For more than half a century, countries in Africa have been overstocked with billions of foreign aid. However the growth and development of the continent are sill very sluggish with a few economies experiencing significant growths. The GDP per capita income in some Sub Sahara African countries is either motionless or declining. Subsequently trade has been identified as a potential tool for economic growth and development over the years, but the process of connecting to this potential tool has been difficult for many developing countries especially the least developed ones. These difficulties have been due to the lack of infrastructures, policies, institutions, effective procedures that would integrate them into the world trading system.
Due to this view, the Aid for trade initiative was launched in 2005 with the aim of using aid as an investment for trade. This initiative is all about helping developing countries and least developed countries to actively participate in the world trading system by overcoming those structural and capacity limitations that serve as a hindrance to them maximizing the remunerations from trade opportunities. So, this initiative is carried out by; making some trade policies reforms, economic infrastructures, trade related adjustments, and the building of productive capacity of the developing and Least developed countries.
- Africa and foreign aid
In more than five decades, African countries have been overstocked with billions of foreign aid flowing from both International Organizations, private donors and Non-governmental Organizations. But however the growth and developmental level of the continent is still not so good, with the GDP per capita income in some Sub Sahara African countries is either motionless or declining and a few numbers of economies showing signs of growth at he margin. And to top it up the continent has consistently been under-performing both in International Trade and Economic growth in comparisons to other regions of the world.
The theory of foreign aid has been hailed over the years as a solution to end world poverty. The theory states that all forms of aids are beneficial to any country, despite the situation or circumstances. (Abuzeid, 2009) Foreign Aid, for the benefit of this paper refers to all official Devlopment Assistances (ODA). ODAs are flows of official finance to the developing or as some may call it “third world” in the form of grants and loans. They are generally administered with the aim and objective of promoting economic development and growth of developing and least developing countries. They comprise of both Multilateral aid, which flow via intermediate lending institutions like the World Bank and IMF, and Bilateral aid flowing directly from donors to recipient countries.
Development economists have argued that foreign aid is an instrument in overcoming the saving gap in developing and least developed countries. They assumed that since the third world is staggering in poverty, they are unable to make income generating investments, so foreign aid should be that savior in closing that financing gap that is causing extreme poverty. But the case of South Sahara Africa makes this argument only valid on paper. SSA has been washed in over a whopping 1 trillion dollars in foreign aid the last 50 years, but besides a few growing economies, the continent remains staggering in poverty and slow growth. More than a quarter of the SSA countries remain poorer than they were in 1960, with absolutely no implications that foreign aid can take them out of the poverty zone. An example of the failures of foreign aid could be my country Liberia. The country has benefitted from enormous foreign aid since its recovery from the 14years of armed conflict that it suffered. The OECD stated that in 2011 the Liberian government benefitted from a total ODA of 765$ million, which amounted up to 73% of its GNI. But all those aid failed to provide a decent education to the Liberian students, given that all students failed the entrance exams to the University of Liberia in 2013. The issue of extreme poverty and massive corruption still remains a challenge for the country despite enormous foreign aid.
Beside the example of Liberia, James Peron in his 2001 article, cited so many instances of failed aid in Africa. Beginning with the failure of the Norwegian aid agencies in achieving their goal of employing northern Keyans to their newly constructed fish freezing plant. Subsequently, in Tanzania, a 10$ million was spent to build a cashew-processing plant, but this project failed due to poor evaluation of donors. The plant had the capacity of three times more than the entire country cashew production, meaning that the cost was so so high than donors expected. 2$ million was donated to South Africa to aid in the awareness of AIDS in the country. But the funds was misused into buying a model bus to parade actors and actresses that would have helped in the awareness of HIV/AIDS. And also in Zimbabwe the government has received aid for the promotion of land reform. But for 20 years, these reformed lands were being misused by the elites of the ruling party. Congo also sold all donated food supplies and used the funds in purchasing arms factory from Italy. (Peron, 2001)
With all these debacles, the African governments an even donors have come to a realization that Trade not aid is the solution of African problem. Taking the examples of Asian countries who receive a little aid as the diagram above portrays, but yet were able to emerge a huge number of its population from poverty through trade.\
2. Africa Trade Tragedy over the years
Africa have been actively participating in a long distance specified international trade for decades, beginning from trading along the Nile river. Although the European early exploration of the continent was due to its riches in natural resources, but also to expand the continent trading opportunities. A key trade route fro the continent at the time was the trans-Sahara trade route where goods were moved by camels from the coast of north Africa up to the Mediterranean and across the Sahara dessert to the West coast. African early traded salt, gold, and salves, with Ghana, Mali and Mauritania the main trading centers. But however the continent position in the multilateral trading system has worn out over the past 50 years.
Most literatures of the 1980s argued that the cause of Africa trade decline in the past 50 years was probably due to its 1960s and 70s policy of import substitution that most countries adopted during those periods. (Karingi & Leyaro 2009) This import substitution policy resulted in a tighten trade restriction and uneven exchanged rates. Domestic policy misrepresentations like high tariff barriers also raised the cost of international trade along with budgets and balance of payments deficits.
But quite recently, literatures dating from the mid 1990s brought a shift in the argument of Africa’s poor trading performance. Judging from the experience of many Asian economies that chased outward oriented strategies, plus export led growth and achieve a positive result, arguments have shifted that Africa’s poor trade performance is due to non-export led growth strategies and its inward oriented strategies. Dollar et al in their 2003 paper argues that if Africa should pursue a more outward and export-led strategy, they have to work on those constraints that would put them at a disadvantage in trading in the multilateral trading system. Some of the constraints he addressed were; poor infrastructures that support trade, low productivity of public investment, low human capital development, lack of technological know how, and even structural factors such natural barriers to trade hence higher trading costs. (Dollar et al, 2003) other reasons stated are unfair global rules which put the continent at a disadvantage, domestic competitiveness, and weakening terms of trade.
With the level of resources that the continent possesses, it is possible that they can be a central player and partner in the global economy. But in order for them to be a key participant in the multilateral trading system benefiting from globalization, they have to address its more binding trade constraints. And this is where the aid for trade initiative comes in.
3. The Aid for Trade Initiative
The Aid for trade is an initiative that was launched in 2005 at the Hong Kong ministerial conference to help developing and especially least developing countries to overcome those structural constraints that serves as a hindrance to their active participation in the global trading system. The OECD defines Aid for trade as “Assisting developing countries to increase exports of goods and services, to integrate into the multilateral trading system, and to benefit from liberalized trade and increase market access”. (OECD, 2006)
This structural adjustment process will be carried out by reforming the trade related capacity, such as; trade policy reforms and regulations, trade related institutions and infrastructure, productive capacity building, and trade related adjustment. The global aid for Trade initiative aims at interconnecting aid and trade policies in quest of raising living standard and decreasing global poverty.
Statistics shows that Aid for Trade has gradually increased over the years along with its donors. The diagram above shows the growth in the initiative over the years. In 2007, the graph indicates that aid for trade grew more than 20% and followed by an additional 35% increase in 2008. With the largest share of aid for trade flowing to Asian countries at 44% and Africa at 35%.
4. The importance of Aid for trade to Devloped and Least Developed Countries
In addressing the issue of trade openness, there have been a vast body of proof that gives a positive feedback as to the link between the openness of trade and economic performance depending on the speed or form of growth. This is evident in most developing countries that have thrived in getting their rewards from the expansion of the global market. A rapid reduction in trade barriers, for the most fact in manufactured goods has been a stepping stone for these countries to effectively integrate into the global trading system via an export led industrialization process.
Although opening trade up to enhance world market access may not be sufficient, in an effort to enable LDCs effectively participate and reap all necessary benefits of trade liberalization, these LDCs needs help in building their trade related capacities. Aid for trade provides a rational outline for supporting these broad objectives, that is by helping DCs and LDCs grow with the implementation of comprehensive export led strategies that could be very beneficiary to the poor.
But it has been almost 8 years since the 2005 WTO Hong Kong ministerial conference, and we can’t dispute the fact that aid for trade has risen in the discourse of International Trade and Development. Just as its fundings and donors are increasing, so are questions as to its impacts and effectiveness over the years.
- Why Malawi as a case study?
Of all African countries why did I choose Malawi as a case for measuring the effectiveness of aid for trade? Below are some justification of using Malawi as my case study in effectively analyzing the impact of aid for trade.
- Landlocked – being landlocked possess a serious threat to the country’s economic growth. That is higher transport costs, delays at border crossing thus leading to less trade. Being landlocked has been identified by the world bank as one reason that 16 of the worlds 31 landlocked LDC and DC are among the poorest in the world. Because their goods take twice a long to exist neighboring ports.
- Least Developed – ranked 153 of 169 countries of the United Nations Program (UNDP) in 2010 human development report. The country is one of the world most densely populated countries with a population of 17.4 million people with a land space of just 45,745 sq mi as of 2014 estimates. And most of three quarters of the population lives on Agriculture and lives in rural areas. Almost 75% of Malawians earn not more than 1.25 United states dollars.
- Beneficiary of development assistance or Aid – Malawi has lengthily been a beneficiary of many development assistance or foreign aids. Tracing back to the 1980s and 1990s Malawi total ODA rose to about 28% of its GDP, in 1994 39%.
5.1 Aid for Trade and Malawi
Malawi’s economic growth has been closely interrelated with its export performance. But in terms of GDP, the country stands at number 10 of the African economies with the lowest GDP. One key factor in the country’s failure to raise its GDP per capita has been related to the issue of low human capacity and fast population growth in the country. As small as the country is, they have been noted as being one of the Worlds’s most densely populated economies, with a population of 16,362,567 people as of 2013. (Malawi, 2013) The World Bank report indicates that in 2009, of the entire population, only 24% had attained secondary education. All these had a direct influence on the private sector by limiting its ability to effectively trade. Beside the private sector, it also had a huge impact on the government and civil societies in establishing a conducive environment for the development of the private sector.
Amidst all these difficulties, the country’s economy and development still have a heavy reliance on trade. And Aid that supports export-led growth potentially has a direct impact on economic growth and thus reducing poverty. The 2006 revised version of the Malawi growth and development strategy mentions trade as a key objective, but failed to specify how trade will be mainstream into its policy. (Malawi MDG, 2006-2011)
Malawi focus on trade related aid effectively can be traced back to the WTO integrated framework in 2001, though the AFT concept was initiated in 2005. In 2004, the government of Malawi approved a Diagnostic Trade Integration study (DTIS) to develop effective recommendations for those programmes and policies that Malawi and its development partners follow that could enhance the country trading performance. The main trading and developmental challenges were restructured in 2006. But policy recommendations from the DTIS were not mainstream into the MGDS. But in 2006, the Malawi Ministry of Industry and Trade attempted a process of mainstreaming trade into sectoral strategies.
The OECD creditor reporting system reveals that of the 772 million of flows of ODA to Malawi in 2009, 5.0% of its GDP can be attributed to aid for trade. The table below shows the number of active aid for trade projects through Malawi through the years.
Amount of Aid for Trade in various sectors of Malawi economy through the years
|All projects 2002-2010|
|Trade Policy and Regulations||1||2||2||2||5||3||5||2||2||8|
|Building Productive Capacity||4||5||15||26||34||51||44||43||60||111|
|Policy, Develop & Infrastructure||1,2&3||15||32||47||55||59||58||59||72||136|
|All aid for trade excluding Instit. Framework||1,2,3 &4||20||47||73||89||110||102||102||132||247|
|All aid for trade||1 to 5||22||64||94||117||146||134||135||168||324|
Source: Government of Malawi’s project database, Compile by the Author
The table above shows the growth of the aft initiative through the years in Malawi. The figure equally distributes the projects by the type of aft initiative it falls under. Those figures portray he number of active projects in succeeding years. From 2010, there were just two active trade policy and regulation projects and 44 active development projects. Of which 25 were formed in the agriculture sector, involving the provision of extended services or attempted to promote the development of a Subsector within the agriculture sector. Four of these projects were focused on improving the access of firms to credits, another four addressed the government capacity to improve trade, and six other projects were mainly private sector development which included the World Bank technical assistance program and Business environment strengthening program.
One of the success stories in Malawi was that, the National Working Group on Trade Policy in coordination with a trade consultative forum that involved the public sector, a minimum portion of the private sector, the academia and the civil society were all able to organize a Malawian Trade Connection event in Edinburgh in 2007. This event was a part of a three-year Scotland-Malawi Trade Partnership (SMTP) project that was funded by the Scottish Government and was also meant to showcase the best of a diversity of Malawian products already introduced and available in the Scottish market. A number of deals for Malawian products were agreed as a result of the event. The SMTP project, which is managed by Imani Development is helping a great deal in the building of efficient export capacity in Malawi and is also facilitating exports to Europe in general and in particular to Scotland. And this project also led to the formation of the Exporters Association of Malawi that has been very active in the consolidation of exports for small and medium enterprises that do not have the capacity to export on their own.
Although Aid for Trade is a very good initiative that,if directed properly can be the best tool of settling some of Africa’s trade constraint problems, and help them to reap some benefits of international trade. But there are some issues that I found not quite suitable for the initiative.
- The situation of Insufficient trade mainstreaming in national development strategies of beneficiary countries.
- Private sectors are not given the chance to actively participate in identifying the dying trade needs of the economy.
- Many beneficiaries have complained about the Insufficient resources for infrastructure and productive capacity building.
- The lack of data on how and to what extend that the initiative have impacted the levels of poverty
- Lack of proper guidelines on how to measure the effectiveness of aid for trade
- Policy Recommendation
In order for Aid for Trade to be effective in other parts of the continent where they are implementing projects, there need to be certain adjustments in the reform process.
- “Trade policy Regulations” : under this reform, I suggest that countries should have trade embedded in their domestic strategy and policy papers like the MDG, PRS and others. This was one reason that caused Malawi to benefit from the Aid for Trade Initiative. Since they already had Trade as a major tenant of their MDGS. So under this category, I will recommend that the Aid for initiative Ensures clear linkages and connections that exists between a country’s trade agenda and the broader national development agenda. The donors should Support failed trade policy, analyzing better options and effectively identify how changes in trade will impact different economic and social groups. My last concern has to with the involvement of the local stakeholder in the process of reforming these trade policies and regulations.
- “Trade related infrastructure reform” these reforms in trade related infrastructures, hardwares and even softwares (not forgetting transport and telecommunications) are all necessary to the domestic economy as well. So my recommendation is that Donors should include poorer trading groups like, SMEs, micro enterprises, informal traders, and local women.
The AFT initiative has been successful in mobilizing the available amount of funds to carry out these transformations. But as for the impact on recipient countries, there are few to speak of. Malawi, Botswana, Mozambique, Kenya and few other African countries have benefited through one way or the other from the implementation of the project in their countries. Aft is an effective tool in helping developing countries, particularly LDCs to fully benefit from trade liberalization and WTO agreements. Success stories have been cited from both African and also other countries which gives the indication that the AfT initiative is assisting some countries to fully participate and take advantage of market access opportunities available through the Multilateral Trading Sysytem. The WTO and the OECD together, put in place a monitoring and evaluating mechanism as to know the extend to which the initiative had gotten successful or unsuccessful in certain projects.
Aid for trade has been able to some extent change the minds of our African leaders on foreign aid, since these aids are being used for investment that would lead to increase in trade. From all the above factors, it is vibrant that the success of any Aid for trade initiative depends on the coordination that exists between different stakeholders but in particular donors and the recipient countries.. If proper sustainable systems and mechanisms are not put in place, AfT projects could end up as isolated events instead of well-coordinated projects that are meant to assist a country in market access opportunities and overall economic development.
- Peron, James “The Sorry Record of Foreign Aid in Africa: African Governments Are Destroying Their Countries with Aid from the West” August 2001. Can be found here http://fee.org/the_freeman/detail/the-sorry-record-of-foreign-aid-in-africa
- Karingi, Stephen N, and Leyaro Vincent “Monitoring Aid for Trade in Africa:An assessment of the effectiveness of Aid for Trade” African Trade Policy Center ATC no. 83, April 2009
- OECD “Measuring Aid 50 Years Of Dac Statistics – 1961-2011”April 2011 can be found here http://www.oecd.org/dac/stats/documentupload/MeasuringAid50yearsDACStats.pdf
- Country’s Economies http://countryeconomy.com/demography/population/malawi
- (2011). “Aid-for-trade statistical queries”. Website. Organisation for Economic Cooperation and Development, Paris. Available at: http://www.oecd.org/document/21/0,3746,en_2649_34665_43230357_1_1_1_1,00.html
- (n.d.). “Calculation of the Grant Element”. Organisation for Economic Cooperation and Development, Paris. Available at: http://www.oecd.org/dataoecd/15/0/31738575.pdf
- Waldman, Linda “The United Nations and the Malawian Growth and Development Strategy Paper: Process, Content and Outcomes amid Changes in the Architecture of Aid” Institute of Development Studies, University of Sussex http://www.undg.org/docs/8969/Malawi-IDS-study.pdf
- 2010 Malawi Millennium Development Goals Report http://planipolis.iiep.unesco.org/upload/Malawi/MalawiMDGs2010Report.pdf
- Malawi Growth and Development Strategy “From Poverty to Prosperity 2006-2011” http://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/2006-2011_-_Malawi_-_Poverty_Reduction_Strategy_Paper.pdf