The new OECD Development Cooperation report has a vision for the radical transformation of economies across the developing world. But the recommendations, which emphasise ‘leveraging’ private sector investment, are unlikely to get us there.
Supporting nascent domestic industry
The launch of the OECD report in London last Thursday kicked off a debate on how to finance implementation of the goals that will replace the Millenium Development Goals.
In his introductory remarks, Erik Sonheim, chair of the OECD’s development assistance committee, praised South Korea’s leaders for ‘getting the politics right’. Today, their citizens are 390 times richer than they were in 1953.
As Ha Joon Chang describes in his 2002 book Kicking Away the Ladder, the South Korea story was built on state support for nascent domestic industry. The UN Committee on Trade and Development’s 50th anniversary report showcases the efforts of a handful of developing countries to take a similar approach.
By regulating trade, by providing incentives and concessional loans, and by sourcing from domestic suppliers, governments in the South are helping to establish a robust and well-rooted domestic private sector.
The middle-classes in developing countries are growing rapidly, providing these businesses with new markets to serve. The taxes they pay on their profits allow governments to support more domestic businesses, as well as investing in crucial services like education.
But these efforts are the exception, not the rule.
Throwing money at investors already thriving
The South Korean approach to development has been under attack for many years. Liberalisation has left governments without trade policy tools. The idea of a small state is so pervasive that it is almost heretical to argue – as ActionAid often does – that the state should play a more prominent role.
More and more, aid is being used to ‘leverage’ private sector investment. Donors claim that without this support, the businesses involved would struggle to get access to capital, or choose not to invest in a given sector.
But there is almost no evidence to back up donors’ claims.
Most support goes to big businesses that are already thriving. Many investors say that they would have invested anyway, even without donor support.
Big business doesn’t need aid to encourage it to invest in developing countries – it can already see the potential. The recent spate of “Africa Rising” stories is not a PR exercise by development professionals, but a reflection of commercial opportunity.
Helping big business to capture the market
Multinational companies have enormous power in a liberalised world. They are less rooted in an economy than domestic firms – they can and often do move on if workers demand better conditions or a living wage. Their complex business structures allow them to avoid tax, putting domestic firms at an enormous competitive disadvantage.
Donor finance, and the political support that goes with it, increases that power.
There is an irreconcilable contradiction at the heart of the OECD report. A new South Korea story will not be built on anti-competitive market capture by multinational giants.
Undoubtedly there are cases where investment by big business has a positive impact on growth and poverty reduction. But aid and development finance should not be used to support it unless there is clear evidence that this support is needed.