By Rick Rowden
The Guardian
January 10, 2011
If poor countries are unable to adopt the policies they need to transform their industries and diversify their economies, how will they ever get off the foreign aid bandwagon?
The focus on aid effectiveness and poverty reduction, established by the millennium development goals (MDGs) and the Paris Declaration on Aid Effectiveness and Accra Agenda for Action, perpetuates a bloated aid industry that doles out millions of dollars each year to legions of contractors and NGOs to carry out projects in dozens of poor countries. But one should ask if there isn't more to economic development than just better aid effectiveness, country ownership, donor co-ordination, and monitoring and evaluation.
In recent decades, earlier notions of development economics have been replaced with meeting the MDGs. But poverty reduction is not development. We seem to have suffered collective amnesia about the history of development, which used to be widely understood as industrialization - in which poor countries undergo a transformative process out of primary agriculture and extractive industries into manufacturing and services industries with higher value-added over time.
But the idea of industrialization was jettisoned from the official aid agenda in the 1980s with the onset of the free-market creed that has become established in the Washington consensus approach, which calls for minimal government intervention. Because of the belief that the unfettered market would solve everything automatically, the aid industry had only to concern itself with ameliorating suffering and focusing on basic human needs, which led to the logic of the MDGs and "poverty reduction" discourse.
By the 1990s, ideas about "national" economic development were abandoned in favor of "integration with the global economy" as the route to development. Industrial policies in which the government supports the emergence of new industries with publicly financed research and development to acquire new technologies, with subsidies, trade protection, subsidized credit and other mechanisms, had long been part of mainstream development economics until they came under sustained attack from free-market advocates in the 1980s. Today, such terms are met with derision and disdain, and go unspoken in centres of power like Washington or London.
But the absence of knowledge about industrial policies is pernicious. As the Norwegian historian of economic policies Erik Reinert has lamented, there is no discipline called the history of economic policies; students learn quite well what Adam Smith said England should do, but they learn virtually nothing about what England actually did. Others, such as MIT's Alice Amsden and Cambridge's Ha-Joon Chang, have tried to resurrect this forgotten historical record, but they are up against two or three generations that have only learned neoclassical theory. Indeed, the Nobel laureate Joseph Stiglitz has advised developing countries: "Don't do as the US tells you, do as the US did."
In fact, the process out of primary agriculture and extractive industries into manufacturing and services is essential for development. Of course, today all countries must approach industrialization differently, and shift to environmentally sustainable industrial policies based on low-carbon technologies, and shift to low-carbon food production, with gender justice, greater ecological balance and equity, and a new economics that places the environment at its centre.
Aid advocates interested in fostering such transitions should call on their donor governments to cease and desist with attaching Washington consensus policies as conditions on most new IMF and World Bank loans and instead support viable alternatives for more successful economic development, including policies to target higher employment and public investment, enhance domestic productive capacities, and mobilize more domestic resources.
They should call on governments to renegotiate the General Agreement on Trade in Services (Gats) and Non-Agricultural Market Access (Nama) arrangements at the World Trade Organization, as well as the many free-trade agreements and bilateral investment treaties. Under many such agreements, rules stipulate that governments may not be able to adequately re-regulate their financial sectors to ensure stability, may not be able to implement capital controls, or use adequate levels of trade protection for their nascent manufacturing industries, thus blocking their capacity for economic development.
There are, however, other voices that could be considered in the discussions of foreign aid reform, such as the Group of 77 (G77), a group of 130 developing countries that has called for a host of policy and structural reforms to foreign aid and the global economic architecture that would allow for greater economic justice and "policy space". Aid advocates could also look to the Group of 33 (G33), a group of 46 developing countries currently engaged in the agriculture liberalization talks within the WTO who are advocating for the right to use temporary increases on tariffs when their domestic producers are threatened by floods of cheaper imports, or the Nama 11 countries, another group of developing countries opposed to the dramatic cuts in trade protection on manufactured goods currently being demanded by the rich countries in the Nama talks.
The very notion that development as industrialization has been eliminated from the discussion of foreign aid is unacceptable. If countries are unable to use the industrial policies they will need to transform their domestic industries, diversify their economies and build up their own tax bases over time, how will they ever get off the foreign aid bandwagon? Here the "poverty reduction" discourse is misleading; it neglects to ask how countries are supposed develop without industrializing.
It's a difficult question that most policy-makers won't wish to answer. If they say "development" doesn't include industrialization, they will be hard pressed to explain how a country like Malawi can be "developed" while remaining essentially a tea and tobacco plantation. If they say it does include industrialization, they will be hard pressed to explain how a country is expected to industrialize under Washington consensus rules and trade and investment agreements that have eliminated or outlawed most of the basic industrial policy tools and tactics that would be needed. Nevertheless, aid advocates have an obligation to ask.
