Tuesday, 8 April 2014

The latest from the IMF: income redistribution is good for growth

Carlos Fortin photo
In previous blogs I commented on two studies from the International Monetary Fund that appeared to depart from orthodox tenets with respect to: (i) the distributional impact of fiscal consolidation (where the IMF study argued that consolidation through reductions of spending increases inequality); and (ii) alternative ways to address fiscal imbalances (where the study recommended increasing the taxation of the top income earners and introducing taxes on wealth). A recent paper(1) signals a further move away from orthodoxy, this time in connection with the question of the relationship between income redistribution and growth.

The paper reviews the economic literature that tests the conventional hypothesis that inequality is good for growth because it provides incentives for innovation and entrepreneurship, raises saving and investment, and allows individuals to accumulate the minimum needed to start businesses. What it finds is decidedly counterorthodox; “the statistical evidence”, the paper states, “generally supports the view that inequality impedes growth, at least over the medium term.” This backs up what the paper calls a “tentative consensus” in the growth literature that inequality can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus required to adjust in the face of major shocks, and thus that it tends to reduce the pace and durability of growth.

The paper then goes on to examine redistribution and its impact on growth. The starting hypothesis is, again, orthodox, as presented by Arthur Okun in an influential 1975 book on the trade-off between efficiency and equity.(2) “That equality seems to drive higher and more sustainable growth” the paper states, “does not, in itself, support efforts to redistribute. In particular, inequality may impede growth at least in part because it calls forth efforts to redistribute through the fiscal system, efforts that themselves may undermine growth. In such a situation, even if inequality is bad for growth, taxes and transfers may be precisely the wrong remedy.”

The IMF paper’s findings, however, run contrary to the orthodox hypothesis. Applying a multiple regression model to the Standardized World Income Inequality Database(3) that includes data on 153 countries for the period from 1960 to date, the paper concludes that “redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects on growth. Thus the combined direct and indirect effects of redistribution—including the growth effects of the resulting lower inequality—are on average pro-growth”(italics in the original).

The authors of the paper are cautious about over-interpreting these results for policy purposes, not least because of the limitations inherent in the use of regression analysis. But their overall conclusion is clear: “Extreme caution about redistribution—and thus inaction—is unlikely to be appropriate in many cases. On average, across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes, unless they were extreme. And the resulting narrowing of inequality helped support faster and more durable growth, apart from ethical, political, or broader social considerations.”

And that is music to the ears of those who, like myself, believe that reducing inequality is one of the most crucial challenges of development policy today.

(1) Ostry, Jonathan D., Andrew Berg, and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth”, IMF Discussion Note SDN/14/02, February 2014. As with all Discussion Notes, the paper carries the disclaimer that it does not necessarily represent IMF views or policy.
(2) Okun, A.M., Equality and Efficiency: the Big Trade-Off, Washington: Brookings Institution Press, 1975.
(3) Described in Solt, Frederick, “Standardizing the World Income Inequality Database”, Social Science Quarterly, Vol. 90, No. 2, June 2009, pp.231-242.

By Carlos Fortin, Research Associate, Institute of Development Studies

Wednesday, 2 April 2014

What role can business play in tackling nutrition challenges?

Photo of Mar Maestre Morales, Globalisation
What is it about the private sector that makes development actors want to partner with it? In Tanzania, for example, there are several alliances aimed at improving nutrition: the New Alliance supporting the Southern Agricultural Growth Corridor of Tanzania (SAGCOT); GAIN launching the Development Marketplace; donors working with business on the National Food Fortification Strategy.

Private sector engagement in nutrition challenges is contested; nevertheless, while I don’t believe rejecting this approach is the answer, we need a more critical understanding of the context in which the private sector operates and the issues that need to be addressed.

We must acknowledge that business consists not only of big multinational companies, but also involves local companies, microenterprises, small rural traders, and many others. Moreover, it is essential that we learn from companies that are already engaged in nutrition, understanding the challenges they have encountered, their successes, as well as their limitations.

With this in mind, I travelled to Tanzania last December to research a case study about ‘the role of business in providing nutrient-rich foods for the poor, mostly to understand if and how the private sector can overcome challenges relating to distribution, affordability, acceptability, and nutrition impacts among others; where policy support can be needed; and to learn lessons about innovative and effective business models.

Understanding the complimentary foods context in Tanzania

While in Morogoro I met a women’s group that owned a very small company that processes blended cereal flour1 (porridge) for infants. Though their production is small, they felt confident about growing their business. However, although they try, they struggle to learn ways to improve the quality of their product. Also, they lacked the knowledge and resources to control the nutritional content of their product, brand it or certify it under the Tanzanian Food and Drugs Authority.

Walking around the market I found a vast variety of ‘unbranded’ bags of blended flour, with different ingredients and sizes, usually with an unknown origin. This group is only one example of the context in which cereal blended flour processors operate in Tanzania. It is large, fragmented, very price competitive and, often, it offers little or no information regarding the nutritional content or quality of the products.

Case study - Power Foods

The case study focused on Power Foods, the only company in Tanzania that operates a dual business model: the traditional business of the company, Power Flour, which makes consumer products; and Power Foods brand, which produces RUTF2 for institutional buyers such as UNICEF. This allowed us to compare the challenges faced by a more traditional market based business model (Power Flour) with a public non-profit distribution one (Power Foods brand).

Power Foods is a local pioneer medium-sized company producing blended flour, along with other products. Its products are fortified with essential micronutrients, packaged and branded, and certified by local regulatory agencies. Anna Temu, its founder, started the business 20 years ago to “process and distribute quality nutritious food products for children at affordable prices”, though still today, they struggle to reduce their costs and make their product affordable and accessible to low-income consumers, especially those located in remote rural areas.

What is striking about the findings is that the majority of Power Flour challenges are outside the company’s control. These include a lack of market signalling mechanisms to control the nutritional quality of its products, low consumer awareness about nutrition, and weak distribution channels to reach the most vulnerable areas.3 These create an environment where it is very difficult for businesses to produce fortified products at affordable prices. On the other hand, Power Foods’ experience of selling RUTF exemplifies how, having the quality, demand and distribution channels guaranteed by donors like UNICEF, these products reach their targeted population. However, RTUF is typically used in emergency situations only. Sustainability and funding are the critical challenges for non-profit distribution models.

How can these challenges be overcome?

Power Foods has proven successful at developing a business model selling nutrient-rich foods, well-known for its high-quality products and commitment to nutrition; however, it has not succeeded at making these products both available and affordable to low-income groups.

Chronic undernutrition affects over 30% of all children in Tanzania; it is clear that public distribution, or private business alone are not enough. In order to cover this gap, a holistic approach is required, with alliances that target systemic changes and involve other stakeholders, like governments, donors or civil society. Collaborative initiatives like running nutrition behaviour change communications and campaigns, or creating certification schemes for particular products.

The recent launch of the SUN business network in Tanzania, with more than 100 organisations, local companies, multinationals, UN, government, civil society, is an example of this collaboration. However, it is necessary to follow its activities to ensure they target structural nutritional challenges. They might find helpful the recommendations of this case study on how to collaborate with businesses to catalyse their potential.

By Maria del Mar Maestre Morales, Research Assistant, Institute of Development Studies

  1. See Ewan Robinson’s blog about the success and challenges of this product in Ghana.
  2. RUTF stands for ready-to-use therapeutic food and it is used for the treatment of severe acute malnutrition. For a more detailed discussion about these products, see Lybbert (2011)
  3. These constraints have also been encountered by businesses in other African countries, see Anim-Soumah et al (2013) and Robinson and Humphrey (2013) for examples of this.

Thursday, 27 March 2014

Business and Development – A Leap of Faith?

Photo of Jodie Thorpe, Globalisation research fellowHave you ever wondered what is really driving the many initiatives and investments that are taking place in the name of business and development? It was the first question I grappled with when I entered this field over 10 years ago. Yet despite the work of a great many organisations to better understand and quantify the ‘business case’, the answer seems to remain that business and development is largely a leap of faith.

This view emerged at a recent event convened, with Business Fights Poverty, to launch the new Business and Development Centre (BDC) at the Institute of Development Studies. Shankar Venkateswaran, Chief of Tata Sustainability Group, said it most explicitly during the keynote speech which opened the event. He noted that external factors play a relatively small part in driving sustainability at Tata compared to internal drivers like values, employee motivation and Board leadership, and highlighted that it is a “leap of faith” that most often takes a company from its current situation to its future sustainability vision.

Variations of this theme, however, recurred in different guises throughout the day right up to the closing panel debate during which Alistair Fernie, Head of Private Sector for the UK’s Department for International Development (DFID) put it another way. “The evidence base”, he said, “is weak”. He went onto explain that the evidence on business and development is in its infancy if you compare it to, say, the evidence to tackle malaria in Kenya.

John Humphrey, Director of the Business and Development Centre, struck a similar note based on recent BDC work, noting that there is little consensus on where the ground is most fertile for interventions. A deeper understanding of the impact of business activities on development outcomes is vital, he noted, if we are to make best use of the scarce resources available. We need to move beyond a drive to “do more”, and focus on identifying where business really has a unique role to play in removing blockages to development, and understand as well the limits of business and markets.

Refreshingly, the event was also the first time I heard someone question scale as the goal of business and development initiatives. This was Christian Spano, Global Lead for Enterprise Development at Anglo American, who asked whether our focus should really be on scale, and who would benefit as a result?  Large companies do have the means to achieve scale, but would this deliver development – or hollow out local markets? Several participants suggested that systemic change was a better goal.

While it clearly takes time to build up an evidence base – this is a pressing task, and should be a priority for those who have already invested a lot of energy to pilot and innovate in this area. The Business and Development Centre aims to contribute by focusing our own efforts, to deliver evidence and analysis on specific development problems in agriculture and nutrition, health and the green economy. We will do this by working with more and different partners from business, the development community and research institutes to generate high-quality, evidence-based research that reaches and influences decision-makers.

Much of what compels leading companies to engage in development will continue to be internal drivers. However, meaningful work on business and development should be supported by evidence and not have to rely only on a leap of faith. Perhaps more importantly, internal drivers do not and will not suffice for the vast majority of companies. Instead we must define much more clearly what the development sector needs from business, the limits of what business interventions can achieve, and the tools, including regulation, that will create better alignment between business activity and development goals.

By Jodie Thorpe, Research Fellow, Institute of Development Studies

The Business and Development Centre was launched, in partnership with Business Fights Poverty on 12 March 2014. Check our Storify stream which captures the event through tweets, photos, videos and web-links.

This post was originally published on Business Fights Poverty website, 21 March 2014.

Friday, 21 March 2014

Is 'going green' enough?

This week, as the RIO+ hosted an event in partnership with the Institute for Development Studies in the UK and the STEPS Centre on Green Transformations in the BRICS and what this may mean for developing Africa, it was hard to avoid the bigger question of 'is greening itself enough?”

There is no doubt that the green economy as a paradigm is picking up pace, as more and more countries undertake scoping assessments, declare green intentions through zero or low-carbon targets, pledge to make development greener or simply explore the opportunities for cleaner development and business opportunity through renewable energy.

According to all of the mainstream green thinking, which is largely economic, greening is the key for low-income countries, particularly for energy.

This is often seen as a necessary part of the revolution with mixed views on whether green is enough or inclusivity is also important. Most approaches recognise – at least in their rhetoric – the need to not only green the economy but also address poverty, however the latter seem to follow a trickle-down approach.

Current patterns of global resource use do not match our declarations for more sustainable development (see Box below) and bridging this gap will require radical reforms and a 'strong inclusivity approach' as Stephen Spratt calls it, i.e. the kind of approach that ensures that the poor do not just benefit but that they benefit more than other groups.

How much can greening facilitate changing the way we use resources and also who has access to them?

Last week, at an international workshop hosted by the German Development Institute (GDI) (PDF), similar debates arose. Some felt that extreme poverty had more political cachet while others insisted tackling inequality was not even a choice but a must.

At the country level this means, in part, moving from 70% reliance on coal and other forms of energy production to a significant change of renewables in the energy mix while reducing income and other forms of poverty at the same time. Amongst the BRICS, there are goals to make renewables more than 40% of energy generated.

Theoretically, this should be good for development. It is too soon to tell though if this will be true.

Rural and urban disparities on access to resources as well as differences between the poor and non-poor on access to basic services are still scandalous and new energy models still tend to use the same production and distribution models: concentrated, based on long value chains where limited overall benefits go to small farmers or small producers, and sometimes displacing many to meet the needs of others.

If we achieve green energy goals while failing to narrow the energy poverty gap or by creating new forms of inequality, is this still green transformation?

In a paper with RIO+ Deputy Director, Layla Saad, she and I basically say no, it should not be seen as such.

We found that a green agenda needs to do more than diversify the economic base and reduce emissions. By implication, green energy, whether in the form of bio-fuels or hydropower, would also need to 'ensure that the deep-rooted social, and to some degree environmental questions of our times are not left unanswered' and 'should not continue to be rooted in the lopsided motivations and unequal structures of traditional economic models that benefit the few and do little to quell the demands for equity and justice of those who have been consistently excluded'.

We also found that the green agenda in the BRICS and elsewhere is not yet providing enough big-sized answers to big fundamental problems, including how people who depend on nature for their subsistence are going to benefit from models that still prioritise money and growth, most of which is likely to be concentrated in the hands of big business, governments and the wealthy living in urban centres.

The BRICS themselves have taken varied approaches on green energy, particularly where the green and inclusion (social) agendas meet more clearly. 

India and Brazil have invested in biofuel and bio-energy options which have targeted or sought to engage small holder farmers (PDF), linking them to more secure income streams and to markets, with differing levels of success. In South Africa and China, the energy mix has been diversified differently through evolving combinations of hydro-electric, natural gas, nuclear, solar and wind. With China in the lead, reportedly, on clean energy finance and discussions on a BRICS Bank still active, there is significant opportunity for them, as first movers and the drivers of a global green agenda, to not only show how to go green but how to do it more equitably and how this can be done for both the short and the long-term.

A sustainability approach, I hope, would also promote:
  • energy (with water security and sanitation access) as foundational elements
  • education, health and jobs as pillars and stabilisers; and
  • sustainable consumption and production as well as governance as key conditions.
Leisa Perch is Policy Specialist at the Rio+20 World Centre for Sustainable Development.

Tuesday, 18 March 2014

Energy access a key priority for Africa in South-South cooperation

By Mao Amis

Most people who have lived in sub-Saharan Africa have a personal tale about access to electricity or lack thereof. Whether it is ‘blackouts’ that last several days or having to put up with noisy diesel powered generators in the neighbourhood, Africa’s struggle for reliable power supply is all too evident.

My own experience is no different.

For the 6 years of my secondary schooling in Uganda in the 1990s, each student carried 5 litres of kerosene and a lamp to boarding school at the beginning of every school term.

This was necessary because electricity supply lasted only a couple of hours, which was not enough to cover the time needed to study and pass tough A-level exams. As a result we used to go for evening studies in the school library carrying our books with one hand and a kerosene lamp with the other.

As soon as the main grid power supply went off, our kerosene lamps kicked in so we could continue our schoolwork. The danger of exposure to poisonous gases and the risk of storing large quantities of highly flammable liquids in the dormitories were all too apparent, but we had no other option.
Fast forward to 2014, the above scenario is still a daily reality in many schools, households, hospitals and other vital installations throughout sub-Saharan Africa. Many communities are still faced with the daily dread that they might not have the electricity needed to carry out their routine activities, which could cost a life, an education or a meal.

It is in this context that the green transformation and the realignment to promote South-South cooperation should be viewed.

Improving energy access and empowering those at the base of the pyramid should be the defining framework for any South-South cooperation

According to the World Energy Outlook (2011), in 2009 sub-Saharan Africa had an electrification rate of 30% compared to 68% in South Asia and 93% in Latin America. Two years later, the WEO 2013 notes that Africa is still home to a large share (nearly 50%) of the 1.3 billion people in the world without access to electricity (PDF) and 25% of the 2.6 billion who still rely on biomass for cooking .

It’s clear that Africa’s top priority should be to increase access to electricity supply as the basis of any South-South Cooperation in the energy sector.

Depending on the choices that African leaders make, the low rate of electrification accords Africa the opportunity to deploy cleaner technologies that could place the continent at the forefront of green transformation. Improving energy access can be achieved much more cost effectively through mini-grids or stand-alone off-grid installations at the local level, especially in rural areas. Interventions that focus on extending the main grid do not often result in improving energy access, because such schemes are costly and may require long-term commitments from large consumers to make them sustainable.

Are we doing enough to lift millions of Africans out of energy poverty?

Lifting millions of Africans out of energy poverty and achieving greater economic prosperity depends entirely on how much effort is placed on the green transformation.

Many countries in Africa have made significant progress in the transition to a green economy. For example, South Africa has recently completed its third major procurement process for independent power producers, and it is estimated that by the sixth bid, the potential investments in renewables would be worth more than US$10 billion. However, some analysts are worried that most of the preferred bidders are large international utilities, driven mostly by profit motives and less interested in socio-economic outcomes like narrowing the energy poverty gap.

This tension between the pursuit of profit and socio-economic and environmentally sustainable outcomes is at the core of the opportunities and challenges facing green transformations that are meant to serve broader development goals. A similar challenge faces South-South Cooperation for development.

To-date, most of the economic interactions have been driven by corporate interests, and it remains to be seen if rules of the game will change to ensure that investment patterns result in decent jobs and environmental sustainability. Some of the more powerful countries in the global South, have been accused of exploiting less developed but resource-rich countries to satisfy their needs for raw materials in fast-growing economies, in deals similar to those that have long defined the North-South economic relationships of African countries.

Will South-South cooperation  lead to an effective green transformation?

My personal observation is that unless things change radically this is very unlikely, partly because the focus of South-South cooperation is still biased towards the major economies, with the rest playing a marginal role.

There is a need to shake up this arrangement to bring more players on board to ensure that benefits of South-South cooperation trickle to those regions where change is needed the most. For example, the recent discovery of oil in the east Africa region is going to be a major economic boost for the region, but at what cost to the environment? The current flurry of oil-prospecting activities in the region, including in areas designed as National Parks and critical watersheds is quite worrying. Without strong green transformation goals, many African countries may well find themselves on the same paths the industrialised world has followed, to the detriment of all.

It is my hope that the mutual learning and knowledge sharing that has underpinned most South-South Cooperation interactions so far will be an opportunity for many African countries: an opportunity to embrace a green future, on their own terms.

Image: by Bige1977 at en.wikipedia (Own work) [Public domain], via Wikimedia Commons

Other blogs on green transformation and green growth: