Aid for trade: perspectives on progress and the way forward

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Nobel prize-winning economist, Professor Joseph Stiglitz, has called for enshrining of a “Right to Trade” in the global trading regime as a new initiative to help trade performance of the world’

Nobel prize-winning economist, Professor Joseph Stiglitz, has called for enshrining of a “Right to Trade” in the global trading regime as a new initiative to help trade performance of the world’s poorest and most vulnerable economies.

He has also accused wealthy countries of repeatedly failing to honor their pledges to help poorer nations on aid for trade. At a Round Table discussion in London hosted by the Commonwealth Secretariat, Professor Stiglitz assessed the successes and failures of the aid for trade arrangement.

In his paper, The Right to Trade, Professor Stiglitz said aid for trade emerged because the global trading system was unfair and the Doha Round had not delivered on its development promise. The Professor said that because trade by itself may not lead to growth and development, a combination of factors had produced a crisis in trade negotiations. At the same time, he said the aid and development community was facing parallel challenges. Aid for trade was the product of a marriage of convenience between the trade and aid communities.

According to Professor Stiglitz, a basic problem was that the US and EU began to see the Doha round of negotiations in isolation instead of looking at it in a broader context. Developed countries made little progress in ending agricultural subsidies. For example, WTO ruled that cotton subsidies were in violation of a WTO agreement, but the US tried to maintain the subsidies. Finally, the US bribed Brazil to stop bothering them; as a result, Professor Stiglitz said, sub-Saharan countries and others like India were still suffering from subsidies.

Professor Stiglitz raised a few eyebrows when he argued that trade liberalization often did not result in improved growth performance because of market imperfections and realities in developing countries (eg. existence of unemployment in contrast to full employment as assumed under standard models). He said researchers questioned whether trade liberalization increases trade or growth or reduces poverty. He pointed out that many successful countries developed through managed trade regimes. The problem, according to Professor Stiglitz, is that aid for trade is used to keep developing countries engaged – it was a form of a bribe; there was no enforcement mechanism to ensure delivery. In 2003, developing countries walked out of the Doha round of talks. He listed barriers to trade, such as tariffs, and said it was important to review the extent to which “aid for trade” has succeeded in meeting objectives. He said about 25% of all trade has an aid for trade label. Parts of the system had been effective such as the establishment of some infrastructure projects. On the whole, he said, there had not been a significant increase in trade or development.

In his presentation, Professor Stiglitz, called for measures to create a more level playing field by bringing action against those countries which did not deliver what they promised. He proposed that a developing country (or countries) should be able to bring successful actions under the right to trade and that an offending policy could be eliminated or changed as a result of mediation.

According to Professor Stiglitz, questions which needed to be addressed included trade sanctions, who has the right to bring action and how best to utilize aid for trade. He proposed that developing countries should be able to club together to impose joint actions where they are mutually affected by a developed country policy. He also called for the creation of a public defender of the right of trade. He suggested that dedicated funds for aid for trade should be allocated to a special facility to be administered by UNCTAD. Resources should be allocated based on proposals from a wide range of development organizations and based on need and impact. He suggested that development organizations should compete to offer most efficient aid for trade.
Professor Stiglitz reiterated that aid for trade was a pragmatic response to challenges facing the global trade and aid system, but that trade liberalization by itself is not sufficient to reset trade and economic development. He believed aid for trade had failed to fulfill its promise and had not proved to be additional, predictable, and effective. Instead, he said, aid for trade had become a substitute for meaningful reform of global trade system. He said the right to trade and a global trade facility would help ensure that international trade works for poor countries.

Dr. Cyrus Rustomjee, Director of the Economic Affairs Division of the Commonwealth Secretariat, praised the contribution made by Professor Stiglitz in helping to formulate the organization’s policy on trade and development. With 54 member countries, about a third of the world’s population, Dr. Rustomjee said the Commonwealth Secretariat’s aim was to promote sustainable development, especially among least-developed countries. He said the Commonwealth’s central concerns were how best to help members receive more aid for trade resources and utilize aid for trade. As for positive benefits, he said that a Commonwealth study finds aid for trade to have reduced costs of trading by about 5 percent, resulting in improved competitiveness of developing countries.

In Dr. Rustomjee’s view, disadvantages were that not all countries have benefitted from aid for trade. He argued that there were important differences between donor and recipient countries as regards the perspectives about what constitutes aid for trade; minimal transformational impact as most poor countries have failed to diversify their production and export composition; and the system had failed to meet unique needs of smaller Commonwealth members, particularly the island states.

The presentation by Professor Stiglitz was followed by a lively discussion. Anthony Maruping, Ambassador and Permanent Representative of Lesotho in Geneva said aid for trade was not fully understood by least developed countries, the big challenge was to make it results based.

Wayne McCook, Ambassador and Permanent Representative of Jamaica to the WTO in Geneva, said there should be subsidization to break new frontiers in technology. He said the concept of right to trade had merit but posed several questions: how would we bind these rights? What would underpin right to action? Is there a link between right to trade and capacity to trade? He asked about the transferability of sanctions. He said the US was able to create havoc in Europe by moving around from one area to another and called for a look at compensation system. He described the global trade facility as a guardian but not a parent. He said there should be a narrative based on mutual growth and development and that there should be new targets for exports.

Professor Alan Winters from the University of Sussex, commented that Professor Stiglitz’s paper was not as simple as made out. He said there was not enough evidence to back up several of his points, and he challenged Professor Stiglitz’s assertion that aid for trade does not lead to growth. On the issue of monitoring delivery of commitments, Professor Winters said one had to be careful about establishing a precedent of giving too much authority to the WTO.

Faizal Ismail, Ambassador and Permanent Representative of South Africa to WTO, said a critical review of aid for trade was a progressive idea but he believed that the WTO does not have a mechanism to assess aid for trade. He supported Professor Stiglitz’s recommendation that UNCTAD should be responsible for this.

Dr. Richard Kozul-Wright, Director, Unit on Economic Cooperation Integration Among Developing Countries, UNCTAD, Geneva, said he would have liked Professor Stiglitz to have included more of a linkage between trade for aid and financialization.

A speaker from the Caribbean said that despite the talk about helping developing countries, every time poorer nations made progress, the goalposts were changed. He cited examples of the sugar industry and banana production, both of which collapsed after being undercut by the United States and other developed countries. “We agree we want developing countries to stand on their own feet but when you have subsidies, somewhere rules will change when I am not getting my way.”

In his closing remarks, Professor Stiglitz, responded to comments on his paper. He conceded that aid can be effective and trade can promote growth, but said this had not led to levels that had been hoped for. He said one reason was that when you liberalize, jobs get lost, and new jobs are not being created. He said there was a growing awareness that the global financial system was not sympathetic towards developing countries. He said the US views everything that it does as admissible while the rest of the world thinks not. He said fundamental questions remained: how do we correct asymmetries in trade and how can we make trade lead to development in poorer nations?

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Editor in chief for eTurboNew is Linda Hohnholz. She is based in the eTN HQ in Honolulu, Hawaii.