database of the OECD indicates that disbursement of AfT has not increased in recent period compared to base period. Only AfT for “trade policy and regulation” was additional, though the actual volume is far lower than that of the other sectors. On the other hand, total disbursement as a percentage of total commitment of AfT declined in recent period, and the gap between commitment and disbursement continues to widen. Such gap along with the change in the priority of donors and the delayed implementation of projects are factors behind unpredictability.
In case of ownership, AfT projects are closely linked to the objectives of national development policies, but Bangladesh’s effort to mainstream AfT into national policies is still limited. The scope for involvement of broader stakeholders in formulation, implementation and monitoring of AfT is very narrow. A positive feature of ODA flow to Bangladesh in recent past is that it has been aligned with national priorities. The number of parallel project implementation units has decreased since 2005.
Less aid is tied as well, but stakeholders view that donors continue to impose conditions and restrictions. Donor coordination has improved through a joint cooperation strategy between the government of Bangladesh and donors, which aims to improve the aid relationship in terms of discussing and planning projects together.
In order to improve the effectiveness of the AfT initiative in Bangladesh a number of measures should be undertaken.
First and foremost, the methodology of estimating AfT should be clarified. The existent OECD database takes into account all projects under the ‘economic infrastructure’ category as AfT even though many projects may have no link to trade activities. Therefore, the commerce ministry and the Economic Relations Division (ERD) should have a guideline and a set of criteria to calculate and analyse the actual AfT flow.
Second, as there are now several global initiatives to review the effectiveness of AfT, it is necessary that AfT data are recorded separately at the national level and maintained by a cell such as the Aid Effectiveness Unit of the ERD.
This cell will keep a database of AfT flows and monitor its implementation in close collaboration with the commerce ministry and donors. The commerce ministry and the ERD have to identify projects under AfT based on their own criteria.
Third, trade policies have implications for several ministries, and international trade rules and agreements can have direct and indirect links to those ministries. Therefore, trade should be mainstreamed at all relevant ministries, and all trade-related policies and strategies need to be discussed with and reviewed by concerned ministries.
Inter-ministerial and inter-agency coordination should be strengthened in implementing and monitoring AfT projects. Awareness on AfT has to be raised in various ministries. Awareness building among the private sector and NGOs is also necessary so they can monitor AfT projects to ensure accountability and transparency.
Fourth, one of the reasons for insignificant impact of AfT on export promotion is that the amount of AfT flow is still lower than the requirement of the country. There has been substantial growth in AfT flows for trade regulation and policy. However, AfT flows should be increased in the category of economic infrastructure in order to have any meaningful impact on export promotion in the medium to long run.
Fifth, AfT projects have so far been mostly supply-driven and the involvement of government officials in project formulation has been very low. The government should conceive and formulate AfT projects in consultation with the private sector, NGOs and experts. To establish shared ownership of projects all relevant stakeholders should be involved right from the conceptualisation of the project till the implementation phase. Stakeholders should be made clear of the potential benefits and challenges of understanding of AfT projects.
Finally, capable and competent human resources are essential for formulating and implementing AfT projects effectively. The absorptive capacity of the ministries and departments should be improved through improving skills of relevant officials. The private sector also needs to improve its capacity to design and implement AfT projects.
The writer is research director at the Centre for Policy Dialogue.