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3.4) Approaches of development policies
By taking theoretical considerations into account, chapter 4 is concerned with the practical implementation of development policies. Following measures are currently realized or discussed:
� Internal reforms (e.g. capital market);
� Measures for sustainability and leapfrogging;
� Climate policy and development.
� Support by international initiatives;
� Debt relief (HIPCs initiative);
� Development aid;
� Trade and capital movement liberalization, increase of FDI, inclusion into GVCs (chapter 4).
Following latest discussions, many developing countries started internal reforms.
If implemented, these reforms are mainly successful. Examples are Chile, in part Argentina, Central and Eastern Europe and several Asian countries. In Africa, only few examples for internal reforms are observable (Mozambique, Burkina Faso). Reform elements are:
� Institutional change
� Capital markets and microcredits
� others, such as
� currency reform (stabilization program);
� privatization and fiscal policy reform (often ignored)
Why do reforms happen sometimes and why not on other occasions?
Freytag and Renaud (Journal of Evolutionary Economics, 2007) analyse the policy change from short-term to long-term orientation (rule-binding) in economic policy, which is deemed to be favourable to economic welfare:
� business cycle;
� time consistency;
� veil of ignorance.
Learning plays a major role in the concept. It is routed in prior knowledge of the agents and their limited ability to process new knowledge (information). The attention process is selective (shift effect vs. refinement effect).
(5) cognitive dissonance; i.e. the model does not deliver (6) � feedback to interest groups, burden of proof being reversed (7) � pressure on the government (8) � doubts in politics, as model seems to be ill-performing (9) � foreign support.
The level and role of active learning are positively dependent on…
… integration of a country into the world economy (pressure, images);… positive experience with rules (competition rules, CBI, golden fiscal rule);… good education;… free media.
In other words: competition drives (institutional) innovations!
Hanushek and Woessmann (2008) derive following policy options from problems which occur for developing countries as of lacking cognitive abilities of people living in these countries:
• Institutional reforms;
• Accountability of school politicians ;
• Decentralized autonomy � competition between school authorities;
A crucial problem is the lacking financial endowment of small and medium sized enterprises and entrepreneurs in developing countries. The reason can found in imperfect and badly organized capital markets:
� Capital market failure;
� Fragmented capital markets;
� Policy failure.
Especially small loans, which are affected by the so called credit rationing, are concerned with these problems. Small enterprises are not considered with for them favorable interests by the banks.
With the help of subsidized microcredits a financial market is established. Thereby, the special circumstances are considered. The focus is on poverty reduction: women shall especially be supported. Mechanisms are for example:
� Cooperative models;
� Group credit models;
� Progressive Lending.
There are many positive experiences (e.g. in Bangladesh and Bolivia).
� Nobel Peace Prize 2006 for M. Yunus (Grameen Bank)
Some projects are self-supporting and commercially successful. Within the insurance economy exist thoughts on micro insurances. Further there are technological innovations.
However, there are also negative developments. The fast growth of the markets led to irrational lending.
Often the credits are hard to repay. In fact a credit is still a credit.
The structural change which is necessary in industrial countries – especially within the so called low wage labor market – is better managed.
However, it needs to be secured that developed countries open their markets for alternative goods and services. One possibility for leapfrogging is to support modern marketing forms (e-commerce) and to create new markets and new forms of labor division, respectively.*
The problem is the financing and creation of needed network infrastructure; here, positive developments are observable for mobile telephony. Further, these activities need to be included into the global labor division.
*Sources: Goldstein, Andrea and David O‘Connor (2000), E-Commerce for Development: Prospects and Policy Issues, OECD Development Centre Technical Papers No. 164, http://www.oecd.org/dataoecd/37/61/1922730.pdf
Bastos Tigre, Paulo and David O‘Connor (2002), Policies and Institutions for E-Commerce Readiness: What Can Developing Countries Learn from OECD Experience?, OECD Development Centre Technical Papers No. 189, www.oecd.org/dataoecd/17/38/2081349.pdf
In the last decades, a positive trend towards the utilization of mobile telephony is observable.
Results of different empirical studies indicate a positive correlation between an increase in mobile telephony penetration and an increase of different development political indicators.
However, it is difficult to quantify the isolated effect of mobile telephony penetration, but some positive effect can be observed and are increasingly expected.
In Kenya for instance, a thriving industry develops functions, apps and devices � Silicon Savannah
see e.g.: http://www.safaricom.co.ke/, or : http://www.konzacity.go.ke/
The number of people connected with the world has dramatically risen.
A special problem of the concept of sustainability as well as of leapfrogging is that this type of development reflects the preferences of developed countries.
Preferences of people living in developing countries are not necessarily considered; they want jobs and rising living standards.
� environmental protection as superior good
Approach to the solution following Coase*:
Property rights for the exploitation of the environment are in the procession of local people � who is interested in considerate exploitation, participates in financing � trade of exploitation rights.
Coase, Ronald C. (1960), ‘The Problem of Social Cost‘, Journal of Law and Economics, Vol. 3, October, pp. 1-44.
Tourism may bridge developing and developed countries’ preferences. It creates jobs (often low-skilled) and has indirect effects on transportation, manufacturing and crafting in developing countries.
Empirical studies show that developing countries have comparative advantages in the tourism sector;
Thus, biodiversity can be interpreted rather as a location factor than as a cost factor. It would be profitable to invest into biodiversity.* Industrialization would be lowered and tertiarization promoted.
Still, the growth potential of tourism is limited.
Still, developing countries have only taken only poor efforts to solve environmental problems. However, environmental problems and climate change might cause serious developmental problems. There is a trend bringing together development and environment: high potential for renewable energy in developing countries.
� Greening growth in Africa
However, global environmental problems require a global strategy for their overcoming.
� Environmental problems as global spillovers.
Market failure vs. government failure (Coase).
In principle, the Kyoto-protocol is such a strategy.
Contracting parties (so called Annex I countries) agreed upon a collective reduction of greenhouse gas emissions by 5.2 % (effective 1990) until 2012 (commitment period: 2008-2012).
Thereby, the individual commitments vary.
Basically, the reduction (measured in carbon dioxide equivalent) is possible via avoidance and utilization of or the construction of sinks respectively, i.e. through the utilization of soils and forest to bind greenhouse gas. Three mechanisms exist:
Therewith, flexible (in spatial as well as temporal regard) and market based instruments were established with which’s help negative spillovers can be eliminated by simultaneously maintaining enough freedom for a competition of systems.
However, there are a number of problems which may impede a consistent global climate policy.
� Hot Air
� Increasing international air traffic
� Calculation of the efficiency of reforestation
� Sanctions
� Attempt to implement a market based and source-specific global environmental policy; further development in December 2007 in Bali, Copenhagen 2009, Cancun 2010 and Durban 2011.
In December 2007, representative of 187 countries came together to debate on the future of the climate policy. Negotiations were conducted on how to guarantee a smooth transition after the end of the Kyoto-protocol. Furthermore, measures on following topics were decided:*
On the G7 Summit in Schloss Elmau, June 7 and 8, the heads of state placed de-carbonization high on the agenda; from the Summit Declaration:
“…We affirm our strong determination to adopt at the Climate Change Conference in December in Paris this year (COP21) a protocol, another legal instrument or an agreed outcome with legal force under the United Nations Framework Convention on Climate Change (UNFCCC) applicable to all parties that is ambitious, robust, inclusive and reflects evolving national circumstances…
This should enable all countries to follow a low-carbon and resilient development pathway in line with the global goal to hold the increase in global average temperature below 2 °C…
Accordingly, as a common vision for a global goal of greenhouse gas emissions reductions we support sharing with all parties to the UNFCCC the upper end of the latest IPCC recommendation of 40 to 70 % reductions by 2050 compared to 2010 recognizing that this challenge can only be met by a global response…
We commit to doing our part to achieve a low-carbon global economy in the long-term including developing and deploying innovative technologies striving for a transformation of the energy sectors by 2050 and invite all countries to join us in this endeavor. To this end we also commit to develop long term national low-carbon strategies...
Climate finance is already flowing at higher levels. We will continue our efforts to provide and mobilize increased finance, from public and private sources, and to demonstrate that we and others are well on our way to meet the USD 100 bn goal…
Mobilization of private sector capital is also crucial for achieving this commitment and unlocking the required investments in low-carbon technologies as well as in building resilience against the effects of climate change.…”
The objective following Article 2 is , "enhancing the implementation" of the UNFCCC through:[6]
• "(a) Holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change;
• (b) Increasing the ability to adapt to the adverse impacts of climate change and foster climate resilience and low greenhouse gas emissions development, in a manner that does not threaten food production;
• (c) Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development."
Countries furthermore aim to reach "global peaking of greenhouse gas emissions as soon as possible".
The Global Compact was developed as part of the global economic political assignments.
Trade policy lies within the responsibility of the WTO. The thesis is that humanitarian and environmental concerns are poorly represented so far. Public Private Partnership as part of the Global Governance.
Involved parties are UN-organizations, companies, NGOs. The implementation involves four elements
As a forum for dialog and measure for voluntary agreements, the Global Compact can be positively evaluated.
� Signaling!
From a humanitarian perspective, these principles are self-evident (but not complied everywhere); therefore, their emphasis is necessary. It needs to be highlighted for all concerned parties that the observance of these principles is economically reasonable.
� Mechanism of sanctions?
Business participants: 8.744 (315 Germans)Non-business participants: 5.142 (81 Germans)
NEPAD (http://www.nepad.org/) was established by the initiative of five African governments ( Algeria, Egypt, Nigeria, Senegal, South Africa) and operates in six programmatic areas:
• agriculture and food security,
• climate change and natural resource management,
• regional integration and infrastructure,
• human development,
• economic and corporate governance
• cross-cutting issues.
The cooperation across the whole continent is remarkable. The “Good Governance” in all areas as well as the strengthening of the inner-African cohesion accounts as a crucial (e.g. deepened regional integration).
A big problem is the dept expressed in internationally convertible currency of many developing countries.
To solve these debt crises, a number of propositions and initiatives were presented, including above all debt relief and debt restructuring (e.g. Jubilee 2000).
Central Institutions and initiatives:
� Paris Club
� London Club
� HIPC Initiative of the Washington Institutions and the G8.
Especially the HIPC (Highly indebted poorest countries) initiative arouse a high degree of international attention.
The HIPC initiative for the conditional debt relief was decided in 1996 and extended by the G7/G8 in 1999; based on PRSP, debt relief is decided after tow steps have met (completion point, decision point).
In total, 42 countries were ranked as HIPC, today they are 39, of which 36 reached the decision point (fully eligible) and 3 the completion point.
Aim of this initiative is the reduction of the debt level in relation to the exports to approx. 150 percent.
At the G8 summit in 2005, a further debt reduction was decided. 18 countries are concerned
The conditionality refers to aimed poverty reduction which is set within the framework of Poverty Reduction and Growth Facility of the IMF.
It is disputable if debt relief is a good method to solve development problems. If there are no changes in the economic policy, it is rather contra-productive.
First, basic arguments for a debt relief:
� Allocative arguments
� fresh start, debt overhang � negative externalities, risk of contagion� Reforms political better enforceable (“dirty
work“)
� politically required to increase the willingness of the political class for reforms
� Without international coordination, it will come to free-riding.
� Support of corrupt regimes (von Fürstenberg 1999: “Butchering Burundi“)
� Distraction from important measures (“Aid by Trade“).
Further, it is reasonable to distinguish between structural and level problems. If the interest share of the debt service is very low (which is the case in many HIPCs), the debt problem is less urging. With and without debt relief, it is solely the economic policy which counts; institutions matter!*
* Source: Dluhosch, Barbara (1999), ‘The G7 and the Debt of the Poorest‘, in J.J. Kirton, J.P. Daniels and A. Freytag (Hrsg.), Guiding Global Order, Aldershot et al.: Ashgate, pp. 79-91.
The DAC approves only these resource transfers as development aid which feature a grant share of 25%.
Furthermore, the transfer needs to fulfill certain requirements for the promotion of the economic and social development., and the recipient country needs to registered.
The DAC considers only public and non private development aid.
Germany gives approx. 0.3% of the GNP as public development aid, the biggest share as bilateral aid (in the narrow sense). All DAC countriesOn average, the aid of all DAC-countries together amounts to 0.24% of the GNP (extreme cases are Denmark: 0.99%, and the USA: 0.10%).
Important is the review of the effectiveness of the development aid. The KfW as well as the German government (http://www.deval.org/de/) use a evaluation system for their purposes:
4 principle questions under the consideration of sustainability:
The theoretical insights of Peter Bauer were mostly confirmed by a meta-analysis by Hristos Doucouliagos and Martin Paldam*. The authors determine the impact of development on:
� Investment: Increase by 25% of the aid, the remaining amount trickles away (S↓);
� Growth: low insignificant increase;
� Growth (controlled): no effects
*Doucouliagos, Hristos and Martin Paldam (2009), The aid effectiveness literature. The sad result of 40 years of research. Journal of Economic Surveys 23, pp. 433-61.
On the other hand, slightly positive effects of aid on democratic institutions are observable.
� Institutions: slightly positive effects *
Maybe, developing aid – as well as debt reduction – can be linked to institutional reforms which then have an indirect impact.. The literature on institutions and growth shows a positive correlation between both.**
Is this the reason why the united states reorganized their aid budget to higher shares for the promotion of good governance
*Heckelman, Jac (2010), Aid and Democratization in the Transition Economies, Kyklos 63, pp. 558-79.
**Glaeser, E.L., La Porta, R., Lopes-de-Silvanes, F., Shleifer, A., 2004. Do Institutions Cause Growth? Journal of Economic Growth 9, pp. 271-303.
***Azpuru, D., Finkel, S.E., Pérez-Linán, Seligon, M.A., 2008. Trends in Democracy Assistance. What has the United States Been Doing? Journal of Democracy 19, pp. 150-9.
Furthermore, case studies show that development aid is only helpful in countries with functioning institutions, i.e. where good governance is prevalent.
� Botswana
Despite these results, development aid has recently been and shall be extended.
A reason might be the extended engagement of China in Africa.* This aid is mainly without conditionality (no-strings-attached-strategy).
Infrastructure investment could well be financed with ODA.
* Pehnelt, Gernot (2007), 'The Political Economy of Chinas Aid Policy in Africa', Jena
Economic Research Papers, 2007-051, Abel, Martin (2008), Doubling Aid to Africa, Saarbrücken: VDM.