Thursday, 29 March 2012

Should the UK commit to spending 0.7%?

By Spencer Henson

Sceptical elements of the British media have a big smile across their face today!  A just-published report of the Lords Economic Affairs Committee has recommended that the UK government should do away with its commitment to spend 0.7% of national income on aid to developing countries.  An editorial in the Daily Mail reads: “Now will they listen on overseas aid?”

Now, I have only skimmed over the report, but my less passionate reading of it comes to a more sanguine conclusion. The concern the report raises is that an aid target based on amount spent may not put sufficient focus on the effectiveness of that aid. This is a legitimate concern. Certainly boosting aid spending needs to go hand-in-hand with efforts to find the best ways in which to spend this money towards the goal of eradicating global poverty, and to ensuring accountability (provided such efforts don’t then act to compromise the very effectiveness we are trying to achieve).

My hope is that this report will contribute to ongoing discussions over where and how the UK can have the greatest impact on the global poor. However, we cannot ignore the fact that reports like this are “grist to the mill” of the sceptical. More importantly, is the impact this report will have on debates that are below and beyond the headlines.

But why are targets like 0.7% important?  
Certainly the International NGO community has reacted with horror to the notion that the UK government should drop its commitment to reaching this target by 2013.

I think there are two reasons why targets matter:

  1. They are a good way of holding the government to account in terms of the aid given to poorer parts of the world.  Of course we should always be looking at ways in which the effectiveness of aid can be enhanced – who can disagree with that? And arguably the Department for International Development (DFID) can do better in this regard. However, measures of aid effectiveness do not provide blunt and easily communicated metrics that can be used to ascertain if and when the government is ‘stumping up the cash’. For better or for worse, the 0.7% target serves this purpose. Thus, a Canadian friend of mine recently retorted something like: “I wish Canada was more like the UK, your government has met the target whilst we are nowhere near it. It makes me ashamed especially given it was a Canadian that established the target in the first place”.
  2. The 0.7% target is also important as a means to ‘drum up’ the support of the public. Such targets provide an easy line of communication to the general population who we must recognise know little about international development or the causes of global poverty, and indeed think little of it in their daily lives.  It is easy to pose the question, is our government doing its part? Less easy to judge what this ‘part’ actually is. Of course, the answer lays well beyond how much it spends on aid and even how this aid is spent. Also important are polices on trade, immigration, environmental protection, etc. However, in a world of a frantic media, simple ‘tag lines’ such as 0.7% serve a useful purpose in getting the public to consider: are we doing enough?

Monday, 26 March 2012

The hot potato: Why farmers and consumers need the middleman

By John Humphrey

Potatoes have been in the news in Europe in the last couple of weeks. In the face of economic crisis in Greece, some municipalities had been organising direct sales of potatoes from farmers to citizens. The story is that this cuts out the intermediaries (wholesalers and retailers) gives higher prices to farmers and lower prices to consumers. Many observers have been quick to establish the moral of the story: "bad" wholesalers are ripping off farmers and consumers, and everything is much better when they are eliminated. 

This is a familiar story. It is rare that you hear of a producer of any sort claiming that s/he was receiving a fair price, any more than I have ever heard workers alleging that they are being paid too much or (with one notable exception in Brazil 30 years ago) a company manager admitting that the wage rates in the company were low. A quick glance at how the prices of products increase along the value chain suggests that mark-ups can be very substantial, and presumably unjustified.

Making markets work for the poor
There is no doubt that some markets operate "imperfectly" (in economist-speak). This is why programs aimed at making markets work better for the poor focus on eliminating problems such as information asymmetries – usually where the buyer, the intermediary, has more information than the seller, such as the poor farmer. Facilitating access to market information, particularly via mobile phones, can enable farmers to judge when, where and to whom to sell, and to obtain better deals in the process. In some cases, however, the problems relate to structural problems in markets that are more difficult to solve. Cartels of traders can take control of wholesale markets, driving out competitors by both foul means and fair.

The function of the intermediary 
Nevertheless, recognising that these are serious problems should not lead us to take all criticisms of intermediaries at face value. Intermediaries perform important functions in markets.

  • They bulk together production from scattered producers and transport products to where they are to be sold and consumed;
  • They may grade and pack products, assume quality control functions and assume the risks of price fluctuations between purchase and sale; 
  • In some cases they provide credit, in cash or kind, to farmers in order to facilitate production and gain access to the output. Intermediaries are usually necessary for markets to function efficiently.

The Greek case
So why have sections of the Greek population suddenly discovered that intermediaries are vultures feeding off the victims of Europe's debt-masochistic capitalism? Well, there could be a perfectly good reason. One of the factors that have driven up the cost of food in recent years has been the increase in time-rich, but cash-poor consumers, who value convenience: packaged food, ready-to-eat and ready-to cook food, etc. However, as the Greek economy dramatically contracts wages and benefits have been slashed and people are losing their jobs. Suddenly, convenience at any cost is a luxury that cannot be afforded. The reporters covering the story found people waiting in queues. It may take longer to purchase potatoes this way, but it is saving money that counts now.

So, the availability of cheap potatoes, and other products, may be highly valued by many people in Greece as they struggle to make ends meet and look to keep their spending down. But it doesn't mean that intermediaries don't play an important role in ensuring that both farmers and consumers get what they need.

Thursday, 22 March 2012

Private investment in infrastructure: The road to ruin or to the Promised Land?

By Stephen Spratt

Earlier this week David Cameron announced plans to increase private investment in –and management of – Britain’s road network, which will be offered to investors on long-term leases. The hope is that institutions such as China’s sovereign wealth fund (SWF), which are looking for sources of reliable and attractive returns, will be tempted to fill the public funding gap in the UK’s infrastructure sector.

There is nothing wrong with this in principle, but whether it will lead to a better transport network at a lower cost to the taxpayer remains to be seen. This is likely to depend on three questions which have been largely absent from the debate so far:

  1. How will the returns needed to attract private investors be created? Given that SWFs can invest anywhere in the world, these will have to be rather high. Apparently a share of existing vehicle taxation will be ring-fenced to pay investors to maintain roads, perhaps allocated according to the level of road use. Given that maintenance is already funded from general taxation, this will only be cost-effective if the private operators can maintain the network more efficiently than currently happens, after they have taken their returns. For example, the Highways Agency has an annual budget of £1 billion. If investors require a return of 10%, the available pot is immediately £100 million smaller. If the private sector cannot do a better and cheaper job with 90% of the previous budget, the net effect on the public finances will be negative. 
  2. What will be the impact of road pricing and private sector management? To encourage new investment, tolls will be allowed on new roads. Given that potential revenues will be highest where road use is greatest, this provides an incentive to build new roads where the demand is greatest. A day return train fare from Brighton to London during peak times now costs around £50 – more than many low-cost airfares. Tolls on the busiest new roads can also be expected to be very high. While this is sound economics, with prices being used to equate supply with demand, it means that only the relatively wealthy can afford to travel at the most convenient times and on the most popular routes. Across the train network, the cost both to the taxpayer and the travelling public has increased dramatically since privatisation in 1996, a reminder that private sector delivery does not automatically deliver the expected efficiencies. 
  3. What will happen to the less lucrative parts of the network? Assuming maintenance payments for existing roads are linked to the level of use, the private sector would therefore be incentivised to focus on the busiest and most congested areas for both new and existing roads. This makes sense as resources would be diverted to where they are more needed, but becomes potentially problematic if less profitable, yet strategically important routes are neglected. This is precisely why private participation in public goods and services requires robust regulation: commercial and public interests overlap but are not fully aligned.

So, what has all this got to do with development?
Well, private participation in infrastructure has become increasingly important in developing countries, and this looks set to continue. This can produce great results, attracting new investment where it is sorely needed. But the same limitations apply. It is easiest to attract private money into the more commercially viable sectors (e.g. telecoms) than to vitally important but less lucrative areas (e.g. water and sanitation).

Also, while public bodies may be keen to maximise positive development impacts, for example, by ensuring water is made available in remote areas and is affordable for the poor, these can run counter to commercial interests. However, for the private sector, the best way to maximise returns is to charge what the market will bear and to focus on the largest market segments, typically in urban areas. Where there are trade-offs between development and commercial objectives, it is important that the former are not sacrificed to ensure the project is attractive to private investors.

Do commercial and development objectives overlap?
Commercial and development objectives overlap in many areas, but this is less likely where the poorest groups are concerned – this is true in both developed and developing countries. We are only just beginning to understand the conditions under which private investment can deliver better outcomes and cost savings, and where public support mechanisms are needed to ensure social objectives are also realised.

If the poor are to receive good services they can afford, it is often necessary for these commercial interests to be tempered by public intervention (i.e. finance) to ensure access and affordability. Increasing private investment in infrastructure is crucial in both developed and developing countries, but we should not pretend that it will achieve development objectives in all cases.

Good infrastructure is one of the keys to development and a prerequisite for a good quality of life. Similarly, developing a low-carbon infrastructure is a stated objective of countries at all income levels. Working out how to maximise private investment in ways that also maximise social and environmental outcomes – particularly given ongoing fiscal constraints – is a question that deserves far more attention than it currently gets.

Friday, 16 March 2012

Export restrictions and supporting national champions

By Xavier Cirera

Although not my main area of research, this is the second time that I have written about export restrictions. The reason is that this week saw one of the fastest trade policy reversals in history. In the space of a week, India introduced and reversed an export ban on cotton. The ban was intended to allow the domestic textile industry access to cotton at lower prices. After angry reactions from farmers and the main cotton importer, China, the ban was reversed.

The ban was bad news and, more importantly, was bad policy. First, because it would have been ineffective in addressing the constraints of the textile sector. Trade policy instruments are often ineffective in addressing industrial policy issues. Second, because of the negative distributional effects from the reduction of cotton farmers’ incomes. People tend to forget that as trade liberalisation has large effects on income distribution so do trade restrictions. Third, because a ban increases volatility in international markets (indeed prices increased 5% after the ban and returned to previous levels after the reversal). This affects, for example, the livelihoods of many subsistence farmers in Africa.

This makes me think about our earlier post on supporting national champions by Carlos Fortin. I agree in principle with Schumpeter’s view of industrial growth. Too often industrial policy has been neglected by mainstream economists and policy makers, and very little attention is given to supporting these ‘national champions’. However, the problem is one of policy design and implementation. How do you decide what is a national champion and what are the main instruments to support these sectors? These important questions are far from being solved, and the problem is that too often government policy focuses in practice on the sectors with more successful lobbying and using the wrong instruments; as the example above suggests.

Addressing this problem of targeting and instruments should undoubtedly be at the centre of industrial policy. This will make industrial policy more focused and effective, and would also benefit society by removing the large number of existing distortions in other sectors.

Wednesday, 14 March 2012

Post-2015 MDGs: Already? Again?

By Noshua Watson

Since January 2012, UNDESA and UNDP are chairing the UN System Task Team for the Post-2015 Millennium Development Goals. The aim is to produce a report to guide the intergovernmental discussions in early 2013. The process will have three platforms: 1) inclusive consultations at the national level; 2) insights from academia, media, private sector, employers and trade unions, civil society, and decision makers on health, education, growth and employment, environmental sustainability, governance, conflict and fragility and population dynamics themes; and 3) Internet and social media stakeholder interaction.

To guide the process, UNDP is asking, ‘Is it more inclusive? Is it more equitable? Is it sustainable?’ But it seems that the private sector is asking, ‘Are we interested?’

A few weeks ago, I suggested that foundations should be included in 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. I floated this idea while presenting at the United Nations Economic and Social Council Special Policy Dialogue on ‘Private philanthropic organizations in international development cooperation: New opportunities and specific challenges’ in preparation for the 2012 Development Cooperation Forum.

However, some of the attendees felt that they were struggling to engage foundations and the private sector in general in the Post-2015 MDGs. They believe that many private sector actors took notice and customised the MDGs to fit with their goals, but they continue to be hesitant to engage with the process as a whole. They speculated that the uneven progress towards meeting the MDGs and questions about their overall relevance are turnoffs for the private sector.

Is this true?

Friday, 9 March 2012

Two reasons why the private sector is slow to cut carbon

By Hubert Schmitz

This week we started a new IDS seminar series on Business and Climate Policy. The reason for bringing business into the climate change debate is clear. For the green transformation to happen it requires enormous investments. The International Energy Agency estimates that 85% will need to come from the private sector.

We ask our speakers (from the private sector) to address two issues:
  1. How is business influenced by climate policy?
  2. How does business seek to influence climate policy?
Our first speaker was Jonathan Shopley, Managing Director of The Carbon Neutral Company and Board Director of the Climate Markets & Investors Association. Shopley’s own work is concerned with accelerating green private investment but his excellent seminar served to keep a sense of realism about the pace of change.

My two main take-aways were:
  • Yes, billions of pounds have been invested in low-carbon industries, but remember that trillions of pounds remain invested in high-carbon industry.  Business in the latter industry will seek to protect its assets for as long as possible.
  • There are differences in organisational capacity between high-carbon and low-carbon business. High-carbon industry is highly organised and has very active business associations. In contrast, the low-carbon industry, being a much younger industry and including many start-ups, remains weakly organised and has yet to develop an effective collective voice and influence.
The latter is in fact an old dilemma for progressive policy makers. In order to bring about change they need to work with the private sector. The problem is that the sunrise industries they seek to support are poorly organised, while the sunset industries are highly organised in business association and have strong policy networks. The late Joerg Meyer-Stamer called this the ‘life cycle paradox’ of industrial policy*.

*Joerg Meyer-Stamer, ‘Paradoxes and ironies of locational policy in the new global economy’, in Hubert Schmitz (ed), Local Enterprises in the Global Economy, Cheltenham: Edward Elgar 2004, pages 326-348.

Tuesday, 6 March 2012

What are the opportunities and challenges that arise from climate policy and climate change?

By Vivienne Benson

We want to know, from the business perspective, what opportunities and challenges arise from climate policy and climate change. Here at the Institute of Development Studies (IDS) the Globalisation and Climate Change teams are hosting the fourth Business and Development Seminar Series which is focusing on Business and Climate Change.

Considering the vastness of ‘business and climate change’ we have steered away from the perspective which addresses the impact of decisions and behaviour of businesses in the development community, although this is incredibly important. But, we are asking how climate policy and climate change influences business decisions, and if and how businesses seek to have an influence.

It is imperative for academics and policymakers to understand what makes businesses tick if they are to going implement structures and policies that enable and encourage businesses to have a good impact on climate change. That is what this series hopes to achieve.

Jonathan Shopley, Managing Director of Carbon Neutral, will be opening the series on Tuesday 6 March and will be exploring the influence and impact of business on climate policy and development. Following that Manuel Fuentes, Manager of Renewable Energy and Climate Change Unit, IT Power will be addressing how climate change policy affects the rural electrification process in developing countries. Other speakers that will present include Iain Watt, Principle Sustainability Advisor at Forum for the Future; Del McCluskey, Managing Director, Environment and Energy Sector at DAI and Marie Rosencrantz, Consultant at Hystra - Hybrid Strategies Consulting.

The seminars are open to everyone, and no registration is required. If you cannot attend any of the seminars, they will all be recorded posted on the event page in the week following the presentation. Please contact me at for further information.

This blog post was originally posted on the Business Fights Poverty Blog.

Friday, 2 March 2012

Panel discussion on Thinking Development: Three Decades of the Trade and Development Report

By Vivienne Benson

Following Carlos Fortin's blog post earlier this week, after he attended a seminar organised by 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 'webcast' of the panel discussion is now available. Carlos presented a paper on 'Keynes, Schumpeter and the Macroeconomics of UNCTAD's Trade and Development Report'.

Panel discussion on Thinking Development: Three decades of the Trade and Development Report (TDR)