Challenges Facing Asia and Pacific in Terms of Sustainable Development
Stephen P. Groff, Vice President (South East Asia, East Asia and the Pacific), Asian Development Bank
Despite great strides in reducing the number of people in abject poverty, Asia and the Pacific remains home to more than half of the world’s extreme poor. With the global and regional economic outlook uncertain, the key challenge facing Asia is to sustain the growth needed to create jobs and reduce poverty.
Just as important is making sure that development efforts to address poverty tackle the multi-dimensional nature of the problem. The Sustainable Development Goals (SDGs) recognize that many challenges overlap in areas such as water, sanitation, education and health,—and demand an integrated approach. Balancing multiple components in a single project adds to complexity, so we need to take careful note of lessons learned from such past interventions. Doing so ensures that our efforts at a project level reinforce structural and macro-economic reforms to promote economic growth, and increase well-being.
In that regard, there is wide agreement that growth must be socially inclusive. Performance on many Millennium Development Goal (MDG) indicators demonstrates that economic growth and income poverty reduction alone have not reduced many forms of deprivation. While countries were generally able to meet the primary education-related MDG targets for enrolment and completion rates, the target for reducing the number of underweight children, child health and maternal mortality, will not be reached. Many were also off-track on access to basic sanitation, which is associated with poor health. While the MDG on gender parity in education is expected to be achieved, progress on women’s empowerment is lagging.
These persistent gaps are worrying, as rising disparities of income and access within and across countries and subregions can undermine social cohesion and erode development gains. Continuing gender disparities, for example, lead to loss of valuable productive human resources, which affects a country’s economic performance as well as the social fabric of its communities.
Compounding these problems are environmental threats such as increasing greenhouse gas emissions, loss of biodiversity, and changing weather patterns leading to flooding and droughts, which harm the livelihoods of vulnerable people in particular. They also intensify pressures on natural resources, which are likely to worsen as Asia’s population grows.
Such realities highlight the inter-linked and multiple dimensions of challenges to be addressed under the SDGs.
What can we learn from the implementation of the MDGs?
In this context of overlapping challenges, well designed projects and programs can make a real difference to people’s lives. Our experience with multi-sector activities in the social sectors “pre-2015” offers useful insights for such programs going forward.
First, for international finance institutions, difficulties in achieving targets in multi sector projects can lead to low performance ratings and inadvertently create internal disincentives. In response, we have shifted our operational strategy by:
simplifying project design; a sector-specific approach with fewer components should be adopted if conditions don’t suit a multi-sector approach; assessing, and where needed, strengthening the capacity of the government in undertaking multi-sector operations e.g. for municipal services; creating incentives for citizens to access services through approaches such as conditional cash transfers; working with governments to engage alternative and efficient service providers, like NGOs, SOEs and the private sector, for service delivery and accountability; and modifying financing arrangements to better support large government-led programs, where these work well and are delivering outcomes reasonably well.
Second, while the MDGs were primarily viewed as goals for governments, their implementation has highlighted the importance of partnerships between governments, citizens, and the private sector if we are to deliver on the SDGs. While the understanding and commitment to the SDGs from all partners is strong, much more remains to be done at the country and regional levels to translate these international development goals into laws, regulations and operational policies adhered to by all parties.
Third, the implementation of the MDGs underscores the importance of data and knowledge to guide incremental improvements in operations. The advent of the SDGs is opportune as it coincides with technological advances in a more open and globalized world that will allow us to undertake operational research using new tools such as the web, satellites and mobile phones; communicate with stakeholders with powerful images and data on what is happening in our classrooms, to our forests, and within the oceans; and use social media to debate, inform policy priorities and fine tune government programs.
These lessons help to expand country ownership, sharpen the focus on development results, attract private sources of financing, and encourage innovation. They build on lessons from the MDGs and can be scaled up under the SDGs.
Role of International Financial Institutions (IFIs) in supporting the SDGs
The SDGs are ambitious and demand integrated agendas for action, providing new opportunities for IFIs to respond to the evolving needs of countries. Two particular areas deserve increased attention to enable integrated actions that deliver results: financing for development and sustainable development investment.
IFIs can play crucial roles in strengthening financial markets, catalyzing private sources of finance towards development, expanding domestic fiscal resources and, importantly, helping direct increasing resources for climate finance to countries where such investment is needed.
Asia’s diversity makes it critical that investments in sustainable development and other financing instruments are tailored to individual country conditions. ADB is expanding its financial capacity to provide significantly higher resources for lending operations, based on the differing needs of our member countries. We plan to boost annual lending, increasing from an average of $13.6 billion in 2012-2014 to at least $16.8 billion by 2018, and possibly reaching $20 billion by 2020.
Meeting the SDGs will be an operational challenge, but one that offers IFIs a chance to recalibrate their strategies for maximum impact. ADB has started work on a new long-term strategy for 2030 to respond more effectively to the region’s fast-changing needs. Meeting the SDGs in the region will be a core goal, and providing integrated, multi-sectoral assistance will be central to our success.
Asian Development Bank VP Stephen Groff on development in Asia-Pacific
Noe van Hulst, Ambassador of the Netherlands to the OECD
With oil prices unexpectedly dropping to $30 and their lowest level in dollar terms since 2003, many people are asking what the impact will be on the global economy and on energy markets. It used to be conventional wisdom that a falling oil price puts more money in the pockets of consumers and industry, thus boosting spending and global economic growth. Whereas experts normally differ on the size of this positive economic impact, there seems to be more hesitation about whether even to expect any positive impact for the most recent oil price drop.
Some observers suggest that “this time is different” because somehow the adverse effects on oil-producing countries and firms seems to be greater than the benefits to oil consuming countries and firms. It can certainly be noted that the “losers” of falling oil prices are much more vocal in exposing their pain than the “winners” in welcoming their gains. And of course we all feel empathy for those parts of the population of oil producing countries that are severely hit by welfare and salary cuts.
However, this should not let us lose sight of the bigger macroeconomic picture where it is very hard to imagine anything else than that the positive impact of so much lower oil prices on a broad group of consuming countries and companies outweighs the negative effect on a limited group of producers. In my view it is more likely that it simply takes more time for lower oil prices to “work through the system” and generate the full positive economic impulse on economic growth. This has also been the case in past experience, as some experts have pointed out.
In other words: we are still to harvest more of the economic gains that consumers enjoy. Last summer the IMF estimated the positive effect of lower oil prices on global growth (even allowing for only partial pass-through to retail prices) at around 1/2 percentage point in 2015-16 and the last Economic Outlook of OECD (November 2015) had roughly similar numbers for the OECD area. Since then oil prices have dropped significantly further, so these estimates are on the low end of what we may expect. Obviously, other shocks like the volatility caused by financial turmoil in China may offset this positive effect. But without the oil price fall the economic consequences of these other shocks would have been worse.
Another reason why the oil price decline has a net positive effect on global activity is that oil producing countries don’t reduce spending to the same extent as their revenues shrink because many, including Saudi Arabia, Iran and Russia, built up significant buffers in earlier days. At the same time there are signs that we are seeing oil producing countries adjusting to the new reality of “lower for longer”, meaning oil prices perhaps remaining at relatively low levels for a longer period of time than previously anticipated. An increasing number of them are engaging in fiscal adjustments with magnitude and pace varying according to the size of their buffer, e.g. by reducing fossil fuel subsidies and stepping up efforts to introduce or increase taxes and economic diversification to non-resource sectors. These policy changes are actually very welcome and although in the past similar moves haven’t been very successful, maybe this time is different after all!
One of the key questions is of course how long oil prices will stay so low. Oil producers are slashing investment big time which may indeed cause prices to rebound in 2017, as the IEA expects. But nobody knows to what extent and how fast this reversal will take place and the oil-producing countries now aiming for a “freeze” of production levels seem less able to align their policies than previously. More importantly, U.S. shale oil production operates under a different, much more flexible business model which is demonstrating surprising resilience in the face of the price collapse. That’s why some experts talk about a “new oil order” where U.S. shale oil puts a cap on oil price rallies. In addition, oil is facing increasing competition in the previously captive market of transportation: electric vehicles, natural gas, etc.
A final key question is what impact the oil price fall has on the implementation of more stringent climate policies after COP21. Oil prices in many complex ways also push down other energy prices, which is why we should worry about the weakening of the price incentive to step up energy efficiency in transportation, buildings, industry and households. And we may also see a smaller appetite to boost renewable energy around the world. This last factor may actually be the nastiest consequence of low oil prices. Policy makers should carefully consider how to ringfence their climate policies as much as possible in the sense of making the progress in this area less dependent on the level of oil prices, because oil prices will remain very volatile as history shows!
International Energy Agency (IEA) 2016 Medium-Term Oil Market Report
February 2016 OECD Interim Economic Outlook
Alistair Nolan and Dirk Pilat, OECD Directorate for Science, Technology and Innovation
The production of goods and services has been transformed in many ways over recent years. First, production increasingly takes place across borders, in global value chains. Second, production is increasingly knowledge-based and involves a mix of goods and services, a phenomenon also known as the “servitisation of manufacturing”. Third and closely related, a growing part of production, in particular in the services sector, is affected by digitalisation and can sometimes be delivered through digital means. And finally, a new wave of technological change is now fundamentally altering the nature of production, heralding what has been referred to as a next production revolution. Ensuring that these transformations support overall growth and wellbeing requires sound policies in many areas and is a current focus of OECD work.
Global value chains. Over recent decades, the world has witnessed a growing movement of capital, intermediate inputs, final goods and people. Technological progress and innovation, notably in transport and communication, alongside trade liberalisation, have led to the fragmentation of production across borders and across tasks. Goods and services, and their components, are produced and assembled in different locations, often geographically clustered at the local and regional level, before reaching their target markets. This partitioning of production in global value chains (GVCs) has drawn attention to the role of different stages in a GVC to overall value creation. Indicators derived from the OECD-WTO Trade in Value Added (TiVA) database point to the growing importance of global value chains for international trade and production, and point the heterogeneity and complexity of trade flows in these GVCs. Whether for domestic or international consumption, the increasing reliance of production on intermediate inputs produced elsewhere stresses the need for countries to act so as to exploit their comparative advantages and fully benefit from GVCs.
Knowledge-based capital (KBC). At the same time, sustained competitive advantage in production is increasingly based on innovation, which in turn is driven by investments in R&D and design, software and data, as well as organisational capital, firm-specific skills, branding and marketing, and other knowledge-based assets. Generating higher value-added largely hinges on the (continuous) development of superior and often firm-specific capabilities and resources. These are frequently intangible, tacit, non-tradable and difficult to replicate. Investment in KBC has become an important driver of success in GVCs. Much value creation occurs in upstream activities, such as R&D, design, and the manufacturing of key parts and components, as well as in downstream activities, such as marketing, branding and customer service. OECD countries increasingly specialise in developing ideas, concepts and services that are related to the production of physical goods, and less on the production of physical goods as such. As physical production has increasingly relocated to emerging economies, manufacturers in OECD countries rely more on complementary non-production functions to create value, using KBC to develop sophisticated and hard-to-imitate products and services.
The digitalisation of the economy and society. Important as they are, KBC and GVCs would not have provided the opportunities they have without the rise of digital technologies. These have triggered deep changes in economy and society and enable strong productivity gains. It is not just the digital sector which makes a difference, the Internet and other digital technologies are now ubiquitous and underpin economic activities in all sectors. The innovations spurred by digital technologies hold huge potential for boosting growth and driving societal improvements, including in such areas as public administration, health, education and research. For example, the creation of large volumes of data and the ability to extract knowledge and information from them (“big data”) is initiating a new wave of (data-driven) innovation and productivity gains. The analysis of these data (often in real time), increasingly from smart devices embedded in the Internet of Things, opens new opportunities for value creation through optimisation of production processes and the creation of new services. This is what some dub the “industrial Internet” as empowering autonomous machines and systems that can learn and make decisions independently of human involvement generate new products and markets.
The Next Production Revolution. As the global economy continues to transform, new technologies mix and amplify each other’s possibilities in combinatorial ways. Many potentially disruptive production technologies are on the horizon and some are already starting to have an impact, e.g.:
- Data analytics and big data increasingly permit machine functionalities that rival human performance.
- Robots are set to become more intelligent, autonomous and agile.
- Synthetic biology, still in its infancy, could become transformative, for instance allowing petroleum-based products to be manufactured from sugar-based microbes, thereby greening production processes.
- 3D printers are becoming cheaper and more sophisticated. Objects can now be printed (such as an electric battery) that embody multiple structures made from different materials.
- Bottom-up intelligent construction and self-assembly of devices might become routine, based in part on greater understanding of the principles of biological self-construction.
- Nanotechnology – which uses the properties of materials and systems below the 100 nanometre scale – could make materials stronger, lighter and more electrically conductive, among other properties.
- Cloud technology is enabling the rapid growth of Internet-based services.
The precise economic implications of these and other near-term technologies are unknown. But they are likely to be large. These new production technologies will be able to significantly boost productivity, particularly if they can be diffused across less productive firms and support an inclusive growth process. New technologies could also make production safer, as robots replace humans in the most dangerous manufacturing tasks. New production technologies also hold the promise of cleaner production and the creation of an array of products that could help meet global challenges. For instance, facilities producing bio-based chemicals or plastics could help to address environmental and waste issues and generate new jobs.
Challenges for policy. At the same time, various barriers might hinder the potential impact of the next production revolution on productivity, growth, jobs and wellbeing. For one, there is still a low level of digital technology adoption in most businesses, preventing realisation of their full potential. And enabling the next production revolution is not only about technological change: benefiting from new technology also rests on the ability of firms, workers and society to adjust to change, and on government policies that ensure that this transformation is inclusive and yields broad-based gains across the population. Organisational change, workplace innovation, management and skills are some of the areas where firms will need to invest to support rapid technological change, supported by complementary public investments in education, research and infrastructure. Enabling resources to flow to the most productive and innovative firms is also essential. Trust will also be critical to maximising the social and economic benefits of the digital economy. And, as our dependency on digital technologies increases, so too do our vulnerabilities, making on-line security, privacy, and consumer protection ever more essential.
The more governments and firms understand the implications of new technologies for production, the better placed they will be to prepare for the risks, shape appropriate policies, and reap the benefits. The OECD is therefore undertaking work on possible developments in production technologies, and their risks and opportunities, so as to help policy makers and business leaders realise the benefits and minimise the costs of the next production revolution.
Markus Schuller, Panthera Solutions
Professional managers of other people’s money, like regional banks, private banks, wealth managers, investment companies, (multi-) family offices, etc. are confronted for the first time in decades with a situation that forces them to do one of the following:
- Grow aggressively in size to play a shaping role in the industry’s concentration process.
- Take on the competition with investment management fintechs in offering low-cost, fully automated wealth management solutions.
- Position themselves as leaders in an investment management niche via innovation-driven competitive edge.
- Accept to be squeezed out of the market.
The first two options are out of reach for many investment service providers as they are too small, too conservative and/or too loaded with overhead costs. Assuming they want to survive, they will have to target a niche where they can exploit an innovation-driven competitive edge. This means becoming a learning organization with a continuous improvement cycle. We regularly ask the investment management deciders and investment committees how they learn. Silence is the most frequent response.
Another insight we gained in our consulting work concerns resistance to change. In our 2015 article “Man at the centre of the investment decision” we concluded that the underperformance of professional investors versus the market portfolio is dominated by two structural factors. The first is a straightforward cost penalty incurred due to transaction costs, management fees, distribution fees, etc. The second is the “Behaviour Gap Penalty”, defined as the contribution of the human factor to a biased perception of reality caused by cognitive dissonances. Indicators of the penalty along the investment process include certain market timing techniques, the application of flawed portfolio optimization techniques, minimizing career-risk as primary objective and other expressions of cognitive biases.
The less personal the aspect to be optimized in an investment process, the lower the organizational resistance, so minimizing fees, optimizing tax structures, or implementing regulatory changes meets relatively little resistance. Increased organizational resistance becomes visible when we’re dealing with asset-allocation related topics. There, one can distinguish between subject-specific input on methodologies, in which the professional investor got academically or professionally socialized (you do what you know) and subject-specific input on methodologies beyond the academic or professional socialisation of the professional investor.
For example, a CIO trained in modern portfolio theory can apply the mean-variance optimization in his job, and will show little resistance to a change towards minimum-variance optimisation. But if you ask that same person to switch from correlation-based risk management to causality-based risk management, expect a significantly increased level of resistance, as it goes beyond his or her background. The highest resistance level can be found when investment process topics relate to the individual decider, like optimizing the daily work routine, configuring the team role profile, or reducing the person’s knowing-doing gap.
So how do you create what we at Panthera call a High Performance Investment Team (HPIT©) able and willing to oscillate between the operational and meta-levels in its qualitative and quantitative optimisation of the investment process? Only working on low resistance levels will not lead to a sufficiently significant competitive edge. You have to go where it hurts, and this inevitably becomes personal. But if an industry has exceptionally high relevance for society and is rewarded over-proportionally well for it, equally high expectations have to be met. (A logic that is considered surprisingly new in the finance industry.)
We’ve identified four levels of change management interventions to boost performance: individual, team, process, culture. The quantitative and qualitative optimisation methods applied at individual and team level are similar, for example establishing certain skills and rituals that are needed to get the job done well. Where there is low resistance, change can probably be effected without any external guidance. But given the potential personal and organisational tensions involved in the medium higher resistance actions, it’s better to seek external guidance in tackling these issues.
Culture and Process define the game arrangement of an investment process. The meaning of this can be described as follows: we all know that the more often one plays at a casino, the more likely it is that the house wins, even if a player can temporarily enjoy a lucky streak. A certain asymmetry in favour of the house is structurally embedded in the game. The very same is true for the game arrangement in an investment process. If a certain overachieving behaviour of the individual decider, say high work ethics, is expected, while the same standard is not set as part of the team or organisational culture, it only is a matter of time until the individual aligns his behaviour to the established organisational culture or leaves the organisation.
To take a couple of examples. If an employee is expected to openly experiment with new asset allocation methodologies, following an evidence-driven trial and error process, but the organisation remains driven by a culture based on fear and therefore responds destructively to errors, it only is a matter of time before the employee either returns to the rituals that come with a fear-based culture or leaves the organisation. Or if an investment management employee is expected to act as intra-preneur, but the organisational decision-making process and compensation schemes are aligned to those of public authorities for civil servants, it is only a matter of time until the employee either returns to the rituals that come with a bureaucratic culture or leaves the organisation.
If professional managers of other people´s money want to position themselves as leaders in an investment management niche via innovation-driven competitive edge, the optimization goals shown in the illustration below have to be targeted to establish and manage high performance investment teams.
Source: Panthera Solutions
Global GDP growth in 2016 is projected to be no higher than in 2015, itself the slowest pace in the past five years, according to the latest OECD Interim Economic Outlook. The OECD projects that the global economy will grow by 3 percent this year and 3.3 percent in 2017, which is well below long-run averages of around 3¾ percent. This is also lower than would be expected during a recovery phase for advanced economies, and given the pace of growth that could be achieved by emerging economies in convergence mode.
The US will grow by 2 percent this year and by 2.2 percent in 2017, while the UK is projected to grow at 2.1 percent in 2016 and 2 percent in 2017. Canadian growth is projected at 1.4 percent this year and 2.2 percent in 2017, while Japan is projected to grow by 0.8 percent in 2016 and 0.6 percent in 2017.
The euro area is projected to grow at a 1.4 percent rate in 2016 and a 1.7 percent pace in 2017. Germany is forecast to grow by 1.3 percent in 2016 and 1.7 percent in 2017, France by 1.2 percent in 2016 and 1.5 percent in 2017, while Italy will see a 1 percent rate in 2016 and 1.4 percent rate in 2017.
With China expected to continue rebalancing its economy from manufacturing to services, growth is forecast at 6.5 percent in 2016 and 6.2 percent in 2017. India will continue to grow robustly, by 7.4 percent in 2016 and 7.3 percent in 2017. By contrast, Brazil’s economy is experiencing a deep recession and is expected to shrink by 4 percent this year and only to begin to emerge from the downturn next year.
Trade and investment remain weak. Sluggish demand is leading to low inflation and inadequate wage and employment growth.
Financial instability risks are substantial. Financial markets globally have been reassessing growth prospects, leading to falls in equity prices and higher market volatility. Some emerging markets are particularly vulnerable to sharp exchange rate movements and the effects of high domestic debt.
A stronger collective policy response is needed to strengthen demand. Monetary policy cannot work alone. Fiscal policy is now contractionary in many major economies. Structural reform momentum has slowed. All three levers of policy must be deployed more actively to create stronger and sustained growth. The recipe varies by country, especially with regard to needed structural reforms.
Real GDP growth to 2017
Job, in the book of the Bible he gave his name to, was a whiner’s whiner. His version of Happy Birthday includes the catchy lines “May the day of my birth perish and may God above not care about it; may no light shine on it. May gloom and utter darkness claim it once more.” Not a man to see a glass as half full or half empty, for Job it would be smashed on the floor and slice open your foot. So his words on precipitation are pretty much as you’d expect: “If He holds back the waters, there is drought; if He lets them loose, they devastate the land”.
To be fair, that was in the days before governments played “a key role in developing targeted policy responses to market failures that impede the efficient mitigation and allocation of drought and flood risks”, as the OECD Studies on Water report on Mitigating Droughts and Floods in Agriculture puts it. These responses, plus progress in agricultural methods and technology, mean that in most countries, droughts and floods don’t have the terrible impact on economies these days they’d had since biblical times.
In that respect, it’s interesting to look at the findings of Rudolf Brázdil from Masaryk University, Brno, in the Czech Republic and his colleagues in their study of data going back a thousand years on droughts in the Czech Lands. Nearer modern times you get data from instruments, but the earlier chronicles, diaries, tax data and so on describe a series of issues the OECD report talks about, too, such as competition for water resources and the way different impacts can interact. In the Czech case lack of rainfall is often described as not only damaging crops, but also making it impossible for water mills to grind what the farmers did manage to harvest.
It may seem odd taking Europe as an example when there are so many striking (and tragic) cases elsewhere. But one of the surprises for me in the OECD data was the figure below, showing the number and duration of droughts by continent. Europe is similar to Africa, and North America is worse than both of them. But their levels of resilience and vulnerability to risks, whether drought or flood, are very different. The report provides brief summaries of what these different terms mean: risk is the combination of the probability that something will happen and the impacts if it does; vulnerability is the capacity of a system to cope with a risk or combination of risks; and resilience is the system’s ability to recover after a shock.
Number and duration of droughts
Intuitively, you’d think that for risks you can’t eliminate, reducing vulnerability is the best policy. It’s not so simple: “Physical and economic interdependencies associated with specific characteristics of water imply there can be synergies and trade-offs in vulnerability reductions across water users and uses” says the report. Lord Smith, Chairman of the UK Environment Agency summed it up in February 2014 after particularly bad floods hit England, pointing out that flood defences cost money and the question was how much the taxpayer should be prepared to spend on different places, communities, and livelihoods. Or, as he put it, “this involves tricky issues of policy and priority: town or country, front rooms or farmland?”.
There can even be trade-offs between shorter and longer term vulnerabilities. Increased irrigation could help farmers cope with a drought, but over time groundwater reserves may be used up and the land become damaged irremediably by erosion and over-exploitation.
Fortunately, there are also ways to make everybody better off, by improving the efficiency with which water is used for instance. Given that agriculture accounts for 44% of the groundwater withdrawn in OECD countries, even relatively small changes by farmers could have a significant impact, although if the water allocation system gives them cheap, plentiful water they would have little or no incentive to change their ways of doing things.
Dams and other hydrological infrastructures could help. The Aswan High Dam for example saved Egypt from the impacts of the droughts and floods that provoked so much misery before it was built, but the OECD report argues that big hydrology projects should complement water policies that try to influence demand rather than replace them. It argues, too, for the need to reconcile environmental, social, and economic objectives (or sustainable development as it’s sometimes called).
Even with all the best policies in place, though, the OECD thinks drought and flood risks are likely to become a growing concern in the future for three reasons: increased population and associated rising demand for food, feed, fibre, and energy in the context of rising competition for water resources and increasing water-related vulnerability; increased demand for flood protection and mitigation for urban areas; and climate change increasing the frequency and magnitude of extreme weather events.
And the report reminds farmers of the need to look after themselves by taking out insurance and not just wait for help, for as Job so rightly pointed out, “Those who are at ease have contempt for misfortune”.
The Sustainable Development Goals and Development Co-operation
Erik Solheim, Chair of the OECD Development Assistance Committee
The Sustainable Development Goals which world leaders agreed on in 2015 are focussed on people, peace and planet. Achieving goals requires a transformational, integrated, and universal agenda that is based on effective policies, sufficient pecunia and true partnerships.
Achieving economic growth is not a miracle according to the Commission on Growth and Development (2008). Impressive progress towards the Millennium Development Goals in countries like Botswana, Brazil, China, Indonesia, Malaysia, Oman, Singapore and Thailand highlights that sustainable economic growth was an essential ingredient to raise the income of all, the poor in particular. The growth models of these countries carried some common flavors: the strategic integration with the world economy; the mobility of resources, particularly labor; the high savings and investment rates; and a capable government committed to growth.
The Sustainable Development Goals envision a new growth model, one that is inclusive, sustainable and resilient. In the face of mounting global challenges, a new approach to growth requires consideration of how the benefits of growth are distributed, the impact on the environment and the stability of the global financial and economic system. A growth strategy incorporating all these elements does not involve following a single recipe. This is because no single recipe exists. Timing and circumstance determine how the ingredients should be combined, in what quantities, and in what sequence (Rodrik, 2008). Limited political and financial capital for reform should focus on the most binding constraints to sustainable economic growth and poverty reduction.
More and better public and private resources are needed to promote sustainable development. Official development assistance (ODA) has, until recently, been seen as the main source of funding for development. Increasingly, ODA is only one part of the flows that are targeted to support development. At nearly USD 161 billion in 2013, ODA represented now only 18% of all official and private flows from the 29 member countries of the OECD’s Development Assistance Committee (DAC) and the International Financial Institutions. In addition, better-off developing countries also received USD 190 billion in “Other Official Flows” provided at close to market terms. Private finance such as foreign direct investment and remittances as well as and private grants from philanthropic foundations and non-governmental organisations amounted to almost USD 650 billion in 2013 (OECD, 2014).
While the relative importance of ODA compared to private investments is decreasing in the middle income countries, ODA can continue contributing to their development by mobilising private flows, leveraging private investment and facilitating trade. Southern providers of development co-operation are also increasingly important. China is now a major source of development assistance, particularly in Africa. In addition, it accounts for 20% of all foreign direct investment in developing countries. Based on their own experience, Brazil and Mexico assist Latin American neighbours. Foundations have also become important actors. For instance, the Bill & Melinda Gates Foundation now donate more to development than many OECD countries.
External Finance flows, 2013
The emerging consensus in the literature is that aid has a positive, if small effect on growth. While aid has eradicated diseases, prevented famines, and done many other good things, its effects on growth is difficult to detect given the limited and noisy data available. Tarp et al (2009) in an extensive review of the aid-growth literature concluded that the bleak pessimism of much of the recent literature is unjustified and the associated policy implications drawn from this literature are often inappropriate and unhelpful. Clemens et al (2012) re-examine three of the most influential published aid-growth papers and found that increases in aid have been followed on average by increases in investment and growth. The most plausible explanation is that aid causes some degree of growth in recipient countries, although the magnitude of this relationship is modest, varies greatly across recipients and diminishes at high levels of aid
The policy environment for development has fundamentally shifted. The Third International Conference on Financing for Development and the UN Conference on Climate Change hold great promise, but they also pose a challenge to the way the international development community does business. In response to the changing nature of the world economy and its rising complexity, new analytical approaches are needed to better understand the trade-offs and complementarities between policy objectives – e.g. between growth promoting policies and equity and environmental concerns. Addressing these concerns requires integrated approaches that breakdown silos between policy communities. Three priorities will be critical in delivering this ambitious global agenda’s: Firstly: collective policy action to address global challenges, secondly; putting people’s well-being at the centre of development efforts, and thirdly; partnerships to deliver results on the ground.
Arndt, Channing and Jones, Sam and Tarp, Finn, Aid and Growth: Have We Come Full Circle? (2009). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 09-22. Available at SSRN: http://ssrn.com/abstract=1489392 or http://dx.doi.org/10.2139/ssrn.1489392
Clemens M., Radelet S., Bhavnani R.and Bazzi S. Counting Chickens when they Hatch: Timing and the Effects of Aid on Growth (2012) , The Economic Journal, Volume 122, Issue 561
Commission on Growth and Development (2008), The Growth Report Strategies for Sustained Growth and Inclusive Development, World Bank Washington DC
Rodrik D (2008) One Economics, Many Recipes: Globalization, Institutions, and Economic Growth. Princeton, NJ: Princeton University Press