Trade and Aid: Partners or Rivals in Development Policy?

8 February 2006 13:00 - 15:00 GMT+00
Public event

Speakers:

Chiedu Osakwe, Director of the Doha Development Agenda Special Duties Division, World Trade Organization

Sheila Page, Senior Research Associate, ODI

David Booth, Research Fellow, ODI

Discussants:

Matthew Lockwood, formerly Head of Advocacy at Actionaid, UK

Susan Prowse, DFID

Chair:

Dirk Willem te Velde, ODI

Description

Trade and aid are normally the most important external forces helping a country to develop. There is extensive research on how each can contribute to development. But there is less understanding of how their effects interact. Recent rethinking of aid priorities has suggested that more aid should go to helping countries develop the capacity to trade, while in trade policy the failures of some countries to respond to market opening have led to suggestions that aid is a necessary pre-condition for success in trade. To mark the publication of a new book, Trade and Aid, Partners or Rivals in Development Policy? edited by Sheila Page, published by Cameron May Ltd., this meeting will examine our current understanding of how aid and trade work, and use this to assess current policy initiatives such as giving a development dimension to the World Trade Organization.

The chair welcomed everyone to the launch of the book, highlighting the issues covered, the variety of contributors and the timeliness of publication.

Chiedu Osakwe gave 4 aims for his presentation:

  1. to place the book in the current policy context

  2. to explain his understanding of the book's central issues

  3. to give his observations

  4. to make suggestions about work still outstanding

The book emerges in a policy context in which efforts are being made by Director-General Pascal Lamy and the Membership to complete the ambitious Doha Development Agenda (DDA) in 2006. Other important contextual considerations are the debates around the importance of aid in development and of trade in reducing poverty.

The central issue of the book is the interaction between aid and trade, which can be either positive or negative, and how this can be dealt with. A key question is the range of aid priorities and their effects.

His observations included that the book stimulates our thinking; challenging the 'common sense' idea that more aid will produce the best development outcomes. It shows that an excess of aid or a disproportionate aid to GDP ratio can, in fact, reduce competitiveness and weaken trade outcomes.

A further important issue is the effort to revamp the Integrated Framework. He stressed that recipient countries must lead and have ownership of development processes.

Osakwe stressed some areas of work that still require attention:

  • the importance of domestic policy;

  • domestic policy reform;

  • factors other than aid which lead to development (e.g. opportunities for market access).

Osakwe concluded with three points:

  • A question to the authors - how do they plan to maximise the policy impact of the book?

  • The need to consider domestic policy in the aid and trade debate;

  • The need for further study on aid effectiveness especially on donor coherence and domestic policies. 

David Booth discussed the New Aid Agenda (which includes the MDGs, PRSPs, the 2005 Paris Declaration on Aid Effectiveness and budget support). He started by citing some criticisms of the current policies on aid, in particular that it overlooks the possible negative effects of aid on trade.

He pointed out several salient issues:

  • The weakness of PRSPs on trade and their poor translation into policy at country level;

  • The precondition of creating effective states. He stated that PRSPs have not created national authorities that make policy and have not changed basic politics;

  • There are different approaches to aid. The successful Japanese approach of investing in infrastructure in Asia is different from the EU approach to Africa. The Japanese point of view is that the EU is mistaken in its approach to African aid;

  • Dutch disease (the macroeconomic impact of large inflows) creates tensions between aid and trade. 

He concluded by pointing out an area for further research: how to evaluate the Paris Declaration on Aid Effectiveness.

Sheila Page started by emphasising the importance of aid in relation to GDP and to total government revenue. This is important given the polarisation of the trade and aid debates. Some trade researchers tend to be anti government intervention, and since they see aid as part of government spending, this colours their view of aid.

She focused on the unintended problems caused by the interactions of trade and aid:

  • On using trade to encourage development via preferences, Page stated that by encouraging countries to trade more in some commodities than they otherwise would, problems could arise from interfering with the signal mechanism that trade performs

  • an influx of revenues could cause Dutch disease.

  • On the concept of 'political Dutch disease', which she explained as the pressure for governments to satisfy donors (because of reliance on aid funds), rather than citizens or business people (taxpayers), she pointed out the problems of accountability that are created.

On the slogan 'Trade not Aid', she pointed out that the term was ambiguous. What is clear, however, is that one does not substitute for the other. Generally speaking, aid tends to be associated with the 'public sector'(government budget, projects) and trade with the 'private sector'. Aid and trade have very different impacts on income distribution.

She concluded with a warning that, although the influx of aid into an economy can create problems in the economy (such as the effects of Dutch disease), these problems should not lead us to think that aid should not be given at all. Donors should, however, give due consideration to the wider economic effects that aid can have.

Other authors who were present also gave comments from the floor. Kathy-Ann Brown, who wrote on effective access to the WTO dispute settlement system, pointed out that that there is strong support for the view in developing countries that where the WTO is the source of the problem, it should also provide the means for a solution; as the proverbial saying goes 'the buck ultimately stops there'. She stressed that it is very difficult to persuade developing countries to adopt policies which developed countries did not adopt during their development.


Dirk Willem te Velde, who has chapters on aid for private sector development and developing trade in services, pointed out the need for forward planning in human resource and infrastructure development to reduce constraints on the private sector. Aid could be used directly in these areas or for more general budget support.

Points emerging from the discussion included:

  • Donor vs. citizen interest and whether these are the same. Page responded that developing countries should be able to make their own decisions and often donors do not agree with one another.

  • Businesses in developing countries being able to link up with those in developed countries. Page recommended John Roberts' chapter on aid and trade at the micro level. Dirk mentioned that the book covers constraints to trade and donor approaches to private sector development. Osakwe directed the audience to the International Trade Centre [www.intracen.org], a joint WTO and UNCTAD body which facilitates exports from developing to developed countries.

  • PRSPs and National Development Plans. The WTO sees PRSPs as country owned. The first generation of PRSPs did not have a growth (trade component).

  • Tied aid and the need for change on the political factors which affect aid and trade. Osakwe stated that aid complements the Doha negotiations and is not a bribe to get countries to proceed with negotiations. Aid can be used for adjustment costs, to ease supply side constraints and to bring about a more ambitious Doha outcome.

  • The differential impacts of trade negotiations on women and men, especially in the apparel industry. Page responded that domestic policy is the most important factor rather than trade negotiations.

  • Whether Fair Trade distorted prices. Page replied that the effects depend on governments rather than trade negotiations. There is a risk that producers will become trapped in unsustainable production.

  • Aid as a compensation for preference erosion. Osakwe responded that this provides scope for covering the adjustment costs of liberalisation. Page responded that compensation is necessary to the success of the Doha round as all countries must agree.

  • Sectoral approach and picking winners. Page responded that a sectoral approach is taken in both aid and trade interventions.

  • The debate in the WTO in 2006. Osakwe responded that all actors are welcome to input into the WTO process.

Outputs

Trade and Aid: Partners or Rivals in Development Policy

Books or book chapters | May 2006 | Sheila Page (ed.)

Analyses the understanding of how trade and aid work. This book examines a range of examples of how one has been used to support the other and how both developed countries and developing countries have found difficulty in reconciling the different approaches....

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