Can aid for trade be a salve to the poorest nations?

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From July 11-13, the World Trade Organization (WTO) hosted the conference Aid for Trade at a Glance 2017: Promoting Trade, Inclusiveness and Connectivity for Sustainable Development. With uncertainty about global economic prospects and protectionist tendencies in the ascendancy, the topic is timely.

As an increasingly important part of official development assistance (ODA), there is no doubt that aid for trade (AfT) represents a significant source for developing countries, inter alia the least developed countries (LDCs) with meager resources and limited capability to raise domestic resource mobilization. Through regulatory reforms and modern trade facilitation solutions, such as e-commerce, AfT can increase tradability in recipient countries, and boost their realization of 2030 sustainable development goals (SDG 9, Target 9.c: “Significantly increase access to information and communications technology and strive to provide universal and affordable access to the internet in least developed countries by 2020”).

The world’s gaze should shift to the pressing development challenges faced by the least developed countries

However, AfT flows to the LDCs from developed countries have been significantly below the target set by the United Nations. The world’s gaze should shift to the pressing development challenges faced by the LDCs.

Development needs of LDCs

The LDCs are typically geographically challenged, either landlocked, sealocked or remote. Due to their congenitally geographical challenges or remoteness from large markets, the LDCs are facing greater risk of being marginalized, suffering from high transaction costs for their external trade and teetering towards economic and natural disasters. Most of the LDCs are having low scores on the way to the global “best practice frontier.” The distance to frontier score, normalized to range from 0 to 100, with 100 representing the frontier, measures how far on average an economy is at a point in time from the “frontier.” Globally, the European Union and North America are “frontiers” in trading across borders, while Africa still lags.

Naturally, limited digital and physical connectivity together with socio-cultural and other regulatory factors can intensify the woeful poverty in the LDCs. In these countries, internet connectivity is significantly lower or less affordable and computers are still not common in households, for which high prices and unreliable electricity supplies are responsible.

Geographical challenges in the LDCs justify infrastructure development, both physical and digital, as a top development priority that is critical for sustainable economic growth, poverty reduction and socio-economic development. Both physical and digital connectivity can step up trade and inclusive growth by alleviating distance barriers, information asymmetries and nontariff barriers, abating trade costs, and buttressing competitiveness and productivity. Connectivity can contribute to poverty reduction by giving the poor access to information and goods as well as health, education, water, energy and communications services.

Moreover, digital connectivity allows individuals and businesses to plug into the digital global economy, which is especially beneficial for those in rural areas. It offers unprecedented opportunities to tackle development challenges in innovative ways; for example, it empowers traditionally underrepresented populations, such as women, small businesses, and rural entrepreneurs, by helping them get involved in the digital economy. It also helps to deliver more affordable and inclusive energy and guarantees access to energy for all, through home systems such as off-grid solutions or small-scale power grids.

The rationale for well-targeted interventions

While improved connectivity is indispensable for development in the LDCs, the full potential of digital connectivity is far from being exploited, even though connectivity in the LDCs has been ramped up over the past years. Major barriers causing the connectivity gap between the LDCs and the rest of the world are subdued accessibility, poor literacy, and restrictive policies and weak regulatory environments that hinder trade connectivity and the development of competitive goods and services.

Access is not only about infrastructure but also about ensuring affordable, understandable, high-speed internet connections available for less literate users. The absolute numbers of internet users in the LDCs are much lower than in the rest of the world, and so are the access growth and internet speed. Only about one out of eight people is online, among which just 12.5 million women have access to the internet, as opposed to 18 million men. Internet access is led by mobile telephone technology; as a consequence, fixed-line internet access in the LDCs remains below 1%.

A lack of basic education and an insufficient knowledge of English can prevent children from gaining access to the internet. Improving basic digital literacy is an important prerequisite for increasing value-added production and engaging in the global economy. Regulatory reform and the development of stronger legal institutions are also key to reducing trade complexities and costs to facilitate cross-border trade.

AfT programs have a vital role in helping the LDCs build productive capacities and economic infrastructure, improve trade policy and regulations, create an enabling environment, facilitate digital trade, and drive growth in services. They can slash onerous trade costs associated with physical infrastructure and logistics, helping the participation of small and medium-sized enterprises and disadvantaged people in global and regional trade and value chains. They can also foot the bill for improved literacy and education levels.

What next?

According to the OECD Creditor Reporting System (CRS), since 2006, there have been 146 developing countries receiving AfT assistance, from which middle-income countries (MICs) have benefitted more than twice as much as low-income countries (LICs). India, Vietnam, Turkey, Afghanistan, Iraq, Egypt, Morocco, Pakistan, Indonesia, and Tanzania are the top 10 AfT recipients, receiving a little over 35% of the total (US$104.6 billion) since 2006, of which Afghanistan is the only LDC.

In terms of AfT disbursements to the LDCs, roughly one-quarter of total AfT was delivered in spite of their relatively urgent needs. The overall trend has been encouraging in recent years given the fact that the AfT disbursements increased by 11% in 2015 following the negative growth rate in 2014. Afghanistan, Bangladesh, Ethiopia, Mozambique, and Tanzania were the top five LDC recipients in 2015, accounting for 37% of all AfT disbursements to the LDCs. On the other hand, a number of LDCs received limited AfT disbursements.

In 2015 ODA flows from the OECD Development Assistance Committee (DAC) members amounted to 0.3% of their total gross national income (GNI), falling short of the commitment by many developed countries to provide ODA commensurate to 0.7% of GNI set by the United Nations. Accordingly, the overall level of ODA commitments for the LDCs has been disappointing. In 2014, total ODA from OECD DAC members to LDCs was $41 billion or 0.09% of GNI, a way off from the UN targets of 0.15-0.20%. Only Denmark, Finland, Luxembourg, Norway, Sweden, the United Kingdom, Belgium and Ireland provided ODA to LDCs in excess of 0.15% of their GNI. Although 2015 observed a rebound of the ODA commitments to LDCs, significant gaps need closing.

Improving connectivity requires combined efforts by the international community, including LDC governments, donors, the private sector and development partners. Despite recent increases, international public financial flows remain insufficient to fill the financing gap for public investments for sustainable development and mobilizing private finance for development in the LDCs. Given their resources dearth and rather limited ability to increase domestic resource mobilization, it is important for all OECD DAC members to fulfill their global responsibility by delivering their promised ODA to LDCs.

There is also the need for LDC governments to put in place legal policy frameworks and supportive regulatory environments to accelerate the uptake of new technologies, generate greater investment, allow for digital expansion, and unleash development potential.

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