Speeches & Transcripts

Trade and Development in the LDCs: The Aid for Trade Facilitation Agenda

December 13, 2010

Mr. Mahmoud Mohieldin Pre-Conference Workshop for UN LDC IV Conference - The World Bank Geneva, Switzerland

As Prepared for Delivery

Good morning everyone. I want to welcome you here to this UN LDC-IV pre-conference event on trade facilitation and aid for trade in the LDCs – sponsored by the World Bank, through its trade research team, and the UN Office of the Under Secretary General and High Representative for the LDCs.

I would like to welcome our counterparts at the UN and the WTO to what I know will be a very interesting dialogue– and important first step – in our path toward a renewed and emboldened working partnership to encourage enhanced development and trade opportunities in the least-developed countries.

We very much welcome, also, those with us today that have travelled specifically to Geneva for this event. I want to assure you we are committed to the enhancement of our work programs in the LDCs.

The topic we will address here is timely and compelling.

Sound and sustainable development opportunities in the LDCs demand a renewed push to lower barriers to trade and increase the effectiveness of trade-related aid.

As we know, in practical terms aide for trade has five main pillars:

  • technical assistance to countries that face challenges with modern trade,
  • capacity building to deal with trade issues,
  • institutional reform to create sound and competent institutions for trade such as customs and quality assurance
  • assistance with adjustment costs and short term financial burdens associated with the process of opening up
  • infrastructure, within which there are 2 domains: roads, rail infrastructure, ports, airports, and IT and the soft such as the business environment and transparency.

We know both from economic research– and practical evidence on the ground – that high trade costs seriously damage prospects for increased economic integration and hinder competition of the economies with high costs of services and inputs, supply chain bottlenecks, and distortive domestic policy.

High trade costs, which are a tax on consumers and act to put a break on economic growth, tend to be highest in those countries at the bottom of the development ladder.

With this in mind, we must ensure that issues related to trade facilitation figure prominently into the forward-looking development agenda for the LDCs:

  • the crisis has highlighted the importance of diversification across markets and products.
  • cooperation to keep markets open
  • enhance regional integration
  • facilitate trade finance and ensure that new regulation will constrain credit to traders

In complement to this, we must also ensure that aid for trade in these countries is targeted at activities that yield the greatest rates of returns in the form of increased trade flows and economic integration, which requires a better understanding of constraints and aid effectiveness.

Research at the Bank and elsewhere shows that reform in trade facilitation matters a great deal to the poor and least developed countries. Bank research documents that reform to lower trade costs – and increase transparency in the trading system promises a high payback and rate of return on our efforts. This is especially true for highly targeted aid for trade assistance.

For example, staff in the Research Department at the Bank estimate that if investment were focused to improve the infrastructure quality of Chad halfway to the level of South Africa, trade levels of the former would increase by 79 percent. A comparable increase in exports would also be feasible with a reduction of 58 percent in import tariffs.

Similarly, improving the business environment in Bangladesh halfway to the level of India would increase its trade by about 38 percent – comparable to a 26 percent reduction in the value of current tariffs on goods from Bangladesh.

One of the many manifestations of the non-competitive trading environments in the LDCs is difficulty in attracting foreign investment.

Research at the Bank also shows that most incoming FDI in developing countries finance operations involving trade -- including exports of goods in low-skilled and labor-intensive sectors. High trade costs are a tax on operations. Landlocked developing countries – some of the poorest in the world -- tend to have higher export costs than their coastal neighbors—and they also attract less foreign direct investment.

These and many other concrete examples provide us with ample motivation for new work.

We have a foundation to build on, including work at the Bank that shows that one dollar of aid for trade focused on trade policy and regulatory reform produces about $700 in exports from developing countries. The United Nations through its Department of Economic and Social Affairs and its work on data and aid have also produced very valuable insight into monitoring and evaluating aid effectiveness.

Much more needs to be done, however, to serve the objectives of targeting assistance to the LDCs, and I think the UN LDC-IV program of action for Istanbul could serve as a unique platform for new initiatives on understanding aid effectiveness.

At the World Bank, finding new partnerships to expand and build on our work in data and research – and knowledge sharing -- is directly in line with the vision for development economics outlined Mr. Zoellick’s vision that development knowledge should become “multi-polar” to recognize the rising importance of developing countries as new poles of growth and experience.

In addition, new partnerships between the Bank, the United Nations, and the least developed countries would complement and support work in the new G20 Working Group on Development – specifically on trade and development, which emphasizes the importance of duty free, quota free (DFQF) market access for the least-developed countries and increased cooperation between emerging economies and low income countries in capacity building.

In addition the emphasis on deepening our focus on research, data, and aid effectiveness indicators – The World Bank has a robust program of assistance on trade facilitation and integration in our operational agenda, as well, a substantial portion of which are in low income countries. Net commitments by the Bank on trade facilitation projects in 2010 were $4.6 billion, up from $2.4 billion in 2008. Lending in this area is close to half of all trade-related commitments by the Bank. At the end of FY10 the active trade and integration portfolio stock totaled $9.2 billion, covering 204 projects. More than a third of the Bank’s trade related projects are in Africa followed by South Asia with 11% and East Asia with 10%.

The timing with respect to the broader trade and development agenda is important as well. With the aforementioned G20 Working Group on Development engaging the emerging economies on these issues, and the upcoming Third Global Review of Aid for Trade due to take place in July next year, the policy priorities raised through the LDC-IV process will have many opportunities to inform other global agendas and attract the attention, particularly of donors and lending institutions, that comes with them.

It is worth mentioning that in the context of the post crisis challenges the Basel Committee on Banking Supervision (BCBS) is tasked to define new rules to strengthen financial systems worldwide. This will inevitably require increased burden of compliance and more intense regulations and supervision for all financial activities. The Basel III proposals impose new requirements for banks to set aside capital relative to the value of their off-balance sheet liabilities. The measure is aimed at stopping banks pushing assets off-balance sheet, one cause of the 2008 financial crisis, and exposing them if the assets subsequently prove toxic. The Basel III rules do not recognize the low-margin and low-risk nature of trade finance business which has functioned efficiently over the years even under very difficult market conditions. By imposing higher capital requirements, the new rules will likely raise margin requirements for trade finance, thereby increasing its cost, and adversely impacting global trade. Pascal Lamy and Robert Zeollick recommended that the G20 examine the potential impact of Basel II and III on the availability of trade finance with a particular focus on developing countries’ trade and take stock of such examination at the next summit.

As I have already mentioned, we at the Bank believe that the trade facilitation and aid effectiveness agendas should figure prominently in these new priorities.

In fact, as part of our contribution to a success in Istanbul and the UN LDC-IV Conference, we are developing the outline – in consultation with the United Nations and other partners – for a new “Aid Effectiveness Partnership” to support data, research, new indicators, and knowledge sharing on the LDCs to help better support trade and integration of the poor into the global economy.

The goal of the seminar will be to bring forth ideas on how this agenda might be better supported through new work in research and analytics as they relate to enhanced trade facilitation and aid programs for the least-developed countries.

Also, of course, we are mindful of the upcoming LDC-IV Conference to take place in Istanbul in May of next year, and so we hope to raise some important policy issues to better inform discussions there.

Let me now close by again welcoming all of you here today on behalf of the Bank, and again thanking the UN for the opportunity to co-host this event.