Valdai Club

It is necessary to question the relevance of solutions proposed or even encouraged by the OECD, that ignore important political issues, when they only worsen and not solve situations.

Real problems and sham solutions

The problem of financing of development is one of the most important in international economy. It is not surprising therefore that the OECD has dedicated to this issue a special conference, which took place in Paris on March 31 - April 1, 2015. Entitled as "Global Forum on Development", the conference focused on a number of questions of considerable importance. The list was published on the OECD website:

• How do developing countries interpret the global policy agenda — as set out by the United Nations (UN), the OECD and others — on the ground?
• How can goals and their financing be realistically tracked?
• What national constraints and conditions govern development finance policy and practice?
• What does the state of play reveal about national development financing realities vis-à-vis the overarching financing for development discussions?
• What are the views and roles that non-state actors (such as private sector, foundations, institutional investors) can play in the SDGs’ (Sustainable Development Goals) implementation?

But in reality these questions only reformulate the problems that have been known for nearly a century. If it is normal that the knowledge base of these problems was acquired long ago, one might question why to reformulate constantly questions with not so many answers. Does the OECD think that a new formulation of a question will make the solution easier? It is at least curious attitude and certainly deserves explanation. We must wonder about the process that leads the big international organization to adjust its discourse in an attempt to use euphemistically those problems that are in no doubt extremely important and urgent.

I. Question of investment.

The major problem that developing countries face for various reasons can be described as a limitation of the offer in relation to a potential demand. That’s important. The problem is that this demand is only potential and not real because of lack of financial resources. There is a significant mismatch between the potential demand and effective demand. As a result, the offer will be limited to the effective demand. While we believe that the offer is technically limited, and should therefore provide technical solutions to its development (innovations are mainly owned by companies in developed countries), in reality there is a monetary limitation that hampers development. In fact, it is the hope of profit which limits investment (understood here as investment in fixed capital and circulating capital), which itself should generate production. This raises the question of savings that can increase demand of the population. In fact, the gap between potential demand and effective demand has its equivalent in a gap between potential savings and actual savings. In developing countries the savings are insufficient, but it is because of insufficient income. We can overcome this limit in three ways:

1. Providing the population with enough revenues to increase the expected profit and therefore to increase investment.
2. Increasing labor productivity to lower the relative price of capital goods, which allows to buy more for the same amount of savings.
3. Transferring the resources to producers who make the least expensive investments, so that for a given profit expectancy the size of the investment will be greater.

The third method often leads to a dead end. This resource transfer raises new problems. If one takes resources from the population to transfer to producers, this means artificial increase of savings level in the country. It will decrease the level of consumption and profit expectancy drop, at least when the production is hardly intended for the population. This is what happened in the USSR in the 1930s where collectivization can be analyzed as a mechanism to capture resources from majority of the population [1] with important social and economic aftermaths (consumption drop and even famine in 1932-1934), and has given birth to a production consumed mainly by the state[2]. Thus growth was largely deformed and could not be sustained without pressure from the state.

The productivity increase appears to be more promising. But it implies - at least initially - major investments. Countries liberalize their capital accounts to increase foreign investment in addition to national savings. But in doing so, they risk to create the situation where savings will be attracted by purely financial employments. In addition, short-term capital movements are deeply destabilizing a developing economy [3]. Basically this raises the question of financial openness. It did not help the developing countries. One cannot read in any statistical report correlation between the development of this process and growth [4]. The cycle called "boom and bust" that many of these countries have experienced, has actually slowed growth [5]. The massive inflows of speculative capital in these countries also often distorted the structure of consumption and led to investments of little interest for economic development. However, it is perfectly true that the mechanism of Foreign Direct Investment (FDI), when it was accompanied by a national policy of infrastructure development, had positive effect on the growth and development in these countries. But FDIs have less than 5% of the global capital movement [6] and in reality there was no need to conduct a full openness to attract them. Financial globalization was an obstacle to the development of the so-called "emerging countries" that helped reduce significantly the investment rate in developed states [7]. By transforming the world into a gigantic casino, it helped only enrich a small minority at the expense of many others.

So here is the first solution: to promote an income increase of the population. It requires, in part, a public investment in infrastructure. The OECD conference highlighted the shortage of these investments mainly in Africa, but not only in this continent. These investments must be financed. This implies taxes. Logically, the tax rate should be important in developing countries. But we can’t surcharge taxation of a population whose incomes are low. Of course, we can tax more businesses. But this reduces their profit rates (after taxes) and therefore the availability to invest from shareholders or owners. A logical solution is the introduction of the state enterprises, but then we might be led to the third option of the widespread state ownership in the industry. If companies remain private, and the economy remains opened to the financial globalization, there is a risk of being confronted by a magnificent euphémisme what OECD calls the base erosion and profit shifting (BEPS) or the tendency of companies to escape the tax burden and realize their profits overseas, usually in tax havens [8].

II. Are there the solutions?

Aforementioned OECD conference in Paris followed other major events. It focused on the Sustainable Development Goals (SDG) but also on the interpenetration between the public and private sectors under the Public-Private Partnerships (PPP) and on the Global Partnership for Effective Development Co-operation (GPEDC), inviting private foundations to take more important responsibility over the development policy. One of the sessions of the conference was entitled Possible solutions: New players, new instruments.

Thus we notice a logic that seeks to remove from the state a number of responsibilities for development. We can understand this logic. Financially, the states, which have been subject of financial globalization and ever more open at least until 2008, are now in very difficult fiscal situations. They may be subject to austerity policies that further restrict investment in infrastructure, either on their own will or on the will of regional organizations such as the euro zone. It also may involve developed countries.

The idea of partnership with the private sector seems to be a logical and promising solution.

But we must emphasize that it only "seems". Indeed, private investors will wait for profit rates, but also for the period of capital return, which are simply not compatible with the logic of investment in infrastructure. The result is that PPPs are poorly developed (and in the EU half of them were made in Great Britain), involve direct transfers of state resources to the private sector to make these investments profitable, and finally the private sector accepts the management of infrastructures that were largely paid by the state. The recent scandal of privatization of highways in France is just one example of the PPP abuses.

Finally, the use of charitable foundations, or nonprofit funds, can appear to be a solution, especially in the areas where there is a need to invest with no significant profits, such as health or education. But then we abandon ideological groups in the entire section of the state apparatus. For example, if we take fight against AIDS, we see that in Tanzania nearly 98% of this struggle is funded by private non-profit organizations [9], representing over 80% of the Tanzanian health budget [10]. Then we can openly ask the question of a possible conflict of priorities between these funds and governments [11]. These funds are seeking to show their "donors" that money have been used in fight against AIDS while a more scientific approach shows that it would be also important to address other infectious diseases that accompany or even encourage the AIDS epidemic [12]. In general, the existence of these conflicts of interest and possible takeover of public policy by private groups has been shown in several studies [13].

More generally, it is necessary to question the relevance of solutions proposed or even encouraged by the OECD, that ignore important political issues, when they only worsen and not solve situations. For instance, a purely technical tool is presented to solve a public political problem of more than 10 years [14]. The issue of investment is certainly a central problem of development, and the investment is at the same time tangible and intangible. But the example of development of Asian countries indicates the importance of both the legitimacy of the public actor, and a strong consensus around this public actor [15]. In some sense "nationalism" can be considered as a positive ideology of development.

III. Thinking about development without prejudice.

It is necessary to think about what was not spoken at the above mentioned conference. If we can say that a policy combining openness to good macroeconomic is generally better than a policy associating protectionism to bad macroeconomic measures, this does not mean anything about protectionism. This, in fact, much depends on the quality of macroeconomic policies than on the openness [16]. Indeed, countries that have associated protectionist policies to good macroeconomic policies have experienced growth rates that were much higher than those of most open countries, which invalidated the previous result of the ouverture [17].

This brings us to the issue of development, which proves to be far more complex than the advocates of the generalized free trade and a states weakening want to explain. The works of Alice Amsden [18], Robert Wade [19] and those grouped around Helleiner [20] show that in case of developing countries the choice of protectionism, if it is associated with real national policy of development and industrialization [21], provides growth rates that are far above than in those countries that did not make the same choice. Dani Rodrik [22] emphasized the fact that Asian countries with the fastest growth rates systematically violated the rules of globalization established by the World Bank and the IMF.

Here we return to the question of national policies and the issue of a state-developer which were debated in recent years [23]. This problem is actually in the heart of Asia's industrial revival. In fact, national policies are real critical variables for growth and development, and not for the existence of international trade liberalization. But to admit this means to reconsider the role of the state in economic policies and the role of nationalism as an ideology associated with the development. This affects powerful taboos of orthodox thinking in economics and politics.

Jacques Sapir is Professor of Economics at l’EHRSS-Paris and MSE-MGU (Moscow).

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

Notes

[1]T. Shanin, Russia as a “Developing Society”, Macmillan, Londres, 1985.
[2] H. Hunter et J.M. Szirmer, Faulty foundations: Soviet Economic Policies 1928-1940, Princeton University Press, Princeton, NJ, 1992. R.W. Davies, M.Harrison et S.G. Wheatcroft, The economic transformation of the Soviet Union, 1913-1945, Cambridge University Press, Londres, 1994.
[3] G. L. Kaminsky, C. M. Reinhardt, C. A. Vegh, « When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies », IMF Discussion Paper, Washington (D. C.), FMI, août 2004
[4] Voir D. Rodrik, « Why Did Financial Globalization Disappoint? », (avec A. Subramanian), IMF Staff Papers, vol. 56, n° 1, mars 2009, p. 112-138.
[5] H.-J. Chang, J. G. Palma, H. Whittaker, Financial Liberalization and the Asian Crisis, Londres, Palgrave, 2001
[6] E. S. Prasad, R. G. Rajan, A. Subramanian, « Foreign Capital and Economic Growth », Brookings Papers on Economic Activity, n° 1, 2007, p. 153-209.
[7] J. A. Ocampo, J. G. Palma « Dealing with Volatile External Finances at Source: The Role of Preventive Capital Account Regulations » in J. E. Stiglitz, J. A. Ocampo (dir.), Capital Market Liberalization and Development, Oxford, Oxford University Press, 2007.
[8] OCDE, PART 1 OF A REPORT TO G20 DEVELOPMENT WORKING GROUP ON THE IMPACT OF BEPS IN LOW INCOME COUNTRIES, juillet 2014, Paris.
[9] TACAIDS, 2010. HIV and AIDS Public Expenditure Review 2007-2009 – Tanzania Mainland.
[10] Foster, M. et al., 2008. 2007 Tanzania Public Expenditure Review – Multi-sectoral Review: HIV-AIDS, Final Report, Dar-es-Salaam: TACAIDS.
[11] Youngkong, S., Kapiriri, L. & Baltussen, Rob, 2009. Setting priorities for health interventions in developing countries: a review of empirical studies. Tropical Medicine & International Health, 14(8), p.930-939.
[12] Galárraga, O. et al., 2009. HIV prevention cost-effectiveness: a systematic review. BMC Public Health, 9 (Suppl 1).
[13] On citera la remarquable thèse de M. Moritz Hunsmann, que j’ai eu l’honneur de co-diriger, « Depoliticizing an Epidemic: International AIDS control and the Politics of Health in Tanzania » thèse soutenue au CEMI-EHESS, EHESS, 2012. Voir aussi : Hunsmann, M., 2012. Limits to evidence-based health policymaking: policy hurdles to structural HIV prevention in Tanzania. Social Science & Medicine, 74(10), p.1477-1485.
[14] Gallagher, K.P., 2005. Putting Development First – The Importance of Policy Space in the WTO and International Financial Institutions, London: Zed Books.
[15] Wade, R., 1996. Japan, the World Bank, and the Art of Paradigm Maintenance: The East Asian Miracle in Political Perspective. New Left Review, (217).
[16] Voir D. Ben-David, « Equalizing Exchange: Trade Liberalization and Income Convergence », op. cit.
[17] Voir H.-J. Chang, « The Economic Theory of the Developmental State » in M. Woo-Cumings (dir.), The Developmental State, Ithaca, Cornell University Press, 1999 ; Kicking away the Ladder: Policies and Institutions for Development in Historical Perspective, Londres, Anthem Press, 2002.
[18] A. Amsden, Asia’s Next Giant, New York, Oxford University Press, 1989.
[19] R. Wade, Governing the Market, Princeton (N. J.), Princeton University Press, 1990.
[20] G. K. Helleiner (dir.), Trade Policy and Industrialization in Turbulent Times, Londres, Routledge, 1994.
[21] Voir C.-C. Lai, « Development Strategies and Growth with Equality. Re-evaluation of Taiwan’s Experience », Rivista Internazionale de Scienze Economiche e Commerciali, vol. 36, n° 2, 1989, p. 177-191.
[22] D. Rodrik, « What Produces Economic Success? » in R. French-Davis (dir.), Economic Growth with Equity: Challenges for Latin America, Londres, Palgrave Macmillan, 2007. Voir aussi, du même auteur, « After Neoliberalism, What? », Project Syndicate, 2002 ( www.project-syndicate.org/commentary/rodrik7 ).
[23] Voir T. Mkandawire, « Thinking About Developmental States in Africa », Cambridge Journal of Economics, vol. 25, n° 2, 2001, p. 289-313; B. Fine, « The Developmental State is Dead. Long Live Social Capital? », Development and Change, vol. 30, n° 1, 1999, p. 1-19.