Globalisation and Development

Food price volatility: Debating causes and consequences

2012-02-10T16:52:00.000Z

By Stephen Spratt

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

At the workshop, we posed three questions:

Why does volatility matter?
What impact, if any, do financial speculators have?
What, if anything, should be done about this?

The issue provokes heated debate. Some argue that speculators have affected both the level and volatility of prices, with major development consequences. Opponents argue the exact opposite: ‘speculators’ bring liquidity to markets, lower farmers’ hedging costs and reduce volatility, and so have a positive development impact. Our aim was to bring together the warring factions and shine light on this debate, even if just a chink.

Why does volatility matter?

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

What impact, if any, do financial speculators have?

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

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

What, if anything, should be done about this?

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

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

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

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

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

2012-02-08T11:16:00.000Z

By Xavier Cirera

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

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

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

Prior to the workshop I was not convinced that volatility was the primary problem in agricultural markets. It seems to me that there is a lot of confusion between the impact of high food prices and the impact of volatile prices. Some of the evidence presented seemed to mix both effects:

with high prices, net-producers should benefit, and net-consumers should lose out;
with volatile prices, the impact on net-producers is clearly negative, but the impact on net-consumers is unclear.

There were some interesting discussions on other specific volatility impacts on poor people in developing countries that deserve further research. For example, large price fluctuations can have long-term effects on a variety of factors; the irreversible sale of assets; removing children from school and impact on women who buffer the nutrition intake of the household. These effects can be directly linked to volatility.

How much does volatility really matter?

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

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

Structural supply issues

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

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

How should private foundations support development?

2012-02-02T14:12:00.003Z

By Noshua Watson

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

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

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

China: The End of the Free Market?

2012-01-24T11:03:00.002Z

By Carlos Fortin

The beginning of the Chinese New Year brings to mind a book by Ian Bremmer with the provocative title 'The End of the Free Market' *. Bremmer is president of a political risk research and consulting firm. His book is about the emergence, led by China, of ‘state capitalism’ as a major factor in today’s world economy and a potential threat to the very survival of the free market.

Bremmer defines state capitalism as a system ‘in which the state dominates markets primarily for political gain’. In it governments use

'state-owned companies to manage the exploitation of resources that they consider the state’s crown jewels and to create and maintain large numbers of jobs. They use select privately owned companies to dominate certain economic sectors. They use so-called sovereign wealth funds to invest their extra cash in ways that maximize the state’s profits’.

He also writes that:

‘The ultimate motive is not economic (maximizing growth) but political (maximizing the state's power and the leadership's chances of survival)’.

In addition to China, Bremmer maintains that Russia, Brazil and Saudi Arabia are further examples of state capitalism, while elements of the system can be found in a large number of other developing countries.

I am not terribly impressed with Bremmer's characterisation of state capitalism. It strikes me as somewhat simplistic in its almost psychological approach, and I find it difficult to think of non-trivial features of an economic system that is supposed to simultaneously encompass China and Saudi Arabia. But the phenomenon he is concerned with is real and important enough. To use his words again, after apparently being relegated to oblivion by the neoliberal revolution, ‘in the first decade of this new century, public wealth, public investment, and public ownership have made a stunning comeback’.

According to a special report in The Economist**,

state companies make up 80 % of the value of the stock market in China, 62% in Russia and 38% in Brazil;
three Chinese state-owned companies rank among the world’s ten biggest companies by revenue, against only two European ones (Royal Dutch Shell and BP).
The thirteen biggest oil firms, which control more than three-quarters of the world’s oil reserves, are state-backed, as is the world’s biggest natural-gas company, Russia’s Gazprom.

And the approach, according to the Economist piece, is spreading:

the French government has set up a sovereign-wealth fund
South African government is talking about nationalising companies and creating national champions.

What we seem to be seeing, though, is not so much the omens of the end of the free market - arguably, the end of the unregulated free market is already here in the aftermath of the financial crisis of 2007-2008- but a re-emergence of the state as an economic actor to provide a sense of direction to the market, correct its failures and lead accumulation in strategic sectors. Whether this, as Bremmer would have it, is tantamount to a full-fledged change of paradigm is doubtful.

* Bremmer, I. (2010) 'The End of the Free Market: Who Wins the War Between States and Corporations?' New York: Viking

** Wooldridge, A. (2011) "The Visible Hand", The Economist, 20 January 2011

Global economic recovery - what will be the ‘new normal’?

2012-01-19T13:57:00.000Z

By Stephen Spratt

Getting back to normal is taking a long time. Not so long ago there was much talk of recovery; yesterday the World Bank warned emerging economies to prepare for a ‘global economic meltdown’ if the Euro Crisis continues to deteriorate, as it very well might.

Concerns about the Eurozone – and developed countries generally – have tended to be tempered by confidence in emerging economies as drivers of global growth. Again, things are no longer looking so good. Brazil’s central bank is cutting interest rates to spur growth after a contraction in the economy at the end of last year. India is implementing an emergency $35 billion stimulus programme, after growth slowed from 9 to 7%. Even China is beginning to look vulnerable.

Most countries would be more than happy with the annualised growth rate of 8.9% that China achieved in the fourth quarter of 2011, but this was down from 9.7% in the first quarter, and the year as a whole saw the lowest growth rate since 2002. Forecasts for 2012 are worse, with most predicting further declines, and some suggesting growth could fall as low as 7.5%. Given that 8% has been considered the minimum needed to generate sufficient employment to avoid social unrest, this could be highly significant.

And it’s not just countries. After recent talk of a financial-sector led recovery, yesterday also saw Goldman Sachs announce sharply lower revenues, with earnings down 58% (article available by subscription only). This follows similar declines at JP Morgan and even worse results from Citigroup, where the investment banking division suffered a loss.

All the banks cited the problems in the Eurozone as central to their woes. The assumption appears to be that, once resolved, they can get back to ‘normal’. Lloyd Blankfein, CEO of Goldman Sachs, expressed this view in a statement yesterday: “This past year was dominated by global macro-economic concerns which significantly affected our clients’ risk tolerance and willingness to transact ... As economies and markets improve – and we see encouraging signs of this – Goldman Sachs is very well positioned to perform for our clients and our shareholders.”

I wonder... The profitability of banking has certainly been affected by problems in the Eurozone, but this does not make a return to the go-go years of bumper bonuses inevitable. Much of this was driven by investment – or ‘casino’ – banking’, where exotic financial instruments and absurd leverage levels combined to create and inflate bubbles from which traders profited hugely. Those days are gone, at least for now. In both the UK and US, regulators are moving to rein in these types of activities. In the Eurozone area, plans for a financial transaction tax continue. Whatever the new ‘normal’ in banking turns out to be, it is unlikely to deliver the astronomical – and largely illusory – returns that bankers have grown used to. It is noteworthy that the best performing US bank is Wells Fargo, which posted solid – if unspectacular – results based on ‘boring’ activities (article available by subscription only) such as taking deposits and lending to firms and individuals.

And I wonder about the prospects of China returning to double-digit growth rates too. While domestic factors are becoming more important for growth, exports remain key. At least in part, China’s success has been a function of the willingness of people in developed countries to buy their exports in ever larger quantities. With personal debt still at unprecedented levels, what appeared ‘normal’ may turn out to have been an historical anomaly.

Maybe banks and emerging markets will both have to get used to more modest returns, and develop different ‘business models’ that fit the new reality. Whatever the ‘new normal’ turns out to be, we can be sure of one thing – it won’t be the same as the last one. The World Bank is no doubt right to warn developing countries to ‘hope for the best but prepare for the worst’. The problem for policy-makers, however, is that no-one has much of an idea what either ‘the best’, or ‘the worst’ will actually look like; this makes ‘preparing’ for these outcomes even more difficult than it would normally be.

And that’s before we even consider the Eurozone...

Trade policy tensions among the Rising Powers

2012-01-18T16:09:00.000Z

By Xavier Cirera

While the emergence of the Rising Powers has proved critical in rescuing the world economy during hard times for OECD countries, potential tensions in the future between the Rising Powers may jeopardise their future hegemony as drivers of the world economy.

Growth in Brazil and China has been mainly driven by exports. However, significant tensions have developed in recent times, especially in Brazil regarding Chinese imports. While trade flows between both countries have increased dramatically during the 2000s, 95% of Brazilian exports to China are primary commodities, whereas 95% of Chinese exports to Brazil are manufacturing products and capital goods. This, together, with the long term appreciation of the Brazilian Real, has encouraged manufacturing sectors in Brazil to successfully lobby the government to adopt protectionist measures against Chinese imports (article available by subscription only). In addition to specific taxes, there has been an increase in anti-dumping investigations, requests to MERCOSUR to increase the list of Brazilian sensitive sectors or to increase the share of domestic firms in government procurement. The concern of some Brazilian firms is not only related to competition in the Brazilian market but also to the loss of market share in neighbouring Latin American countries.

It is worth noting that the adjustment in Brazilian manufacturing firms had already started during the late 1980s and the 1990s with the gradual liberalisation of its economy. The key challenge for Brazilian firms is the adoption of innovation and quality policies in order to increase their productivity and diversify exports. In addition, imports of Chinese goods allow manufacturing firms to use cheaper inputs. As a result, the adoption of protectionist measures will not succeed in addressing the main competitiveness issues that the manufacturing sector faces. On the contrary, it is likely to exacerbate them.

But more important is the impact of any trade tensions on global trade policy issues. An escalation of these tensions may have an impact at the global scale, further threatening the already vulnerable world economy.

What will it take for the UK media to present positive images of development?

2012-01-13T15:08:00.000Z

By Spencer Henson

Colleagues of mine have just produced a short film examining how the British media portrays developing countries. It features interviews with journalists and filmmakers, such as Jon Snow (journalist and news presenter, ITN), Caroline Nursey (director, BBC Media Action) and Richard Kavuma (journalist, The Observer, Uganda).

This film particularly interested me as it picks up on some of the issues that I’m researching using the UK Public Opinion Monitor (UKPOM) – a representative panel of the UK public who are surveyed about life in the UK. We’re interested in people’s beliefs, attitudes and values towards development – and how these impact on the choices they make in their lives.

Our research with UKPOM has shown that most of the UK public think they are uninformed about aid and development issues. What’s more, it’s clear that the UK public widely associate developing countries with images of disasters, famine, war and corruption. As the film shows, the media plays a key role here; it is where most UK people hear about the South.

Such media coverage is critical for the fundraising efforts of international development NGOs in times of emergency. However, it perpetuates views that are rather destructive in the longer term; concepts of ‘charity’, of nothing getting better (and hence aid not working) and of helplessness. The media also rarely do anything to bring forward the wider structural issues that underlie global poverty.

This begs the question, what will it take for the British media to present more positive images of global poverty and the South, and what will it take for the UK public to watch them?

Business as a development actor

2012-01-12T11:13:00.001Z

By Noshua Watson

This term, IDS' Globalisation team is teaching a new course called ‘Business as a Development Actor’. At IDS, we study the causes and effects of poverty at a number of levels: household, region, country, international, gender and so on. But there is still a lot to be learned about the impact that business has on jobs, education, infrastructure, investment and innovation.

What I’m reading this week in order to prepare:

Khanna, T., Palepu, K, G., and Sinha, J. (2005) ‘Strategies That Fit Emerging Markets’. A Harvard Business Review article that looks at how institutional voids in political, social, financial and cultural structures keep multinationals from investing in developing countries. (Restricted Access)
Oxfam International (2009) ‘Oxfam Poverty Footprint: Understanding Business Contribution to Development, Briefings for Business No. 4’. If business affects development, how are we going to measure it?
‘Les nantis d’Haiti’. (2012). Le Monde’s slick and sarcastic indictment of Haiti’s business elites in its continued underdevelopment. Terrific photography! (in French)

Can the Rising Powers save our planet?

2012-01-09T12:50:00.000Z

By Hubert Schmitz

Are the changes we observed in the world in 2011 leading to changes in the 2012 research agenda here at IDS? I think they should.

I suggest that we pose a question which few of us would have thought sensible a year ago: Can the Rising Powers (China, India, Brazil) save our planet?

The Rising Powers and climate change

This may seem a surprising question given that the Rising Powers (in particular China) are responsible for the recent net increases in carbon emissions. There are, however, indications that China, India and Brazil are now making major investments in climate change mitigation, largely because government and enterprises seek to establish competitive green industries. Given recent changes in the world economy this is of great significance.

The old industrial powers had expected to lead the green transformation, invest heavily in the green economy and revive job growth, but this now looks unlikely. With the partial exception of Germany, the old powers are stagnating economically and paralysed politically. In contrast, the Rising Powers show increasing confidence on the world stage and are set for continued growth.

Such diverging trends are bound to affect the dynamics of the green transformation. The capability to invest in green innovation is high and rising in the new powers, in both their public and private sectors. This contrasts with the high public indebtedness in the old powers and the patchy investment capacity in the private sector. The diverging capacities of the old and new powers have been visible for some time but the ramifications for the green transformation have only become clear (to me) more recently - while I was working with colleagues from India, China and the German Development Institute.

What does this mean for our research agenda?

I would suggest a collaborative programme examining the propositions

That China, India and Brazil have greater transformative power
That they can therefore provide quicker and cheaper solutions
And that - given their own factor endowment – they can provide solutions that are more appropriate for the income-poor and energy-poor countries of the world.

I guess the outcome will differ by country and sector but that there will probably be a big net effect on whether and how the green transformation takes place.

I think this will be a big and hot topic for quite a few years – too big for any single institute to take on. The first step will be most difficult: defining researchable questions and hypotheses.

A Chilean dilemma: compulsory or voluntary vote?

2012-01-04T12:12:00.001Z

By Carlos Fortin

In the midst of the Chilean political and social turmoil that I have reported on in my last two blog posts, the Chilean Congress has passed legislation introducing a major change in the country's electoral system. It did this in the hope that it may help reverse the growing alienation of the population vis-à-vis the political process. It is however very far from clear that it will do so.

Until now Chile had had a system of voluntary registration and compulsory voting for those registered. Registration is now automatic; all Chilean citizens are added to the electoral registry on turning 18. Voting, however, becomes voluntary.

The issue was intensely debated not only in Congress but in academia and the media. Those in favour of the change argued, to start with, from first principles: voting is a right, and forcing people to exercise it is a violation of their freedom. They then contended that the change will both result in a much enlarged potential electorate (in effect, the number of potential voters will increase from about 8 million to about 12 million); while those taking part in the political process will be a much more committed section of the population, as they will do so voluntarily. Legitimacy will thus increase also.

Those against the change, among whom I count myself, countered that voting is not only a right but also a civic obligation, comparable to jury duty, which nobody could claim is a violation of individual freedom. As for legitimacy, any reduction in the level of actual voting will diminish it, no matter how committed are those who bother to vote, since the rest will have no incentive to find out about the issues and involve themselves in the democratic process.

At the theoretical level the argument is far from settled and, given its almost philosophical nature, it is unlikely to be in the foreseeable future (a good summary of the issues can be found in Emily Keaney and Ben Rogers, A Citizen's Duty. Voter Inequality and the Case for Compulsory Turnout*. But at the level of the concrete consequences of the change for political participation there is some empirical evidence that is highly relevant.

The Netherlands changed from compulsory to voluntary voting in 1970, and a sample survey study compared the levels and kinds of participation in the last election with compulsory voting (1967) and in the first election with voluntary voting (1970)**.

The results:

Total turnout went down from 94.6% to 74.1%
Youth turnout (21 to 29) fell considerably more than that of other age groups (from 93.5% a 61.4%, while that of other age groups went down from 94.8% to 77.6%)
Voting among those with only primary education went down from 94% to 69.2% among voters with higher education the drop was from 96.7% to 87%
The turnout of lower income groups fell from 93.6% to 73.1%; that of the higher income groups from 98.4% to 84.1%
Male voting went down from 95.3% to 76.7%; female voting from 93.8% to 71.1%.

The change, at least in the short run, had therefore a regressive impact not only in terms of total participation, but also in the composition of the electorate, resulting in a reduced presence in the political process of the young, the poorer, the less educated, and women.

Not exactly, I would have thought, what Chilean democracy needs today.

*Keaney, E. and Rogers, E. (2006) A Citizen's Duty. Voter Inequality and the Case for Compulsory Turnout, London: Institute for Public Policy Research

**Irwin, G. (1974) ‘Compulsory Voting Legislation. Impact on Voter Turnout in the Netherlands’, Comparative Political Studies 7. 3: 212-315.

A year of blogging: My favourite blog posts from 2011

2011-12-30T10:00:00.000Z

By John Humphrey

As 2011 draws to a close, I thought I’d look back on a year of blogging from here in the Globalisation Team at IDS.

Here are my top 3 blog posts from 2011:

2011 has seen much debate on the issue of innovative financing for development – as public sector budgets are squeezed and global financial systems are in a state of uncertainty. My former colleague Neil McCulloch blogged about his research on the Financial Transaction Tax (FTT), with Do £20 notes get left on the pavement? which could provide a possible solution. It’ll be interesting to see going forward how the FTT debate progresses in 2012: perhaps an FTT is no longer seen as a source of financing development in the global South, but instead viewed as a revenue stream for plugging deficits in developed countries?
Food has been one of the major themes in development this year – sparked by volatility in food prices, popular uprisings across the Arab world, and famine in the Horn of Africa. 2011 was the year of Oxfam’s biggest ever campaign on food (GROW) and also the year that we at IDS held seminars looking at the role of business in issues of food, nutrition and development. My post on 'The food conundrum: Can small farmers and big business work together to solve the world food crisis?' reflects one of the toughest questions: who will solve the food crisis?
Finally, an ongoing issue for those of us that work in development is to fully understand what the public think about issues of aid and global poverty – this is going to become even more crucial in 2012 as public sector cuts begin to bite here in the UK. After all, it’s the public that so generously support development NGOs at times of crisis and disaster. And politicians who decide where government aid should be spent do pay attention to what voters think. My colleague Spencer Henson’s blog posts on public attitudes towards development, based on his research with the UK Public Opinion Monitor are always fascinating: his latest one is ‘Are the UK Public more supportive of aid than we thought?’.

We re-launched our blog in February this year, and have thoroughly enjoyed expressing our views, sharing ideas on new research, and hearing your comments. We hope you’ve also found the posts interesting and useful for your own work – let us know which are your favourites.

Best wishes for the New Year, and do visit again for more posts in 2012.

Being sold development at Christmas

2011-12-21T12:32:00.001Z

By Spencer Henson

At this time of year more than any other, UK consumers are bombarded with efforts to sell them development. Buy a goat in Kenya for your loved one, spend a little extra on Christmas cards where a certain (usually undisclosed) portion goes to a charity working with poor people in the ‘developing world’, give a handicraft made by poor women in rural India, and so on. Fundraisers in international development NGOs recognise that such efforts are effective at getting UK consumers to part with their money. That is why they use them….especially during the ‘season of good will’. But what do they tell us about how ‘the person on the street’ relates to international development?

The recent book Poor Economics by Abhijit Banerjee and Esther Duflo reminded me of some research at the University of Pennsylvania in the mid-2000s. Students were given $5 and then showed one of two leaflets asking them to make a donation to Save the Children. The first leaflet provided factual information about the scale of famine in various countries of sub-Saharan Africa. The aim was to communicate the sheer magnitude of the food insecurity situation across the continent, and thus the imperative for people in the rich world ‘to give’. The second leaflet described a named person (“Rokia”, a seven-year old girl from Mali). The aim was to put across the level of hardship this individual was facing and the impact that a donation could make on such a person.

You can guess which of these two messages was most effective at getting students to donate. Unsurprisingly, the average donation to change Rokia’s life was more than double that from students who were offered the chance to ‘help the masses’.

Various things may be at work here. Certainly, it is easy for people to feel overwhelmed by the magnitude of the millions in need ‘in Africa’. Perhaps more important, however, is the way in which we all tend to relate to individuals. That is why efforts to sell us development at Christmas often come with the smiling face of a boy or girl…..that YOU can help.

Much ‘good’ work’ may be funded from efforts to sell us development at Christmas. However, there are two critical problems with this model of engagement of international development NGOs with the public.

First, it is very much based on the notion of benevolence of the (powerful) rich towards the (powerless) poor. UK consumers can decide how to spend their money at Christmas whereas the poor have little money to spend on anything. Further, as a wealthy donor the consumer can decide who is ‘deserving’ of their charity, however they might judge this.
Second, and more importantly, efforts to sell development do little or nothing to challenge the very reasons that people are poor…and the need for benevolence by the rich in the first place. Thus, how is it that such global inequality exists, and what can be done about it? The act of buying a goat, a charity Christmas card or a handicraft fails to challenge the status quo. Some would even argue that buying development perpetuates the very systems that make people poor in the first place.

How regulations and standards affect sub-Saharan African countries’ participation in global agri-food trade

2011-12-20T14:58:00.000Z

By Spencer Henson

A recent article in Trade Negotiations Insights highlights the importance of sanitary and phytosanitary (SPS) regulations and standards for the participation of sub-Saharan African countries in global agri-food trade. This article provides a timely reminder that the ability of poorer countries to diversify and add value to their agri-food exports hinges on their ability to comply with the food safety and plant and animal health requirements in export markets. Whilst compliance with stricter SPS regulations and standards can undoubtedly act as a barrier to trade, most notably where the associated costs undermine the competitiveness of countries with weaker capacity, compliance can also be the basis of market positioning and competitive gain. The act of compliance with food safety and plant and animal health controls in international trade can also act to enliven processes of upgrading in controls directed at domestic markets. This suggests a rather complex interplay of costs and benefits for developing countries pondering improvements in SPS compliance capacity.

There is a widespread recognition that the increasing importance of SPS regulations and standards in global trade contrasts with the declining role of traditional trade restrictions such as tariffs. There are frequent and maybe irresistible accusations (or at least suspicions) that SPS regulations and standards represent the new way in which countries protect their domestic markets against import competition. However, there is limited hard evidence to support this claim. It is important to recognise that, unlike tariffs, food safety and plant and animal health controls can bring about significant benefits in terms of public health and agricultural productivity, and also through increased consumer demand. Furthermore, countries have a legitimate right to protect their citizens, even where the standards and regulations they enact inflict pain on poorer parts of the world.

Of course, all should be done to minimise the adverse effects of SPS regulations and standards on the countries of sub-Saharan Africa. For example, it is legitimate for SPS requirements to be adjusted where comparable but different controls that reflect local conditions can be shown to provide an equivalent level of protection. The history of such equivalence agreements to date, however, does not offer much hope. Rather, the emphasis must inevitably be on building the SPS compliance capacity of the countries of sub-Saharan Africa, both to enhance trade performance and to promote the welfare of their citizens and productivity of their agri-food sectors. The article in Trade Negotiations Insights provides some useful ideas in this respect, including a number of areas where countries can collaborate in order to share information and capacities. However, whilst regional initiatives are effective at stretching the inevitably limited resources available for SPS capacity-building, hard decisions still need to be taken in order to prioritise the ‘shopping list’ of needs presented in the article. Recent work by the Standards and Trade Development Facility (STDF) in developing a coherent and transparent framework for establishing priorities can play a key role in this regard.

The article puts significant emphasis on enhancing the role of the countries of sub-Saharan Africa in the setting of SPS standards, presumably through Codex Alimentarius, OIE and the IPPC. The greater inclusiveness of these institutions is essential, not only for the interests of poorer countries but also to the continued relevance of international standards. Participation of sub-Saharan African countries in the promulgation of international standards is not, however, a panacea to the cure of ‘all ills’. Even if the ‘voice’ of developing countries in general (and the countries of sub-Saharan Africa in particular) were to be heard more effectively, SPS compliance would still be a problem. To be relevant (and to be used), international standards must reflect the needs of all countries, including those that are wealthy. At the same time, the private sector is wading into the standards landscape, such that some argue ‘public’ international standards are being increasingly sidelined. At the heart of the issues faced by developing countries is their incapacity relating to food safety and plant and animal health.

It is refreshing that the article puts considerable focus on the role of SPS regulations and standards at the regional level. The need for countries in sub-Saharan Africa to pool capacities in order to meet the compliance challenges posed by industrialised country markets has been highlighted above. Over time, however, SPS regulations and standards are likely (or at least it is assumed) to become a more pertinent issue in south-south trade, highlighting the need for harmonisation within sub-Saharan Africa. The Regional Economic Communities (RECs) potentially have a major role to play in this regard. Relatively little is known, however, about the role of SPS regulations and standards within regional trade in sub-Saharan Africa today, and how these are evolving over time. Work along these lines is essential if we are to predict (and plan for) the evolving impact of SPS regulations and standards into the future. Whilst IDS is doing some work on this issue with UNIDO, much more analysis is needed.

It is important to remain mindful of the considerable challenges faced by the countries of sub-Saharan Africa in the face of seemingly ever stricter SPS regulations and standards. Many of these issues, however, are much more complex than appears ‘at first sight’, belying the effectiveness of ‘quick fixes’.

Good-bye to the future

2011-12-12T17:20:00.000Z

By Hubert Schmitz

For an Anglo-German (I have dual nationality – British and German) it is heartbreaking to see how the UK Government is de-coupling from Europe. There is nothing wrong in defending the national interest. But what is the national interest? Our Prime Minister equates it with the interests of the financial sector, clustered in the City of London. This is deeply worrying.

Continental European Governments have come round in favour of the financial transaction tax in order to slow down speculative financial flows. IDS research has shown that such a tax can be effective. But the UK government regards it as against the national interest. Continental European governments want to exert more control over the financial sector. This is never easy but at the time of the last election even the Tories proclaimed that this was needed. Now it is judged against the national interest.

An even greater tragedy unfolds if we look at the wider picture and reflect on the position of the UK and Europe in the world. I have just come back from research trips to China and Vietnam. The pace of change and transformation in East Asia is visible and breathtaking. It has been for some time and seems set to continue. The global power shift is clearest in industrial production but is beginning to extend to industrial innovation. And most interestingly, it is extending to the green economy. China is ramping up public and private investment in wind power, solar power and electric vehicles. Meanwhile the UK and most of Europe is scaling back investment in the industries of the future.

The UK decision over whether and how to collaborate with Europe needs to be seen against this bigger picture. A well-functioning European financial and industrial system can find a way of competing and cooperating with China. We have shown this in a recent study on the European and Chinese wind power industry. A mal-functioning European financial and industrial system means that European governments, including the UK governments, will be limited to administering decline. The national British interest would have been served by working with continental European government on ways of reforming the financial sector so that it supports rather than undermines the real economy. It is a hard thing to do and the Prime Minister turning his back on Europe makes it even harder.

Beyond Durban: On track towards a +4 degrees C world

2011-12-07T13:14:00.001Z

By Dirk Willenbockel

While all eyes are fixated on the future of Euroland and the looming global depression, the UN Climate Summit in Durban has entered into its decisive final phase and stumbles on to pre-programmed failure.

Will Durban drive the final nail in the coffin of the Kyoto process and give up on a new global deal with legally binding emission reduction commitments altogether?
Or will the negotiations at least lead to some “road map” to a comprehensive post-Kyoto deal that may eventually enter into force by 2020?
Or will the decision simply be postponed yet again – as seems most likely at this stage?

What seems clear is that none of these conceivable outcomes leads to an emission path consistent with the agreed goal to limit the average global temperature rise to 2^oC above pre-industrial levels. Climate science is adamant that annual global CO2 emissions will have to peak by 2020 at the latest and need to drop steadily in subsequent decades in order to maintain a reasonable chance to achieve this aim.

The International Energy Agency estimates that about 80 percent of the power stations likely to be in use in 2020 are either already built or under construction. Most of these are fossil fuel powered and will continue to pour out carbon for decades. This means that a large fraction of the global energy-related emissions permissible under a +2^o C scenario are already locked in by the existing infrastructure. The implication is that the door to achieving the required emission cuts at a manageable cost is rapidly closing. Delaying action is a false economy.

A recent contribution to the scientific journal Nature points out that the hope to maintain the 2^o aim if decisive mitigation action is delayed further now “is equivalent to racing towards a cliff and hoping to stop just before it”.

With no second commitment period under the Kyoto Protocol and no binding post-Kyoto deal covering the major emitters in sight before the end of the decade, we are left with the voluntary pledges for emission reductions submitted by developed and developing countries under the Copenhagen Accord. It has indeed been suggested – notably by the former UK chief scientific adviser David King – that a voluntary bottom-up pledge-and-review process would be a realistic and promising way forward. However, UNEP research shows that the voluntary pledges submitted are pathetically inadequate to meet the +2^o C target.

UK Climate Secretary Chris Huhne’s verdict on King’s suggestion:

"Sidelining the push for a legally binding deal on curbing emissions in favour of a voluntary approach is about as useful for the climate as a chocolate tea pot”.

Meanwhile, greenhouse gas emissions reached a new record high last year, and scientists are getting serious about contemplating development prospects in a 4^o C world. A whole recent issue of the Philosophical Transactions of the Royal Society is devoted to the topic. I have reached my word limit here, but recommend the paper on sub-Saharan Africa in that issue.

Diamonds, violence and tyranny: NGO Global Witness leaves the Kimberley Process

2011-12-06T17:11:00.001Z

By Vivienne Benson

There was no doubt a degree of scepticism from Mike Davis from Global Witness when he spoke about the Kimberley Process at the beginning of our Conflicting Interests: Business and Development Seminar Series in November. So, yesterday’s announcement that the international NGO has decided to leave the diamond certification scheme, which was originally established to stop the trade in blood diamonds, is not altogether surprising.

Mike Davis cited several reasons why the scheme has been unsuccessful in his seminar:

A myth has emerged that the Kimberley Process solved conflicts such as those in Liberia and Sierra Leone – the reality is that the process only got underway after the conflicts had ended.
The only controlled part of the diamond trade is from the moment the diamond is exported from the producer company to when it is imported at the other end.
There are no clear standards for supply chain control or due diligence, which is a huge weakness –the industry relies on the State to control the flow of the diamond’s certification, but this creates a problem because often the State is not able (or not willing) to do this properly.

Charmaine Gooch, Founding Director of Global Witness further argued this point yesterday*, on the role of industry:

‘The diamond industry must finally take responsibility for its supply chains and prove that the stones it sells are clean.’ She continued, ‘they should be required to demonstrate that the diamonds it sells are not fuelling abuses – by complying with international standards on minerals supply chain controls, including independent third party audits and regular public disclosure. Governments must show leadership by putting these standards into law.’

So how should businesses operate in areas of conflict?

This sentiment has been repeatedly echoed throughout the seminar series – with several references to John Ruggie, UN Special Representative on Business and Human Rights who within the UN 'Protect, Respect and Remedy' Framework in 2009 laid out guiding principles for businesses and states operating in areas of conflict, in particular:

Because the risk of gross human rights abuses is heightened in conflict-affected areas, States should help ensure that business operating in those contexts are not involved with such abuses.
Some operating environments, such as conflict-affected areas, may increase the risks of enterprises being complicit in gross human rights abuses committed by other actors.

This reiterates a key theme from the seminar series, that the State and industry cannot operate separately, or in place of each other, particularly as their interests are inherently different. Businesses should not be expected to take over the State role, but they should adhere to international due diligence standards and always consider their impact on the communities in which they operate.

* Global Witness (2011), Global Witness leaves Kimberley Process, calls for diamond trade to be held accountable, http://www.globalwitness.org/library/global-witness-leaves-kimberley-process-calls-diamond-trade-be-held-accountable, (accessed on 5 December 2011)

Can philanthropies lead us to an economics of wellbeing?

2011-12-02T10:37:00.001Z

By Noshua Watson

A team from IDS recently led the Bellagio Summit in Italy, as part of the Bellagio Initiative on the Future of Philanthropy and Development in the Pursuit of Human Wellbeing, funded by the Rockefeller Foundation. Philanthropies have big names, but relatively small pockets. Aid flows, let alone foreign direct investment flows and remittances, are far greater than philanthropic funding for international development. So what could philanthropies possibly do to ease, fix or change the effects of globalisation on development?

From the Bellagio Initiative and Summit, there seem to be three ways philanthropic foundations can influence globalisation:

Engaging with the processes of globalisation
Tackling the inequities of globalisation head on
Focusing both more AND less on outcomes.

Philanthropies need to be more politically engaged by supporting organisations that take direct action and also take advantage of their independence by taking more risks and experimenting more. Of course, philanthropies do try to address inequities and meet communities’ needs, but they also need to explore how they are part of a system that generates those very inequities through lack of accountability, how they manage and spend their funds or how they incorporate feedback and learning. Philanthropies are also in a situation where they are trying to better measure and manage their resources, but not focus on outcomes so much that they don’t experiment or lose sight of the long-run benefits. There is much to be learned from the reports on the series of Global Dialogue meetings, commissioned research and the Bellagio Summit.

If we are really honest, what would it mean for globalisation if, like the Bellagio Initiative, we frame development in terms of wellbeing? Wellbeing is a broader conception of development than economic growth. We currently describe globalisation largely in terms of economic institutions, flows, patterns and outcomes. But what if we looked at what globalisation means for wellbeing, we would certainly advocate different policies. Given that the OECD and national governments are beginning to adopt the concept, maybe economists should add this to our bag of tricks.

More on the cracks in the "Chilean economic miracle"

2011-11-29T14:43:00.000Z

By Carlos Fortin

In my previous blog post I reported on an impressionistic assessment of the extent to which Chilean society is experiencing a deep malaise about the prevailing social, political and economic model.

The Latinobarómetro Opinion Survey 2011 released on October 28 provides quantitative evidence for the assessment. The survey examines the attitudes of Chileans to public policies as well as a number of social, economic and political variables, and compares the 2011 responses to those in 2010 - it does not make for comfortable reading.

The worst rated public policy is education:

When asked ‘What is the best public policy in your country?’, only 1% of respondents mentioned education;
9% of respondents answered ‘education’ in response to the multiple-choice question, ‘Which of the following public policies has benefited you and your family’a question not asked in 2010).

This is not surprising given that the present wave of protest is precisely about the poor quality, high cost and unequal nature of education. The dissatisfaction, is however, much more general:

Less than one third of Chileans replied that they were satisfied with democracy, a drop of 24 percent from 2010.
Similarly 34% of respondents said they trust government, a decrease from 58% in 2010.

As for the operation of the economic model, the survey reveals serious doubts about some crucial components:

Only 20% of those asked felt privatisation of state companies has been beneficial for the country (34% in 2010);
Those satisfied with the performance of privatised public services dropped from 27% (2010) to 18% in 2011;
16% considered the current economic situation in the country to be ‘good’ or ‘rather good’ (27% in 2010);
Although 30% felt that their personal economic prospects for the following 12 months were ‘better’ or ‘somewhat better’, this is substantial fall from the 48% in 2010;
Although a majority (63%) of Chileans still believe that private enterprise is indispensable for the development of the country, the proportion has fallen from 76 % in 2010; and
For the first time since 1998 less than half (43%) of respondents agree that ‘the market economy is the only system that can make Chile into a developed country’ (56% in 2010).

More ominous was the response to the question, ‘Would you say that the country is governed by a few powerful groups in their own benefit, or is governed for the good of all the people?’

Only 22% of Chileans believe the country is governed for the good of the people, as against 34% in 2010.

This is no doubt linked to the perception that the society is highly unequal: to the question ‘How fair do you think income distribution is in the country?’, only 6% thought it was ‘very fair’ or ‘fair’; the corresponding percentage in 2010 was 12%.

Chile seems therefore in for a rather difficult period of political, social and economic soul searching, and it is unclear whether the present political structures can provide an adequate framework for the exercise.

Climate change finance: What future for the Green Climate Fund?

2011-11-24T11:55:00.000Z

By Stephen Spratt

The Green Climate Fund was announced with some fanfare in 2009. Conceived as a vehicle to transfer up to $100 billion per year from developed to developing countries, it was seen as one of the few successes to come out of the wreckage of Copenhagen. Importantly, developed countries committed to provide this $100 billion as ‘new and additional’ resources.

The Fund remains a shell, but one which many hope will be filled at COP17 in Durban starting next week. Exactly how this will be achieved remains anyone’s guess. Last year the UN Secretary-General's High-level Advisory Group on Climate Change Financing proposed a combination of direct budgetary transfers, carbon taxes, carbon market instruments and private investment leveraged by multilateral development banks. They also suggested some more innovative sources, such as a Financial Transaction Tax. None of this has happened yet, and disagreements between countries are far more noticeable than any emerging consensus.

Some have suggested that pessimism is overdone. A couple of weeks ago, for example, the Economist reported on a study by the Climate Policy Initiative (CPI), which estimated annual flows of $98 billion going to developing countries already. So, maybe the Green Climate Fund is not needed after all?

The problem lies in the nature of the finance and what it is being funded. The Green Climate Fund is supposed to do two things: help fund the transition to a low carbon economy (i.e. mitigation); and help countries cope with the climate change that is already in the system (i.e. adaptation). Of the $98 billion of financing identified by the CPI, $93 billion has gone to mitigation activities such as renewable energy infrastructure. The bulk of this finance has come from private investors.

Why the focus on mitigation? Well, the obvious reason is that there is no money in adaptation. While investors can generate a return from, say, building a wind energy plant – particularly where there are subsidies to support this – the same cannot be said of things like flood defences. Some of the mitigation-focused investments that have happened are made possible by public subsidies funded by developed countries, but many would have happened anyway for commercial reasons, and so cannot be described as ‘new and additional’ sources of finance in any meaningful sense.

Adaptation is different. It is more properly thought of as compensation from the countries that have caused the problem to those that suffer most from it, rather than a mutually beneficial investment. If we rely on private finance, adaptation funding will be meagre, yet the World Bank estimates annual adaptation financing needs of between $80-$100 billion per year, or about the same as the target for mitigation and adaptation that we are struggling to reach.

And the costs are likely to be larger. The World Bank’s estimates are based on adaptation needs in a world of 2 degrees warming. But fewer and fewer people think that this is achievable. Many now talk of 4 degrees being a more realistic ambition. On current trends we are on course for 6. Last week the World Meteorological Organization reported record levels of greenhouse gas concentrations in the atmosphere – far greater than predicted a few years ago. On the same day, the Financial Times described how drilling techniques like ‘fracking’ were unlocking vast reserves of natural gas and oil (article available by subscription only), creating a new ‘age of plenty’ of fossil-fuel resources in the US. The same article described the scramble for Arctic oil reserves, made possible by the shrinking of polar ice caps.

Regardless of progress on mitigation, which looks distinctly unlikely, judge Durban on its ability to generate large quantities of new public finance for adaptation in vulnerable developing countries. It looks like it will be needed.

An ‘extractive’ perspective on operating in areas of conflict

2011-11-17T17:16:00.001Z

By Vivienne Benson

So far our Conflicting Interests Seminar Series has heard from three speakers. Interestingly all their talks focused on the nature of the extractive industry operating in areas of conflict or fragile states, albeit coming from different perspectives:

Some key points have arisen:

UN ‘Protect, Respect and Remedy’ Framework – more widely known as the John Ruggie Framework is a relatively new initiative offering clear guiding principles for businesses to follow
The idea of due diligence is recurring – companies should adhere to a set of high standards when operating in a fragile area, often going beyond state ‘regulation’, as the governing body is not always able to enforce rules, or not interested in doing so
Considering business impact on the community is paramount, as in vulnerable circumstances businesses can either help or exacerbate a volatile environment with their actions.

This series will continue on 22 November, with Kate Meagher, LSE Researcher and IDS Alumna discussing ‘How bandits make business: informal enterprise, unemployment and instability in Nigeria’.

Hugh Elliott, International Government Relations Manager of Anglo American will conclude the series on 29 November by addressing management and conflict prevention from an insider’s perspective.

*The speakers are all interviewed and seminars are recorded to go online – so have a listen...

Are the UK public more supportive of aid than we thought?

2011-11-11T11:28:00.001Z

By Spencer Henson

A recent report in the Independent newspaper suggests that the majority of the UK public support the government’s policy of increasing spending on aid to developing countries. Further, they seem to believe that we should be spending much (much) more on aid than we currently do, and way beyond the target set by the government. For those that support aid, this appears to be good news. It certainly paints a different picture to the results from the UK Public Opinion Monitor (UKPOM) based at the Institute of Development Studies (IDS), which suggest that over 70 per cent of people think aid spending should be cut.

But which of these different views of the world do we believe?

And, why is there such a divergence in evidence on how the UK public feels about aid to developing countries? Largely, this reflects the way in which questions are asked in our surveys and how we interpret the results. In the case of this recent report, which incidentally was commissioned by David Cameron’s Director of Political Strategy – people were asked whether they agreed that:

“…even as we deal with our deficit, Britain is still one of the wealthiest countries in the world and we should be proud we are continuing our commitment to international development.”

In total, 50 per cent agreed with this statement, with 37 per cent disagreeing. It is perhaps surprising that more people did not respond positively to a question that generates such a ‘warm glow’ inside.

Interpreting responses

Interpreting these responses depends on whether we believe that most people who answered the survey were aware of “our commitment” in terms of how much the UK aims to spend on aid. Even if they were told the amount in pounds, many likely struggled to interpret whether this is ‘big’ or ‘small’ or perhaps more importantly ‘sufficient’ or ‘insufficient’.

Perhaps one indication of this is that survey respondents, on average, thought that the UK should allocate almost eight per cent of government spending to aid….which is more than it currently spends on national defence, police and the criminal justice system, transport, etc. Does the public really believe we should spend this much? If so, are they happy for taxes to rise to pay for it and/or for spending to be cut (even more than is currently taking place) on some ‘big ticket’ items? The questions used in the UKPOM try to make this reality more apparent to respondents. Thus, it is not surprising that support for increases in aid spending are more muted.

So do we really know how the public feel about the UK’s aid to developing countries, and especially whether they support increases in aid spending? Certainly we can almost get any number we like through careful choice of how the question is posed. However, it seems that even when we generate a ‘warm glow’ in our respondents, still only half support increases in aid spending, whilst over a third do not.

Whilst such a negative perspective on public support for aid may not be welcomed amongst those of us who work in the area of international development, there is nothing to be gained from a pretence that the public are more positive about aid than they actually are. Rather, we need to redouble our efforts to ‘turn public opinion around’….by raising awareness and knowledge of where aid works (and where it doesn’t).

Is the idea of China saving the world a fair expectation?

2011-11-08T11:54:00.001Z

By Jing Gu

In the recent weeks, the Eurozone crisis has become much more dramatic. Despite grave and widespread predictions among officials, business people, academics and journalists that China can save the world, this has not transpired.

The questions that we should ask are:

Why should China save Europe?
Can China balance its domestic development and its international role?

China inevitably lacks a clear definition of its international role, because it falls between developed and developing countries: Song (2003) points out that it needs a stable and orderly international environment, ensuring free trade, so that it can make the most of its huge economies of scale and large development potential. However, the technical development level of its industry does not match that of developed countries will mean that it wants to try to find ways of assisting its industries. This is reflected in the trade disputes in which it has been mainly a defendant in the WTO. So it can be easily noticed (Pang, 2006) that while China is characterised as a “participant” in the international system, this does not mean China wishes either to be a leader of a developing country block, or to side with the developed countries.

The distinctive element of China's global self-presentation is its cautious, reactive and pragmatic diplomacy: Here, Chinese policy declarations and statements of core principles may appear, in parts, vague, but “…these expressions reflect the Chinese way of viewing and conducting politics and have their roots in Chinese political culture” (Wang, 1998). China may not appear to be following an overall articulated strategy. But this is where an ingrained cultural style combines with a deeply pragmatic responsive mode towards the dominant power in world society. Wang says:

In Chinese eyes, ‘adjustments’ in domestic and foreign policies are only natural as long as ‘principles and goals’ remain unchanged… In the Chinese mind, wise and farsighted statesmen are those who can ‘adroitly guide action according to circumstances (yinshi lidao)’ (Wang, 1998).

It has to be recognised that a primary principle of Chinese culture is the practical and common sense nature of adapting to different relationships: In an interview with Joshua Cooper Ramo - the author of the ‘Beijing Consensus’, the former Singapore’s leader Lee Kuan Yew made remarks about China: “They made ad hoc pragmatic decisions as they went along, and then looked to whether that lead to disorder or loss of control…This is a controlled opening up, exposure to foreign ideas of people who are absolutely sound ideologically. I detect a pragmatic step by step approach.” (Ramo, 2005)

The extent of the difference between the Chinese way of thinking and that of some Western countries is in itself, the key issue that has to be addressed before China can be expected to ‘save’ the world.

* References

Pang, Z. (2006) The role of China in the international system, FuDan International Studies Review, 6 (in Chinese)

Song, H. (2003) China and WTO: A process of mutual learning, adapting and developing, In Y. Wang (Ed.), Construction within contradiction: Multiple perspectives on the relationship between China and international organisations (pp. 164–195), Beijing: China Development Publishing House

Ramo, J. (2005) The Beijing consensus, London: Foreign Policy Centre

Wang, J. (1998) International relations theory and the study of Chinese foreign policy: A Chinese perspective. In T. W. Robinson, & D. Shambaugh (Eds.), Chinese foreign policy: Theory and practice. Oxford: Clarendon Paperbacks

Cracks in the 'Chilean economic miracle'

2011-11-03T09:15:00.002Z

By Carlos Fortin

John Kenneth Galbraith is reported to have once said about Milton Friedman: 'Milton's misfortune is that his economic policies have been tried'. For a long time the Chilean case appeared to give the lie to Galbraith's witticism. Alas, though, not any more.

Despite continuing acceptable economic performance indicators in Chile, a deep malaise about the prevailing model of society and the economy is surfacing. This is highlighted by a wave of publicly supported street protests led by university and high school students. The protesters have succeeded in redefining the country’s public agenda and putting the political class and the advocates of the current neoliberal model on the defensive.

The students' complaint is about education being highly unequal, prohibitively costly and of poor quality. Their main proposals are

a universally free education financed by increased taxation of higher incomes, and
an end to for-profit enterprises running educational establishments that benefit from government subsidies

These proposals are a matter of controversy. In particular the idea of a universal free higher education has been criticised as a subsidy to the rich. But the protest seems to have struck a deeper chord. It is a challenge to the dominant Hayek-Friedmanian view that responsibility for personal advancement is solely individual and that inequality is justifiable on grounds of differential individual talents and efforts and the need for incentives.

An indication of the seriousness of this challenge is the fact that Chilean sociologist Eugenio Tironi has recently published an article in El Mercurio which in effect amounts to a mea culpa.

Education for Mobility?

Tironi, an ideological icon of the social-democratic coalition that governed for 20 years after the Pinochet dictatorship and highly influential in securing the adoption of the neoliberal model by the coalition, writes that the current Chilean model of society:

'rests on the expectations of social mobility of the population which make them accept high levels of inequality as the price to be paid for the forthcoming opportunities...the governing classes told the people the mechanism [for mobility] was education, offering a future whose only limit was the talent of each individual'.

In this view, Tironi writes,

'individual energies should be devoted to studying, not to promoting structural change'.

His conclusion:

'for hundreds of thousand families this promise was … a swindle... The way forward is not to try and repair the myth but to make a clean break with it'.

What seems to be at stake in the current Chilean debate is the vision of what a 'good society' is and the role and place of equality in it. And the answers that are emerging are a far cry from what Milton Friedman had in mind in the 1970s when he coined the phrase "Chilean economic miracle".

If environmental taxes are such a good idea why have they not been implemented?

2011-10-31T17:47:00.000Z

By Stephen Spratt

A couple of weeks ago I attended the 12th Annual Environmental Taxation Conference, which this year was held in Madrid. This was a fascinating event from which I learned a huge amount.

Why should countries implement environmental taxation?

This was the first time I had attended this conference, and – despite its high quality – I came away a little less optimistic about the prospects for environmental taxation than when I arrived.

This had nothing to do with the strength of the broad case in favour:

Taxing ‘bads’, such as pollution, so that taxes can be reduced on ‘goods’ such as employment, which is obviously a good idea
Broadening the tax base in ways that boost tax revenues overall, in both developed countries (under severe fiscal strain) and developing countries (with relatively low total tax takes), also makes sense. If you have to tax something – which you do – using mechanisms that also reduce environmentally damaging activity is a good place to start.

Neither was my pessimism borne of technical or ethical concerns:

From transport to natural resources, to energy and low carbon development, a wealth of scholarship underpins an impressive understanding of how to design and implement environmental taxes
Similarly, issues of equity were addressed in detail, with palpable concern that mechanisms should not adversely affect the poor informing much of this work.

It seemed to me that – in developed countries at least – environmental tax experts have a good grasp of the policy options and their broader implications, particularly where and how environmental taxes should be implemented, and the criteria we should use for assessing this.

So why the pessimism on my part?

Nobody mentioned public opinion...despite the attractiveness of green taxes, no country has implemented them to anything like the extent they could. They remain a small fraction of government revenues, even in the most enthusiastic countries.

Share of Environment Taxes in the Total Tax Revenue in 1995 and 2005
* Source: European Environment Agency

Nobody likes taxes, but environmental taxes are particularly disliked. It is not clear why this should be, but it is a fact. This is documented well by the 2009 Green Tax Report from the Chartered Institute of Taxation’s – check out section 5.4 Public Perceptions of Environmental Taxes.

A topical example of the intense distrust of environmental taxation is this: Australian ‘Carbon Tax’ Wildly Unpopular.

What, if anything, might be done about this?

Part of the problem seems to be a suspicion that environmental taxes are not really about the environment at all, but about raising revenues. There is certainly an element of truth in this, and if the goal of a tax is to raise revenue, policy makers should say so.
Another option is earmarking – or ‘hypothecation’ as it is known in the trade. Tax experts are generally against the suggestions that taxes should be spent on particular things, rather than go into general coffers. While there are good reasons for this, they are not as important as the need to build and maintain public support for such measures – dedicating at least a share of revenues to complementary environmental goals might help in this respect.

Many developing countries have implemented environmental taxes, and many more are considering doing so. There are more outstanding technical and ethical issues than is the case for developed countries, but even if these are resolved the question of public opinion will remain. There is no reason to assume that environmental taxes will be any more popular in low and middle income countries than they are in high income countries. If these mechanisms are to have any chance of fulfilling their undoubted potential, this needs to be addressed directly, and not swept under the carpet as if it does not matter.

* European Environment Agency (2009), Share of Environment Taxes in the Total Tax Revenue in 1995 and 2005, http://www.eea.europa.eu/data-and-maps/figures/share-of-environmental-taxes-in-the-total-tax-revenue-in-1995-and-2005 (accessed on 31 October 2011)

From farm to fork

2011-10-28T12:34:00.001+01:00

By John Humphrey

In my previous blog post I mentioned I would be taking part in a panel hosted by Business Fights Poverty, talking about ways of ‘harnessing value chains and private sector innovation to boost nutrition.’ I sat with Marc van Ameringen from the Global Alliance for Improved Nutrition (GAIN) and Miguel Pestana from Unilever.

The key issues that arose:

How can we close the gap between the farm and finger?

There was some divergence of opinion on this. I focused on how to close the gap between farm and the undernourished populations needing more nutritious food. Miguel Pestana from Unilever rightly observed that just focusing on the value chain ignored issues such as sanitation (and some great work is being done at IDS on community-led approaches to improving sanitation) health services and infrastructure. The unresolved question is that while narrowly focused approaches do miss some important determinants of outcomes, the broader the approach, the more the risk that small advances are not made.

How do we keep the private sector engaged?

This is a tricky one. To some extent, regulations should be put in place to ensure standards. But there is still the question of incentivising companies to engage in the process of buying and selling nutritious products to the poor. Can companies make a profit from reducing hunger and undernourishment? Bottom of the Pyramid is a great idea, but how well does it really work? And if it doesn't, what we do about it?

Finding out what works

The monitoring and evaluation of new initiatives is essential, as from there we can assess how best to take this forward, we are still in very early days. Getting food to those that need it the most is not a new question – agriculture-nutrition linkages has been discussed for a long time, with distinguished contributions from IDS Fellows – but the approach of looking at value chains and the private sector is new territory, and assessments of different value chain initiatives and between these and other approaches (fortification, feeding programmes, etc.) need to be made systematically.