Monday, 28 April 2014

BRICS and the international development system - an interview with Richard Carey

Following the recent publication of The BRICS and the International Development System: Challenge and Convergence?, I had the opportunity to catch up with one of the report's authors, Richard Carey, to ask him more about what he meant by "challenge and convergence"

Formerly Director of the Development Cooperation Directorate at the OECD, Richard is now Chair of the International Advisory Committee for the China International Development Research Network and a member of the Advisory Council for the IDS Rising Powers in International Development (RPID) programme.

1. Your recent paper and brief with Li Xiaoyun outlines two development paradigms between the OECD model and a newly emerging model from the BRICS. In what way do they differ, and how do you think they are converging?

Historically, there were two emerging models.

The first is what we would call the South-South model, which came from the Bandung conference in 1955. Meanwhile, 1960 saw the establishment of the DAC (Development Assistance Committee and the IDA (International Development Association)), both US initiatives during the time of decolonisation. This was the foundation for the definition of ODA - Overseas Development Aid - and the 0.7 per cent for ODA as a percent of Gross National Income, both of which came ten years later.  The South-South paradigm emphasises knowledge transfers rather than resources transfers, and the idea of mutual benefit, because all were poor countries. Conversely, the OECD model aimed to prevent the use of aid for commercial benefit between donors, and there’s an emphasis on moral altruism.

Now, there is a form of convergence between the two.

Firstly, there has been a huge shift in wealth, as China has become the world’s biggest capital exporter – transferring resources as well as knowledge. This is a good development, but inevitably moves away from the South-South model as we knew it. One key convergence is that the emerging economies, including the BRICS countries (Brazil, Russia, India, China and South Africa), now have a big stake in the functioning of the global economy, to make sure the system functions without crises. They have new geographical interests, supply chains with physical investments and people on the ground, and thus there is a common interest between the two models in ensuring effective states and effective markets.

Yet the South still sees the North-South and South-South paradigms as relevant. There’s still the idea that North-South is a “vertical” set of relationships, whereas South-South is a “horizontal” set of relationships – equals to equals. This still impacts relationships, and there’s some controversy over Northern institutions borrowing Southern terminology and concepts, such as ‘partnership’ over ‘assistance’, which Southern countries claim as theirs. This distinction, and the South-South tradition, still has value for southern development providers and participants, and that’s something that’s persisting, not converging.
2. One of things you focus on is the significance of the BRICS New Development Bank. What does it mean for development finance and from the perspective of developing countries? What challenges does this present to current Western-led global governance arrangements?

The BRICS bank will be a challenge, rather than a convergence. It’s already shaken up the world of development banks, as people anticipate its arrival, and it’s also already prompting changes in the World Bank and Asian Development Bank, in terms of their flexibility.

But setting up this bank will still be a big task. The BRICS will need to work out a lot of logistical arrangements, such as on governance, location, professional staffing arrangements, operating modalities, and evaluation systems. Transparency will be a significant issue, as the bank will be a target for international reporting and scrutiny. They will also need the capacity to do their own research and form their own research departments, presenting alternative perspectives and modalities to the World Bank or ADB. 

Evaluation is also a big issue. BRICS bank members need to be concerned with reputation – which is not so much about creditworthiness – but the bank will need a strong evaluation function to be credible. The bank needs to be high-status to achieve the BRICS objective of being seen to be serious and effective in terms of development impact.

3. As you mentioned earlier, the South-South paradigm emphasises knowledge transfers, and perhaps a good example of this is the BRICS Academic Forum. Could you tell us a little bit more about the Future International Cooperation Policy Network, discussed as part of a parallel programme of events organised in Rio de Janeiro by RPID team and partners in Brazil*?  

What the network promotes and presentations in Rio illustrated is really in-depth research into the nature and political economy of the development cooperation efforts of the BRICS and eventually of other rising powers.

From this we see two things:
  1. There are many development lessons to share from 30 years of experience in the rising powers, which has not made itself into the textbooks yet, and this is valuable knowledge.
  2. The research articulated what the political economy drivers are in these countries, and the state of the debate studies are  helping us understand a lot more on what drives development programs and policies in the BRICS.

Beyond that, it’s given us an intellectual community for learning and practice.

Over the last two years, the RPID team and its partners in Brazil, Russia, India, China and South Africa have produced a wealth of studies which provide an excellent starting point for delving deeper, for example, analysing particular development programmes. These include the five BRICS country studies, called "State of the Debate” reports [which will be published soon], documenting public opinion and discussions with civil society, business and policymakers, in addition to a number of thematic reports.

The next step is a biannual conference in which learning can come together. Like medieval fairs – which had a very important function in bringing people together from all over to exchange goods and money and ideas in Europe – these are economical and productive ways of interacting to exchange knowledge, contacts and ideas.

Eventually, the idea is that the Network will move from an initial base in the UK, to shared institutional homes in the rising powers, as network members mobilise their own networks, and can provide a revolving base for this activity. This will better reflect the changing balances in the global economy, and emerging development cooperation partnerships – hence the name “Future International Cooperation Policy Network”.

*The RPID team was delighted and proud to work with World Centre for Sustainable Development, Rio+ Centre,COPPE-UFRJ, the BRICS Policy Center, CEBRAP, and Articulação SUL.

Yunnan Chen is a Research Officer with the Rising Powers in International Development programme at the Institute of Development Studies. This interview took place on 9 April 2014.

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.