Rodrik’s Triple Trap and Growth Prospects in Africa

Many factors lead people to write about heterodox economics in development. This has obviously been greatly informed by the Eurozone debt crisis and political fiasco of the past 4 years where the good old criticism of ‘the system, man’ has gone beyond simply blaming the excesses and transgressions of the financial sector and the superwealthy, to reach at issues of basic wealth distribution and equality and discrimination in society.

The attraction of the schools of thought which reject neoclassical economic models of growth and convergence to me is that they come with concrete policy tools and prescriptions, which are drawn in many cases not from an ideological contre-posture to the Washington Consensus or the like, but tied to concrete cases of economic success. The policies that East Asian countries like Korea, Japan and Taiwan used to develop since the 1950s have been used to highlight and guide policy advice for current developing countries. In short, my appreciation for heterodox development economics has been rooted in the suggestion that it can actually achieve economic development.

So when my favorite thinker in this line, Harvard’s Dani Rodrick, starts getting pessimistic, I get worried. Rodrick has given talks and put out papers in the past year or so looking at the shifts in labor among different sectors of an economy, the productivity of those sectors, and the rate of growth of the countries. The diagnosis, apparently, is bleak.

Developing economies, Rodrik argues, are facing a triple trap of economic structural change. Convergence in productivity certain sectors of manufacturing has slowed down compared to previous decades, meaning that transitioning an agrarian labor force to manufacturing will be less effective than before at increasing productivity. However, the service sector has its own pitfalls (a leitmotif of many development economists), mainly in the high barrier to entry that it has, presented by the higher skills needed to enter this labor market and the lower number of workers that it can absorb. And the third trap is that of primary-resource-led development. The argument here is also a classic- agriculture and mining are too dependent on demand + investment in commodities, or they are simply not sustainable. Besides which, the more high productivity sectors such as mining are invariable much less labor-intensive. Much of African growth over the past decade (stellar by the way) has been led by high primary commodity prices.

The outlook is somewhat grim. African countries’s real issue according to Rodrik seems to be a mix of their high urban informal sectors, which are apparently very unproductive, and the can’t go here, can’t go there conundrum.

I wonder though. Countries like China and Korea achieved high growth in part because they first saw huge increases in factor accumulation- they brought more labor into their manufacturing sectors, and they bought and used more machines- before productivity went up much (this is Krugman’s famous ‘perspiration not inspiration‘ argument (pdf) regarding East Asia’s development). African countries haven’t seen this sort of shift (at least not into the formal sector manufacturing jobs), so it is perhaps too early to say that manufacturing cannot lead to very solid growth. We simply haven’t seen much sustained manufacturing growth- not even in inputs, forget productivity- in African countries to be able to tell what factors would push it forward. The optimists on Africa will not stop talking about the rise of an African consumer. Imagine a growing manufacturing industry which benefits from rising costs of production in China on one hand and rising demand on the continent on the other.

To achieve this, it’s clear that the large informal urban economy (think Nairobi) would have to be addressed by policymakers. Finding way to drive labor into the most productive sectors of the economy (Rodrik’s opinion on the best way forward)? This isn’t the fight-the-comparative-advantage Rodrik I know. Imagine if you raise the productivity of these informal urban micro-firms and production centres, just a little, and the effect that might have. Imagine subsidy programmes which encourage larger scale production, social protection which drives people to larger firms, and skills and business education which makes individuals more productive.Let’s see if Dani Rodrik can start proning more solutions as well.

While I am by no means an optimist of the “Africa Rising’ type, the continent has not yet had its final word.

Korean Aid: from ‘Development Experience’ to ‘experience development’

I have recently changed jobs, leaving the ‘scary D.C. organization’ I was at for the more moral-hazard-free (haha) shores of the United Nations here in East Africa. I am working on implementing a project funded by KOICA, the Korean aid agency. The past few weeks have been a time of adjustment (to the new country, to work) and my first discovery of how Korean aid operates on the ground. It is too early to come to any conclusions, but safe to say that there are many interesting questions and doubts to follow up on. I look forward to doing this as I move along in my writing here.

So, the ‘new’ donors. Or the ‘once alienated, slowly being brought into the fold’ donors. Japan. Korea. Brazil. South Africa….others.

There is something fascinating about countries that have paid their dues to the World Banks and IMFs and then turned around to become worldwide donors, regional powerhouses, or even to add a brick or two to the mosaic of countries and agencies with their own little niche in the world of international cooperation.

The most fascinating element is probably how these countries use the knowledge and lessons, the know-how gained throughout their history in their development programmes. Some countries are more high-profile about it than others. Some countries prefer sticking to policy advising, others like very technical advice, others still prefer direct, on-the-ground action. But there is one thing in common with all ‘development experience’-related programmes from new donors: they are all new.

Take a country like Korea. I will spare you the story behind Korea’s economic development. But it was just in 2010 that Korea joined the OECD’s Development Assistance Committee, and it was just two years ago that its Knowledge Sharing Program got off the ground. Everything is still in planning. Here and there, scattered in Southeast Asia and Africa, one can find Korean-aid funded ‘pilot projects’ with grand visions of scaling-up once they get the ‘Korean development model’ down pat (good luck).

Because all of these initiatives are new (yes, you can also find older initiatives as well, the best example of which is Brazil’s social protection/school feeding know-how being exported), and because the road ahead is not paved, there is often a lack of clarity in how one gets from the experience of development to the packaging of an aid/development programme.

I used to be a big fan of discourse analysis, so if we order things by ‘frame’, we get something like this:

  1. The development itself. This is the string of policies, the events, people and decisions that drove economic growth and that produced whatever result we see. Needless to say, this is an ephemeral concept, and not really analyzable in and of itself, if not to make a simple statement: Korea’s GDP went from X to Y in A years.
  2. The perception of the development experience. How do countries order and understand the course of their economic and social, political and cultural history? How do they perceive the ‘success’ and ‘failures’ of policies after the fact?  To what do they attribute it? We can add to this one more dimension, that of ‘who’? Who perceives a policy as a success? The state? Civil society? Scholars within the country? This is in my mind one of the key points that will inform what road new donors’ aid (and especially Korean aid) goes down over the next decades.
  3. How these countries’ different actors make the leap between their understanding of how their country developed and their ‘aid philosophy’. To what are development successes attributed, and do related policies form part of the plan when the higher-ups decide where the money goes? Are there countries that retain one discourse about their own development and employ greatly differing or non-sequitur aid allocation strategies?  (The short answer, from what I know of Korean aid, is yes)
  4. The packaging of the development experience. That is, how aid-related ideas are perceived to travel in space and time. What is seen to travel well and what is not. There may also be an interesting variation by region (ie. Different policy advice, different programs etc. depending on the region the recipient country is in, and not depending so much on similarities in economic, political or social structure).
  5. The actuation of the development experience. The concrete policies and programs that come out of the ‘packaged development experience’ and their effects. The idea, when one hears talk about a ‘model’ (the ‘Korean model’, and so forth) is that repeating the same experiment will lead to fundamentally similar results. To my knowledge there has been very little literature looking closely at this question. (Should you know of any though, I would be happy to hear about it!)

Memories of Busan: HLF-4 and the Private Sector

A new paper by the Canadian Council for International Co-operation and the think-tank the North South Institute, as well as an insightful Oxfam blog post have inspired this look back at what Busan got wrong with the private sector, and how to fix it.

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In November of 2011 I received the opportunity to volunteer at the Busan High Level Forum on Aid Effectiveness (HLF-4)…’s Global Civil Society Forum. It was a 3-day Forum bringing together the voices of civil society in preparation for the actual High Level Forum. Speaking English, French, Spanish and Korean with the participants, sitting in on plenary sessions, helping to translate the final document, or interpreting for a Guatemalan participant during his presentation were definitely some of the highlights for me.

Many different agenda were brought together in the plethora of plenary and splinter sessions, but two main ideas kept coming up. The first was the need to shift the aid paradigm to a discussion on ‘development effectiveness’ and not ‘aid effectiveness’. The second was born out of concern that further involvement of the private sector in bilateral aid could be dangerous to sustainable development and democratic ownership of the development process.

These concerns reflected an apprehension that the agenda set for the HLF, along with the blueprints for a ‘global partnership’ for aid and development were all really just an excuse for donor countries to justify ‘privatizing ODA (Official Development Assistance)’ and partnering with the private sector to offset their declining aid allocations.

“Effective Use of Declining Aid Resources”

me at busan

Me (far right) translating for a Guatemalan delegate during a Busan Civil Society Forum session

The result, after several days of meetings, was the Busan Global Partnership for Effective Development Cooperation, a mouthful of a name. But for all its good language, the actual High Level Forum’s final document did not take civil society’s concerns very seriously. There is certainly progress in the discourse and focus of the international aid community. Busan did make some positive steps:

  1.  It put forward the idea of a global partnership for development
  2.  It embraced a discourse of ‘development effectiveness’ and ‘democratic governance’
  3. It emphasized several core values and rights placing people closer to the center of development processes.

It really failed to impress on certain other counts, though:

  1. It failed to speak specifics about the nature of the partnership it was supposed to build
  2. It did not reach a clear conclusion on the nature of BRICS and NIC involvement in the new aid architecture
  3. It pushed for increased private sector participation in development aid without sufficiently defining the parameters and expectations, the dangers and safeguards that need to go along with it. (The non-binding, sidelined Joint Statement (pdf) was a good first step)

This last point struck me as the most important at the time; the private sector is the bulk of most economies, the driver of growth and creator of wealth, but is also a potentially harmful partner in a development context. Moreover the shift to the private sector seemed to be more about donor country funds shrinking with the onslaught of the financial crisis, and less to do with a sudden discovery of how awesome private sector actors were.

Evaluating the Private Sector in Development Since Busan

So this Canadian Council for International Co-operation report on bilateral donor approaches to development cooperation is certainly edifying in this respect. It discusses how top OECD donors have incorporated (‘partnered’ with) the private sector into their bilateral aid programs, and what this has come to mean for development effectiveness, especially in a post-Busan context.

The paper looks at the type of private-sector partnership and promotion aid, and notes that it focuses mostly on macro-level interventions (the famous business-enabling environment), on firm-level projects, including public-private partnerships. The conclusions it reaches speak to the fears that were present at the Busan Civil Society Forum, namely that partnering with private sector actors in development, in its current form:

  • Tends to favor economic shifts driven from outside the beneficiary country
  • Tends to forgo local capacity building and offers little incentive for funding mechanisms to favor the domestic private sector
  • Tends to confound private and public results
  • Does not lend itself well to evaluation due to a lack of data and to the various mechanisms though which private-sector aid takes place

A notable point that came out of the research: despite many references to rights, to sustainability and to gender, it is not clear at all that these issues were given special consideration on the aggregate.

IFC_Logo

Oxfam: “The World Bank’s private sector financing arm doesn’t know the environmental and social impacts of nearly half its portfolio”

Case in point: a recent audit released by the World Bank’s Compliance Advison/Ombudsman says that the World Bank’s International Finance Corporation (IFC) is very poorly informed about the environmental and social impacts of its financial market lending portfolio. The logic of lending to financial markets is very clearly not coupled with principles of sustainable development, social or environmental impact.

Questions

Erinch Sahan at Oxfam asks an important question “can aid money be a meaningful driver of growth?” That is, can bilateral assistance, partnering with the private sector, become part of the solution?

On one hand I think that we have yet to see a country in which aid, in general, has become a meaningful and sustained driver of economic growth (never mind equitable distribution of wealth). What we do have are countries that have successfully used growth strategies to achieve (more or less) inclusive growth.

Partnering with the private sector certainly has its benefits. But one of the more serious side effects that it comports is to evacuate the donor country from the aid process (take a look at how European multilateral public-private partnership funding mechanisms like the Africa Enterprise Challenge Fund are structured- it’s just layer after layer!). In so doing, this tends to also evacuate the recipient (‘partner’) state from the processes of its own development. This was the big argument brought against the World Bank’s PPIAF, that it put pressure on governments to do business with international firms, and then to concede to often disastrous changes in the provision of social goods, like water or electricity.

So, we know the dangers. We can see the evolution of the involvement of private sector actors in bilateral aid (more of them, with ever more diverse mechanisms of action, centered on macro and firm-level interventions).

postbusan seoul civsocfor

The 2nd Seoul Civil Society Forum, one of the many Post-Busan evaluation conferences

Busan’s HLF-4 was one step on the road to consolidate and legitimate what evidently turned out to be an ad-hoc appeal to new sources of money, or new ‘partnerships’ to use the pretty term. It reached out to Chinese and other emerging economies’ capital, just as it did to companies, in order to buttress lagging ODA numbers. In its haste to create the semblance of unity in the form of a partnership, it gave no more than lip-service, non-enforceable, if-you-don’t-mind-sir recommendations on how to properly integrate these new sources of funding. And even those didn’t make it into the final document.

Before the Private Sector Party Jumps Off…

Okay, but what are the responses? What specific private sector funding mechanisms have worked and in what context? How can governments preserve policy coherence all while harnessing the financial power and access to financial markets that private sector partners can provide?

Answers to questions like these are needed, like, yesterday. Because for one, the Post-Busan Partnership Framework is proving to be a slow, slow process. Another reason is that new and emerging donors like South Korea are more and more eager to jump on the private sector bandwagon, but not as conscious of its pitfalls.

A year and a bit after Busan, I can’t help but regret that the Civil Society Forum’s voice was given so little weight.

The Korean State and Private Actors: Building Capacity

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What do welfare and R&D have in common? They’re both keys to an interesting policy lesson from Korea.

The nexus between the public and private sectors is an integral part of Korea’s development history during its middle-income period (from about the mid-1970s to the mid-1990s), and has always gotten special attention. Most known are the Chaebol conglomerates, private businesses which, through their very close relations to political power contributed to the country’s industrialization.

There are many lenses through which one can look at the relationship between state and private sector; here is an interesting and often overlooked one:

In many middle-income countries (MICs), development problems often revolve around capacity issues: state capacity to provide services, private sector capacities in investment or infrastructure-building for example. These challenges go along with that of properly negotiating the role of the state vis-à-vis private actors, ensuring cooperation for development. In this respect the Korean example is very germane, giving policy insight into a number of specific issues.

Two examples show rather well how the relationship between the state and the private sector was established and subsequently evolved over time.

The first one is that of research and development. In Korea, the state played a strong architect role, initially establishing research institutes in the 1960s such as the Korea institute of Science and Technology to promote technological ‘catch-up’. But from the mid-1960s onwards the state enlisted its tax regime, credit allocation system and trade policy to push for higher private sector investment in R&D. The private sector shouldered a very large portion of research and development investments starting in the mid-1960s, with its share in total investments reaching around 75% twenty years later. The state investments made early-on corresponded to the immediate needs of its developing private sector which, coupled with incentives, pushed the private sector into more ownership of the R&D process. The attached graph shows the rapid evolution in the private sector’s share of R&D investment.

Longterm Trend Korea's R&D Expenditures

Long-term Trend in Korea’s R&D Expenditure

The second example is that of welfare policy. The Korean welfare system started in the 1970s by placing almost the whole burden for financing on the shoulders of the private sector. The state instituted mandatory but privately funded welfare programs. For medical insurance, coverage was taken on by companies with more than 500 employees in the mid-1970s. This was subsequently expanded to companies with 100 or more employees (1984), then 16 or more (1986), then finally to the self-employed by the late 1980s. But it was with the 1997 financial crisis and increased public vulnerability that spurred increased state expenditure on welfare (the government instituted a minimum living standard guarantee for the first time). Here, the state-planned, privately-implemented system was brought further into the public realm as time passed.

These issues are of great importance to MICs as well. Countries like Thailand struggle to increase the portion of private investment in R&D, while countries like the Philippines are looking for ways to expand welfare coverage in the population.

welf

To be sure there are setbacks, not the least of which was the exclusion of small firms and of the self-employed from social policies for the longest time. There is also the fact that the ‘transfer’ of the burden for R&D onto the private sector was not made in a fair or equitable way, and was very much tied to the political relations that different companies had with the state. This contributed to widening the gap between chaebol and small and medium enterprises.

The state was also had a rather limited idea of its social responsibilities for quite some time (still today really). It boiled down to the provision of different types of insurance, and was heavily weighted on employment. So when the 1997 ‘IMF crisis’ hit and the number of unemployed soared, or in the aftermath when the portion of temporary employment climbed to over 50%, the inadequacy of the systems of protection were laid bare. This is a problem that continues to this day.

But despite its shortcoming, the Korean experience raises interesting questions on how the state and private sector reinforced each other’s capacity weaknesses, and how that relationship changed over time with economic growth.

Is this pattern prevalent in other countries as well? How has financing for social policies and R&D been informed by the relationship between the state and private sectors?

Also, the Korean example is one of a very strong state, with a tight handle on its finances; but have similar policies been pulled off with any success (or not) by more decentralized states, and in more recent climates of economic openness?

And the most important question, are such policies possible in today’s climate of liberalized public services? That is, do countries have the policy breathing room to start taking on more welfare-related responsibilities given the push (free trade agreements are part of this) to privatize medical services and other ‘social’ allocations? Or is it more of a capacity problem, where the state is simply unable to envision upgrading its social service responsibilities in the first place?

Chris Blattman

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