Use the money wisely

  • How can Nepal benefit from the transition from ‘trade as aid’ to ‘aid for trade’?
- Bijendra Man Shakya

May 29, 2014-

The concept of “aid for trade” as a replacement to the once popular idea of “trade as aid” has been dominating the external trade scenario of the least developed countries (LDCs). Realizing that trade opportunities without the ability to supply goods to the export markets in a competitive manner are meaningless, aid and technical assistance for capacity building are being offered to the LDCs through various international initiatives. Nepal is one of the LDCs that has been benefiting from the aid for trade scheme. However, there has been no improvement in the country’s trade capacity in general and exports in particular. This is a complaint frequently raised by Nepali exporters.

Although our exporters have countless complains ranging from trade requisites and infrastructure to absence of consistent policy, it is quite absurd to find that even basic problems have been left unaddressed. One glaring example is lack of internationally recognized testing and certification facilities for export products despite the long-standing demand by exporters. In the absence of such mechanisms in the country, a majority of exporters have been unable to fulfil these technical barriers and sacrificed opportunities of preferential access in many lucrative international markets.

Another major concern is that even basic things such as a proper institution for trade information and export training are not yet available in the country. Due to lack of access to these trade services, exporters are deprived of international market intelligence leading to their being unable to keep up with a rapidly changing global business environment. Failure to fulfil requirements like these has not only cast doubts over the country’s commitment to capacity building but also stifled exporter motivation. Why have these issues been neglected although they are indispensable to enhancing the country’s trade capacity as everyone knows? Is there a shortage of aid and technical assistance to conduct such programmes?

There is no reason to be sceptical about the role of aid for trade in capacity building as it has gone through a lengthy procedure prior to its commencement. A diagnostic analysis of the country’s trade and economic sectors was done before the scheme assumed its present shape. At that time, recommendations were made for action plans of prioritized trade-related issues and assistance for the country’s overall development strategy. That allowed bilateral and multilateral donors to respond to the country’s trade-related agenda and priority areas in this sector. Unfortunately, a lot of money was spent on consulting services which produced a stack of reports containing the same old thing but no investment was made on capacity building.

The aid for trade programme has come in response to the inability of LDCs like Nepal to benefit from the preferential access that was given to them with the notion that trade is better than aid. Although a number of LDCs have been successful in diversifying and promoting their exports since the initiation of the preferential schemes (such as the Generalized System of Preference or GSP in the early 1970s), Nepal has performed poorly in trade diversification and expansion. Like other incompetent countries, Nepal was able to utilize very little of the preferential access offered.

While the problem of under-utilization of preferential access was due in part to the inability in the capacity to supply, stringent rules of origin and unstable preferential schemes made things worse. Moreover, the erosion of preference margins arising from reduction of the average international tariffs has posed the most serious challenge to Nepal and other LDCs. As the international trading system continues to liberalize, the benefits from preferential access will tend to decrease. Meanwhile, the adjustment costs resulting from the integration of these economies with the global economy will also increase.

Given this situation, the challenge for Nepal is to efficiently mobilize the funds received as aid for trade so that it facilitates diversification and expansion of the country’s trade. Ultimately, it should help reduce Nepal’s dependence on preferential market access which will become less relevant as multilateral trade negotiations progress. At the same time, the aid programme should support the adjustment and integration of the country with the multilateral trading system giving consideration to its development needs and the requirements of multilateral trade rules under the World Trade Organization (WTO).

Additionally, there should be proper management and implementation of the aid for trade programme in line with the country’s economic policies and programmes. If that is ignored, Nepal will be doubly hit. While losses to the country from the erosion of preference margins are imminent, the resources received under the aid for trade scheme would be fruitless.

(Shakya specializes in economics and the trade interests of Nepal and the LDCs.)

Published: 30-05-2014 09:21

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