Busan: Yes we could

We’ll start with a close-up of a woman on her knees. She seems to be scrubbing some tiles. We track back and see that in fact she’s scrubbing the tyre tracks off a forecourt. Back a bit more and we see that she and her colleagues are in front of a huge conference centre. It’s covered with banners in Korean and English announcing the Fourth High-Level Forum on Aid Effectiveness, HLF4.  There’s a metaphor there somewhere, and it’s called Busan, the host city and the world’s fifth largest port.

Busan is like a life-sized lesson for participants in the Forum. As the Korean president Lee Myung-bak reminded delegates in his speech to the conference, when he was a child, this was one of the poorest countries in the world, and Busan’s harbour was used to import food to stop people starving after the civil war. In From Poverty to Power, Oxfam’s Duncan Green makes this point too, recalling that 50 years ago Korea’s main export was wigs made from human hair.

Aid played a part in changing this, and it’s worth looking at why Korea succeed in moving from being a recipient to a member of the OECD Development Assistance Committee, the donor group that oversees Official Development Assistance (ODA).

The first lesson is that ODA has to be stable and reflect a long-term commitment. Korea could count on the US and Japan, and knew from one year to the next what funding to expect. Volatility makes programme management harder, or even impossible. I’ve heard stories from the field of health, education, and other projects that were started, were going well and then had to be stopped because promised funding suddenly dried up. The OECD says that the value of aid is reduced by 15% to 20% when it is unpredictable and volatile.

For the outsider, one of the more opaque terms of the “aid community’s” particularly opaque jargon is “ownership”. What it means is that countries receiving aid take charge of the process. Korea didn’t always agree with its partners, but the results show that it knew best what strategy corresponded to its needs and resources. It wanted non-military aid rather than the guns, tanks and planes it was being offered, and it insisted on focusing on large enterprises rather than the small and medium-sized businesses foreign development experts told it were the key to success. If Korea hadn’t decided for itself, today Samsung and Sons would no doubt have been a great little shop for the latest Japanese and American gadgets.

However, to “own” the development process a country needs to develop a whole range of skills and institutions. For instance, if it’s going to export, it needs lawyers who understand international trade rules and port managers who can get the goods onto the ships on time. This is what’s meant by “capacity building”. Countries can’t be expected to acquire all these capacities on their own, but they shouldn’t depend on outsiders either. While over 1500 foreign experts were sent to Korea between 1962 and 1971, over 5 times as many Koreans received training abroad.

Another thing about aid programmes is that the best ones become useless because they’re no longer needed. In the 1950s and 1960s, practically all of Korea’s foreign funding came from grants, but by the mid-70s, grants only represented 11% of funds, the rest being loans. The fact that Korea respected repayment conditions reassured private finance and encouraged foreign direct investment in the country.

Korea also proves that it’s possible to recover from even the most desperate situation. At the end of the 1950s this was a mainly agricultural country still suffering from a war that had killed or injured over 2.5 million civilians. If conference delegates want to see a success story, they just have to look around them. And if they want a reminder that the fruits of economic success aren’t always shared equally, they can look at those women scrubbing the ground they walk on.

Useful links

OECD work on developent cooperation

OECD Forum 2010: Road to Recovery: Innovation, Jobs & Clean Growth

Welcome to the OECD FORUM 2010. The theme this year is “The Road to recovery”, and we’ll be covering the sessions here on the Insights blog.

The opening session on “Innovation, jobs & clean growth” had OECD Secretary-General Angel Gurría and Italy’s Finance Minister Giulio Tremonti on the podium.

The session opened with Angel Gurría revealing that when he was Finance minister in Mexico, he earned himself the nickname Gurría Scissorhands for overseeing six rounds of budget cuts, following the collapse in oil prices. As he pointed out, he’s now in good company, with cuts the order of the day in a number of countries seeking to tackle the legacy of the financial crisis and the Great Recession, not least Italy, which yesterday announced an emergency austerity budget.

Gurría praised the courage of the Italian decision, which includes a public sector wage freeze, a six-month deferment of new state pensions, and raising the retirement age of women to 65. The budget is designed to reassure markets that Italy can support its public debt, which stands at 115.8 percent of GDP.

This desire, or need, to please the markets was the subject of the only intervention from the floor that was applauded. A speaker from Germany echoed the feelings of many, not just in the room, that all the talk last year about taming the markets had come to nothing and that it was back to business as usual. Financial markets were, he said, no longer there to provide a service to actors in the real economy seeking investment capital, but had taken on a life of their own.

Speaking to people after the meeting, none of them were convinced by Giulio Tremonti’s reply about the origins of the problems being accountancy standards and over-reliance on the use of net present value, a measure of cash flows, although there was widespread approval for reforming financial market regulation.

Another theme emerging from the floor was the to give developing countries a greater role in international affairs. One speaker from an unidentified African country said she thought the OECD concentrated too much on South Africa and should be more involved with other nations on the continent.

A speaker from Egypt echoed the concerns that nothing had changed since last year and the same old rules were still being applied despite the promises.

Angel Gurría described how the OECD is engaged with practically every country in Africa through a number of means, not least the African Economic Outlook, and that the Organisation is actively pursuing a programme of enhanced engagement with several emerging economies.

He also pointed out that the World bank had changed the weighting it uses for votes and that the chair of the IMF’s policy steering committee is an Egyptian – Youssef Boutros Ghali.

So, not much about innovation and clean growth so far, but that will no doubt change as the Forum gets in to the sessions on specific aspects such as energy, ethics and what green jobs actually are.

China: Shock-absorber for the developing world?

Coinciding with the China Development Forum in Beijing, the Insights blog is focusing on China this week. In this posting, Andrew Mold of the OECD Development Centre looks at how China’s booming economy has eased the impact of the global recession on developing countries.

Number One, actually. Photo courtesy of Jacques Bron

Over the past decade China has attracted an enormous amount of attention principally because of the sheer resilience of its economic ascent. This has come to the fore during the financial crisis, as Chinese growth has continued to soar (at around 8%) while OECD countries have languished in the most serious economic recession since the 1930s. Harvard professor Niall Ferguson talks about the symbiosis of Chimerica, alluding to the deep mutual economic dependence that has evolved between the United States and China over the last decade. Put simply, to a large extent the macroeconomic stability of the global economy hinges on the way in which the imbalances between these two economic giants play out.

As fascinating and crucial these as issues are, they hide the truly remarkable impact of China on the developing world. By its economic resilience, China is having a tremendously positive effect, cushioning many developing countries from the worst of the fallout from the financial crisis. And its growth engine has become exceedingly important for many low-income countries through its trade and investment links. Calculations by the OECD Development Centre suggest that every percentage point of growth in China helps lift 16 million people in the developing world out of poverty.

The trading links are revealing. In early 2010, China bypassed Germany as the world’s No. 1 trading nation. What was less commented upon was the fact that over the last year China has also become the No. 1 trading partner of India, South Africa and Brazil. A full 56% of China’s exports now go not to United States but rather other developing countries.

To be sure, some of these exports put industries in other developing countries under severe competitive pressures. Textiles is a case in point: Competition from low-cost Chinese operators has led to job losses in a number of African and Asian countries. But this is not the whole story. With its enormous productive capacity, China has been driving down the prices of consumer goods, which benefits many poor people in developing countries who would not otherwise be able to afford even simple items like radios and televisions. Also – and this is less widely acknowledged – China has been driving down the cost of capital goods, which allows low-income countries to benefit through cheaper infrastructure and equipment for their productive sectors.

At the same time, China draws in raw materials and intermediate inputs from developing (and other high income countries) countries and transforms these into finished goods for the United States and other OECD markets. In effect China has become a funnel for inputs from other Asian countries, including low-income ones like Vietnam, Cambodia, and Bangladesh.

But it is not just developing countries in Asia that are benefiting. For instance, Chinese imports of oil, soy beans and copper were about 30 times higher in 2008 than they were in 1995. As a consequence, Latin American commodity exporters have been riding China’s coat-tails to unprecedented trade surpluses. Africa, too, has reaped benefits. For example, while many Western companies suspended or delayed investments due to the uncertainty created by the financial crisis Chinese investments continued to surge ahead.

There is, of course, a million dollar question: Is all this is sustainable? Only time will tell, but for now one thing is certain: As long as the Chinese growth “engine” does not stall, the prospects for the rest of the developing world will be rosier than might otherwise have been the case.

Useful links

China at the OECD Development Centre

OECD work on China

OECD Insights: From Crisis to Recovery

网站(中文) The OECD’s Chinese-language site

Jacques Bron’s photos

Point of view: OECD Analyst reports from Copenhagen

What images come to mind when we hear “Copenhagen”?  Ministers sitting around a table and protesters waving banners?  COP15 is also analysts, scientists, businesses and civil society representatives working together on climate-related initiatives…OECD Analyst Christa Clapp tells us what she is doing at COP15:

“While in Copenhagen, I will be speaking at an event sponsored by Eneco, a Dutch energy company. Eneco is supporting the Luz Verde programme to distribute 30 million compact fluorescent light bulbs in Mexico. This is one of the first “programmatic” Clean Development Mechanism (CDM) projects to be approved. It groups similar disbursed projects together to lower transaction costs to access the carbon market and earn carbon credits. Such projects are a first step towards scaling-up carbon market mechanisms. The OECD is working together with the International Energy Agency to support the Annex I Expert Group, which is a group of climate negotiators, on carbon market issues. Our recent papers focus on the strengths and weaknesses of project-based carbon market mechanisms and scaled-up sector-based approaches.

More than 30 countries are already trading in carbon markets, either at a national or sub-national level. Additional countries are discussing how to design new market instruments and potentially link emission trading systems. Decisions taken in Copenhagen may impact the reach of these carbon markets and how they function. At OECD we are actively exploring how carbon markets might evolve post-Copenhagen, building on our recent Economics of Climate Change Mitigation work, which analyzes how carbon market instruments can be used to build up a global carbon market.

To further explore how carbon markets are expanding and evolving, we are bringing together experts and policy-makers for an OECD Workshop on Carbon Markets in April 2010. This workshop will offer an early post-Copenhagen opportunity to investigate these key questions:

  • How can we build up a global carbon market, for example by increasing the number of countries participating, and through direct linking of emissions trading schemes?
  • How will decisions taken in Copenhagen impact incentives for developing country engagement in carbon markets, including the design of “offset” mechanisms?
  • Under what conditions can cities and sub-national actors access carbon market financing for local low-emission projects?
  • How might voluntary markets evolve as compliance markets grow?

Pay a little now or a lot later?

Climate change has stirred controversy since scientists first started debating it.  Cop15 seems to signal a new consensus  – or at least the beginnings of one.  But many big questions remain : How will climate change actually affect people’s daily lives?  What’s the best way to attack the problem ?  Who should pay the bill?

Agreeing that climate change is a world problem requiring world cooperation is only the first step, and many of us watching the summit wonder what real solutions will emerge.

As political leaders settle in to negotiate an agreement, we should be aware of a basic economic fact:  the costs of tackling climate change are moderate provided that we start lowering emissions now.   OECD calculations show that the longer we wait, the more expensive the bill.

Useful links: