A role for the G20 in aid for trade?

Port of Rades, Tunisia. Photo: © Dana Smillie / World Bank

As the G20 looks to establish itself as a permanent fixture in the multilateral policy dialogue, it should consider the global aid-for-trade agenda a top priority. The Summit in Seoul next month presents a unique opportunity to take concrete action in new directions on aid for trade.

The G20 originated – in part – as a global financial crisis management forum, and expanded out of the G8, in the wake of the 2008 world economic crisis. The Group has gained momentum and is solidifying its unique position as the most influential decision making group on global economic stability and growth. As it looks to solidify its transition as a global “steering committee” to sustain sound global growth what better policy issue to champion than one that is high profile, critical to both developed and developing countries, and in need of more effective global coordination -- than aid for trade?  

The global aid-for-trade agenda was catapulted to the forefront of multilateral policy discussion after the WTO’s 2005 Hong Kong Ministerial meeting. The meeting called on Members to allocate increased development assistance to trade-related projects and programs. This reflected a recognition that firms in many developing countries are unable to benefit from market access opportunities. Poor quality infrastructure, high trade transaction costs, and weak institutions can block many of the advantages of reduced barriers to trade. By focusing on boosting investment in complementary measures to improve access to higher-quality, lower-cost services, along side of already large investment in infrastructure “aid for trade” can help countries to capture more of the benefits of existing market access opportunities.  

The good news is that aid commitments from donors are largely on track and aligned with commitments. However, much better strategic coordination in identifying specific capacity needs in developing countries -- and in monitoring aid effectiveness in trade-related assistance -- is needed.   The G-20 is uniquely placed to steer and help shape an agenda to coordinate, target, and monitor aid.  It can also shape an agenda and focus new directions in trade facilitation – projects in policy and regulatory reform – to complement the already large flows of aid for infrastructure. Bank research suggests, for example, that $1 of aid for trade spent on policy and regulatory reform could produce almost $700 in trade – a potentially higher rate of return than on other investments. The G-20 can help build consensus on more strategic and effective investments  -- as the world looks to maximize aid effectiveness in light of strained fiscal budgets in the medium-term.

Therefore, in addition to delivering on commitments to expand aid-for-trade funding made in 2005 at the G8 Gleneagles Summit, the G20 can shape an “Aid-for-Trade Facilitation Action Agenda on the following. These policy recommendations are drawn from Hoekman/Wilson (2010):

• Establish a platform for capacity building and knowledge transfer focused on trade policies and regulatory options. A coordinated program of assistance and knowledge exchange that includes active involvement of middle income G-20 countries could do much to increase the rate of return on aid-for-trade investments in hard infrastructure by creating a mechanism to strengthen capacity to put in place the associated complementary “software” inputs—policies, pro-competitive regulation, and so forth—that are critical to both social (equity) objectives and improving the efficiency of network infrastructure use.  
• Complement the financial aid for trade provided by high-income countries with market access reform by middle-income G-20 members to lower barriers to exports from poor countries. Extending duty-free, quota-free access for LDCs to all G-20 members, with minimal exceptions, would constitute a concrete initiative that would directly promote the trade and development prospects of the poorest countries in the world. It would come at very low cost to the G-20 countries in terms of additional imports because the production and trade structures of the LDCs and the G-20 countries have little overlap and the LDCs are usually very small suppliers. 
• Create a public-private aid-for-trade partnership to leverage the dynamism in the private sector for strengthening trade capacity  in the countries that are recipients of aid for trade. Such a partnership might focus initially on capitalizing on private sector expertise and information in identifying potential solutions and monitoring progress, while leveraging the coordinating capacities of governments and/or multilateral donor institutions. Greater sharing of information on such initiatives and learning about what works and what does not would enhance the visibility of such efforts and boost the role of the private sector in the broader aid-for-trade program. 
• Develop a strategic action plan to provide dedicated financial support for a targeted program of M&E of aid for trade  anchored in systematic data collection and research. The importance of M&E and analysis of trade outcomes and performance are widely recognized. The OECD is leading the efforts to share the results of M&E by donors and agencies so that they can benefit from lessons learned. There is, however, no dedicated funding to ensure consistent cross-country collection of data on trade outcomes and their determinants on a comparable basis.

The fragile economic recovery—combined with the need to strengthen the international trading system in support of sustainable and inclusive growth and employment—places the aid-for-trade initiative as a critical priority in the international development community.  Given this, taking aid for trade into the development agenda of the G20 could bolster the group's standing as a credible, long-term driver of global economic policy success. Recent developments, including the creation of a G20 Working Group on Development by the G20 are an encouraging start, and the vital next step will be to reach consensus on which priority issues the working group will tackle first. Certainly aid for trade -- and the trade facilitation agenda at its center -- should be among them.