Needs and Solutions: Trade Capacity Building in Sub-Saharan Africa

Mr. Magnay began with a brief description of his own 30-year background in the Ugandan private sector, where he has long been active in developing agricultural infrastructure and purchasing crops for local and regional trade. He reminded the audience of one of the great ironies of Africa: a small population of which 80% are involved in agriculture can’t feed itself and is forced to rely on $19 billion in food imports. He stated his belief that Africa’s economies will not be in a position to benefit from sustained growth unless agricultural production is first improved.

Uganda has traditionally been a low food importer and, since 1990, one of the few with surpluses. Uganda’s market is characterized by significant amounts of informal food trade and low productivity. Unlike many other African countries, Uganda is fortunate not to be dependent on a single crop such as maize, but rather relies on two products. It needs $8 billion in export revenues to balance its expenditures on imports; 25% of this is garnered from exports, 25% from remittances, and 50% from donor assistance. The need for cooperation—and cooperatives—became evident after a month surplus of grain caused the local market to collapse; following this, 16 producers banded together to ship their surpluses to Zambia. Many producers, however, lack the infrastructure to take advantage of regional facilities for storage and other services necessary to bring goods to market.

Uganda occupies a unique position of being, along with Ethiopia, one of the largest recipients of food aid in the Great Lakes region as well as one of the largest suppliers of regional food aid. As the above example illustrated, the danger occurs when producers have surpluses without the corresponding ability to sell to regional partners. With respect to the Food for Peace program, it was Mr. Magnay’s opinion that it would be better to pay Uganda’s farmers to build production capacity than to pay for USAID food aid to the country.

Mr. Magnay identified three primary areas of opportunities for trade in Uganda: import substitution, regional trade, and niche markets. Regarding import substitution, he identified several key crops, including rice (of which all of Africa, with the exception of Egypt, is a net importer), sugar (for which Uganda imports 20% of its needs), vegetable oil, petroleum (Uganda recently discovered oil reserves in December of 2005), and barley. Barley has been a particularly successful crop for Uganda following an effective government program of tax incentives. Later phases of this program saw producers using locally grown ingredients to create a local beer label. Another related program encouraged smallholders to produce dry cassava for a syrup that could be used in the fermentation process.

Mr. Magnay next emphasized the unnecessary restrictions placed on regional trade by national boards and concerns about food security. In order to get off food aid, African countries will need to develop regional markets. Without proper mechanisms for financing, storage, and regional export, including the ability to hedge food crops against markets (e.g. Safex in South Africa), little progress on food dependency is possible. Kenya, for example, which used to be self-sufficient, has experienced severe hunger since 1990 that can be directly attributed to counterproductive government policies. The grain market in East Africa has crashed four times in 20 years, which further underscores the weaknesses of markets with no structure or financial supports.

He described an ideal scenario for regional trade that was predicated on a regional market with a modern futures system. This would address two significant problems: the fact that different markets have different timings associated with them and the challenge of effective coordination in the use of regional storage facilities. To achieve this objective, Mr. Magnay believed that two things were necessary: (a) political will on the part of both local and donor governments, and (b) some form of artificial price mechanism. The presence of these two prerequisites will help ensure that proper market signals reach producers. In one case, buyers from a neighboring company showed up seeking 50 thousand tons of beans without prior notice, and the Grain Traders association had nothing to give them. The final element of this equation, according to Mr. Magnay is infrastructure. In his opinion, investment in this area should be driven by market signals and the private sector, not merely donor interest.

Dr. Michael Taylor, Professor and Senior Research Scholar, University of Maryland

Professor Taylor offered a presentation entitled, “Financing Africa’s Infrastructure: A New Approach,” on the need for public investment to fill the financing gap facing many large scale infrastructure projects. He recognized the importance of wise trade policy and technical assistance, but warned that they won’t translate into real benefits without the infrastructure (especially electricity and transportation) necessary to bring products to market. He suggested that future aid for trade programs should focus more on such infrastructure projects.

One important step in this direction was the Maputo Declaration issued by New Partnership for Africa’s Development (NEPAD) in June 2004, which called for substantial increases in investment in rural development. Even when the right priorities are in place, however, external capital is still necessary. NEPAD’s Comprehensive Africa Agriculture Development Programme, for example, is limited to $25 billion over 10 years, an amount that is clearly inadequate to address a problem of this magnitude.

Professor Taylor was careful to note that private sector input will be invaluable in developing priorities for infrastructure projects; with that said, such involvement does not obviate the need for the mobilization of public financing. Often, it is the larger, more basic projects that can only be completed with government help that end up making the biggest difference. He reiterated that even donor-driven investment in African infrastructure is insufficient. The World Bank, for example, provides only $3.9 billion [a year?] for infrastructure projects in all of Africa, of which only $1 billion is designated for rural development. USAID contributes no money at all in this area, primarily because it is specifically excluded from their mission but also because they lack the capacity to take on such projects even if they wanted. Theoretically, infrastructure falls under the competence of the Millennium Challenge Corporation (MCC), but even that agency is underfunded and lacks the scale to achieve significant results.

Next, Professor Taylor addressed what he termed the “donor effectiveness gap” in order to explain why existing assistance has not achieved greater gains on the ground. The underlying reasons for this, he argued, were that aid was: too donor driven and restricted (by earmarks and other constraints), too fragmented (on average, USAID invests on $6 million per year per country on rural development), and too inefficient. In addition, it served to undermined principles of local ownership and accountability by enabling leaders to deflect responsibility for persistent local problems; in this respect, assistance provided under the current framework might be fundamentally at odds with other good governance priorities.

One proposed solution that Professor Taylor offered was the creation of a Rural Development Infrastructure Finance Facility. The fund would be administered under the aegis of the African Development Bank (ADB), naturally viewed as the lead agency on African infrastructure by NEPAD. Establishing a new fund like this would require significant investments in soft capacity—in the ADB and elsewhere—but if policymakers want to see an African solution to poverty, then they need to invest in African capacity. He urged that any such financing mechanism focus on capital intensive physical infrastructure, usually the hardest to build, rather than diverting its limited resources to a larger number of small projects. Identification of priorities and potential projects should be jointly undertaken by both the public and private sectors. In order to make a real difference, an infrastructure finance facility will have to be underwritten by new funds, not capitalized through accounting tricks or shifts of existing resources; the hope is that gradually all existing funds sharing the goal of rural development will gravitate to the facility as a clearinghouse. The facility would have to be a model of transparency and have a clear compact with donors that includes a common understanding on the “rules of the game.”

In conclusion, Professor Taylor reminded the audience that more of the same is simply not good enough. While programs such as the MCC are good models in concept, they leave much to be desired in the implementation phase. While intelligent trade policies are unquestionably of paramount importance, they are irrelevant on the ground if African entrepreneurs do not have the capacity to produce and sell their goods.

Jayme White, Legislative Director, Office of Congressman Jim McDermott

Africa currently stands at a crossroads, crippled by failed states, the AIDS epidemic, and persistent poverty. The African Growth and Opportunity Act represented a positive first step on the part of the U.S. government to confronting these challenges and should serve as a model for future congressional coalitions on trade capacity building (TCB). With that said, he pointed out the eliminating roadblocks does not in and of itself increase traffic, and that is precisely why more Aid for Trade is needed.

On the subject of Congress, Mr. White commented that the specialized knowledge and portfolios of committees in the field of international affairs made Aid for Trade a particularly difficult problem. In the House of Representatives, members of the Ways and Means Committee are well versed in taxes, tariffs, and trade negotiations, while those on the International Relations Committee deal with development. Money is actually spent by the Appropriations Committee, and Mr. White stated this means no single committee has exclusive competence on the interdisciplinary issue of Aid for Trade. Complicating the difficulties arising from institutional structure is a fundamental lack of understanding within Congress about what “Aid for Trade” means and the basic reality of Washington politics. Democrats on Capitol Hill, for example, believe that Republicans would prefer to craft trade initiatives that they know will be unpopular across the political aisle so long as they have just enough votes to pass. The political climate has been gradually improving, according to White, with the arrival of USTR Robert Portman, who has made real efforts to speak with members on both sides of the political spectrum in a timely manner.

There is some support for trade capacity building within Congress, particularly for the agriculture sector and for small and medium-sized enterprises, which have a difficult time getting started in Africa and acquiring capital. There may also be some national security interests in helping less diversified economies that may be vulnerable to political instability. In closing he reiterated his firm belief that the American people want robust trade capacity building if it can help developing economies reduce poverty. Mr. White called for additional Aid for Trade funding that helps recipients rather than merely serving the interests of donors.

Mary Ryckman, Assistant US Trade Representative for Trade Capacity Building

Ms. Ryckman began by responding to some of the remarks made by other speakers and rejecting the notion that there was an ulterior motive behind U.S. offers on Aid for Trade. As a point of clarification, she reminded the audience that USTR is not a programming agency, but rather relays commitments—as it did in Hong Kong—on behalf of the US government; it’s primary responsibility is to lobby the administration and other government agencies for increased funding. She agreed with Mr. Magnay’s comments on the need to get out of individual country allocations and give greater prominence to regional issues. Developing regional markets will increase overall competitiveness and she hoped to see more activities in this direction.

Ms. Ryckman stated her belief that there is a commonly accepted definition of Aid for Trade (technical assistance, trade capacity building, and adjustment assistance) that was reaffirmed in paragraph 57 of the Hong Kong Ministerial Declaration. From her perspective, practical considerations are more important than conceptual questions of definition. Donor governments should respond to the needs of their developing country partners—whether that be access to credit, inventory control, market knowledge, transportation infrastructure, or anything else—and help them meet those needs to the greatest extent possible.

On technical assistance, Ms. Ryckman emphasized the central role of trade agreements in helping construct legal frameworks for developing countries to attract investment. To this end, donors need to continue providing technical assistance through transitional and implementation periods so that the policies expressed in such agreements can become on-the-ground realities.

She urged that Aid for Trade should not just be thought of in the context of official development assistance. Rather, the main goal is to create a business environment conducive to entrepreneurship, business linkages, and growth. Organizations such as the Business Coalition for Capacity Building have been instrumental in the effort to engage the private sector on Aid for Trade. As with many development issues, there is no easy solution and members of the Aid for Trade Task Force in Geneva see the need for a long-term conversation on the topic. From the point of view of the U.S. government, momentum for trade capacity building is advancing on several fronts, from congressional appropriations and the Millennium Challenge Account to bilateral trade agreements and the private sector.

In response to concerns about how countries identify their trade priorities, Ms. Ryckman warned against overburdening developing country governments with more plans to draft and requirements to satisfy. The Millennium Challenge Corporation, for example, began by asking potential partners to submit a list of priorities but was forced to take more of a tutorial approach once the lack of local technical capacity became evident. In her opinion, poverty reduction strategies (PRSPs) need to include trade provisions, but such so-called “mainstreaming” is not a panacea. Not all countries want to prioritize trade considerations, and donors should accept that. On the other hand, it is difficult to lobby for increased Aid for Trade without a solid business plan, such as the PRSPs, detailing how such funds will be used. In practice, very few PRSPs are vetted with the local private sector or civil society, thus severely limiting their effectiveness. Donors, however, bear their own share of responsibility for the failure of these strategies to achieve results and need to make greater strides in coordinating their funding activities.

Finally, Ms. Ryckman offered a report on the first meeting of the Aid for Trade Task Force in Geneva. Director-General Pascal Lamy has been heavily involved in the proceedings thus far and has laid out nine points on which he would like the group to concentrate. He has made it clear, however, that the WTO will not be involved in directly funding Aid for Trade activities. Instead, the WTO will collaborate with other international financial institutions and country ministers and help work to empower local trade ministers in their respective PRSP processes. Lamy sees Aid for Trade as the first real test of the WTO’s coherence mandate and is keen for the Task Force to focus on how to advance the goals of Aid Trade, not debate the questions of “why” or “how much” which is properly the job of the Director-General. The next meeting was scheduled for Monday, March 20, but its agenda has recently been amended; this may cause difficulties for developing country representatives with smaller staffs and more limited resources.

John Ellis, Team Leader, Trade and Investment, US Agency for International Development

Mr. Ellis wanted to emphasize two points in his presentation: (1) the need for trade capacity building in relation to realizing trade opportunities, and (2) the need for large scale projects. Despite the rather pessimistic conclusions outlined in Sandra Polaski’s recent report, “Winners and Losers: Impact of the Doha Round on Developing Countries,” trade opportunities can have a significant impact on the economies of developing countries. He pointed to the examples of China and Vietnam, both of which have achieved huge reductions in poverty over the last 10 years. He echoed some of the disappointment that had been expressed with the AGOA, arguing that since opportunity alone does not guarantee supply both governments and the private sector need to step in to bridge the gap. Ultimately, progress depends on the Africans themselves, but industrial nations have the experience to help empower them to help themselves.

Current trends in developing thinking advocate transformational development and institutional reform. The great challenge is to make the public sector more responsive to the private sector, by controlling anti-competitive behavior, reforming labor and capital markets, and improving the general conditions for doing business; he held up the World Bank’s Doing Business in 2006 Report as an exemplar of cogent analysis of progress in these areas. Poor business regulations prevent the efficient flow of capital and other resources and hamstring developing countries as they try to translate trade into real growth gains and poverty reduction. Africa is the worst part of the world in this respect, and it is almost impossible for an African businessman to compete with his Vietnamese counterpart when he has to jump through 20 government hurdles to get to the same point. In Zambia, for example, 23 signatures are required in order to export certain goods, whereas the corresponding number is 12 for Vietnam and 1 for Denmark; counterintuitively, there are sometimes more artificial barriers to exports than there are to imports. He pointed to the example of Madagascar as a particularly egregious offender. It recently passed what is widely acknowledged as a bad policy for encouraging investment, increasing the minimum capitalization required to start a business to the equivalent of $700,000; the law has since been revoked, but the damage done is permanent and has seriously set back the country’s economy.

One area where Aid for Trade efforts have been particularly effective is trade facilitation. USAID partnered with Kenya and Uganda to create a joint border post that would streamline and harmonize the two countries’ customs procedures; in a relatively short time span, the program has reduced per container costs by $350. Mr. Ellis was keen to say that while hard infrastructure projects can be valuable, they are not the only solution. There have been enough “white elephants” in Africa—projects built but never effectively used—to remind us of the importance of good governance, infrastructure maintenance, and wise regulation. He closed with some statistics that give a sense of the broader trends in Aid for Trade funding. According to the annual trade capacity building survey conducted by the US government, trade capacity building funding for Africa was up in 2004-5; but if Madagascar, with which the MCC reached a compact in that period, is excluded, TCB for Africa was really down 20%.

Discussion Session

Vanessa Ulmer of the German Marshall Fund of the United States raised the issue of sanitary and phytosanitary standards (SPS) to ask whether there were certain intervention points that individual countries could not tackle on their own. Ms. Ryckman responded that the USTR was not involved in the efforts of sovereign nations to harmonize their standards. With that said, industrial countries can help developing partners deal with SPS issues by facilitating interactions among regulators. Mr. Ellis added that he thought it was artificial to dictate what Africa needs from Washington, DC. On SPS specifically, he mentioned USAID’s four Global Competitiveness Hubs, each of which employs an SPS expert who helps conduct pest-risk analyses and provide other forms of technical assistance. Some bilateral programs, such as those that helped Kenyan and Ugandan exporters of cut flowers develop bilateral export relationships with American and European buyers, have been successful models. He concurred that trade facilitation was best tackled on the regional level and offered the example of transportation corridors, which have boosted intra-Africa trade and improved regional export competitiveness.

A representative from the Embassy of Mauritius asked how much of the recent debate on Aid for Trade has reached Congress. Mr. White replied that it has not reached Capitol Hill at all, although some legislators are starting to think about how aid dollars are spent (foreign contractors vs. brick and mortar investments). Ms. Ryckman added that Congress had seen some of the draft text from Hong Kong on technical assistance to help countries comply with commitments on trade-related intellectual property rights (TRIPs). Some individual members of Congress, such as Representative Jim Kolbe (R-AZ) and Jeff Bingaman (D-NM), as well as many members of the Appropriations Committees do have a special interest in these areas.

Josh Walton of ACDI/VOCA asked Mr. Magnay if were forced to choose only one trade capacity building project to fund for Uganda and the East Africa region what it would be. Mr. Magnay gave three suggestions. First, he suggested that the policies of the Kenyan government were the key to the East African market. Given their lack of food security, he would urge the Kenyans to provide better market signals and to facilitate better coordination in the use of regional capacity. Second, he would pay to complete the Nairobi road, which would provide the skeleton for a huge, seasonally balanced regional market for grain and other agricultural products. Finally, he would try to add a Nairobi deliverable to South Africa’s Safex market.