Hrb/cmb March 16, 2006

HRB/cmb March 16, 2006

CHALLENGES FACED BY THE PRIVATE SECTOR IN TAKING ADVANTAGE OF THE NEW TRADING OPPORTUNITIES UNDER THE INTERNATIONAL TRADING SYSTEM

By Havelock R. Brewster 1⎦

1⎦

Executive Director, Inter-American Development Bank, Washington, D.C., Honorary Professor of Economics, Sir Arthur Lewis Institute of Social and Economic Studies, University of the West Indies. (Correspondence to [email protected])

1

Antecedents

Beginning in 1996 at the WTO Singapore Ministerial Meeting, Member States set up the Integrated Framework for Trade-Related Assistance (IF) for the least-developed countries (LDCs). Its activities consisted basically of diagnostic studies of trade constraints and of capacity building. Typically, Diagnostic Studies identified needs in such areas as trade policy, trade facilitation, trade capacity and policy coordination, and market access. At the MTNs Council meeting held at Doha in November 2001, Members reaffirmed their commitment to developing countries, and especially the LDCs, agreeing, among other things, to "well-targeted, sustainably financed technical assistance and capacity building."

This was followed in July 2004 by the Framework Agreement, in which the WTO General Council stated that developing countries, and in particular LDCs, as well as low income countries in transition, should be provided with enhanced trade-related assistance and capacity building to increase their effective participation in the negotiations, to facilitate their implementation of WTO rules, and to enable them to adjust and diversify their economies. And at the WTO Hong Kong Ministerial Meeting in December 2005, Members adopted a Declaration on Aid for Trade (AFT) that they would aim to help developing countries, particularly the LDCs, to build supply-side capacity and traderelated infrastructure that they need to assist them to implement and benefit from WTO Agreements and more broadly expand their trade. The Task Force (TF) setup for this purpose is expected to make recommendations to the General Council by July 2006.

To date, therefore, it cannot be said that AFT has focused on supply-side capacity, and in particular, on the private sector. The 2005 Declaration in respect of supply-side capacity and trade-related infrastructure, and the work of the Task Force are likely however to bring the private sector more fully into the picture.

2

Experience

The experience to date with trade-related aid would be invaluable in considering how AFT directed to the private sector should and should not be designed. That experience regrettably is anything but encouraging.

It is perhaps one of the most extreme

manifestations of inefficient development aid. Some of the defects include:

1.

Failure to rationalize and prioritize the kind of activities to be supported and to mobilize the resources needed for them to be effectively executed. As a result, minimal resources have been spread wafer-thin over countless activities, most with an unverified connection to the ultimate objective. For example, the IF, over the last eight years, covering some 30 LDCs, was allocated $30 million by six major international institutions. Or, consider trade-related aid to a typical small vulnrable economy, Dominica. According to WTO/OECD Database total trade-realted aid to this country, 2002 to 2005, amounted to $8 million, funding about 60 interventions, practically all of which consisted of financing participation in various seminars, conferences, meetings, workshops, many staged in Geneva.

Or, the Dominican

Republic, where the activities undertaken ranged from evaluating pesticide residue to bio-terrorism legislation to anti-fraud policy.

2.

A near total lack of bona fide coordination among donors.

Virtually every

international organization and every OECD country has gotten into the act, apparently with little or no concern for coherence, consistency, efficient management, or cost and development effectiveness. These donors, in particular the bilaterals and non-specialized international organizations, appear to determine their priorities independently of each other. As a consequence of this, there has been a heavy overlapping concentration of trade-related assistance on trade policy formulation, negotiation and implementation, and on financial support for participation in meetings of regional trade bodies, the WTO and international financial institutions. Direct aid to the productive and export processes is rarely found.

3

3.

A complete lack of concern for measurable results. It is not possible, even in broad terms, to say what perceptible difference the various seminars, workshops, conferences, capacity-building, WTO participation have made to negotiating outcomes.

Principles of a Private Sector Aid for Trade Program

These shortcomings then must be faced squarely if AFT is to be directed to the private sector. First, what would be the rationale for directing AFT to the private sector? This must be the fact that the private sector is actually the locus of production and trade, and often is not in a position itself to finance the measures needed to improve its competitiveness, and make its products more exportable. Firms are caught in a vicious circle of inefficiency. The mere access to markets does not automatically guarantee the expansion of exports. The ACP experience with virtually free access to the EU market over decades is a salutary lesson of failure in this respect. On the other hand, the South East Asian experience illustrates that better trade and development outcomes are correlated with policies that improve infrastructure, and a variety of factors pertinent to the business climate and productivity enhancement. However wide the access may be, and however much governments' capacity for trade policy analysis, formulation, regulation and implementation may be enhanced, unless productive and export capacity is sufficiently competitive to take advantage of the new trading opportunities, much of that AFT would have been wasted.

Similarly, however large the financial transfers made to governments to compensate for adjustment cost, food price increases, preference erosion, fiscal revenue costs, if resources do not actually reach the locus of production and trade, and attack the root causes of poor supply response and lagging export performance, much of these transfers would have amounted to little more than a holding operation. This underlines too the desirability of treating AFT as a development issue and not merely as one of transfers to compensate for losses.

4

Second, what would be the rationale for the kind of AFT activities to be directed to the private sector? A useful approach could be the gap that currently exists in the development aid spectrum. The relative priority of eligible activities within that range would be influenced by their importance as building blocks (logical dependence) and by the assessments arrived at in the framework of negotiations directly between the parties: - the specific private sectors concerned and donor agencies. Third, the principle should be recognized that AFT should be determined in the context of specific private sector/donor agencies negotiations. Agreement should be reached, based on professional diagnostic studies and needs assessments, on what should be the minimum threshold for a results-effective, realizable program of assistance; and on arrangements for a semi-continuous monitoring system using mutually agreed benchmarks. This collective negotiating approach should have the additional benefit of improving coherence and coordination of action among multiple donors.

Scope of a Private Sector Aid For Trade Program

What sort of activities then might be suitable for AFT directed to the private sector as it attempts to take advantage of the new trading opportunities, while at the same time minimizing overlap with existing facilities? The range of supply-side constraints fall broadly into trade-related infrastructure constraints (TICs), and production and marketing related constraints (PMCs). TICs are generally considered to refer to, for example, ports, shipping, roads, electricity, telecommunications. PMCs refer to a variety of production and marketing problems that beset firms in trying to export their products and services, from poor standards to lack of business information.

(1) Trade-related Infrastructure Constraints TICs need to be broken down into appropriate categories, as such a disaggregation helps to clarify what might be appropriate or not for AFT: -

5

Infrastructure Preparation. This includes such activities as project identification, the preparation of programs, plans, and projects for funding, including pre-feasibility and feasibility studies, project design, document preparation and revision to support financing requests, and /or for bidding purposes and studies related to project viability; the financing structure and rating of project proposals of public sector sponsored projects, and, on a contingency recovery basis, for the private sector. Infrastructure Software. This is shorthand for technical assistance in setting up systems for the efficient operation of infrastructure. It would include, for example, the legal framework for maritime activity/ports; norms and standards for airport infrastructure; regulatory legislation and institutions for public utilities like electricity and telecommunications. And, Infrastructure Construction. This is the actual physical construction, rehabilitation, or upgrading of such trade-related infrastructure as mentioned above. This seems to be what some AFT advocates have in mind. It is a component of AFT proposals that would give rise to serious problems, especially if conceived of as being funded by a separate multilateral assistance facility that comes with a resource-additionality warranty. The sheer volume of resources needed for such infrastructure, and the dubious claim that it has a special, unique trade-related character that sets it apart from the overall development agenda vitiates its advocacy as AFT. Recent experience of the multilateral development finance institutions is instructive. Most of them are highly liquid and massively underspending. Total lending in the InterAmerican Development Bank (IDB) declined from a peak of $10 billion in 1998 to an average of $6 billion over the last four years. Infrastructure is now accounts for merely 23 percent of total lending, compared with the 65 percent devoted to the social sectors and governance. In the World Bank Group, over the past four years, project lending has hardly increased, averaging about $19 billion a year. And in the African Development Bank there has been a similar stagnation in project lending around the $1.0 billion mark. The trends in respect of private sector investment in infrastructure are even worse. According to a recent World Bank study such investment has collapsed since 1998 and shows no sign of recovery. Total investment in infrastructure projects with private sector participation dropped from $71 billion in 1998 to $16 billion in 2003. In both the IDB

6

and the IFC the total number of infrastructure loan approvals has hardly increased over the less than ten projects a year for each institution, during the past ten years It can hardly be said that there is a shortage of loan capital. To the contrary, some of these institutions are now actively promoting infrastructure projects, using such innovative devices as flexible mixed private public combinations and non-sovereign guarantees. For example, the IDB proposes to lend to Latin American and Caribbean countries for infrastructure no less than $12 billion over the next four years. The value-added in creating a new multilateral financing facility would therefore lie in its being endowed with resources to offer grants on a fairly massive scale. In such a case country eligibility criteria would be drawn more sharply in question, as would the issue of private sector participation in such investments. The proposal then would be to use AFT in the trade – related infrastructure field basically for the first two purposes i.e. infrastructure preparation and infrastructure software, where there is no serious overlapping with other institutions. In respect of infrastructure construction, further thought needs to be given as to how such resources as may become available for this purpose can best be used in collaboration with the multilateral and regional development banks. One possibilty is to use such resources to subsidize the interest rate on loans secured from those institutions, and in special cases, such as the HIPCs, to make partially and/or wholly reimbursable or non-reimbursable grants, as appropriate.

(3) Export Product Competitiveness Development.

Activities in this field are

aimed at improving the competitiveness, and thus expanding the volume, of production of export and exportable goods and services. Examples are: product upgrading,

including

the

use

of

cost

reducing

technology;

work-

force/management training; e-commerce readiness; the application of quality, technical, health, and sanitary and phytosanitary controls and standards; labeling and packaging; rationalization of production; the adoption and tailoring of products to specific market demands.

7

(3) Export Product Promotion and Market Access. Activities in this category would include accessing business and transport information; market intelligence; ICT databanks; identifying the requirements for accessing new export goods, new markets and niche markets; trademarks, product design and quality and environmental certification of productive processes; formation of strategic alliances and partnerships with importers; the development of country trademarks; customs procedures and trade facilitation; de-bureaucratization; computer literacy, including the development of digital signatures and the encryption of commercial documents. A gap approach also suggests that it might be desireable to avoid certain forms of assistance in a dedicated AFT facility. While many or all of these forms of aid are of positive benefit to the private sector they are liberally dispersed in the portfolios of international and bilateral aid agencies. They suffer from a lack of coordination, which might be remedied by bringing them within a single facility, but it would probably be unrealistic to think that that could be achieved, given the interests and mandates of international institutions, and the foreign policy motivations of bilateral agencies. Where there is insufficiency of resources in those programs this should be dealt with directly, rather than by setting up new, overlapping underfunded sources of aid.

Illustrations of Challenges Faced By Private Sectors and their AFT Needs: The African-Caribbean-Pacific (ACP) Group of Countries

Turning specifically to the private sector and the challenges it faces as it attempts to take advantage of the new trading opportunities, some industry-specific information from the ACP is available, and may be used to illustrate AFT needs. Some of this material comes out of the ACP-EU Cotonou Agreement, and relate to both the negotiating / implementing procedures, and the content of the programs. Ironically, these programs precede the newfound interest in trade-related aid, and can be considered as precursors to present initiatives.

8

The preparatory activities for and the resulting Cotonou Agreement, provided for negotiations on the broad parameters of export development and promotion programs for specific export industries of interest to the ACP Group that needed trade-related aid to ensure that they would survive and prosper.

Negotiations in the context of these

programs took place directly between the European Commission and the private sector interests concerned, as members of their governments' delegations.

Although these

negotiations did not come up with a target figure for aid, in side-understandings the ballpark size of the resource expectation was discussed. Following the entry into force of the Cotonou Agreement these de facto AFT framework agreements, called Declarations, and appended to the Cotonou Agreement, detailed negotiations ensued on the specific needs and projects to be tackled in integrated sector-specific aid programs, and on the precise allocation of resources for their execution. The sectors dealt with in the Cotonou context were among major ACP private sector export industries—rice, rum, and bananas. They are interesting as concrete illustrations of challenges faced by the private sectors concerned and the related forms of aid that they themselves identified as priorities for what was in effect AFT.

Rice •

Improvement of the conditions of production and enhancement of quality through action in the areas of research, harvesting and handling;

•

Transport and storage;

•

Enhancing the competitiveness of existing exporters of rice;

•

Assisting ACP rice producers to meet environment and waste management standards and other norms in the international market, including the Community;

•

Marketing and trade promotion;

•

Programs designed to develop value-added products.

•

Enhancing the competitiveness of existing exporters of rum;

Rum

9

•

Assistance in creation of rum marques or brands by ACP region or country;

•

Enabling market campaigns to be designed and implemented;

•

Assisting rum producers to meet environmental and waste management standards and other norms in the international markets, including the Community market;

•

Assisting the ACP rum industry to move out of bulk commodity production into higher value branded rum products.

Bananas—Special Framework of Assistance Example taken from the Eastern Caribbean States program. •

Construction of inland reception countries;

•

Improvement of environmental management of bananas farms;

•

Training in drainage and irrigation techniques, farm management forecasting;

•

Establishment of systems for land use, and information systems for agricultural diversification;

•

Improved road access;

•

Promotion of fair trade and organic products, and of niche markets.

Apart from these sector-specific programs designed in the context of the ACP-EU Cotonou Agreement, some material is available on the private sector needs for AFT in Caribbean sugar, citrus and tourism industries:

Sugar •

Upgrading milling technology;

•

Improving genetic varieties;

•

Rationalizing milling, cultivation areas and water use;

•

Developing cogeneration of power;

•

Workforce training; 10

•

Developing domestic marketing capability;

•

Diversifying export markets.

•

Improving delivery of support services;

•

Improving quality standards;

•

Upgrading technology and accessing research on pests and disease

Citrus

control to improve productivity; •

Updating legislation and regulations governing the citrus industry;

•

Continuous market assessments;

•

Promotional activity in new markets.

Tourism Although this is not a sector in which new trading opportunities have become available under the WTO system, it is connected to the latter by the fact that its development needs are of primary interest as resources shift out of the traditional industries affected by the new liberalized trading regime. Assessments have indicated needs in such areas as: •

Workforce training;

•

Diversification and revitalization of the ageing tourism product;

•

Improvement in quality of service;

•

Improvement in e-commerce readiness;

•

Promoting economies of spill-over and clustering;

•

Upgrading marketing activity and promotion of new markets.

Prototype Of A Private Sector Aid For Trade Program

Although the above sectors illustrate and represent a significant portion of private sector export trade interest, most sectors, in developing countries generally, have not been the subject of diagnostic studies. Nevertheless, a prototype for an AFT program directed to the private sector that begins to take shape is along the following lines. 11

Scope of Private Sector Aid for Trade Based on an identification of gaps in current Official Development Assistance in the trade-related field, (a) infrastructure preparation and infrastructure technical cooperation; (b) programs directly addressing the competitiveness of production processes and of the quality of exports/exportables produced; and (c) measures that directly promote the marketing of specific export/exportable goods and services.

Excluded would be activities more or less substantially included in the mandate of existing multilateral development agencies, i.e. infrastructure construction, shipping, trade financing, venture capital, investment in MSMEs, etc. and various pre-existing bilateral forms of technical assistance.

Organization, Delivery and Monitoring of Private Sector Aid For Trade Programs These programs should result from Negotiations between interested multilateral and bilateral donor agencies and Sector Specific representative institutions on a country basis or, where they exist, Regional Economic Communities or Groupings. Two models are possible. The negotiations could involve direct participation by the the donor agencies, in which case they would accept responsibility for the distribution of agreed AFT projects among themselves, and for their funding. Or, the negotiations could take place between a designated funded managing organization and the beneficiary sector specific representative institution.

The negotiations should be based on prior Diagnostic Studies, and they should conclude with AFT Agreements which specify the activities to be supported, by whom, the amount and the sources of aid, disbursement modalities, duration of the program, etc. The agreed Monitoring Mechanism and Benchmarks should also be specified.

An existing international trade-related organization that has a comparative advantage in this field, and also enjoys the confidence of developing countries should be given

12

responsibility for managing the Program. On the recipient side, the Executing Agency should be the agreed representative institution that has the requisite legal character.

Bibliography

ACP-EU Cotonou. Brewster, H.R.

2006.

The Competitiveness of Caribbean Countries, Caribbean

Community Secretariat, Georgetown, Guyana. CDB. 2002. Report on Regional Agriculture, Barbados. CTO. 2003. Caribbean Regional Sustainable Tourism Development program. Barbados. FTAA-Consultative Group on Smaller Economies. 2003. National Strategy to Strengthen Trade-Related Capacity, Dominica. ILEAP-JEICP. 2005. Aid for Trade—Why and How? Toronto. OAS. 2005. The OAS Support to Trade-Related Capacity-Building in the Americas, Washington, D.C. Prowse, S. 2006. "Aid For Trade"—Increasing Support for Trade Adjustment and Integration—A Proposal, UK Department for International Development. WTO. 2003. Final Report of the Evaluation of the Integrated Framework, Geneva. WTO/OECD. Doha Development Agenda Database.

13