Economic Development <Lecture Note 6> 13.5.10

1. Economic Development <Lecture Note 6> 13.5.10 ED: Development Assistance and Capacity Development * Some parts of this note are borrowed from the references for teaching purpose only. Semester: Spring 2013 Time: Friday 9:00~12:00 am Class Room: No. 322 Professor: Yoo Soo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home P.: //yoosoohong.weebly.com

2. Development Assistance - Development assistance would include multilateral governmental (or “ODA”), NGO, and private grants plus highly concessional loans (grant component) - “Official Development Assistance”: Net disbursements of loans (on concessional terms) or grants by governmental agencies for development purposes - All aimed at transferring resources in currency or In kind - All “ pro-developmental” or emergency relief, not “welfare” oriented - Non-commercial from donor perspective

3. History of Development Assistance • Marshall Plan • Cold war impetus • Gradual expansion to the1990s, decline then renewal • Citizen, “Faith-based” and NGO Initiatives • UN and the Millennium Development Goals • Reflection and Redirection of aid effectiveness

4. The Poverty Trap Basic needs Impoverished household Decline in capital per person Negative economic growth ZERO Household savings (Negative) ZERO tax payments ZERO public investment budget Population growth and depreciation

5. The Role of ODA in Breaking the Poverty Trap Basic needs Household savings Economic growth Impoverished household Economic growth Microfinance Humanitarian relief Public investment (Negative) Public budget Official development assistance Budget support Population growth and depreciation

6. Forms of ODA • Development Assistance (ODA) may be: - bilateral: given from one country directly to another; - multilateral: given by the donor to an international organisation or EU • The proportion is about 70% bilateral and 30% multilateral. • About 80-85% of total developmental aid comes from government sources as official development assistance (ODA). Germany and the European Union are major DC players. • The remaining 15-20% comes from private organisations such as NGOs, foundations and other development charities.

7. Considerations for Development Assistance

8. Donor Motives for Providing ODA  Political - e.g. Commonwealth connections - Win friend countries and influence people  Strategic/military  Commercial  Humanitarian  Ethical - Ethical Justification: Should high income countries provide aid to low-income countries?

9. ODA (Official Development Assistance) □ ODAs are official flows of resources to or for developing countries that are provided: • for developmental purposes • by the official sector (government, public funds) • as grants or • as “soft loans”

10. Examples of ODA Activities • Development projects – schools, clinics, water supply systems, etc. • Emergency aid for natural or mkan-made disasters • Contributions to multilateral development agencies • Food aid, emergency and developmental • Aid to refugees • Debt relief outlined by Paris Club Agreement • Officially financed Ssholarships for students in developing countries

11. Non-Eligible ODA Activities • Military or security assistance • Cultural programmes for the donor’s nationals resident in other countries • Aid from NGOs financed from private sources • Foreign direct investment • Official export credits or other commercially motivated transactions • Guarantees on private export credits or investments • Reduced tariffs or other concessions on imports from developing countries

12. What is the DAC? • Development Assistance Committee (DAC) of the OECD • 23 Bilateral Donors, plus European Commission (EC) • Objective: improve development assistance through coordination and collaboration with major stakeholder. • Collect and synthesize data on aid and foreign assistance and deliver the data to the public

13. DAC Subsidiary Bodies • Working Party on Statistics • Working Party on Aid Effectiveness • Network on Development Evaluation • Network on Gender Equality (GENDERNET) • Network on Environment and Development Co-operation (ENVIRONET) • Network on Poverty Reduction (POVNET) • Network on Governance (GOVNET) • Network on Conflict, Peace and Development Co-operation • Fragile States Group

14. Current DAC Members

15. OECD DAC and BRICs Development financing provided by BRICs can help LIC(low income country)s alleviate some key bottlenecks to domestic economic activity. Despite its still relatively small volumes compared to financing by OECD DAC members, BRIC financing is highly significant in some areas and in some countries. In the area of infrastructure financing—a key BRIC focus—it is now comparable to that from OECD DAC donors, and is expected to contribute significantly to electricity generation capacity and the construction of roads and railways in many LICs.

16. From a Receiver to a Donner of ODA • Korea’s Received Aid -- Korea was an aid recipient up until the late 1990s. Since entering the new millennium, Korea has become a donor. According to the OECD, Korea’s official development assistance (ODA) was $264 million in 2001. It increased to $672 million in 2007, 0.07 percent of its GNI, but is still far below major donors, whose average donations in 2007 accounted for 0.3 percent of GNI. • Korea, which received $33.1 billion in assistance from advanced countries and international organizations since liberalization from Japan in 1945, is an example of the miracle that outside help can create when combined with good development strategies. • It only took about a half century for Korea to become the world’s 15th largest economy. In the process, Korea had a lot of help from the United Nations. • The money was spent on building highways and factories, turning the $70 per capita income country into an industrial powerhouse.

17. ODA Strategies of Korea, Japan, and China • On top of humanitarian needs, developed countries around the world are using ODA to strengthen ties with recipient countries to build up their influence and reputation, considering it a form of long-term investment. ODA helps Korean firms find business opportunities in the recipient country. • Japan is the third largest donor in the world after the United States and the United Kingdom, but was one of the top two for a long time before the weaker yen pulled it down in the rankings. • It is also the second largest contributor to the regular U.N. budget after the United States, as it continues its bid for a permanent seat on the U.N. Security Council. • Japan's ODA strategies are serving to promote national interests on top of fulfilling humanitarian needs.

18. Japan is spending around 25 times more than Korea, and is concentrating on Asia and reaping the benefits. From Southeast Asia to Central Asia, Japanese firms are outrivaling others in getting major infra projects and gaining strong footholds in local markets. • If Japan was a traditional big hand in ODA, China has lately risen as a guru in the field ― securing resources is its basic motif. • As the demand for resources rises with global economic expansion, keeping close ties with the government has become crucial to secure resources. Now donor countries are vying to provide ODA to resource rich countries. • China, rapidly industrializing, has been the most aggressive player in the energy war. Though it never officially announces how much it spends on ODA, it is estimated to spend billions of dollars each year on such projects. • Korea’s efforts to become an active donor are in line with its plan to raise its international status commensurate with its economic power.

19. China pledged to double its aid to Africa, and to provide $3 billion in preferential loans at the Forum on China-Africa Cooperation held in 2008, to which leaders from 48 African countries were invited. • It imports over a quarter of its oil from African countries such as Angola and Sudan. While China provided $3 billion in loans to Angola, Korea's ODA totaled only $30 million. Though China is also criticized for giving ODA to undemocratic governments, its strenuous search for energy sources and new markets draws the attention of rivals.

21. Official Development Assistance, 1998-2008(Net Disbursements, in billions of US Dollars) By All Donors Source: OECD Database

22. ODA, Net Disbursements, 1980-2008(billions of US dollars) Source: OECD-DAC Data base.

23. ODA by Recipient (from All Donors)(Mill US Dollars)

24. Official Development Assistance by Recipient

26. Contributions of Assistance • Gap-Filling Role: Foreign exchange, tax revenues, technological, managerial or entrepreneurial gap, etc. • Direct Basic Human Needs or MDG Filling Role • Emergency Relief: Regional flood, famine, military, and political crisis relief • Reconstruction Role: Promote re-construction of war-torn lands • An Investment in Shared Security as well as Prosperity • Capacity-Building Role

27. Negative Impacts of ODA  May permit recipients to pursue counter-productive or foolish policies - May support an ineffective, counter-developmental and corrupt government - May support dictatorial regimes that violate human rights  May Promote a “Dependency Welfare Syndrome” - Leadership and responsibility may be abdicated.  May deform domestic policies to accommodate priorities of donors  May permit donor to exercise inappropriate influence on recipient  May permit recipient country to shift resources to other undesirable areas  Volatility of aid flows may be hurtful to recipient

28. Criticism on Development Assistance • Aid to developing countries is strongly criticized. - Scholars and policymakers increasingly express doubt that development aid will • Increase economic growth • Alleviate poverty • Promote social development • Foster democratic regimes • Have a positive sustainable impact  On Balance - Aid alone can not achieve sustainable development - A useful support for domestic or national effort - Responsibility may more rest with developing countries themselves, not aid donors. - Perhaps neither “sufficient” nor “necessary” but “useful”

29. Desirable Factors • Governmental commitment to development objectives • Reasonably incorrupt government • Equity orientation of public policy • Sound economic policies to strengthen and sustain an indigenous economic foundation • An “enabling environment” so that people can improve their own situations for themselves

30. US$9.2b US$77.5b Africa’s Aid Dependency • World aid per capita has increased over the years – from about US$1.4 to in 1960 to about US$12.3 in 2003 • The level of aid per capita to SSA has increased even more – from about US$2.6 to about $34.3 over the same period • The result is that by 2003, almost one-third of all aid comes to SSA, compared to about 15% in 1960

31. Trends of ODA, Non-aid Official Flows and Private Flows to Africa, 1993 - 2003

32. The Tale of Two SSA Countries-Foreign Aid Highest aid to Botswana in 1989 was about $160m compared to $717 for Ghana - Aid to Ghana has been consistently and significantly higher than that to Botswana. • Aid to Botswana averaged about US$ 66 million annually compared to US$ 303 million for Ghana.

33. The Tale of Two SSA Countries–Per Capita GDP Botswana’s GDPPC of over $3500 is about 13 times that of Ghana which is about $276 Ghana’s GDP of $280 is marginally higher than that of Botswana of $253 - It is not too difficult to see which country has performed better in terms of growth.

34. The Evidence • SSA countries have received almost a third of total world aid. • SSA’s growth and development have been anything but impressive. • Ghana has been significantly more reliant on aid compared to Botswana. • Botswana has performed significantly better than Ghana.

35. Fundamental Questions  Can More Aid be “Absorbed” or Used Effectively? • Would high levels of aid institutionalize dependence? • Would it lead to a collapse of domestic effort (e.g. taxation,foreign exchange earnings, etc.)? • Would it promote “Dutch Disease” • Would it sap indigenous efforts and initiatives • Could it be used effectively? • Would donor priorities take over?

36. Improvement of Development Assistance  Increase the Quantity of Development Assistance - More grants and fewer loans - Link aid more directly to need - Further debt service reductions? • Recipients: - Pursue wise, equitable and effective development strategies - Make a major domestic effort - “Take Charge” and “Own” the Program - Improve budget management and accountability; combat corruption; - Ensure effective management; - Avoid currency appreciation due to aid inflows (“Dutch Disease”)

37.  Donors: Improve the “Quality” of Aid - A “Partnership” philosophy and approach - Orchestrate programs to avoid chaos; Use a “consortium” approach - Reduce administrative burdens placed on recipient governments - Minimize aid volatility and unpredictability - Reduce the tying of aid to donor suppliers - Increase untied budget support? Increased “Program Aid not Project Aid” - Emphasize capacity building

38. The Paris Declaration “Pyramid” • 56 Action-Oriented Commitments

39. 12 Indicators to Monitor Progress

40. The Number of Donors Per Country • Donor programmes cover many countries (EC, France & Germany: over 100 countries each). • 37 countries host more than 24 donors. • Quartile distribution of number of DAC and major multilateral donors by country

41. Capacity Development  What is capacity? - Capacity is the ability of a human system to perform, sustain itself and self-renew. • Capacity development is: • the activities, approaches, strategies, and methodologies which help organizations, groups and individuals to improve their performance, generate development benefits and achieve their objectives  This definition makes clear that capacity is not a static state or quality. It is about: • Creating some form of added value for members and the outside world (perform); • Staying alive and active (sustain); • Adjusting and developing over time (self-renew) on the basis of external pressures and internal drivers.

42. Capacity Development •  Which capacities need to be developed? • The capacity to engage with stakeholders and create consensus around a policy, a bill or a plan • The capacity to articulate the mandate of the institution or to vision the trajectory of an organization or even a society • The capacity to develop a strategy, translate it into a plan and prepare a budget • The capacity to implement a program or a policy and the capacity to monitor its implementation and evaluate results • These are all fundamental capacities that organizations, institutions and societies need in order to be effective and function well.

43. Capacity Development Process

44. Capacity Development • Concept to put emphasis on holistic approach to capacity building and technical assistance • Four drivers of change to yield significant and lasting gains on capacity • Institutional – creating capable institutions • Leadership – building smart leadership • Knowledge – increasing technical knowledge • Performance – tools for measurable improvement

45. Capacity Development vs. Capacity Building Capacity building: • process that supports only the initial stages of building or creating capacities; • is based on an assumption that there are no existing capacities to start from; • less comprehensive than capacity development; • can be relevant to crisis or immediate post‐conflict situations OECD/DAC • ‘suggests a process starting with a plain surface and involving the step‐by‐step erection of a new structure, based on a preconceived design. • Experience suggests that capacity is not successfully enhanced in this way.’ (UNDP Capacity Development – June 2009) Capacity development • process of creating and building capacities and their (subsequent) use, management and retention; • driven from the inside and starts from existing capacity assets; • living process, multi-dimensional, relational, adaptive.

46. Evolution of Development Assistance • Technical Assistance • 1970s and 1980s • Capacity Building • 1990s – early 2000s • Capacity Development • Current approach

47. Capacity Development - Analogy Lao Tzu - "Give a Man a Fish, Feed Him For a Day. Teach a Man to Fish, Feed Him For a Lifetime.“ Assistance Give a Man a Fish Capacity Building Teach a Man to Fish Capacity Development Sustainable fishing industry meeting societal needs

48. ACaseof Manila

49. Growing consensus on aid effectiveness and capacity The 2005 Paris Declaration on Aid Effectiveness Calls for capacity development to be an explicit objective of national development & poverty reduction strategies The UN Millennium Project and the Commission for Africa Challenges the world to treat capacity development with greater urgency The New Partnership for Africa’s Development (NEPAD) Identified capacity constraints as a major obstacle to sustainable development Capacity Development: One of the most important elements of aid effectiveness Without sufficient capacity, development efforts will not succeed

50. Importance of Capacity Development Two connected observations Country Ownership is the cornerstone of aid and development effectiveness Country capacity is the key to Development Performance