The Role of International and National Agencies in

Trade-Related Capacity Building

 Susan Prowse¹

1. INTRODUCTION

With increased awareness of the relevance and importance of trade for development, bilateral and multilateral agencies have begun to mobilise more resources (although still very limited) to support trade-related capacity building in developing countries. In addition, the Doha Ministerial Declaration to launch new trade negotiations is peppered with promises of trade-related assistance, with just about all negotiating chapters containing explicit commitments to provide unspecified amounts of technical assistance, to help countries participate, negotiate and implement WTO agreements. Given the magnitude of needs in developing countries, the launch of new trade talks, and limited funds for assistance, the biggest challenge is to ensure that available resources are effectively utilised to deliver tangible benefits to developing countries. The question is not so much as to the need for a significant increase in “aid for trade” but “how” to deliver. This paper assumes the former and is concerned about the latter.

The paper touches on some basic premises to support the need for trade-related capacity building (TRCB).  It appreciates that trade reform and openness alone is proven to automatically equate with economic growth and poverty reduction, but accompanied by appropriate mutually re-enforcing policies will provide the basis for significant welfare gains from trade liberalisation. Consequently “trade capacity building” has to constitute a far broader concept. The paper also notes that against the availability of aid, TRCB cannot be a substitute for meaningful market access improvements.  

¹SUSAN PROWSE is a Senior Economic Adviser from the Department for International Development (DFID), UK, currently on secondment from the International Monetary Fund. The views expressed are personal and should not be attributed to DFID or the IMF.

The paper looks at the current difficulties associated with the effective delivery of TRCB and draws particularly on problems with recent collaborative efforts to promote a more integrated approach to trade assistance between the bilateral and multilateral agencies.

The effective delivery of trade-related capacity building relates specifically to two areas: firstly, in-country, to help formulate appropriate trade positions as well as to place trade reform in the context of the country’s overall development strategy that will promote a supply response and facilitate pro-poor growth; and secondly within the global rule making process to ensure that implementation of WTO rules and efforts to negotiate and implement future disciplines makes sense from a development perspective and that assistance is considered in the context of other competing development needs.  In terms of future negotiations, without such mechanisms it will be very difficult to provide sufficient assurance to developing countries of the benefits to negotiate additional regulatory areas for fear that they will divert development-related priorities and lead to sub-optimal outcomes.

The paper looks at both of these in turn. It elaborates a recently launched initiative to bring the main providers of trade-related assistance and bilateral donors together to support recipient countries to include a trade agenda in their overall development strategy (in many cases the PRSP or UNDAF) process and ensure trade-related capacity building is coherent to the trade policy aims of the country concerned and prioritised with other development assistance needs. The recent case study of Cambodia is presented.

The paper then reflects on the current provisions in the WTO Agreements to meet the concerns of developing countries, notably with respect to special and differential treatment and implementation difficulties. To overcome many of the existing problems with these provisions, the paper proposes an issues based approach to support developing country participation and implementation of WTO agreements that could be formulated within the global trade rules. This would draw together the transition requirements and sequencing for implementing agreements, taking into account an appraisal of the associated costs of implementation given competing demands on developing country resources and the availability and need for additional trade assistance.

2. SOME BASIC PREMISES FOR EFFECTIVE TRADE-RELATED CAPACITY BUILDING

There is widespread evidence that trade and investment reform and deeper integration with the global economy undertaken within a comprehensive development strategy is a key component to achieving higher economic growth, this being a necessary (although not sufficient) condition to poverty alleviation, in developing countries. Considerable cross- country evidence has shown that trade reform and openness increases growth of income and output (Sachs and Warner, 1995, and Dollar and Kraay, 2001)². Those developing countries that deepened their integration with the global economy have achieved income rises in excess of three times of those that did not (Dollar and Collier, forthcoming).

While this supporting empirical evidence appears compelling to provide a policy prescription of trade liberalisation, there are considerable variations about this average linkage of trade openness, improved economic performance leading to poverty reduction.   The experience of the world’s poorest countries and those sectors where the poor are predominantly located have diverged significantly. While the share of developing countries in global export markets has risen by almost seven per cent during the 1990s to represent 25 per cent of world non-energy merchandise trade, the export share of the 49 poorest countries in the world declined from three percent in the 1950s to less that one half of one per cent over the last decade (UNCTAD, 2001). Importantly the expansion of trade volumes in agriculture and labour-intensive manufactures (sectors where the poor are predominantly located) have fallen behind growth in world trade over the last decade.

These divergences reflect three core elements; (i) the supporting domestic policy agenda to ensure the success of trade reform for economic growth and poverty reduction (ii) the global trading environment that a country faces and (iii) the adequacy and effectiveness of trade-related capacity building to re-enforce country efforts.

² For a more complete list of the literature on trade openness and growth, see Global Economic Prospects and Developing Countries, 2002, The World Bank

Reducing trade barriers must be accompanied by other policies and regulatory and institutional reform that enhances the investment environment and productivity growth. A sustainable programme requires mutually re-enforcing policies designed to ensure the supply response and promote pro-poor growth. Although the specific complementary policy issues facing each country are different, ongoing analyses and research have brought the following elements to the fore: the importance of sound macroeconomic, financial, regulatory, institutional and governance policies (World Bank, 2000, Dollar and Kraay, 2001) as well as assessing the impact of trade reform on fiscal revenues, the agriculture sector and the effective provision and adequacy of social safety nets (DFID, 2001). It is not going to be the case that all of these issues are pertinent to any one country, but by identifying and prioritising those that are, significant gains from liberalisation can be realised (McCulloch, Winters, and Cirera, 2001)³.

Of no less importance is the global trading environment that developing countries face, and centres on two issues namely, market access and the global trade rules. On market access, despite progress, in sectors of importance, developing countries still face tariffs and non-tariff barriers which remain prohibitively high.  The poorest – those living below the international poverty line of $2.00 a day – work mostly in labour-intensive sectors and agriculture, encounter average applied tariffs that are more than twice as high as the non-poor (World Bank, 2002).  Such a distortion in the global market makes it extremely difficult to argue the case for domestic reform in developing countries.

³RODRIGUEZ and RODRIK (1999) argue that while there is a strong link associated between exports and growth, it is unclear as to whether this link is a consequence of exports causing output growth, or of the two being jointly determined by the strength of countries’ institutions. Even accepting this, the resulting policy requirement is still a comprehensive approach to development that includes improving a range of institutions as part of the complementary agenda to support trade reform.

Market access issues also extends beyond traditional tariffs; contingent protection (notably anti-dumping)  has increased while product standards and technical regulations can also be another source of market access barriers.

While effective multilateral trade rules can benefit rich and poor countries alike, harmonisation of trade rules and institutions must take into account the development profile of a country and notably on a country’s implementation capacity, including an assessment of the availability of assistance, as well as crafting mechanisms that effectively apply appropriate flexibility and discretion to trade agreements to meet the needs of developing countries.

In a resource constrained environment (both with respect to domestic savings and foreign resources), it is important that improvements and efforts to reshape the global trade architecture to benefit developing countries be mutually re-enforcing.  Trade-related capacity building should support a country’s overall domestic trade agenda which in turn needs to be formulated and prioritised as appropriate within a country’s development process (given other competing challenges).  Equally trade-related technical and capacity building assistance alone without meaningful market access improvements and international trade rules that adequately reflect the development dimension will not provide much compensation⁴.

⁴NAGARAJAN (1999) estimated that total developing country gains from a 50 percent cut in tariffs, by developed and developing countries, would be in the order of $150 billion – around three times aid flows.

3. DELIVERY OF TRADE-RELATED CAPACITY BUILDING – THE REALITY

Given the importance of trade and the growing complexity of the multilateral trading system and increased participation of developing countries, the nature and scope of assistance in the trade-related arena has evolved over time. Promoting trade development has on the whole been focused within limited sets of policy interventions and support measures by the multilateral agencies and partner countries and therefore bilateral donor involvement has correspondingly been narrow. Table 1 provides information on trade-related assistance provided by the key multilateral agencies.

The problem is that over time, trade-related assistance has been delivered, frequently randomly, indiscriminately and more often than not on a stand-alone basis.  There has been a vertical multiplicity of trade-related assistance initiatives with little to no horizontal coordination (OECD, 2001).  Assistance can frequently be delivered with little evaluation of a coherent development framework in which a trade agenda needs to prioritise areas of action, to improve the ability of the country to increase productivity growth that provides for poverty alleviation and welfare gains. Trade-related assistance initiatives are often primarily aimed at assisting developing countries to meet existing trade obligations or as part of other agreements (regional in particular) or future negotiations, often taking the form of seminars/training for a limited number of trade officials. Such assistance is often conceived by the provider (i.e. supply driven) with little consultation and assessment of the beneficiary’s particular need and consequently does little to help in-country capacity to formulate trade policy.  Therefore the overall impact has been diffuse and difficult to gauge. In addition the exclusive focus on trade issues without adequate concern of the implications of the policy on the environment, and/or need for social protection also undermines the efficacy of such assistance from the perspective of sustainable development (ICTSD, 2001).

No less important is the need to ensure that assistance is as impartial as possible and this is particularly difficult in the area of trade. Capacity building needs to strengthen the recipient country’s ability to take independent positions on trade issues and develop its own trade policy. Earmarking support for selective capacity building initiatives can be highly distortionary, with donors discriminating positively in favour of assistance that generates benefits to their own economies or firms and negatively in competing areas that may be seen to harm their own interests in the short term, (for example favouring assistance for investment negotiations against efforts to improve market access and help countries meet product standard requirements, (ECDPM, 2001).

Table 1: Trade-Related Assistance provided by the Multilateral Agencies

4. DEFINING TRADE-RELATED CAPACITY BUILDING

Recognising that developing countries face an array of challenges to improve their trade performance and participation in the multilateral trading system (MTS), it is increasingly accepted that “trade capacity building” constitutes a far broader concept. Trade Related Capacity Building refers to:

A coherent set of activities by donors (bilateral and multilateral) and partner countries designed to enhance the ability of policy-makers, enterprises and civil society actors in-country to improve trade performance through policy and institutional strengthening as part of a comprehensive approach to achieve a country’s overall development goals and poverty reduction strategies (DFID 2001, OECD 2001).

Against the multiplicity of issues that constitutes building trade capacity there are also many organisations and bodies that have the comparative advantage and competence to provide specialised support to countries. In addition to those listed in Table 1, other specialised agencies include the BIS, FAO, ISO, UNIDO, WCO, WIPO, as well as the regional institutions and banks. However, mechanisms to harness this support and assess and mobilise the implied additional financial resources for assistance, are required, and this arguably represents one of the biggest challenges for the effective delivery of TRCB.

Such mechanisms need to be established at two levels to support countries; firstly, in-country, to help formulate appropriate trade positions as well as to prioritise trade reform in the context of the overall development strategy, and secondly within the global rule making process to ensure that implementation of WTO rules makes sense from a development perspective. Both of these components are considered in turn.

5. HOW TO PUT THIS INTO PRACTICE

a.  A Trade Agenda for Development – the Integrated Framework (IF) Approach

The WTO Singapore Ministerial Conference (December, 1996) mandated a more “integrated approach to assisting LDCs to enhance their trading opportunities” (Integrated Framework – IF), requesting the six core agencies providing trade-related capacity building and technical assistance (UNCTAD, the international Trade Center (ITC), UNDP, WTO, IMF and the World Bank) to collaborate more closely, and with bilateral donors to achieve a more efficient and coherent delivery of assistance (WTO document, paragraph 2, WT/LDC/HL/1 Rev.1 October 1997).

Three years of IF implementation made evident several problems, which were highlighted in the mandated review of the IF and again related primarily to the stand-alone nature in the provision of trade-related assistance (Rajapatirana, 2000). The original IF process failed at three levels:

At the country level: identified assistance (“needs”) were largely generated by the trade ministries (or in some cases just the Geneva trade missions) with little to no broader consultation in-country and across other departments which would be more closely engaged in the country’s overall development assistance programmes (notably Finance, Planning, Agriculture, Social Services) and with practically no consultation with other stakeholders in country. This lack of “ownership” in-country, made trade reform and implementation to comply with WTO agreements very difficult and consequently, the importance of trade and required trade-related capacity assistance failed to be sufficiently prioritised (if at all) into a country’s overall development process.

At the agency level: key lending agencies responsible for donor meetings, understandably gave little priority to the rather limited set of assistance requests and consequently financing failed to materialise. More significantly however, country programmes may not have sufficiently prioritised trade and assessed an appropriate trade agenda. Importantly the medium-term financial viability of country programmes supported by the key lending agencies, and notably those under the enhanced HIPC (Heavily Indebted Poor Countries) initiative, are predicated on realising export growth rates and economic performance beyond historical rates and in several countries significantly so. While it would be expected that the adjustment programmes should achieve improved economic and welfare performance, gains in trade are essential to their overall success.

At the donor level: given the above factors a constituency to support trade amongst bilateral development agencies has been very slow to develop. The interaction and engagement between trade and development communities has been weak. Few bilateral development agencies have a dedicated trade unit and few trade departments a developing country focus. The IF mandate from the WTO Singapore Ministerial was largely made by trade ministers with little consultation with their respective development agencies nor with other multilateral agencies who are responsible for the development assistance budgets and programmes (which are predominantly located in country).

An enhanced IF programme has now been put in place (May, 2001) the modalities of which are to address these issues at all three levels.  The basic purpose is to embed a trade agenda into a country’s overall development strategy (in most cases the PRSP (Poverty Reduction Strategy Paper) or UNDAF  (UN Development Assistance Framework) process) and ensure TRCB is coherent to the trade policy aims of the country concerned, and prioritised with other development assistance needs. The process starts with analysis, a trade diagnostic study: this assessment looks at a number of issues, including establishing the link between trade development on the one hand and poverty reduction on the other, the impact of trade reform on economic growth and development in the country, the complementary policy agenda necessary to support successful trade reform, market access issues and an assessment (matrix) of prioritised trade-related capacity building and technical assistance needs that are linked to the country’s overall development strategy (Chart 1). This assessment is undertaken in country and in partnership with a lead agency such as the World Bank/UNDP. A small tripartite task force has been formed comprising the multilateral agencies, and donors and recipient country representatives (the Inter-Agency Working Group). The IAWG reports to a recently established Integrated Framework Steering Committee at the WTO – thereby engaging the trade community and also reports to the heads of six agencies which meet periodically to discuss progress under the IF. A trust fund has been established (with seventeen bilateral donors) to fund the “integration studies” and selective technical assistance related to human capacity building⁵.

⁵Terms of reference for the IF pilot programme can be found in WTO document WT/LDC/SWG/IF/13. Work on three countries began in May 2001, and work on a further four countries has been initiated. The intention is to extend the benefits of the IF to as many LDCs as possible by the time of the conclusion of the new Doha Trade round and to support the IF concept to several non-LDC low-income economies, as appropriate (see, Joint Communiqué by the Six Core Agencies of the Integrated Framework – IMF, ITC, UNCTAD, UNDP, World Bank and WTO, WTO document WT/IFSC/1, February 2002).

The present criteria for selecting a country are broadly as follows: (i) demonstration of a strong commitment in-country to integrate trade into the national development strategy, (ii) the preparatory stage of the development programme (iii) the preparatory stage of lead agencies donor meetings, and  (iv) conducive operational country environment (i.e. pace of domestic reform, resource base of the lead agencies country offices, likely donor response) (for details see WTO document; WT/IFSC/W/9).

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