Wednesday, 29 February 2012

Should developing country governments support national champions by allowing them monopoly rents?

By Carlos Fortin

I recently attended a seminar in Geneva organised by the United Nations Conference on Trade and Development (UNCTAD) to mark the thirtieth anniversary of its flagship annual publication, the Trade and Development Report (TDR). The Report is regarded as the main alternative in the United Nations system to the mainstream approach represented by the World Bank, the IMF, the WTO and the OECD.

My paper ‘Keynes, Schumpeter and the Macroeconomics of UNCTAD's Trade and Development Report*’ for the event, generated some controversy over dinner and drinks.  I point out that Joseph Schumpeter, economist and political scientist, thought that some degree of monopoly in the economy is necessary for innovation. I had quoted him as writing:
… because perfect competition is impossible under modern industrial conditions—or because it always has been impossible—the large scale establishment or unit of control must be accepted as a necessary evil inseparable from … economic progress … What we have got to accept is that it has come to be the most powerful engine of that progress and in particular of the long-run expansion of total output.1
Put it bluntly, the policy question is:

Should developing country governments support national champions by allowing them monopoly rents, as in the East Asian miracle?  As it tends to be the case with all important questions of economics and economic policy, the opinions of the economists present were deeply divided.  Due reference was made to Krugman’s iconoclastic view that the so-called East Asian Miracle is in effect a myth:
“Asian growth, like that of the Soviet Union in its high-growth era, seems to be driven by extraordinary growth in inputs like labor and capital rather than by gains in efficiency”;2
and to Stiglitz’ riposte that:
“in the extreme, and in my view, unlikely event that East Asia had no total factor productivity growth, the region still would have demonstrated a remarkable ability both to maintain high saving rates and to allocate that capital to productive uses”.3 
What came closest to a majority opinion is that developing country governments should not forgo the option of supporting national companies, particularly for purposes of making them internationally competitive, but should only exercise it with two significant caveats:

  1. support should not be a blank cheque, but contingent on performance; 
  2. support should be consistent with international obligations and disciplines, notably those of the World Trade Organization.
I myself subscribe to that view.

1 Schumpeter, J. A. (2003) Capitalism, Socialism and Democracy, Taylor and Francis e-library: 106
2 Krugman, P. (1994) ‘The Myth of Asia's Miracle’, Foreign Affairs 73.6: 70
3 Stiglitz, J. (1998) ‘Sound Finance and Sustainable Development in Asia’,  Keynote Address to the Asia Development Forum, The World Bank Group, Manila, Philippines, (accessed 28 February 2012) 
*The paper will be published in April by UNCTAD in a volume entitled "Thinking Development: Three Decades of the Trade and Development Report", which will be presented at the XIII UNCTAD Conference in Doha in April.

Wednesday, 22 February 2012

Framing development cooperation with the private sector

By Noshua Watson

As the awareness of the private sector’s role in development grows, a variety of parties are becoming interested. The United Nations Economic and Social Council is hosting a Special Policy Dialogue next week on ‘Private philanthropic organizations in international development cooperation:New opportunities and specific challenges’  in preparation for the 2012 Development Cooperation Forum.

Some of the challenges faced by aid agencies working more closely with private foundations include:
  • engaging foundations in solutions that strengthen systems, not just addressing single issues
  • getting foundations to sign up to international aid reporting standards (like the International Aid Transparency Initiative)
  • reducing overlap in new projects and helping to scale existing projects
  • increasing innovation in new forms of development finance. 
Foundations can be brought more closely into existing development cooperation frameworks like the Paris Declaration on Aid Effectiveness for multilateral aid donors and the Millennium Development Goals discussions for new post-2015 goals.

Another event, ‘A New Architecture of Aid: The Role of Private Capital’, is being sponsored by the UK charity Article 25 and the Royal Institute of British Architects (RIBA) Knowledge Communities. This event will look at private sector finance of all sorts, not just philanthropy.

I believe that as the private sector influence on development becomes explicit, the development community will need to convince private sector actors of the value of local community voices and resources, bottom-up solutions, and non-material outcomes like wellbeing, dignity and social capital.

Friday, 17 February 2012

The mining boom: will residents of mineral rich countries benefit?

By Gerry Bloom (guest blogger from the IDS KNOTS team)

As part of my ongoing work investigating health markets and the role of non-state actors in provision of health services, I am involved in a project concerning the role of mining companies in supporting the provision of health services to their employees and the wider community in mineral rich countries. This provided me with the opportunity to participate in the Mining Indaba 2012 in Cape Town in early February. This is an annual event for managers of mining companies, financiers, officials of multi-lateral organisations and Ministers from many African countries. The meeting was an eye-opener.

I had not been sufficiently aware of the magnitude of the present boom in the demand for minerals, which seems to be associated with rapid economic growth in many low- and middle-income countries and the enormous investments being made in the infrastructure of many large cities.

I was impressed by the size of investments being made in a number of African countries. Several new finds will provide large revenue streams for many years. There was a lot of discussion of ‘resource nationalism’, stimulated by high mineral prices. There was a view that companies need to earn their ‘licence to operate’ over the many years needed to recoup the large investment in a new mine. This was seen to involve much more than ‘traditional’ investments in corporate social responsibility.

Mamphela Ramphele, who chairs the Board of Gold Fields, presented a vision of a partnership between large corporations, community social investment organisations and national and local governments aimed at solving major problems with the provision of education, delivery of health services and the development of communities where mines are located. She called on large mining companies to play a leadership role in helping governments address these problems, suggesting that they operate on a time frame longer than the usual political cycle.

The unspoken alternative, of course, was the possibility that calls to nationalise mines could gain political support and that mining companies from countries where demand for minerals is growing rapidly might be potential partners for joint ventures with governments.

The take home message from the Indaba is that we are in the midst of a major mining boom. If mining companies, governments and civil society organisations can create effective partnerships for development, many people living in mineral rich countries will benefit a great deal. Otherwise, we may be witnessing another turn in a boom and bust cycle that enriches few and leaves many more in poverty.

[See also the Globalisation team’s Business and Development seminar series. Three of the five seminars under last autumn’s theme ‘Conflicting Interests: How Businesses Operate in Areas of Conflict’ focused on mining.]

Friday, 10 February 2012

Food price volatility: Debating causes and consequences

By Stephen Spratt

I thought I'd follow up on my colleague Xavier Cirera's post earlier this week, about high food prices versus food price volatility. We both attended Monday's Future Agricultures Consortium (FAC) and IDS hosted workshop on food price volatility and financial markets.

At the workshop, we posed three questions:
  1. Why does volatility matter?
  2. What impact, if any, do financial speculators have?
  3. What, if anything, should be done about this?
The issue provokes heated debate. Some argue that speculators have affected both the level and volatility of prices, with major development consequences. Opponents argue the exact opposite: ‘speculators’ bring liquidity to markets, lower farmers’ hedging costs and reduce volatility, and so have a positive development impact. Our aim was to bring together the warring factions and shine light on this debate, even if just a chink.

Why does volatility matter?

For question one, there was agreement that volatility is important, but cannot be separated from price levels. What really bites is elevated price levels combined with sharp – and unpredictable – spikes. This describes the situation over the past five or six years well. It is also important to distinguish between prices and levels. High prices hurt consumers and benefit farmers, but high volatility hurts everyone except for a small group of financial market actors: hedge funds that trade on market movements and exchanges that benefit from high volume, which often rises in step with volatility.

What impact, if any, do financial speculators have?

For the second question there was no agreement. Many factors may contribute to high prices (e.g. climate change, rising demand from the BRICs, high oil prices or reduced supply due to biofuel mandates) and to high volatility (e.g. unpredictable harvests, exchange rate shifts or low levels of global food stocks). Separating out the impact of any one cause is fiendishly difficult, so most stress a role for all these factors.

Financial speculation is different. Here one group points an accusing finger, while their opponents see speculators as entirely innocent. The space for this disagreement is created by an inability to prove (or disprove) causality, but maintained by ancient disputes about whether markets are inherently stabilising or not.

What, if anything, should be done about this?

For the third question there was a little more agreement. For example, all accepted the need for better information, both on fundamentals (such as levels of stocks) and on financial factors (such as the level of positions). Opinions diverged at this point though, with some calling for constraints on speculation and others that this was unnecessary.

Take a look at this video to hear what Steve Wiggins (Overseas Development Institute), Jörg Mayer (UNCTAD) and Rob Nash (Oxfam) think should be done:

How to move this on? My view – and it is only my view – is that the development costs of food price volatility, particularly when compared with the quite minor implications of limiting financial speculation in global food markets, makes a case for the precautionary principle. This does not imply that speculation should be curtailed in all markets, far from it, but food is different, or at least most people would accept that it is. At the same time, it is dangerous to fixate on ‘speculators’ at the expense of fundamental causes that need to be urgently addressed. While speculators may potentially amplify price swings, they are unlikely to be the original cause. It is important not to lose sight of this.

We clearly need to know more. What types of volatility matter most and to whom? How do the various causal factors affect these forms of volatility? What types of speculation might matter in each case, and under what conditions? How do national policies affect the transmission of global price volatility to the local level? At least one thing is clear: these questions are not going away. Watch this space.

Wednesday, 8 February 2012

What is the main problem - price volatility or high food prices?

By Xavier Cirera

On Monday I attended a very interesting IDS workshop on agricultural price volatility.

Colleagues from the UK's HM Treasury, Oxfam, UNCTAD, IFPRI, WDM and SOAS gave fascinating presentations, especially on the role of speculators in increasing volatility. The evidence presented was mixed, showing how difficult it is to clearly disentangle the effect of financial agents from other sources of volatility, in a period where fundamental determinants of prices, such as demand, have also been very volatile.

What’s the problem – volatility or high price levels?

Prior to the workshop I was not convinced that volatility was the primary problem in agricultural markets. It seems to me that there is a lot of confusion between the impact of high food prices and the impact of volatile prices. Some of the evidence presented seemed to mix both effects:
  • with high prices, net-producers should benefit, and net-consumers should lose out; 
  • with volatile prices, the impact on net-producers is clearly negative, but the impact on net-consumers is unclear.
There were some interesting discussions on other specific volatility impacts on poor people in developing countries that deserve further research. For example, large price fluctuations can have long-term effects on a variety of factors; the irreversible sale of assets; removing children from school and impact on women who buffer the nutrition intake of the household. These effects can be directly linked to volatility.

How much does volatility really matter?

While the discussion on financial speculation and volatility is fascinating, I wonder how important this is in relative terms with the challenges ahead in agricultural markets.

International prices only matter as long as they are transmitted to domestic prices. IFPRI presented evidence that on average around 40 per cent of international price changes was transmitted to domestic prices in a sample of developing countries. We can combine this figure with other IFPRI simulations which suggest that national prices (tariffs, subsidies, export bans etc) were responsible for doubling the impact on prices and amplifying the external shock. This leads me to conclude that if we want to reduce the impact of volatility, eliminating some of these national distortionary polices should be top of the list.

Structural supply issues

One presenter provocatively suggested that the focus on financial speculation and price volatility was distraction from the more important existing structural problems in the agricultural sector, such as supply response in developing countries. I agree with this. For example, after decades of national policies and billions of dollars in donor support in the agriculture sector in Africa, farm productivity and household incomes have not been encouraging.

However, for many years we argued that a critical supply constraint (in addition to a long list of other issues) was that prices were too low. This has changed and in recent years prices remain at significantly high levels. If agricultural supply, especially in the poorer countries, is incapable of responding to these price rises, poverty and hardship will continue to increase. It is in this context, looking at the impact on producers in the poorer countries and on long-term impact on households, where I think it is critical to assess the impact of price volatility.

Thursday, 2 February 2012

How should private foundations support development?

By Noshua Watson

Last October, I had the privilege of giving evidence to the UK Parliament’s International Development Committee inquiry into private foundations.  I was invited to speak due to my role as project manager of the Bellagio Initiative on the Future of Philanthropy and Development in the Pursuit of Human Wellbeing, funded by the Rockefeller Foundation.

In general, I agree with the Committee that foundations should take more risks in their project choice, funding approaches and political advocacy. However, I am much more cautious than they are about the role of high-profile advocates like Bono and Bill Clinton because I feel it continues to perpetuate existing power dynamics.

You can read more about what I think on the Bellagio site and the (UK) Guardian’s analysis. And don’t forget to read some of our conclusions from the Bellagio Initiative about how foundations can support wellbeing.