By Dirk Willem te Velde
The UK Government White Paper on International Development, published yesterday, is positive about the need for resilient economic growth strategies in developing countries and examines how global public goods-which everyone enjoys - can support these strategies. These global public goods include, for example, a clean environment, global economic and social governance, and knowledge on economic policies.
The White Paper comes as the world faces the greatest recession since the 1930s. Developed and developing countries have been hit by a series of macro-economic shocks (food, fuel, flu, the financial crisis and climate change) undermining growth and development successes. ODI has been banging the drum on the implications for development, and has been leading case studies in 10 developing countries to see how the financial crisis will be felt on the ground.
The White Paper makes many references to the shocks of the past year and builds up the argument for global public goods with which to address them. It does not, however, explain in detail how to build growth strategies, explain why countries grow at different speeds or discuss the implications of new economic development models for the United Nations, European Commission, International Financial Institutions and the World Trade Organization.
So, what does it say on economic growth?
‘We must support countries to create better policies out of the crisis, to build resilient growth so that they can absorb future shocks and still prosper.' (p. 24)
It argues for ‘growth that lasts' (p.28)
‘no transformation will prove durable unless it equips countries not only to succeed today, but also to adapt to the challenges of tomorrow and in particular to those of a low carbon world' (p. 45); and
‘countries will not be able to grow, reduce poverty and pursue climate resilient and low carbon development without peace and stability.' (p. 66)
It stresses interdependence, as highlighted by ODI Director Alison Evans yesterday. ‘The problems facing [growth strategies in] developing countries affect us all. Our prosperity, our security and the future of our environment is tied to theirs. It is in our national interest and our shared interests with others that we address these problems.' (p. 141). This chimes with the key message of ODI's modelling research and of our Development Charter for the G-20: welfare in developed and developing countries are interlinked.
White Paper ingredients for resilient growth
On resilient and transformational growth, the ingredients listed in the White Paper include:
Conclusion of the Doha round and Economic Partnership Agreement (EPA) trade negotiations;
Provision of aid for trade (in which the UK plays a leading role, such as promoting the North-South corridor)
Support for the Least Developed Countries (LDCs) in negotiations;
Provision of trade finance;
New financial rules (as in the Turner review);
Better access to finance;
A Challenge Fund for new technologies;
Supporting the business environment by promoting agriculture research;
Promoting the Africa Enterprise Challenge Fund;
Providing academic expertise on growth;
Encouraging valuation of environment resources (think about green accounting); and
Supporting regional integration
While most of these policies are welcome, few are new. The World Bank's World Development Report in 2005 set out policies to create an investment climate. But times have changed, and what is needed now is an ‘investment climate plus plus' approach.
The missing ingredients
The White Paper lacks what I call ‘bottom-of-the-pyramid macro-economics' - a new way of thinking about development to promote resilient growth in poor countries by addressing shocks and include the poor in the solutions. It would include stable, open export markets for poor countries, yet the White Paper does not touch on the protectionist trends shown by all G-20 countries. Poor countries benefit from stable financial flows, yet financial protectionism and pro-cyclical accountancy rules in developed countries have not yet been implemented. Most importantly, ‘liquidity constrained' consumers (when more access to finance would immediately be spent on consumption) in poorer countries are those who can use a fiscal stimulus most effectively to kick start growth in the current credit crisis.
A shift is needed from poor macro-economic management towards macro-economic management that includes the poor. The White Paper notes the importance of front-loading aid and the need to monitor the effects via a global poverty alert, but there is far more to be done here on macro economics beyond aid.
What is needed further are measures to reduce the impact of shocks in the future, insure against that impact, and help people cope with the impact if and when it comes by, for example, creating effective institutions and good industrial policies. Most of this has to be done by developing countries themselves.
The Paper does state ‘Major failures in financial regulation and supervision were fundamental causes of the crisis.' (P.115) but makes no specific mention of the ‘market failures' that played such a key role, including a short term focus on financial rather than economic performance, coordination failures, and herding behaviour. Similarly the market failures on climate change are becoming ever more visible. Isn't this the most fundamental lesson of recent shocks? And that the role of state is changing and will only become more important? The term ‘market failure' did not appear once in the White Paper.
Industrial policies did a little better - they were at least mentioned once (p. 38 on the role for industrial policies that encourage effective collaboration between governments and business, to identify key missing investments and help economic diversification), even though some of the policy solutions (the Challenge Fund and Innovation Facility) are rooted in the belief that industrial policy works. The paper misses an opportunity to open up the debate on appropriate industrial policies (such as those highlighted in the study led by ODI for the Government of Cambodia and UNDP), the role of the state, the practice of state-business relations and the need for a serious analysis of political incentives for growth.
A further issue in the white paper reinforces this point. On page 39 there is a suggestion that ‘Many of the actions needed to stall climate change - such as improved energy efficiency - will make countries more competitive.' Again, there is now a consensus that efficiency does not fall out of the sky even when the investment climate is right: promoting energy efficiency will need an investment climate plus plus approach. Normal private sector development policies plus specific help to promote the adoption of energy saving techniques associated with positive externalities.
Providing the global public goods for crisis-resilient growth
How can developed countries and donors help developing countries build resilient growth strategies, given recent shocks and the new emphasis on market failures? Debates on climate financing need to ensure that growth in developing countries becomes more resilient to climate change. Some development policies (e.g. building hydro power stations rather than coal powered stations) will build resilience and enhance green growth, but this is no reason why 10% of the climate financing should come from official development assistance, as proposed in the White Paper. Aid is provided for development reasons. Climate finance should be additional (an ODI Opinion provides a rationale). Development finance institutions should leverage non-ODA sources and the White Paper is right to emphasise sectoral targets for Development Finance Initiatives (DFIs) to promote green technologies and energy efficiency (p. 59).
The White Paper says that ‘both the World Bank and the International Monetary Fund (IMF) needed modernisation so that they could assist all their members and shareholders to manage the current economic crisis and prevent future crises'. (p. 115) This is a recognition that the World Bank and IMF are not yet geared up to deal with major and pro-longed macro economic shocks, and more discussion is needed on, for example, the World Bank's long term shock facility, or the scope and limitations of IMF loans.
Developed countries cannot ‘deliver' growth in developing countries, but they can set conditions for the right environment and design the instruments to promote the design of crisis-resilient growth strategies. They can help countries cope with such shocks as the economic downturn, high food and fuel prices, or climate change. The provision of global public goods as detailed in the White Paper can support resilient growth in developing countries, (see also the 2005 UNIDO Report) . This now common belief implies a shift for development actors towards the need to provide global public goods while supporting country strategies. The White Paper is a welcome step into this direction.
Re-published with permission by the Overseas Development Institute.