BLOG: Trade-oriented Assistance is a Cornerstone of U.S. Development Policy, Contends DAI’s Jim Winkler

Categories: Africa Investment Rising , Featured , IGD News

 

By Jim Winkler

Ever since the Great Recession, a once-assumed alignment on the virtues of globalization — relatively open borders, increasingly mobile labor, liberalized trade regimes, and competition in the interest of consumers — has shown signs of fraying.

Deepening internal inequality in the “global north,” escalating populist rhetoric, and conflict-driven displacement in the Middle East, North Africa, and elsewhere are triggering tectonic shifts in attitudes toward global trade.

In the United States, trade agreements have at least temporarily become the punching bag of American politics, assailed by left and right. In the United Kingdom the situation is more nuanced, as the same forces that turned away from the European Union work to position Britain as an outward-facing partner to the world.

The U.K. Department for International Development finds itself at the heart of this debate. Britain’s development agency — while it never subscribed to the false dichotomy between aid and trade — has signaled a newfound appetite for trade as a means of delivering mutual benefit. In her introductory comments about DfID’s role, Secretary of State Penny Mordaunt wrote: “… as we leave the EU we must seize every opportunity to champion democracy and human rights, expand trade with developing countries, and build competitive markets to end poverty.”

Critics such as the Financial Times have cautioned against repeating the aid-for-trade, quid pro quo mistakes of the past. Other skeptics have questioned the premise that trade helps poor people in developing countries and therefore whether trade aligns with DfID’s mandate.

But trade has enormous potential to drive economic development and poverty reduction on national and regional scales and benefit nations such as the United States and Britain that provide technical assistance. We have a prime example of this process, and a good idea of how to replicate it. That example is Vietnam.

 

Case in point: Vietnam

In much of the developing world, Vietnam is an object of fascination, at once admired for its economic ascent and feared for its competitive threat. Yet postwar Vietnam faced many of the challenges Africa faces today. Per capita income in 1990 was $130 and the gross domestic product was $6.47 billion. Trade with the West was virtually nonexistent.

The transformation of Vietnam from an impoverished, pariah state to a globally competitive economy demonstrates how trade and development assistance can dovetail to build strategic partnerships and address poverty. Since 1994, when President Bill Clinton lifted the postwar trade embargo, Vietnam has been a model of poverty reduction. The World Bank found that the poverty headcount had fallen from nearly 60 percent to 20.7 percent in 20 years.

The first thing to say is that Vietnam authored its own story. Launched in 1986, the Doi Moi reforms opened the door to foreign trade and economic liberalization. In the wake of Doi Moi, the U.S.-Vietnam Bilateral Trade Agreement of 2001 stands as a landmark event, leading to far-reaching changes in Vietnam’s political economy. Exports to the United States jumped from $1.05 million in 2001 to $38 billion in 2015; imports rose from $460.4 million to $7 billion.

Investors in turn began to favor Vietnam as part of a “China-plus-one” strategy. Vietnam’s stability, productive labor force, and access to U.S. and global markets made it a magnet for capital. Net foreign direct investment, accordingly, jumped from $1.3 billion to $11.8 billion between 2001 and 2015. This success galvanized the internal political will for Vietnam to join the World Trade Organization in 2007.

 

The role of the donors

International donors helped to sustain this domestic momentum. For example, the highly structured trade requirements for accessing the U.S. market required fundamental legal, economic, and institutional reforms, which were achieved through technical assistance programs overseen by the U.S. Agency for International Development. Validated by a third-party appraisal, USAID’s “successful, applied model” helped the Vietnamese get to grips with international trade rules, execute essential legal reforms, and build capacity across more than 60 ministries and state agencies.

A complementary “behind-the-border” USAID program — the Vietnam Competitiveness Initiative — focused on ensuring that Vietnamese enterprises could hold their own once admitted to the world stage, in part by supporting the most pervasive administrative reform in Vietnam’s history.

 

Aiding trade

Today, even as the winds of the political moment blow against global trade agreements, trade-oriented assistance remains a cornerstone of U.S. development policy. In Africa, USAID is supporting a portfolio of Trade and Investment Hubs. The East Africa Trade and Investment Hub, a five-year initiative launched in 2014, has facilitated more than $321 million in exports through the bipartisan African Growth Opportunity Act, attracted $59 million in new investment, created 38,682 jobs, built the capacity of more than 1,400 East African firms, and made 2,326 buyer-seller connections. The Southern African Trade and Investment Hub, launched in October 2016, has already generated $40 million in new private sector investments, facilitated $500,000 in exports, built the capacity of 281 firms and supported 588 buyer-seller linkages.

These hubs and other varieties of pro-trade technical assistance are predicated on assumptions supported by multi-country studies. In From Aid to Trade: Delivering Results — A Cross Country Evaluation, third-party evaluators found that each additional $1 invested in trade capacity-building efforts yields a $53 increase in the value of developing country exports two years later.

The United States, Britain, and other major trading nations that provide such assistance are motivated in part by enlightened self-interest. Helping developing countries build stronger and more inclusive economies bolsters the donor’s standing in the world, removes economic sources of friction in places prone to instability, and unlocks opportunities for U.S. and British firms: In 2014, more than 7,000 U.S. firms exported to Vietnam (84 percent of them SMEs) and more than 50,000 U.S. jobs were supported by these outbound goods and services; in 2015, U.S. exports to Vietnam jumped by 23 percent.

Moreover, where Britain or America do not engage in the trade arena, rivals will.

Conditioning aid on trade is shortsighted, wrong, and — in the United Kingdom at least — illegal. But deploying development assistance to improve the conditions for inclusive trade is another matter. Trade really can spur growth. Bolstering trade is integral to poverty reduction. The fact that politicians in the global north cannot agree on an equitable way to share the fruits of this rising tide and smooth the adjustment for those adversely affected is a serious problem that society must address. But that challenge should not stop us from pursuing a proven development pathway for low- and middle-income countries.

 

Jim Winkler is DAI’s Senior Trade and Investment Advisor.