Does aid for trade really work?

Over the past two decades, the international community has increasingly considered economic growth as the magic bullet for poverty reduction.

Over the past two decades, the international community has increasingly considered economic growth as the magic bullet for poverty reduction. As part of this movement, Aid for Trade emerged in 2005 as the first global initiative to support developing countries to overcome the structural and capacity-based barriers preventing them from fully harnessing trade opportunities. This could be high-level technical support, from developing, negotiating and implementing sound trade strategies; building capacity and infrastructure such as roads and ports; or investing in certain sectors to encourage diversification. The aim is that through this process, a country will have the necessary conditions to be able to reduce poverty themselves through economic growth.

The rising interest in Aid for Trade to developing countries can be seen in its growth by over 200% from 2004 to 2014. With the World Bank’s ever more frequent country income reclassifications, this interest will keep on growing. In 2015 Bangladesh, Kenya, Myanmar and Tajikistan were all upgraded to lower-middle income economies, whilst Mongolia and Paraguay moved from lower-middle-income to upper middle-income status. Yet when we consider these countries, as well as “emerging economic powers”, namely BRICs countries (Brazil, Russia, India, China, and South Africa), there still exists huge inequity and poverty within them. So, does Aid for Trade actually work?

Who is really benefitting?

One of the main critiques is that there is, quite remarkably, very little evidence linking aid for trade to poverty alleviation. The effectiveness of such projects is highly questionable, as outlined in a report by NGO Traidcraft who appraise them as having only an indirect effect on poor and excluded groups and poverty reduction… [with] the link between Aid for Trade and poverty [being] tenuous and subject to considerable debate.” In spite of this, many countries continue to put trade centre stage of their overseas aid strategies, which leads to questions around their motives for doing so.

To provide some context on Aid for Trade allocations, in 2010 it constituted 35% of total official development assistance (ODA); a significant proportion of global aid flow. Regionally, sub-Saharan Africa received the greatest share (40% of its total ODA) and the transport and energy sectors receive the most investments. Not only does this show how significantly trade dominates the global aid budget, but it also suggests an underlying agenda for laying the foundations for future trade relations with upcoming economies. This is concerning as it sets a precedent that aid decisions can be informed by national interests of the donor country rather than the need in the recipient country.

Profit vs. Development

Whilst the knowledge, skills and financial capacity of the private sector should be harnessed, there is an inherent tension in balancing the demand for a return on investments with wider development needs. Many companies have chosen to circumnavigate this challenge by investing in clearly profitable sectors like energy or transport, which has meant there has been little private sector investment in Africa and Asia to date in the water, sanitation and hygiene (WASH) sectors.

Yet where there has been, many projects have resulted in the privatisation of education, health and sanitation services in Africa and Asia in the guise of low-cost private secondary schools or “affordable” healthcare schemes. Some countries, like the United Kingdom, have been known to contract private education and health services to UK based businesses, which again betrays a clear domestic, profit-based agenda. Also, imposing a for-profit model on health and water services should not be condoned in countries with extreme social and economic inequality, but rather donors should be striving to make these facilitates available and accessible to all.

Local context

Whilst trade and the private sector are seen as crucial to “creating a SDG economy”, in which there are jobs and opportunities for all, there is the danger that the current model is a ‘one-size fits all’ strategy. The lack of context-specific consideration in terms of social policies and development, compounded by the drive to meet global demands, could lead to unintended consequences and human rights concerns, such as underpaid workers and unsafe working conditions.

There is the additional danger that by investing in specific sectors, local economies and the livelihoods of those who depend on them could be harmed, e.g. livestock farming or traditional fisheries. Forced industrialisation could also in the long term lead to overpopulation of cities due to increased rural to urban migration, heightened pollution, as well as other climate change challenges. Therefore before pumping money into aid for trade initiatives in structurally fragile countries, these issues need to be considered and accommodated, which unfortunately they are not currently being.

Fishermen in Moalboal. (Photo: Oceana / Jenn Hueting)

Fishermen in Moalboal. (Photo: Oceana / Jenn Hueting)

Need for a more holistic strategy

Of course, economic growth can be a really positive contributor to lifting people out of poverty, but multilateral agencies and donor countries need to recognise the danger of a purely top-down approach to poverty reduction. Macro-level structural development and policy level growth need to be directly linked to vulnerable and marginalised people on the ground.

The current development model is slowly beginning to reflect this by looking at local job creation and skills development as part of projects. However this needs to be done with a view to inclusion – of women, people with disabilities and ethnic and racial minority groups – as well as addressing wider social and civic issues.

And finally, the private sector needs to be accountable, transparent and regulated. Trade deals should not give big businesses free reign to do as they please, but rather demands should be made on companies themselves to be more socially responsible.

Like most development work, social, political and economic change cannot happen in isolation, and aid for trade is no different. Without the necessary social conditions in place, economic growth will not help those most in need and might even exacerbate existing economic divides in a country. Donors therefore really need to think twice, before opening the economic floodgates, whether trade is really the best for aid.

Himali Dave

Himali holds an MSc in Latin American Politics from University College London, where she specialised in the socio-political and economic development of the Andean region, in particular: minority and land rights, social movements and state accountability. Based in the UK, she has worked at various international NGOs and is currently at ChildHope: a child rights INGO that works in partnership with local organisations to support children and young people facing the worst forms of injustice, violence and abuse, in Africa, Asia and South America. Her research interests include the politics of development in “emerging economies”, ethnicity and racism in Latin America and sustainable livelihoods opportunities.
One Comment
  • The Words in My Mind
    17 November 2016 at 11:49 am
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