We are at a point in history when the conjunction of political intentions and economic performance provides unique positive support for improvements in our approach to development. Governments in developing countries have taken concrete steps to improve governance, fight corruption and pursue more balanced macro policies to support expansion of the private business sector. Developed countries have increased their aid commitments and agreed on important steps to improve aid effectiveness. A buoyant global economy affords the necessary latitude for countries to take steps to improve the common good.
Indeed, this combination of positive political and economic conditions suggests an opportunity to concentrate more on long-term structural changes of developing countries. Yet these political intentions must be solidified into concrete actions and the stability of the underlying global economy must be assured if they are both to have a lasting impact on the prospects for sustained improvement in the welfare of the developing world.
The 2005 World Summit provided renewed political momentum for the development goals agreed in the UN Global Conferences and Summits of the 1990s and early 2000s, including the Millennium Development Goals (MDGs). Official development assistance increased substantially in 2005, and many countries have made longer-term commitments, including pledges by many countries that have not yet done so to meet the 0.7 per cent goal by 2015 or earlier. This increased aid will have an enhanced impact because the final decisions on monitoring the Paris Declaration provide the groundwork for real improvements in aid effectiveness and alignment with countries’ development objectives. The completion of the Multilateral Debt Relief Initiative (MDRI) has also released resources for a number of HIPC- and some non-HIPC countries. The MDRI opens the way to make debt relief broader and more equitably distributed across both countries and lenders.
Further action will be necessary to maintain this momentum. The partial debt relief granted through MDRI provides no guarantee that the beneficiaries will not have to take on additional debt in order to finance development goals that, through their domestic planning processes, they have chosen to pursue. Because the MDRI was completed after the new “forward looking” approach to debt sustainability, the threshold parameters of the latter will need to be reviewed to ensure their applicability and efficiency in assessing the amount of new borrowing that can be undertaken without countries embarking on a new round of “lend and forgive”. Substantially more grants will likely be required, and this will mean stepping up bilateral aid commitments.
The increased aid commitments made in the run-up to the 2005 World Summit must be enacted in future government budget decisions and thus may compete with other domestic and international commitments, as well as with the need to preserve developed countries’ fiscal balances. This will be even more difficult given the large proportion of the aid increases that have resulted from debt relief. MDRI relief was meant to be additional to official assistance not be counted as part of the announced increases in aid commitments.
Further, while important steps have been taken to reduce the share of tied aid, a high proportion of official assistance is comprised of emergency relief or other special purpose or project specific aid. Consequently, that assistance cannot benefit fully from the new commitments on effectiveness and alignment, nor can it serve as a source of support for expenditures required to meet the MDGs and other development goals. Indeed, the amount of aid that can be directed by recipient governments to nationally defined objectives has increased hardly at all since Monterrey. As emphasized in the UN’s 2005 World Economic and Social Survey, an important implication of the evolving new approach to aid is that it should be increasingly channelled through the budgets of recipient countries—particularly to enable the full application of the principles of ownership and alignment. This means, in turn, that the proportion of aid so channelled should become a specific target of international assistance.
The 2005 World Summit also set our development efforts in a broader context. The changes that have taken place in international affairs since the Millennium Conference highlight the inter-related nature of peace and security, human rights, and economic and social development. The efforts to achieve the MDGs must be rooted, in turn, in the Global Development Partnership between developed and developing countries achieved by the International Conference on Financing for Development at Monterrey. As the World Summit Outcome suggests, enduring progress will also require integration of the MDGs with the wider array of development goals generated by the UN Summits and Conferences, which together constitute the UN Development Agenda.
Key to success on this front will be increased coordination amongst all parts of the UN System, and especially between the UN and the Specialised Agencies. An excellent example is the need for a coherent approach to achieving economic improvements in developing countries and ensuring that they are compatible with environmental sustainability.
For many countries the challenge to meet the internationally agreed development goals has been limited not by the availability of domestic resources, but by an external constraint. The first UN Conference on Trade and Development noted the need to reform the international trading system so that it could support measures by developing countries to overcome this constraint by building up a domestic industrial export sector. The most recent UNCTAD Conference has again pointed up the need to provide developing countries with the policy space required to undertake the measures in the area of trade that will enable them to earn the external resources needed for their development. While the Aid for Trade initiative takes an important step in this direction, it should be seen not as a substitute but as a complement to assistance efforts in other areas.
In the area of trade, political intentions seem to have fallen short, specifically in the hope for an ambitious, development friendly Doha round. This is somewhat surprising, given the recent continued expansion of the global economy and global trade. We can only urge negotiators to recognize that a round that increases developing countries’ benefits from trade will only benefit all participants in the global trading system.
The World Summit also brought renewed attention to the importance of countries taking responsibility for their own development through fuller mobilization of their own resources. The agreement to formulate national development strategies (NDS) by the end of 2006 aims to expand the focus of domestic policy discussions to include the internationally agreed development goals. This could help to ensure that those discussions concentrate on fundamental factors that underpin long-term development and on any trade offs between different economic and social goals and the policies to achieve them. Because most of the goals require medium-term expenditure planning, they will also require medium-term financing; for developing countries, this would have to include more stable and more predictable aid from donors. The NDS thus provide not a new system for development planning but, rather, a constructive framework for all countries to work out required actions and objective indicators of anticipated results—and one that may also be used by donors to measure aid effectiveness.
For most developing countries the most underutilised resource is the domestic labour force. This shows clearly in the increasing flows of migrant labour and the rising importance of remittances in many countries’ external finances. Most of the MDGs amount to investments in human capital directed toward improving labour’s productive potential. Yet, without policies to ensure that it is productively employed, that potential will not provide any increase in economic welfare. While policies to ensure a domestic environment supportive of private sector initiative are necessary, they may not be sufficient to ensure full utilization of domestic resources. The Summit Outcome thus seeks to bring employment and growth back to the forefront of the domestic policy agenda so that opportunity can replace frustration and resignation.
The importance of positive growth and employment policies can be easily seen in the progress in reducing poverty levels made by rapidly growing developing countries such as India and China. Indeed, most of the progress in reducing poverty is due to the rapid growth of private sector employment in rapidly growing developing countries.
Fiscal and trade policies play a central role in supporting growth and industrial transformation. This suggests that we need urgently to expand the objectives of fiscal policy from maintaining price stability and government solvency to include promoting a higher and more stable expansion of domestic demand. An important first step in this process is the recognition that the recent emphasis on fiscal solvency and macro stability may have been detrimental to developing countries’ growth performance. Another essential step is the consideration of the concept of “fiscal space” in the discussion of more public support for infrastructure investment. In many developing countries, maintaining fiscal balance has meant that increased social expenditures to support MDGs had to be balanced by reduced economic infrastructure investment. This is a short-sighted policy, for it directly undercuts the full potential benefits of meeting the MDGs.
As the paper on fiscal space prepared for the Development Committee concludes, the ability to increase government investment depends on a careful analysis of demand conditions, absorptive capacity, short-term financing constraints and medium term public debt dynamics, as well as trade-offs with other types of expenditure. Nonetheless, the definition of fiscal space proposed therein—as the increase in expenditure that can be undertaken without impairing the ability to service debt—seems unnecessarily biased against the introduction of growth as a legitimate objective of fiscal policy. It appears to overlook some important development aspects of the problem.
The paper suggests, for example, that the use of fiscal policy to offset a cyclical downturn should be avoided if it threatens government solvency. But this seems to disregard the important lessons learned from the elimination of the US deficit in the last half of the 1990s and the explosion of the Argentine deficit in 2000-2001: that growth creates fiscal solvency and not vice versa. Comparison of the recent performance of the US, Japan and the EU also indicates little evidence to support the paper’s main contention that government solvency and macro stability are preconditions for long-term growth. A greater role for countercyclical fiscal policy should be seen as contributing to solvency and supporting a more sustained mobilization of domestic resources. And if a structural or full employment budget balance is used to define the appropriate measure of fiscal space, the linkages between fiscal policy and domestic resource utilization become obvious.
Disappointingly, the paper also found little scope for adopting a fiscal target based on the government’s current fiscal balance, excluding capital expenditures, and more particularly on the structural current balance. Differential treatment of capital and current account expenditures is not only good accounting policy, it is good economic policy. This is implicit in the “golden rule” approach to fiscal balance already implemented in some developed countries. Such a separation would concentrate countercyclical spending on infrastructure expenditures that contribute to productivity and solvency. Finally, the determination of fiscal space for direct government investment should not be distorted by failure to report transparently in government budgets the liabilities created by implicit government guarantees for public-private partnerships. A structural “golden rule” mixed with a target on government public sector debt, including the liabilities associated with public-private partnerships, would meet the counter-cyclical objective of fiscal policy, promote growth and avoid unduly discriminating against public sector investment in favour of public-private partnerships.
I noted above the need for increased coordination raised by the broader approach to development proposed at the Global Summit. I am thus encouraged that the Development Committee’s discussion of the MDGs will go beyond the limited environmental goals of the Millennium Declaration to take up the important issue of providing sources of clean energy capable to support long-term expansion of developing countries. All these issues should be considered within the context of Agenda 21, preserving in particular the principle of common but differentiated responsibility. The forthcoming Commission on Sustainable Development offers an opportunity to further understandings and commitments dealing with the interlinked issues of energy, climate change, industrial development and air pollution.
The paper on “Clean Energy and Development” prepared for this Committee represents a valuable contribution to these discussions. The financing gap is wide, amounting to an estimated $80 billion a year for electricity. While the paper emphasizes the importance of the investment climate to attract greater private sector energy financing and of tariff reform to generate greater cash flow by energy suppliers, it gives less attention to the question of how to tackle the problems of providing modern energy services to the many people too poor to pay for them.
The paper alludes to a potential “double dividend” to be earned from providing cleaner energy—promoting more vigorous economic growth while reducing our “environmental footprint”. It understandably focuses on the energy needs of the biggest, most dynamic economies, which pose the greatest challenge for controlling greenhouse gas emissions and the widest scope for technology cooperation. Yet we must not lose sight of the urgent energy needs of the poor, especially in rural areas of the developing world. Significant “double dividends” can be reaped, for example, when households switch from traditional biomass to cleaner cooking and heating fuels, and when villages are electrified. The reality is that the basic energy needs of these poor communities could be met with only a modest increment to global greenhouse gas emissions.
With respect to the suggestions for future work on financing mechanisms made in the paper, it will be important to ensure that they are consistent with strengthening existing mechanisms such as the Global Environment Fund. In that regard, I see important benefits from closer cooperation with the Commission on Sustainable Development, which enjoys strong and active participation by developing countries, as well as the ability to examine the issues in a holistic manner that fosters new partnerships and initiatives aimed at capturing and equitably sharing the “double dividends” from concerted action on clean energy and sustainable development.