One of the new ideas in our CGD trade-for-development-policy-after-Brexit paper was using the "Cash on Delivery" approach for trade facilitation. "Cash on Delivery" is an idea well developed by Nancy Birdsall and William Savedoff but still under-actually-piloted, and as yet not proposed for use in trade facilitation, for which it may actually be a really good fit. From the paper:
"The UK can improve upon its existing Aid for Trade offer by making increased use of results-based programmes. “Cash-on-delivery” aid (paying for outcomes, not inputs) is most appropriate where local contextual knowledge matters, where the best combination of inputs is uncertain and local experimentation is needed, and where precise design features and implementation fidelity are most critical (see, for example, the discussion by Savedoff [2016] on energy policy). All of these criteria also apply to Aid for Trade.
A typical Aid for Trade programme might carry out an extended diagnostic project to identify the constraints to change, and then design and contract a project to address these constraints. The payments would typically be made for activities (for example, technical assistance for improving a certain process) that, according to a theory of change, should lead to the desired outcomes. But contracting for activities and inputs doesn’t allow for sufficient experimentation and change.
A better approach is to contract for outcomes (i.e., to offer cash on delivery) and allow those with the required information the flexibility to determine the best way of achieving those outcomes.
Common concerns around cash on delivery focus on exactly what outcomes are contracted for, how they are measured, and whether there is any risk of distortion of priorities according to what is measurable or gaming of indicators. Indicators should be quantifiable, ideally continuous (to allow for variable payment in proportion to the degree of progress), and independently verifiable. Another common concern is how governments might fund any up-front investment costs. Here, then, the proposal is not that cash on delivery should replace all aid, but simply that it replace a portion of aid in a piloted manner. Further, if the outcomes are focused on “soft” rather than “hard” infrastructure, these up-front costs should be limited.
With trade, contracts could be based on the World Bank’s ‘Doing Business’ indicators. We have reasonable econometric evidence (Hoekman and Nicita 2011) that these indicators of the cost of importing and exporting (in both time and money) are associated with greater volumes of imports and exports.
An alternative but similar set of possible indicators that could be used as outcomes for contracted payments are the OECD Trade Facilitation Indicators, which probe border procedures in more detail. Moïsé and Sorescu (2013) estimate that streamlining the costs represented by these indicators could reduce trade costs by 15 per cent for low- and lower-middle-income countries.
Rather than trying to tell a specific country how best to reduce that time and cost, we could instead just write a contract to pay a specified amount for each hour the country reduces the time it takes goods to clear the border and exporters and/or importers to comply with documentary requirements.
The potential gains to developing countries are high. The estimated gain to a low-income country from reducing its cost of exporting to that of a middle-income country is 2 per cent higher exports (Hoekman and Nicita 2011). For a typical low-income country, such as Malawi, with total annual exports of around US$1.5 billion, a 2 per cent increase would be worth US$30 million a year. The expenses associated with reducing export times would almost certainly cost less than this amount.
In summary, the UK could take the lead in applying a more innovative and potentially much more effective approach to Aid for Trade by using cash on delivery. It could be used as a complement to the other proposals in this note and, as a relatively new approach, could be established relatively promptly as a pilot."
"The UK can improve upon its existing Aid for Trade offer by making increased use of results-based programmes. “Cash-on-delivery” aid (paying for outcomes, not inputs) is most appropriate where local contextual knowledge matters, where the best combination of inputs is uncertain and local experimentation is needed, and where precise design features and implementation fidelity are most critical (see, for example, the discussion by Savedoff [2016] on energy policy). All of these criteria also apply to Aid for Trade.
A typical Aid for Trade programme might carry out an extended diagnostic project to identify the constraints to change, and then design and contract a project to address these constraints. The payments would typically be made for activities (for example, technical assistance for improving a certain process) that, according to a theory of change, should lead to the desired outcomes. But contracting for activities and inputs doesn’t allow for sufficient experimentation and change.
A better approach is to contract for outcomes (i.e., to offer cash on delivery) and allow those with the required information the flexibility to determine the best way of achieving those outcomes.
Common concerns around cash on delivery focus on exactly what outcomes are contracted for, how they are measured, and whether there is any risk of distortion of priorities according to what is measurable or gaming of indicators. Indicators should be quantifiable, ideally continuous (to allow for variable payment in proportion to the degree of progress), and independently verifiable. Another common concern is how governments might fund any up-front investment costs. Here, then, the proposal is not that cash on delivery should replace all aid, but simply that it replace a portion of aid in a piloted manner. Further, if the outcomes are focused on “soft” rather than “hard” infrastructure, these up-front costs should be limited.
With trade, contracts could be based on the World Bank’s ‘Doing Business’ indicators. We have reasonable econometric evidence (Hoekman and Nicita 2011) that these indicators of the cost of importing and exporting (in both time and money) are associated with greater volumes of imports and exports.
An alternative but similar set of possible indicators that could be used as outcomes for contracted payments are the OECD Trade Facilitation Indicators, which probe border procedures in more detail. Moïsé and Sorescu (2013) estimate that streamlining the costs represented by these indicators could reduce trade costs by 15 per cent for low- and lower-middle-income countries.
Rather than trying to tell a specific country how best to reduce that time and cost, we could instead just write a contract to pay a specified amount for each hour the country reduces the time it takes goods to clear the border and exporters and/or importers to comply with documentary requirements.
The potential gains to developing countries are high. The estimated gain to a low-income country from reducing its cost of exporting to that of a middle-income country is 2 per cent higher exports (Hoekman and Nicita 2011). For a typical low-income country, such as Malawi, with total annual exports of around US$1.5 billion, a 2 per cent increase would be worth US$30 million a year. The expenses associated with reducing export times would almost certainly cost less than this amount.
In summary, the UK could take the lead in applying a more innovative and potentially much more effective approach to Aid for Trade by using cash on delivery. It could be used as a complement to the other proposals in this note and, as a relatively new approach, could be established relatively promptly as a pilot."
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