Development risks

“When the will to power is in charge, the higher the ideals, the lower the results”- Tao Te Ching 

Over the past decade, the concept of “sustainable development” – combining rapid growth with macroeconomic stability, poverty reduction and environmental regeneration – has replaced “market reform” as the main goal of the major multilateral organisations.

The recognition that policy changes and GDP growth by themselves are only part of a complex package of requirements in order to improve conditions in the developing world is welcome; the rather simplistic, one-size-fits-all approach to development strategy which emerged from the Washington consensus has clearly had a mixed impact. Criticism and introspection, especially following the Asian crisis, has elicited a re-think on the part of the multilaterals, prompting improved co-operation and resulting in several important innovative initiatives, such as the HIPC debt relief programme, collaboration on data standards and provision, and most recently, the seven-point joint progress report on development goals – A Better World for All – issued by the UN, the OECD, the IMF and the World Bank.

The goals discussed in the latest venture will serve as a benchmark by which development can be measured in the coming decade. They are ambitious, and possibly over-optimistic. But if the goals have a weakness, it is not so much that as the implicit assumption that the international economy and geopolitics will remain benign in the next 15 years, and that both sides – donors and recipients – will behave responsibly.

Global risks

Global economic risks, such as a possible oil price-induced slowdown in the international economy, a hard landing for the US economy, or another generalised emerging markets crisis similar to the Asian/Russian/Brazilian trauma could set back the achievement of these goals by limiting the funds which industrialised countries are able, or willing, to channel to developing countries. Global political risks, for example renewed conflict in the Gulf or the Balkans, could also detract attention and constrain financing.

There are also other risks. Inadequate funding of the IMF and the World Bank and the problematic support of major donors concerned by these organisations’ aims, methods and influence could constrain their capacity to boost their lending to developing countries in the years ahead. Limited implementation capacity both on the part of donor nations – where aid fatigue is still manifest and where electorates often appear increasingly reluctant to pay higher taxes in return for improved domestic social services, never mind foreign aid projects (witness the recent fuel protest crises in the major European economies) – and the recipient governments, many of which are still struggling with structural adjustment and have little scope for large scale investment in key social areas (education, healthcare, infrastructure) are, sadly, likely to prevent achievement of the goals that heads of government reaffirmed as recently as in September at the UN Millennium Summit.

With privatisation shrinking the public sector in industrialised and developing countries alike, private-sector participation will be required to achieve these goals. Country risks – political instability and inefficacy, policy mismanagement, structural constraints and liquidity inadequacies – already constrain private capital flows to developing countries. It is unclear how, in a profit-oriented global marketplace, the author organisations of the Better World report intend to design incentives which – without incurring sizeable debts for either themselves or the recipient countries, or accelerating the rapid and potentially environmentally damaging exploitation of natural resources which fuelled much of the growth of the 1990s (particularly in Latin America) – might persuade companies to collaborate in the large-scale infrastructure development needed to reduce poverty, increase the length and quality of life and protect the environment.

Debt deeds and freer trade 

High ideals, like fine words, will need to be backed up by deeds if confidence in the international development agenda is to be sustained – witness the lack of progress (and consequent loss of belief) in the establishment of the global financial architecture promised in the aftermath of the Asian crisis, the half-hearted and fractious attempts to achieve an international consensus on environmental protection, or the reluctance of private international bond creditors to participate in burden sharing with defaulting emerging sovereigns.

Swift and significant progress in two areas – international debt relief/restructuring and international trade liberalisation – are priorities if the agenda is to retain credibility. With many developing countries often paying out more in non-productive debt service payments (as measured by debt service/GDP) than they gain through national income growth in any given year, their domestic savings capacity and hence ability to invest in social sectors will be limited until their debt burden is eased, either through restructuring or relief. This is as true for medium-sized, middle-income developing countries such as Brazil or Argentina as it is for less developed countries. Trade barriers in industrialised countries restrict the export capacity of many developing countries, whose main comparative advantage lies in low value-added primary products. International trade liberalisation would help boost exports, and consequently national savings, in a best case scenario providing scope for countries to reduce their debts and releasing funds for investment. More importantly, both these initiatives would empower developing countries and their peoples by giving them greater control over their income and boosting earnings capacity.

The authors of A Better World for All are clear, rightly so, that the objective of development is to enhance human happiness, a vital component of which is the right to self-determination of that happiness. If happiness can be defined in terms of the seven goals, then a vital component of the plan must be to enable developing countries to determine for themselves how these goals are to be achieved. Multilateral institutions must at the very least see their role as being in full partnership with local bodies, including government, business, labour and civil society. Failure to do so would result in a repetition of the interventionist mistakes of the past, and while the statistics may point to progress, the ultimate objective of development may be no nearer.

* The views in this article are those of the author and do not necessarily reflect the position of EIU or any of its related companies. 

©OECD Observer No 223, October 2000

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