What should succeed the 2015 MDGs?: Towards Self-Sustaining Growth

1. Prepared for Towards a Post 2015 Development Paradigm Organized by IFRC and CIGI (Geneva, February 14-15, 2011) What should succeed the 2015 MDGs?: Towards Self-Sustaining Growth Based on Local Capacity Development Wonhyuk Lim Director of Policy Research Center for International Development

2. Contents • Lessons from History • - Conceptual Framework for Development • - Alternative Development Paradigms • - Ingredients for Successful Growth and Development • - Progressive Local Capacity Development • II. Millennium Development Goals • - Poverty Reduction: Significant Progress? • - MDGs: Breakthroughs and Limitations • - MDGs Beyond 2015: Aid to End Aid? • III. Lessons from Korea • - Korea’s Transition to a Successful Aid Recipient: Exit from Aid Dependency • - Lessons from Korea for Aid and Development Effectiveness • - Aid Effectiveness and Development (Cooperation) Effectiveness

3. Conceptual Framework for Development • “Development as Freedom” (Sen 1999) • Interaction between Human Development and Economic Growth (Ranis et al. 2000) • “Modern Growth” and Increasing Returns: Two Breakthroughs • Emergence of a large group people who absorb and assimilate knowledge to improve their human capital and in turn use their improved human capital to apply and generate knowledge to raise productivity (Lucas 2009) • Expansion of markets and hierarchies to facilitate specialization and coordinate productive activities, through the invisible hand (Smith 1776) and the visible hand (Chandler 1977) Per Capita GDP of Various Regions (in 1990 international Geary-Khamis dollars) Source: Maddison (2006: 642)

4. Alternative Development Paradigms • Endowment Perspective: Framework Approach (Liberalization) • Economies with “appropriate endowments” (cultural values, institutions, “investment climate”) grow. Those lacking such endowments do not. • Examples: Protestant ethic, common law, and colonial legacies • The state should focus on getting the institutional framework right and then get out of the way. Release market forces and let individuals play the game. • Evolutionary Perspective: Ingredients Approach (Capacity Building) • Initiating growth does not require state-of-the-art institutions. The challenge is not so much getting growth to start by adopting big-bang reforms, as to sustain it by devising search networks to detect and mitigate constraints as they emerge. • The reinforcement of successful experiments through the feedback mechanism of performance-based rewards can lead to dramatic changes over time. • The state should facilitate growth by supplying the missing ingredients, which are often characterized by externalities. Progressively develop local capabilities. • While a regime that facilitates resource mobilization can be effective in a catch-up phase of development, an institutional platform that fosters autonomy, diversity, and experiment is critical to sustained productivity-led growth.

5. Historical Experience: Ingredients for Successful Growth Performance Five Common Characteristics of Successful Growth (Commission on Growth and Development 2008) • Exploitation of world economy • Macroeconomic stability • High rates of saving and investment • Markets allocating resources • Committed, credible, capable government • Since 1950, there have been only 13 economies that have grown at an average of 7 percent a year or more for 25 years or longer. • 9 Economies in Asia: China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Singapore, Taiwan (China), and Thailand • 4 Economies in Other Regions: Botswana, Brazil, Malta, and Oman

6. Historical Experience: Progressive Local Capacity Development The key is for a country to retain the ownership of its development and progressively build up its capabilities to add value and manage risks even as it actively learns from, and engages with, the outside world. A country must address innovation and coordination externalities in technical/engineering education and vocational training, R&D, industrial clusters, and infrastructure. It should also establish fiscal discipline and prudential regulation and flexibly adjust prices to mitigate the impact of shocks. Last but not least, commitment to social cohesion and broad-based growth would help to reduce the risks of growth-killing conflicts.

7. Poverty Reduction: Significant Progress? Source: Chen & Ravallion (2008)

8. Poverty Reduction: Significant Progress? Source: Chen & Ravallion (2008) and WDI

9. Millennium Development Goals (2000: 1990-2015) • Breakthroughs • -Recognition of Poverty • Statement of Good Intentions • Establishment of Global Partnership • Limitations • Driven by Donors • Focused on Basic Human Needs • Insufficient to Generate Self-Sustaining Growth Based on Progressive Local Capacity Development • (cf. Korea’s G20 Consultation with LICs) • Methodological Features • Simplicity and Measurability • Focus on Ends rather than Means • Relieve Symptoms vs. Causes • No Regard for Different Initial Conditions • Different Levels of Abstraction (Mixed Bag)

10. MDGs beyond 2015: Aid to End Aid? • New Baskets • Basic and Process Freedoms: “Development as Freedom” • Inclusive Growth • “improved lives for slum dwellers” (Target 7.D) • access to finance • Infrastructure • ICT indicators (Target 8.F) • Electricity • Transportation • Industrial and Trade Development? (cf. World Bank: Knowledge Economy) • Consolidated Basket: Basic Health • Child mortality (MDG 4) • Maternal health (MDG 5) • Diseases (MDG 6) • “Sustainable” access to safe drinking water and basic sanitation (Target 7.C) • Enhanced Basket: Education • Primary education (MDG 2): focus on quality and completion • Technical education and vocational training

11. Road Network Source: World Bank, World Development Indicators, 2005. Data are from 2002. (www.worldmapper.org) Note: ‘Roads’ includes motorways, highways, main/national roads, secondary/regional roads, and all other roads in a territory.

12. Electricity Production Source: World Bank, World Development Indicators, 2005. Data are from 2002. (www.worldmapper.org)

13. Secondary Education Spending Source: United Nations Development Programme, 2004 Human Development Report (www.worldmapper.org) Note: Spending is measured in Purchasing Power Parity (PPP) US$ and can be divided by the secondary school aged population (11-17).

14. World Bank Framework on Knowledge Economy: Linking Unequal Pillars? • WB Four Pillars of the Knowledge Economy: Public-Private Balance • institutional framework that promotes the efficient creation, dissemination, and utilization of knowledge (public support vs. performance, IP protection, and meta-institutions) [1] • labor force that continuously educates and upgrades itself [3] • information infrastructure that facilitates the communication, dissemination, and processing of knowledge [4] • innovation system of individuals, firms, academic and research institutions that effectively createsand assimilates knowledge [2]

15. Korea’s Transition to a Successful Aid Recipient Korea as a hopeless aid recipient “…American development agencies found Korea a nightmare, an albatross, a ‘rat-hole,’ a bottomless pit…” (Woo 1991: 46) “Korea…was regarded as so much of a ‘basket case’ that the US Congress decided in 1956 to remove Korea's eligibility for development assistance and to relegate Korea to the category of ‘supporting assistance’ to maintain consumption standards.” (Krueger 1998: 181) Escape from mendicant mentality Deploring that Korea had to depend on U.S. aid for 52 percent of the supplemental budget in 1961, Park Chung Hee (1963: 28) noted: “Though nominally independent, the real worth of the Republic of Korea, from the statistical point of view, was only 48%. In other words, the U.S. had a 52% majority vote with regard to Korea, and we were dependent to that extent…. It showed, dramatically, that our government would have to instantly close down if the U.S. aid were withheld or withdrawn.” Park (1963: 172-173) added: “From 1956 to 1962, we have received, on the average, some 280 million dollars of economic aid each year and some 220 million in military aid. In addition, we have run a current account deficit of 50 million dollars. In other words, excluding our military sector, 330 million dollars should be earned annually to keep the Korean economy on a self-sufficient footing.” In 1962, Korea’s total exports were only 54.8 million dollars.

16. Financing for Development: Investment and Savings in Korea, 1962-81 (unit: percent) Korea had to rely heavily on foreign capital in the early stages of its development. Most of this foreign capital was in the form of loans, which allowed Korea to take advantage of the domestic-international interest rate differential and be the residual claimant on its investments. Korea adopted proactive measures to facilitate foreign financing and earn hard currency through exports.

17. Foreign Capital Inflow for Korea, 1945-92: Exit from Aid Dependency (unit: current million dollars, percent) Source: Ministry of Finance and Korea Development Bank (1993), Foreign Capital and the Korean Economic Development: A Thirty-Year History (in Korean), pp.616, 618, 621. Note: This source does not provide data on grant aid after the 1966-72 period. Public loans include concessional loans, but this source does not provide a detailed breakdown. Nor does it separate the grant element in concessional loans that meet the definition of ODA (i.e., loans with a grant element of 25 percent or more).

18. Use of Development Assistance: Focus on Infrastructure, Industrial, and Human Resource Development Instead of simply subsidizing consumption, Korea allocated funds to facilitate self-sustaining growth, which in turn would support human development. Korea adopted a proactive science and technology policy from the mid-1960s. Korea used reparation funds to develop projects that were opposed by international lenders (e.g., POSCO and Gyeongbu Expressway). Source: EPB (1976), White Book on Reparations pp. 378-381.

19. Composition of Korea’s Inbound ODA, 1960-80 Source: OECD DAC For a country to claim ownership, concessional loans backed by considerations for debt sustainability may be preferable to grants.

20. Lessons from Korea for Aid and Development Effectiveness When and how did Korea become a successful aid recipient? Certainly not in the 1950s, when Korea tried to maximize aid revenues. Korea became a successful aid recipient (and much more) only after it started its export-oriented industrialization to reduce its dependence on aid. Any lessons for ownership? It is just not realistic for an aid-dependent country to claim ownership. The choice of inbound foreign capital (grants, concessional loans, non-concessional loans, foreign direct investment) affects the degree of ownership that a country can exercise. Any lessons for governance? Regardless of regime type, it is important to establish a system of governance characterized by responsiveness, competence, and accountability. While a regime that facilitates resource mobilization can be effective in a catch-up phase of development, an institutional platform that fosters autonomy, diversity, and experiment is critical to sustained productivity-led growth. Can aid catalyze development? Probably not, unless aid donors and recipients are willing to promote self-liquidating aid. Development can be supported by “aid to end aid,” designed to facilitate self-sustaining growth based on progressive local capacity building. Infrastructure and human resource development are critical. Knowledge sharing and institution building should receive more attention as well.

21. Aid Effectiveness and Development (Cooperation) Effectiveness Abiding by a particular set of principles/modalities in employing the chosen instruments will improve the effectiveness of these instruments in achieving the chosen objectives. Instruments ODA Philanthropy Knowledge Sharing Investment Trade Principles/Modalities Ownership Alignment Harmonization Managing for Results Mutual Accountability Partnership Cooperation (Joint Op.) PBR/Cash on Delivery No Policy Conditionality Holistic Approach Exit Strategy Objectives 1. Poverty Reduction 2. Social Development (Education, Health+) 3. Economic Growth 4. Freedom 5. Happiness/Well-Being Actors Countries Int’l Organizations CSOs Firms 1+2: Millennium Development Goals (MDGs) 2+3: Human Development Index (HDI) The Paris Declaration on Aid Effectiveness (2005) is mainly focused on the delivery and management of ODA.