How Relevant is Financing for Development?

Sta. Ana coordinates Action for Economic Reforms.This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, November 19, 2007 edition, pages S1/4 and S1/5.

FFD (Financing for Development) and MDG (Millennium Development Goals) have become ubiquitous in the development community.  Democratically elected leaders, dictators, World Bank (WB) and International Monetary Fund (IMF) technocrats, United Nations (UN) bureaucrats, neo-liberals, demagogues, reformists, journalists, anti-globalization radicals, grassroots activists, and everyone else involved in making a better world  are familiar with FFD and MDG.

FFD and MDG have become the buzzwords to fight poverty and bring about prosperity, especially for the less-developed countries. A commonly repeated statement, a stylized fact,  is that without augmented financing (FFD), the MDG cannot be met.

The Millennium Development Goals consist of eight core goals, namely wiping out poverty and hunger, achieving universal primary education, promoting gender equality, reducing child mortality, improving maternal health, combating HIV/AIDS, malaria and other diseases, ensuring environmental sustainability, and fostering global partnerships for development. Each goal has specific, time-bound targets.

Obviously, all these goals are laudable.  And they are plain and straightforward; in fact, they are mainly motherhood statements.  The difficult part is how to achieve these goals.

The FFD attempts to provide an answer.  The assumption is that the fulfillment of the MDG requires tremendous resources.  Hence, FFD becomes an overarching framework that weaves together major themes or what the official document calls “leading actions.”  To wit: the mobilization of domestic financial resources (e.g, taxation), international trade, international private resources (e.g., foreign direct investments or FDI), international financial cooperation (mainly official development assistance or ODA), external debt, and systemic issues that will provide the coherence of the multilateral monetary, financial, and trading systems.

Just like the discredited Washington Consensus, however, the FFD is very comprehensive.  It contains so many ideas, principles, issues, and tasks, some of which are subtle criticisms of the Washington Consensus.  To illustrate, here is a tiring, verbose statement from the FFD document:

“We stress the need for multilateral financial institutions, in providing policy advice and financial support, to work, on the basis of sound, nationally owned paths of reform that take into account the needs of the poor and efforts to reduce the poverty, and to pay due regard to the special needs and implementing capacities of developing countries and countries with economies in transition, aiming at economic growth and sustainable development.  The advice should take into account social costs of adjustment programmes, which should be designed to minimize the negative impact on the vulnerable segments of society.”

Whew!  In short, it says that the IMF and WB should not impose anti-poor conditionalities and should allow space for home-grown reforms to develop.

Nevertheless, the FFD can be criticized for being like the IMF or WB.  That is, the FFD lists many dos and don’ts.  The maze of ideas confounds.

William Easterly, a former senior adviser at the World Bank and the arch-critic of Jeffrey Sachs, the director of the UN Millennium Project, describes the UN approach as a top-down approach. It is no different from communism’s central planning.  And it is a new form of colonialism wherein global powers ram their programs down the throat of the developing world.

To be sure, Mr. Easterly’s criticism is hyperbolic.  The FFD and MDG are not coercive apparatuses.  And if FFD/MDG policy instruments are well targeted and suited to concrete conditions, they can reinforce internal development reforms.

The FFD and MDG are blueprints, but the problem with blueprints is that their models and details do not exactly correspond to the complexity of development in a particular country.

Let us return to the FFD’s “leading actions.”  Exactly how can they help Philippine development?

Domestic mobilization of resources is critical, but the FFD by itself does not offer explicit proposals on improving tax policy and administration in the Philippines.

Will trade liberalization under the World Trade Organization or under bilateral agreements result in long-term growth?  Rigorous studies done by Ricardo Haussman, Dani Rodrik and others debunk the idea that trade openness is a predictor of growth.  In a word, the regressions that yield a trade liberalization-growth relationship suffer from methodological problems such as the direction of causality, the identification of variables and the coverage of data.

Will an increase in ODA matter?  The FFD urges the developed countries to meet the target of having 0.7 percent of the gross national product as ODA to developing countries.

The conclusions drawn from the aid literature are mixed.  But a re-examination done by Raghuram Rajan and Arvind Subramanian (July 2007) concludes that there is little robust evidence to establish a relationship, positive or negative, between aid and growth.  What makes their study different from previous ones is that their paper takes into account different settings (time horizons, time periods, cross-section and panel data, types of aid). Further, it addresses the problem of endogeneity (that is, whether increasing aid leads to good economic performance or economic performance attracts aid).

Or is good policy a determinant of growth?   There is no supporting evidence, according to Easterly and Ross Levine (2001) and Easterly, Levine and David Roodman (2003). The conclusion in the latter work is that the authors “no longer find that aid promotes growth in good policy environments.”

What needs further study is the role of total factor productivity (TFP) in long-term growth. Easterly says the TFP’s conceptions have yet to be fully explained. Arguably, the most crucial feature of TFP concerns institutions.

Where there is near consensus among economists is that institutions are a determinant of growth.  But again, building and reforming institutions, formal as well as informal, are country-specific.  The institutional development and innovation in fast-growing developing countries China, Vietnam or India cannot illuminate the reform path in the Philippines.

This brings us to the relevance of country growth diagnostics, as amplified by Hausmann, Rodrik, and Andres Velasco (2004), among others.  The key in growth diagnostics is to identify the economy’s binding constraint(s).

In the context of country diagnostics, international mechanisms such as the FFD become a secondary matter, unless it turns out that the main binding constraint on sustained growth in the Philippines pertains to global rules.

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