Dr Alex IjjoAlthough market openness is believed to increase the efficiency of resource allocation and ultimately lead to increased trade and growth, nearly four decades of World Bank and IMF sponsored market reforms in Least Developed Countries (LDCs) have inadvertently exposed the gross lack of capacity in these countries to gainfully participate in liberalised global trading.

This incapacity stems from a myriad of factors including unstable productive capacities, deficient market infrastructure, and inability to meet required quality standards. These constraints have prevented many LDCs from reaping the full benefits of trade openness. 

In response to this, the World Trade Organisation (WTO) launched the Aid for Trade (AFT) initiative in 2005 to coordinate international support to strengthen trade capacity in LDCs. Thus, despite the recent hiccups in aid flows to Uganda due to the passing of the anti-homosexuality law and corruption in the Office of the Prime Minister, Uganda received nearly $1 billion in aid for trade related activities between 2009 and 2012 under the WTO's AFT initiative.

In a recent study funded by the Economic Policy Research Centre in Kampala Uganda and published in AidData's Working Paper series, we evaluated the impact of aid directed into trade related sectors by looking at how aid disbursements are aligned to Uganda's national development priorities, the impact of the trade on Uganda's capacity to trade and the emerging policy lessons regarding how the impact of aid on the country's competitiveness and capacity to trade can be enhanced.

In the study, we found that the disbursements of Official Development Assistance (ODA) in Uganda's trade related sectors under AFT broadly reflect Uganda's development priorities, which include infrastructure development, the development of the energy sector and enhancing commercial agricultural production and productivity.

A closer look at the breakdown of the aid reveals that much of Western aid money for transport infrastructure went into the construction of road networks but almost none into low cost rail and waterway infrastructure development.

Recently, however, Kenya, Uganda, Rwanda and South Sudan launched the construction of the Standard Gauge Railway (SGR) that is expected to link the EAC and the Great Lakes hinterland to trading hotspots in the region. This project which is part of the EAC Railway master plan, is being financed by the Chinese. Virtually, no aid money went into construction of storage facilities such as warehouses and silos even though this could be critical in smoothing some export supply quantities.

The government of Uganda demonstrated strong policy ownership in the development of the electrical power subsector aimed at powering economic growth in the country in line with the national development plan and Vision 2040. In 2012, this effort saw the commissioning of the 250 Megawatt Bujagali hydroelectric power dam financed with aid from the African Development Bank, World Bank, the European Investment Bank and the Agha-Khan Foundation. Aid support in the development of the power subsector has stabilised electrical supply in the country and boosted productivity especially in the manufacturing sector. Access to stable electricity even though still relatively expensive, therefore, represents an important achievement involving aid support.

Agriculture, which contributes nearly 60 per cent to Uganda's export receipts, received approximately $900 million between 2002 and 2011. However, low productivity and limited innovation in the sector shows that more support to agriculture would be extremely useful in strengthening the sector's trade capacity, especially through the development of irrigation infrastructure, storage facilities, and methods for boosting production and productivity.

Overall, we found that a one-percentage increase in ODA is associated with a 0.7 per cent increase in exports and a 0.3 per cent increase in imports. This means that aid actually has the potential to significantly impact Uganda's export capacity. This notwithstanding, Uganda's exports have continued to perform relatively weak vis-à-vis imports leading to a widening deficit in the trade balance.

This result underscores the persisting dominance of other bottlenecks such as non-tariff barriers, high cost of production, technical barriers to trade and deficiency in quality and standards that continue to undermine Uganda's export competitiveness.

Aid support has also enhanced policy capacity in Uganda. Specifically, aid support enabled Uganda to review the status of the trade sector and formulate its first national trade policy in 2007 and later national trade sector development strategy through programmes such as the Uganda Programme for Trade Opportunities and Policy under the Integrated Framework and the Enhanced Integrated Framework of the country's development partners. Uganda has now mainstreamed trade into its overall policy framework, the National Development Plan (NDP).

The study suggests a number of actions that could be taken to improve the impact of aid for trade in Uganda.

First, since the study shows that aid can significantly impact export capacity, increased aid into trade sector can be expected to continue to benefit Uganda's capacity to trade. Without forgetting the crucial requirement of good governance and effective accountability mechanisms, this finding provides justification for more aid, especially of similar concessional nature.

Second, aid must be directed into sectors and subsectors that are pivotal in boosting the country's competitiveness and capacity to trade. These critical areas include regionally integrated road, rail, water, information and communications technology (ICT), energy and storage infrastructure; trade facilitation reforms such as the East African Community Single Customs Territory and electronic single window; investment in productivity enhancement; and the development of capacity in ensuring and certifying standards and quality. The financing of these critical areas will go a long way to facilitate trade and build Uganda's capacity for regional and global trade.

Finally, building capacity in trade and regional integration negotiations is becoming important. From 2002 to 2011, just over $1 million of aid, mostly from the EU and Japan, was directed into strengthening Uganda's trade negotiation capacity. Although currently not very high on the priority list, trade negotiation capacity and capacity to negotiate favourable regional and global trade arrangements is quickly becoming key in safeguarding the country's interests in the region and beyond.



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