Welcome to the fourth edition of the Global Review of Aid for Trade! The theme this year is that of “Connecting to Value Chains”.
Let me start with a phrase that you may not have heard before: the “least connected countries”. This phrase encapsulates why Angel Gurria and I are launching the new Aid for Trade at a Glance publication today. Our joint publication asks two questions: How do we connect the least connected to international trade through value chains? And how can we use Aid for Trade to overcome the obstacles they face? Before I answer these questions, let me explain what I mean by “the least connected countries”.
Who are the least connected? This term was coined by the International Telecommunication Union. Last year, ITU reported that mobile phone subscriptions had reached 6 billion. When you sign the contract for a smart phone, they don’t ask for a degree in telecommunications or software engineering. What’s smart is the phone…
The same is also true of global value chains. You don’t need to know all the intricacies of the engineering to be able to assemble a phone, or to manufacture the plastic casing or develop software apps.
In short, a value chain world offers many entry points for firms to connect to the world-wide trading web. Our trading system is increasingly one based on trade in tasks, not trade in final goods. You connect by being good at one task and then learning others - essentially, moving up and between tasks.
Expansion of connectivity
To join a production network, you do not need to be a Henry Ford to manufacture all the parts and components of your Model T under the same roof. What you do need to understand though is how Henry Ford transformed industrial processes. How he separated them into different functions on his assembly lines. His commercial insight transformed car factories. We can see today how this process has transformed global manufacturing and trade patterns over a century later. Sixty per cent of global trade is now in parts and components.
Some examples: Samoa produces automotive wire harnesses; Senegal is becoming a hub for Indian car assembly. Ford has added production facilities in Viet Nam, India and Brazil to the factory in Detroit that built the model T. Products are made in the world, no longer in country X or Y. Adam Smith’s pin factory has gone viral.
There is nothing new about this process. What is new is their reach and depth. Driven by the transport and IT revolutions and the legal certainty afforded by the WTO legal architecture, production networks now stretch world-wide.
It is not possible to fragment the production of a cow or a chicken. But with the tractor that ploughs the field and the refrigerated truck that transports the meat, you can. The same value chain processes that brought refrigerated beef from South America to Europe in the 19th century are now penetrating the domestic markets of developing countries. Just think of the supermarket revolution in East Africa.
Let us go back to the smart phone a moment: is it a product or a service? The revenue stream from services may be higher than that from the sale of the physical device. For if you count the services component in the manufacturing process before you bought your phone plus all the transport, finance, design and retail services, that proportion grows still higher.
This is not an esoteric reflection. A message that emerges strongly from our joint monitoring survey with the OECD is that companies in developing countries want to add value. They want to move up the value chain. Services are where much of the value lies, whether the product sold is oil and gas, copper, foodstuffs or phones. The service dimension to the global economy is the real news story. The other WTO, the UN World Tourism Organization, will tell us how 1 billion business and private travellers represent a billion business opportunities.
As our connectivity revolution picks up speed, so our economies are changing too. Ethiopian farmers can settle contracts with their phones and be credited on their bank accounts the next morning. Mobile money has exploded across East Africa. Bangladesh is getting into business process outsourcing. Kenya is now the world’s number one user of mobile banking. IT systems have customs clearance times down to less than 10 minutes on some borders in Central America. And other examples of where Aid for Trade was the spark that lit the tinder …
The challenge of connectivity
Even if the pie of global trade is growing, we still live in a world though where least developed countries (LDCs) account for just over 1 per cent of this pie and 1.1 billion live in absolute poverty. But this is a world in which those in absolute poverty as a share of the total population in developing countries fell from 43 per cent to 21 per cent between 1990 and 2010. A reduction of almost 1 billion people. And at a time that trade barriers came down and WTO rules provided added certainty. A coincidence? Not to my mind. With the post-2015 development agenda starting to take shape, I believe that we can do more to ensure trade plays a positive role in development.
Our monitoring survey points to a range of issues where the private sector, both in developed and developing countries, is telling us precisely where we can do more. It’s about access to business and trade finance, the time it takes to complete border formalities, more effective trade facilitation, the ability to comply with standards, improving the business environment, upgrading skills.
Aid for Trade is making a difference
We now have a sound evidence base to say that Aid for Trade is making a difference. We are making progress. Some 275 case stories, a growing range of econometric studies and other research give me confidence that Aid for Trade is making that difference. But our work is not done.
Since 2005, the time it takes to export a 20 ft container from an LDC has fallen by eight days. But it still takes on average 33 days to export that container. That is 14 days longer than other non-LDC developing economies. And if you are landlocked, you are looking at 42 days on average and costs that can be more than twice as high. So progress, but much still to do to drive trade costs down…
In the same way as your web browser is your window onto the internet, so trade facilitation is your window to the trading system. If your browser is slow, you are not connected. The same is true of customs and other border services. Hence, the importance of the statement that will be released this morning in the first Side Event of the day and of finding the path to an Agreement on Trade Facilitation in Bali.
The financial crisis is casting a long shadow. Aid for Trade flows are under pressure. The private sector is increasingly involved in capacity-building efforts, both in collaboration with the public sector and in its own activities. And South-South partners are ramping up their activities. But flows are under pressure.
Collectively, we need to make the case why Aid for Trade remains important. How it can help to connect the least connected. Why it should be firmly part of the post-2015 agenda. I feel certain that the Fourth Global Review will make this case. We will be focused on concrete results on the ground, on the challenge ahead and energized by the progress made.
In closing, we need to have a 360 degree view. To see Aid for Trade in the context of the foreign direct investment that is so important to connect countries to value chains. Aid for Trade is making a difference. But it can make more of a difference if it tackles the factors needed to get the business and investment climate right. To connect the least connected.