April 16, 2013

Who says trade and growth will lead to development?

This article first appeared on the Ottawa Citizen blog on aid and development.

Aid hasn’t done much for development, and even less for sustainable growth in countries. In fact everything but aid – trade liberalization, productivity and technology gains, income redistribution, remittances, the new “gangnam style” dance (ok, I made that bit up) – have been at the heart of the dramatic improvement in living standards in a number of emerging economies in recent years.

This is the main premise of the Globe & Mail’s March 29 editorial, “Towards better, smarter foreign aid”, on their rationale for why merging the Canadian International Development Agency (CIDA) into one Department of Foreign Affairs, Trade and Development makes total sense.

Forget building bridges, roads and dams. Together, aid can better used to promote trade, which in turn will lead to more sustainable growth and long-term development. Just look at Brazil and Mexico and South Africa, the Globe says.

So I did.

In recent years, there has been a growing body of evidence that has analyzed some of the factors that encouraged sustained and inclusive growth and development in many emerging and developing economies.

The World Bank -sponsored 2008 Commission on Growth and Development drew its “strategies for sustained and inclusive growth” from 13 developing economies that enjoyed a sustained (25 years) period of strong growth (seven percent) and human development. The UNDP’s 2013 Human Development Report on “The Rise of the South” was released just one month ago. It taps the experience of 40 countries that had “done better than expected” in terms of both income and non-income dimensions of human development.

Both reports (like me) unequivocally agree that while trade and growth are important, growth is an insufficient condition to ensure long-term, positive and sustainable human development.

So what then? Each report highlights a number of key factors that contributed to the success of these economies in terms of both positive growth and human development outcomes. They overlap in three areas worth highlighting:

1)      Strong leadership and an active government and society  – While the private sector has an important role to play in development, both the Commission and UNDP reminds us of the necessity of a pro-active developmental state and society. Supported by a talented and well compensated public service, the Commission’s cases identified the importance of active governments that were invested in, and committed to, long-term plans to bring about inclusive growth in their economies and to effective institutions to deliver on this commitment.  But governments also need social policy that promotes inclusion, adds the UNDP, to ensure non-discrimination and equal treatment. As the Arab Spring has reminded us, this also requires space for people – in particular young people - to voice their concerns and demands, influence and shape policy, participate in political processes and demand accountability.

2)      A healthy questioning of unfettered liberalization – While the Commission acknowledges the need for open markets and a responsive economy that supports innovative new industries and dumps obsolete ones, it acknowledges that none of the countries they studied were free market purists (nor was the US and UK, for that matter). These countries developed industrial strategies to promote investments in new sectors, subsidized industries that otherwise wouldn’t have emerged, managed their exchange rates, implemented capital controls, and built up their reserves. (It is enough to make Adam Smith roll over in his grave.) Although neither the UNDP nor Commission advocate for such policies long term, they do recognize that there is a time and a place for such policies. Likewise, while the UNDP notes that tapping global markets is key, “success is more likely to be the result not of a sudden opening but of gradual and sequenced integration with the world economy, according to national circumstances, and accompanied by investment in people, institutions and infrastructure.”

3)      Impressive levels of public investments – Both the Commission and UNDP underscore the importance of investing heavily in people (quality education and skills development, in particular for girls, and nutrition and health care), and in infrastructure (roads, ports, airports, electricity, telecommunications). But this must also be accompanied by a strong focus on job creation and equality of opportunity that can shape (and be shaped by) the nature and pace of the job market, in synch with the skill-set of the new workforce. Furthermore, social safety nets, legal empowerment and access to basic services help smooth the transition for people between jobs. According to the Commission, this produces “healthy, educated workers, passable roads, and reliable electricity” and actually crowds in private investment, creating what the UNDP calls “virtuous cycles in which growth and social policies reinforce each other.”

Which leaves me wondering: wouldn’t “better, smarter foreign aid” have more leverage and impact if it aligned less with how we think growth and development works, and more with how it is actually happening – and quite successfully – in many parts of the developing world?

What do you think?

This blog was written by Fraser Reilly-King, Policy Analyst (Aid), CCIC. The views expressed are his own, and do not necessarily represent the views of CCIC or its members.

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