News and Analysis • Volume 10 • Number 6 • September 2006

Aid for Trade Endorsed at World Bank and IMF Meetings

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Meeting in Singapore in September, the ministerial advisory bodies of the World Bank and the International Monetary Fund called on WTO Members to resist calls for protectionism and endorsed increased Aid for Trade separate from the Doha Round’s conclusion.

Media attention focused heavily on the increase of IMF voting rights for China, Mexico, South Korea and Turkey, and the endorsement of World Bank President Paul Wolfowitz’s controversial anti-corruption drive. While the move to strengthen developing country influence in IMF decision-making elicited near unanimous approval, many governments (led by the UK), as well as civil society organisations, expressed serious concern about conditioning World Bank loans and grants to poor countries on their corruption record. This, the critics said, would amount to punishing people for the double misfortune of being poor and having a corrupt government. Under the Wolfowitz initiative, some aid has already been suspended to Bangladesh, the Democratic Republic of the Congo and Ethiopia. The Development Committee, which provides advice to the Boards of Governors of the Bank and the Fund, stressed the importance board oversight on the further development and implementation of the anticorruption strategy, and requested it to report on the matter at the Development Committee’s next meeting.

The Development Committee also called upon WTO Members “to avoid backsliding and provide trade ministers with the necessary flexibility to resume the [Doha Round] negotiations by the end of the year.” The International Monetary and Financial Committee, which advises the IMF Board of Governors, underscored that reinvigorating the momentum of multilateral trade liberalisation was ‘critical’ to sustaining the foundations of global growth. It expressed ‘deep disappointment’ over the suspension of the Doha Round, and called for leadership from the major trading nations to work urgently toward an early resumption of the negotiations.

Aid for Trade

In his address to the Development Committee, WTO Director-General Pascal Lamy stressed that Aid for Trade (A4T) was not formally part of the Doha Round and would continue to move forward despite the suspension of negotiations. He noted that the question of “who gains what?” from trade liberalisation could not be left to market forces only, and that an effective international response was needed to “address concerns about adjustment costs, capacity constraints and supply responses in developing countries and LDCs.” Mr Lamy also said that A4T should contribute to increasing the capacity of LDCs and developing countries to take advantage of new market opening opportunities.

Director-General Lamy characterised the WTO’s role in A4T as predominantly one of advocacy for additional resources and enhanced co-ordination both at the multilateral level and at the domestic level in the case of beneficiary countries, and said he expected the General Council’s consideration of any institutional role for the WTO to focus on monitoring A4T as no direct development assistance role was foreseen for the institution. Generous additional development assistance for trade projects would be particularly important once the results of the Doha Round started to be implemented, he said.

The development and finance committees both welcomed the recommendations of the WTO Task Force on Aid for Trade (Bridges Year 10 No.5, page 8), but provided no details on how they should be operationalised. They did, however, stress the importance of grounding A4T firmly in national development strategies, independent of progress on the Doha Round.

What Mechanism for Strengthening Regional A4T? A specific Aid for Trade issue on the Development Committee’s agenda was strengthening support for regional, sub-regional and cross-border needs.

Presently, both the Bank and the Fund, as well as the regional development banks, interact almost exclusively with national governments. In a report prepared for the Development Committee meeting, World Bank and IMF staff noted that using country- based instruments to support multicountry co-operative projects could generate high transaction costs. For example, World Bank support for strengthening the Eastern Caribbean Telecommunications Authority (ECTEL) involved loans and credits to five member countries of the Organisation of Eastern Caribbean States although the primary recipient was ECTEL, a non-sovereign regional body. The need to develop a series of linked country loans/ credits generated substantially higher costs than would have been necessary if there had been a regional or multilateral facility to support ECTEL directly.

Infrastructure projects involving several countries may also be negatively impacted by the lack of a regional grant facility, particularly when the project is perceived as benefiting one country more than the other(s).

The WTO Task Force on Aid for Trade had recommended exploring the merits of establishing a Regional Aid for Trade Committee, comprising regional and sub-regional organisations and financial institutions, to monitor the implementation of the regional aspects of A4T. While World Bank and IMF staff agreed that there was a rationale for strengthening channels and capacity for regional A4T initiatives, their report firmly rejected the establishment of “new and unproven institutional arrangements to manage and deliver aid for trade,” and recommended building on existing donor co-ordination structures instead. At the WTO, regional and cross-border A4T should be monitored by the ‘overall effort’, which envisages periodic global reviews based on reports from multiple sources, an annual General Council debate to provide political guidance, and an assessment of A4T in the trade policy reviews of both donor and recipient countries.

The World Bank/IMF staff report proposed three different solutions to addressing regional needs.

The first would involve donors responding to proposed regional projects through existing bilateral and multilateral facilities. However, Bank and Fund staff warned that this option might “do little to directly address the co-ordination or capacity constraints that affect co-operation in regions where grant funding mechanisms to support regional cooperation do not exist.”

The second option would be the establishment of a dedicated grant financing mechanism that would essentially fund analysis on such topics as the costs and benefits of regional co-operation on policy integration, infrastructure, joint regional facilities, project preparation, and capacity- building and technical assistance.

The third option would, in addition to analysis and capacity-building, “extend the scope of grant financing to cover a share of the costs associated with large-scale infrastructure projects,” where the costs involved would fall disproportionately on a country compared to the benefits it would receive from the project. This option should only be envisaged as “part of a re-direction of ODA that is already being pledged to Aid for Trade, and should not be entertained if it came at the expense of crowding out other existing development efforts.”

The trust fund facility under options two or three could be established in an existing development institution, such as the World Bank or regional development banks, but should be flexible and open to any implementing body designated by the governments involved.

While the staff of the two institutions had sought the ministers’ views on these options, the Development Committee’s final communiqué only noted that there was agreement on “the need to improve existing instruments to address cross-country and regional projects and strengthen the monitoring of regional initiatives and funding.”

Financing A4T

The communiqué also reiterated donors’ commitment to expanding funding and strengthening mechanisms for Aid for Trade, but made no additional financing pledges. UK Chancellor of the Exchequer Gordon Brown, however, said separately that his government would raise its A4T commitment by 50 percent over the next three years, which would take total UK support for infrastructure, such as roads, ports, power and telecommunications, to US$750 million by 2010.

Previous pledges, made at the WTO’s Hong Kong Ministerial Conference, include US$10 billion over three years for trade, production and distribution infrastructure from Japan, US$2.7 billion from the United States by the year 2010, and EU trade-related development assistance spending worth € 2 billion (about US$2.56 billion) by 2010.