Aid for Trade’s Positive Impact Must Reach Local Markets to be Effective

After receiving and reviewing an advanced copy of the Organization of Co-operation and Development’s (OECD) 2013 report Aid for Trade at a Glance: Connecting to Value Chains, I am intrigued by the ongoing process of replacing a portion of direct foreign aid with viable bi- and multi-lateral trade agreements that help in economic development, especially for developing and least developed countries (LDCs). This could potentially alter the way that global entities think of development, especially in the Global South. However, while the concept of aid for trade presents scenarios that could help these nations, especially LDCs, escape from the reality of perpetual aid dependence, to ensure that the system is effective, the local markets must benefit from such agreements and not just the nation as a whole.

 On the surface, aid for trade is saying all the right things. Understanding that this is an ongoing process is the key to conceptualizing the long-term potential of such a revolutionary spin on the world of foreign aid. The point of this report is to connect countries and markets to the value chains that could help nations improve their standards of living and boost their overall economic standing. Granting access to global markets, technology, information and networks to reduce border thickness will provide an easier path towards economic development, opening opportunities for the Global South to improve its economic position. Connecting to these value chains also streamlines the process of economic and human development by supplying partnerships between the developed world and LDCs, as well as South-South agreements that are mutually beneficial. Aid for trade also attempts to provide more public-private partnerships, while creating incentives in agreements that encourages greater transparency and dialogue, especially among those countries that suffer from corruption at the highest levels.  The encouragement of South-South trade partnerships creates relationships in which developing countries can assist each other in reaching economic goals and creating a burgeoning middle-class that will help reduce the gap between rich and poor. All of these concepts, if executed properly, can eliminate portions of foreign aid through viable trade agreements.

However, as with any program, aid for trade will have its shortcomings as it attempts to carve out its niche within the international forum. The biggest concern that I have regarding aid-for-trade is following the money all the way to the local levels. While conceptually the more improvements and income generating programs within a country will ultimately help all of the people of the nation. The potential problems with aid for trade are also problems with direct foreign aid to begin with, only with an added layer of including private enterprise.

It is hardly a secret that aid suffers from corruption in many countries, especially in emerging economies and LDCs – a fact that has left these places in the poor economic state that they are in. While aid for trade does offer incentives for transparency, the bottom line is that most international multi-lateral trade agreements will have to go through the political elite before it makes it to the local level and the people who require aid the most. Therefore, like direct aid, aid for trade will inevitably suffer from much of the same problems when dealing with developing nations and LDCs. The people at the top will clearly benefit the most, making it difficult to follow the value chains all the way down to local markets and small businesses, something that may help the economic standing of a country, but not necessarily their most impoverished citizens. For example, while a trade agreement in the agricultural sector may greatly benefit mega-farmers, how will a small farmer with a minimal amount of land see the impact of such transactions? These are the issues that should be targeted long-term.

The inclusion of private business in such agreements adds another level of uncertainty. Private business is about profit margins. Therefore, private enterprise follows the money and while investment in the global south may boost economic prosperity, when profit margins dip, private business may move on and who can blame them? In fact, aid for trade commitments to Africa dropped nearly 30 percent from 2010 to 2011. Private investment is only a portion of this, but with increased globalization, if aid-for-trade programs are no longer feasible for private investment, then commitments will decrease exponentially.

Finally, aid for trade creates South-South trade agreements, which are beneficial in helping two or more struggling economies cooperate in a relationship that is mutually beneficial for all. The increased investment of both China and India in the global south helps push this relationship agenda. While decreasing dependence on the West, too much oversight by the Chinese on trade agreements can drive the market in an opposite direction of where the aid-for-trade program would like to go. While Chinese investment in the global south can generate revenue for emerging economies, history has shown that while China is excellent at creating beneficial infrastructure for developing nations, they have little interest in total economic development such as job creation or dealing with low-level markets. They general approach is to fund projects that help them extract resources without concern for transparency. This approach empowers the wealthy political elite, leaving little benefit to the average inhabitant.

While aid for trade is an ongoing process, more of the focus needs to be reaching markets at a local level. If increased transparency can follow funding to average citizens and show that small businesses are thriving from such relationships than it will go a long way in replacing direct foreign aid. Aid for trade itself is mapping out a strategy that has all the right components, it is whether these components are executed properly which will show whether or not it can be a major replacement for aid. Emphasis on the value chains is smart as it connects trading partners on a multitude of levels, streamlining the development process. However, until there is an assurance that the program is helping locals and local business and not simply lining the pockets of the political elite, then for now it is still a work in progress.