Technology Governance

It's not just about Aid, it's also about Policy.

2011-06-01T16:54:00.000+03:00

by Jonathan Brough and Riaz K Tayob

Tallinn 26 May, 2011

At a meeting on Estonia’s development cooperation using aid money for other countries, Indian Professor Jayati Ghosh, suggested Estonians can best assist global development by pushing national and European policy-makers for more technical assistance and solidarity support that is not linked to preconditions of market liberalisation.

Professor Rainer Kattel introduced Professor Ghosh as the first named Ragnar Nurkse Visiting Professor at Tallinn University of Technology's Public Administration Department. She is also Chairperson at the Centre for Economic Studies and Planning at the School of Social Sciences at the Jawaharlal Nehru University in New Delhi, India. “Women in the Developing World”, was her keynote address at the public lecture organised by the Tallinn University of Technology's Technology Governance Study Group and the Arengukoostöö Ümarlaud MTÜ (Estonian Roundtable for Development Cooperation).

Ghosh explained that there was a need to focus on the gender. It was necessary to understand how globalisation over the last three decades has to a large extent relied upon the input of women, and stated there was a clear need to appreciate how the global financial crisis has affected them.

The last thirty years saw a wave of globalisation that culminated in a series of booms across the newly connected global economy. The benefits of these boom periods have however been dispersed unequally, with the share being paid out to labour in the form of wages decreasing over time. As an aside, she added that wages in the US have also not increased in two generations. As production has been increasingly geographically diversified and finished products have come to be composed of parts and services from a wide array of different countries the role of women in the production process has become more widespread, especially in the major manufacturing hubs of Asia. This was due to women’s need to earn money before starting families as well as being more easy to push around in the work place.

Though Asia's economies display a wide diversity, with newly industrialised countries such as South Korea and Singapore sitting alongside poorer neighbours like the Philippines and the powerhouses of India and China, they have all displayed two aspects of female labour practices, namely their increased involvement in production during the 1990’s and the growth of the care economy, such as nursing and the care of children and the elderly.

The Washington Consensus policies of the 1980s, that promoted classical neoliberal economics that urged a reduction of the role of the state and low regulation of the private sector, led to a drastic shift in the ownership of manufacturing businesses across the developed world. The resulting modern management strategies made extensive use of female workers which had previously been engaged in unpaid female employment, as they tend to offer a greater attention to detail and a better propensity for hand-eye coordination, needed particularly on the assembly lines for electronics. In wage discussions these young women were unlikely to expect sole-wage-earner level salaries and were unwilling to rally behind calls for better working conditions. Following nature's life cycle many bow out of employment to start families at precisely the time they were passing their peak utility to the firm. This kind of work is stressful and workers burn out after about 6 years, which was why it is women aged between 18 and 35 years that are overwhelmingly employed in Asian factories.

Exposés in the western media in the late 1990s shone a spotlight onto the unsafe working conditions across Asian sweatshops, Ghosh said. Whilst the large brand-sensitive companies went on to improve working conditions on the surface, a deeper look indicates that these changes typically involved the outsourcing of production. Away from their factories women were engaged in work that did not require their presence at the host factory, such as sewing buttons or even mixing chemicals, and which was paid on a piecemeal basis dependent on the amount of work completed. The result was the emergence of small, often unaccountable, business operations and an increase in home employment. This was portrayed as offering the opportunity to be at home and to raise children whilst still working, however this was in unregulated conditions that could be dangerous. Moreover, the risks of production were shared more by these workers as lower orders meant less work was available, so women felt the effects directly on their incomes. The production system is such that risks were delegated down to the lowest paid workers, who are the most flexible part of the production cycle, as seen during the financial crisis when their profit margins or contracts have largely evaporated.

The rapid rise of the care economy has been another avenue in which women have dominated, and which has resulted in adverse knock-on effects. With the growth in female employment in the industrialised centres of the developed and developing world employment opportunities have emerged in the form of housework, nursing and child care. In developed countries this has been taken up by lower paid migrants from the developing world, typically travelling alone, with the result that the remaining children and households need to be cared for by others through their repatriated income.

This offers an example of the double-edged nature of this kind of employment, which could be liberating when not done under duress, but which may still result in uneven development. The delegation of care moves on down to rural families whose children and households are cared for on an unpaid basis by ageing family members, effectively underwriting the labour enjoyed by families in more developed and urbanised centres, a situation set to increase with the ageing populations.

Having laid out the way the system uses women and how they contribute to the global economic system Ghosh explained ways in which women were suffering disproportionally due to the global financial crisis, especially in relation to nutrition. While high food prices are externally imposed, women tend to consume less because of self-deprivation, so that they are increasingly suffering from malnutrition. This has serious consequences for maternal and infant health. Babies are increasingly underweight with negative effects on brain development leaving a long negative legacy.

This situation has been exacerbated by two recent food crises, a widely publicised one in 2008 and a more protracted crisis that is currently under way, in which prices have surpassed their 2008 levels. Ghosh lays responsibility for these food crises squarely at the door of legislators who over the last 30 years have removed or watered down regulations that were aimed at preventing speculation within the food commodity markets.

During the moderated panel discussion Professor Ghosh was asked where Estonian and European resources can be directed. Ghosh said that while there should be solidarity with other countries, it was important to include demands for much needed policy changes at the global level. Ghosh proposed the reinstatement of regulations like capital controls that can be used to prevent capital from affecting the futures markets of food commodities. In addition, policies that could help counteract speculation and meet basic needs like the building up of international and national grain reserves. Institutions such as The World Bank and the International Monetary Fund that are essentially controlled by the US and EU member states have, it was noted, previously advised countries against these policies. Also emphasised was the need to use the IMF's Compensatory Financing Facility, which was set up to help countries deal with export shortfalls caused by exogenous shocks.

Asked whether developing countries affect change in their own policies at the national level, Ghosh replied that they occasionally can but that they sometimes can not.. All people have problems in convincing their national governments to do things that are better for the poor in their countries. But the problem was also at the international level. In some instances aid budgets tie a recipient to the policies of the host country, which are still overwhelmingly in favour of capital account and market liberalisation. The evidence shows that where countries defy the World Bank and IMF as Malawi had done, they tend to bring practical benefits. Malawi followed advice to liberalise agriculture and not have grain reserves, but after being hit by a famine controlled agriculture, issued subsidies and established a national grain reserve, all of which insulated it from the current food crisis. However, with the ruling elites of developing countries being mostly western educated and keen to emulate the developed world, citizens of developed countries need to push their governments to propose policies that will better serve the interests of the developing world.

Marianne Mikko, member of Estonia's parliament, said that it was important that Estonia consider how to be European instead of following the US. This was important for its approach to international development cooperation.

Professor Rainer Kattel, Chair of Innovation Policy and Technology Governance at Tallinn University of Technology said that official Estonian policy before the crisis was neoliberal and that after the crisis it was even more neoliberal. He said that it was important that Estonia got its own house in order before advising other countries how to develop.

Other speakers at the event, which was chaired by the Elise Nikonov Estonian Debating Society, included Maari Ross, GLEN volunteer with women entrepreneurs in Ethiopia; and Anu Raisma, the first Estonian health care expert in Afghanistan.

This article is published under the Creative Commons conditions 1) Attribution — You must attribute the work in the manner specified by the author or licensor (but not in any way that suggests that they endorse you or your use of the work), and 2)Noncommercial — You may not use this work for commercial purposes.

Panel debate on fiscal 'austerity' by prof. Kattel, prof.Sommers and Prof.Staehr: Part V

2011-05-31T22:29:00.002+03:00

Panel debate on fiscal 'austerity' by prof. Kattel, prof.Sommers and Prof.Staehr: Part IV

2011-05-31T22:28:00.002+03:00

Panel debate on fiscal 'austerity' by prof. Kattel, prof.Sommers and Prof.Staehr: Part III

2011-05-31T22:27:00.000+03:00

Panel debate on fiscal 'austerity' by prof. Kattel, prof.Sommers and Prof.Staehr: Part II

2011-05-31T22:24:00.001+03:00

Panel debate on fiscal 'austerity' by prof. Kattel, prof.Sommers and Prof.Staehr

2011-05-31T22:23:00.000+03:00

Jayati Ghosh - Women and Work in Developing Countries Part 4

2011-05-29T18:43:00.001+03:00

Jayati Ghosh - Women and Work in Developing Countries Part 3

2011-05-29T18:42:00.003+03:00

Jayati Ghosh - Women and Work in Developing Countries Part 2

2011-05-29T18:42:00.000+03:00

Jayati Ghosh - Women and Work in Developing Countries Part 1

2011-05-29T18:39:00.000+03:00

The winning essay for the essay prize competition on "Financial policies" by Johannes Schmidt

2011-03-07T13:14:00.000+02:00

Paul Romer’s Charter Cities – A well grounded concept?

By Johannes Schmidt*

This essay deals with Paul Romer’s concept of charter cities. First the concept is introduced and later, on a closer scrutiny, it is evaluated.

The concept of cities which are governed by their own charter document instead of a state is not new. In fact it is frequently employed nowadays and furthermore already used as far back in time as the late 12^th century. The most repeatedly mentioned example of one of the first cities that received a charter is Lübeck, which was later to become the heart of the Hanseatic League.

Driven by the idea to control the most important trade routes in the Baltic region at his time, Henry the Lion limited taxes, weakened trade restrictions, granted protection and promised fair treatment before the law to attract foreign merchants to settle down in Lübeck. The rights in place he then sent out messengers to Norway, Sweden, Denmark and Novgorod in Russia to offer custom free trade and to introduce the fertile grounds for merchants in Lübeck. Not long after, the city grew to being one of the most flourishing and populated cities in Northern Europe with an increasingly influential and copied constituent: its charter. – Numerous examples for modern charter cities can be found for instant in California. As of 2010 over 100 cities in California are governed by a charter which grants them supreme authority concerning municipal affairs. Other examples, however more relating to regions instead of cities, can be subsumed under the concepts of special economic zones (SEZ) and special administrative regions (SAR) mainly found in China, India, Brazil, North Korea, Pakistan, Russia among others. The common element of all SARs or SEZs is that they enjoy a high degree of constitutionally given autonomy which allows them to implement laws and regulations that are more free-market oriented than those in the rest of the country. Hence, the core concept is that of a city or region, given a set of rules different from the one in the rest of the mainland for the broad reason of economic development.

Romer’s concept

In 2009 Paul Romer, a former professor at Stanford University and father of the neo-classical endogenous growth theory¹, introduced his concept of charter cities². To a certain extent and as already indicated above the concept is not new at all, however, it was not less controversial and highly discussed when Romer reintroduced it.

At the core of his concept Romer places rules. He suggests the leader of any developing country could pick a rather uninhabited and unoccupied piece of land and introduce a new set of rules in form of a charter within. The rules to be introduced should have proven good and are of course those of enlightened developed countries. First the good rules will attract people and firms that are going to build the city’s infrastructure. Residents and other firms willing to try out this new environment will follow. As to the administration of the city Romer suggests either the Shezhen model with a city manager given a wide mandate but in the end accountable to Chinese leaders or doing it like it has been done in Hong Kong. The Hong Kong model allows for a partnership with developed countries (like between British and the Chinese for Hong Kong just on a voluntary basis) which would provide the charter and its enforcement. The strong partners leading the city could then pursue long-term commitments much easier than the less credible governments of the developing country could. The benefits of Romer’s charter cities are obvious. Laggard economies with dysfunctional administrations and low credibility for long-term infrastructural projects are given the chance to change the gear to catch up growth. The charter city would offer legal certainty and attract capital and investments, create jobs, abandon foreign aid and above all address poverty and improve the quality of life. On the whole, attracting investors with stable rules to engage in large infrastructure projects would ultimately bring along externalities or spillovers (within the city but also in the rest of the country) crucial for the transformation from a precarious agricultural subsistence to a manufacturer and service economy. Additionally, by building a city from scratch environmental problems resulting from harmful over-cultivation and over-harvesting could be addressed.

The bedrock of Romer’s charter city is his understanding of catch-up growth in a globalized world.³ Together with Charles I. Jones he argues that the driver for globalization is the reuse of ideas and the gains that come along.⁴ This is certainly not a new view and in depth dealt with elsewhere.⁵ However, Romer’s focus as opposed to The Other Canon perspective is more on the question what makes ideas flow smoothly instead of what are the right ideas or technologies to emulate. His emphasis is therefore more on the institutional side and not so much activity specific. Yet, it is fair to say that Romer recognizes the potential of copying technologies for economic growth. He argues the spread and sharing of technologies and ideas with more people in the context of international trade would ultimately lead to more discoveries.⁶ His main point, however, is to say that rules can be copied as well. Rules are as essential for development as technologies. Even further, rules change as technologies change and therefore often need to be replaced by new and better ones. Better rules are those that give incentives for technology flows and increase productivity. The crucial point where his idea of charter cities comes in is the fact that systems of rule are often very stable and hard to change.⁷ In fact, the default process of changing rules for an entire country from within, particularly by using political mechanisms that are already in place, is costly, time consuming, coordination intensive and involves coercion. Charter Cities, on the other hand, would offer a place with a different set of rules within a country. People are not forced to live under the new rules in the new city but they have the choice to. In fact, offering people the choice to opt-in is a crucial point for Romer in response to many of his critics accusing him for neo-colonialism. Giving people the possibility to opt-in also allows both developing and developed countries to better experiment with the new rules without the disadvantageous change from within and by that to improve their governance. Conversely, if life is not satisfying for the citizens who opted in, exiting is a feasible option. Investors on the other hand, who committed long-term engagements, cannot exit the charter city that easy.

Hence, Romer’s pivotal idea is the focus on meta-rules that enable “people to transition from an existing set of rules to better ones that that have been shown to work elsewhere”⁸. His concept of charter cities exemplifies such a meta-rule. It offers, as Romer claims, the possibility for a smooth and fast transition from a place with bad rules to a place with good rules and by that speeds up the process of development.

The concept on a closer scrutiny

Romer’s concept can be evaluated in different ways. One can either look at the details and judge its feasibility thereof or one can screen the underlying idea of the concept. I have decided to primarily pursue the latter and only spend little space for the former.

Romer argues that rules make the difference for economic development. If good rules, and by good rules he refers to rules that have proved to work elsewhere, are implemented and enforced, all it takes are human, material and financial resources. The three latter, however, will be flooding in almost automatically, driven by the great ambition to work together under good rules. What Romer implies is that economic growth will follow once the right rules are in place. Rules in form of legal or social norms are nothing else but comprised in the term institution. With this in mind not the charter city itself but the underlying idea of getting the institutions right is the first weak point of Romer’s idea, unfortunately it is also the core of his idea. Making good rules and by that good institutions a prerequisite for economic growth is problematic for three reasons. Imposing institutions in a way such as drastic as Romer proposes firstly lacks the understanding that rules evolve in a process which has a cultural dimension, secondly neglects the understanding that institutions co-evolve with economic activity and thirdly is alarmingly reminiscent of colonialism, in fact it is a form of neo-colonialist imperialism.

The cultural dimension

Romer correctly examines that rules structure human living most efficiently when they are of the status of social norms and therefore require no enforcement.⁹ Social norms, however, are the hardest to change. The default way of changing them, as mentioned above, is via the political system. Charter cities that provide the choice to opt-in present a quick alternative to everlasting democratic processes. Questionable, however, besides the inevitable question of legitimacy, which will be dealt with at a later point, is that the people decided to opt-in see themselves faced with new rules, maybe even new social norms, from one day to another. This way of jumping in at the deep end totally disregards the nature of any rule or even rule of law which is that norms are embedded in social custom. Legal systems are thus never pre-fabricated or labeled “made in Canada” or “manufactured in Germany”. On the contrary legal and social norms are subject to continuous, often incremental change and evolve out of a process. Consequently, if one wants to change rules as Romer intents it certainly cannot be done in a sink or swim way but requires a different touch. Ha-Joon Chang and Peter Evans argue for a more culturalist perspective when talking about the evolutions of institutions: “…institutional change [also] depends on a combination of interest-based and cultural/ideological projects (in which worldview may shape interests as well as vice versa). Simply put, changing institutions requires changing the worldviews that inevitably underlie institutional frames.”¹⁰

Institutions and economic activity

As Erik Reinert puts it, today’s discussion about emerging institutions as demand-pull or supply-push can with no trouble lead to a chicken-and-egg loop.¹¹ This has not always been the case. Economic history delivers many examples of how institutions were perceived earlier. Reinert points out that early mercantilist institutions were not perceived external to the economy but very much dependant on the productive system, thus institutions and by that also rules co-evolve with economic activities.¹² In fact, “history shows that only societies that have achieved a certain level of manufacturing and/or other increasing return activities have ever achieved the ʻrightʼ institutions or any degree of ʻcompetitivenessʼ.”¹³ The Bretton Woods institutions, on the other hand, saw the reason for underdevelopment in a lack of institutions. This view is also reflected in the credo of Good Governance because it “demands the creation of institutions and structures before economic development, while all wealthy countries of the “West” established them only afterwards.”¹⁴

Therefore, arguing from an evolutionary perspective, the concept of charter cities with its mere focus on good rules suffers from neglecting the insight that economic activities are at the heart of any development. What charter cities are providing is a place under for instance Canadian rules offering legal certainty for those that are familiar with the rules. Canadian and other western investors will be attracted to work under the good old and familiar rules notwithstanding if they are actually building capacity in the developed country of if they just exploit cheap labor and take home the profits. In fact, the concept lacks a very essential ingredient for economic growth. The role of the state or government is not clear except that the rules used are those of another well functioning state. Planning and delivery however seems to be undertaken by the private sector. This leads to the assessment that the focus on rules and only rules in Romer’s concept is without substance for economic growth.

Neo-colonialism

When Romer talks about good rules he means rules that work in developed countries. The concept of good, however, as the debate about Good Governance shows, cannot be considered as good in any general way.¹⁵ If rules are good or bad is highly context specific. This insight together with the above mentioned issue of legitimacy that results when rules are imposed instead of democratically changed hints at a form of neo-colonialism. Not only there is no substance behind his concept that would only roughly consider economic activities, above all there is not even the slightest element of choice for the residents when it comes to influencing political decision because there are no elections in charter cities. Residents are free to vote with their feet if they want to but that is all the influence they have. – Romer, when he opposes his critics, says that emotions can get in the way of seeing the true value in his concept.
No wonder he is able to burst out sentences like this: “In a sense, Britain inadvertently did more to reduce world poverty than all the aid programs that weʼve undertaken in the last century.”¹⁶ Romer said this when talking about his prime example for charter cities, Hong Kong. He claims that importing British rules made Hong Kong where it is today. Of course the main difference is that China did not enter the agreement with the British about Hong Kong voluntarily but developing countries would very well sign the contract for a charter city voluntarily. Still, the aftertaste remains bitter as Romer’s concepts neglects time. Even when talking about Hong Kong he does not mention how long it took for the legal system to fully evolve and how long it took to correctly enforce it.

Conclusion

Apart from the concept and the underlying assumptions which I have analyzed so far, one can generally question the feasibility of charter cities as Romer suggests them. Certainly the city of Lübeck seems to be a success story and also SEZs and SARs have worked in the past, especially when they were part of a national development plan and made sense therein. Building charter cities from scratch, however, is confronted with more risks and dangers than Romer indicates. Not only is there a danger to build up the city independently from the context of the general stage of development the country is situated in, the city will also bear the risks of the downsides of urbanization. Some of those risks, especially in connection with Romer’s concept, are just too obvious to disregard: How would the city cope with a flood of immigrants? How can one prevent townships around the core city? How much of a choice is left if a family decides to opt-in but cannot go back because what they left behind will not be theirs any longer? How can one prevent a process of segregation if the builders of the city are foreign investors? Given the massive amount of private investments, how can one prevent the outflow of profit, leaving little behind for the host society? How will a case of miserable failure be treated in the host country but also in the giver country, will they be just too big to fail? Those are just a selection of question that one can raise to the concept. – The main criticism, however, the concept has to bear is that it is essentially not new. It sounds like very much in line with standard canon development economics that primarily focuses on foreign direct investments. Romer’s concept ignores activity specificity, it neglects time as a crucial ingredient for the process how rules evolve and above all, it would not necessarily tackle the problem of economic development even if it was implemented somewhere because, as it is now, it is clearly biased towards uncontrolled foreign direct investments. In that sense it leaves a very bitter taste of “getting the institutions right” and by is that reminiscent of colonialism.

1 Romer (1990) Endogenous Technological Change.

2 Romer (2010) Technologies, Rules, and Progress: The Case of Charter Cities.

3 Romer (2010) Which Parts of Globalization Matter for Catch-up Growth?

4 Charles & Romer (2010) The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital.

5Reinert (2009) Emulation versus Comparative Advantage: Competing and Complementary Principles in the

History of Economic Policy.

6 Romer (2010) Which Parts of Globalization Matter for Catch-up Growth?

7 Romer (2010) Technologies, Rules, and Progress: The Case of Charter Cities, p. 7.

8 Romer (2010) Which Parts of Globalization Matter for Catch-up Growth? p. 14. Mistakes are taken over in citation

9 Romer (2010) Technologies, Rules, and Progress: The Case of Charter Cities, p. 7.

10 Chang & Evans (200) The Role of Institutions in Economic Change, p. 5.

11 Reinert (2004) Mercantilism and Economic Development: Schumpeterian Dynamics, Institution Building and International Benchmarking, p. 8.

12 Ibid.

13 Ibid.

14 Drechsler (2005) The Rise and Demise of the New Public Management.

15 Drechsler (2005) The Rise and Demise of the New Public Management.

16 Romer (2009) TED talk.

* Student of Technology Governance at the Tallinn University of Technology. This article is published under the Creative Commons conditions 1) Attribution — You must attribute the work in the manner specified by the author or licensor (but not in any way that suggests that they endorse you or your use of the work), and 2)Noncommercial — You may not use this work for commercial purposes.

Is addressing fragmented EU Aid useful without focussing on productive capacity?

2010-12-17T16:44:00.000+02:00

By Riaz K. Tayob

republished from the TUT DPA and TG Blog

At an 11 November lecture at Tallinn University EU Development Commissioner Andris Piebalgs very candidly highlighted the need for the EU to have “a more determined system” for its aid to address the fragmentation in European delivery. What does this mean in terms of development cooperation, and what should cooperation include?

Since member states manage their own aid, Piebalgs' frankness in the discussion was important, not least, because it offers the possibility both of reducing transaction costs (cited as more than half of all aid, due in part to monitoring and evaluation) but also of centralising control at the EU level. As Piebalgs stated, this would not only mean more work for his department but offers the possibility of enhancing the EU's voice in the global aid debate as one of the largest donors.

Since aid dependency can breed ostensible civility if not servility, being critical of EU aid runs the risk of seeming ungrateful. But this is necessary, if good outcomes are the intention. And while there is lots to be commended in the EU's new development aid architecture, there are some concerns about the prescriptions that flow from Piebalgs' diagnosis.

Part of the prescription involves tying EU aid procedurally with EU external/foreign relations. Piebalg's explained that EU aid, under his control, to particular countries would essentially have to be vetted first by Baroness Ashton (EU High Representative for Foreign Affairs and Security Policy). This may be seen as promoting greater coherence of EU policies, but it is also competent to see it as a more explicit formalisation of aid as an instrument for enhancing EU foreign policy objectives. However, countries like the United Kingdom for instance maintain (at least in principle) a separation between foreign affairs and development cooperation.

This brings to the fore the substance of what the EU hopes to achieve from its aid, aside from Piebalg's explicitly mentioned concerns about “competition” with China in resource rich developing countries, in particular on the African continent.

Recently, there has been a great deal of debate on the efficacy and effectiveness of Aid which has become more mainstream. At a time of budgetary crisis in the rich world this is hardly surprising. However many of these arguments were made before or just at the beginning of the Global Economic Crisis which saw an unprecedented stash of cash made available for a reckless financial sector – cash that was somehow not available for binding international obligations on aid.

Dead Aid (by a former Goldman Sachs economist Dambisa Moyo of Zimbabwe) and Ending Aid Dependence (by Prof. Yash Tandon former director at the South Centre, Geneva) raise substantive diagnostic issues beyond fragmentation.

Moyo states that aid is often misappropriated, unproductive and most importantly leads to indebtedness. Moyo also argues that aid crowds out investment and local initiatives. Tandon argues against “aid dependence”, aid ought to be on a solidarity basis. He is firmly against aid that has compulsory “ideological” conditionalities. He adds that certain types of aid, like concessional financing, are included in the OECD definition of aid but are questionable as aid per sé and lead to significant outflows from poor countries. That is, not all aid was in the form of grants, lots of it was in fact lower cost loans, which have to be paid back!

Competing national development needs within Europe has put the spotlight on aid and its outcomes. And much of the discussion misses some important elements. A dalliance on aid statistics sheds light on the lack of development outcomes despite generosity.

Rich countries often “pledge” large amounts of aid (usually when the media is present) but actually pay out significantly lower amounts, which is called the “commitment”. This practice is unashamedly formalised in OECD statistics. So one could almost forgive EU taxpayers for feeling aggrieved that so much is spent without denting persistent poverty – they see the announcements in the media spotlight but not the follow up “commitment” (which is rarely if ever given coverage).

However these feelings need to be contextualised. There is an international legal obligation on the developed countries to provide a certain amount of aid (0.7% of their gross national product) that has been disregarded by most rich countries, even in the good years, with the notable exception of the Nordic countries. Piebalg's contrition for Europe not honouring its international legal obligations was, therefore, welcome.

Issues of distribution of aid between poorer countries also needs to be considered, particularly so if there is a link to foreign relations. For instance aid and foreign relations make strange bedfellows. In the poorest country in the world, Afghanistan, from the perspective of a villager, the rich world policy was to throw bombs first, followed by food. With these types of contradictions 'winning hearts and minds' of Afghans is undoubtedly made more complicated where simple folk could easily view foreign powers as more incoherent than local elites!

In the discussion with Piebalg's, another substantive critique was made by Prof. Rainer Kattel of Tallinn University of Technology. Kattel said that EU aid did not really focus on building up of technological and productive capacity. It also lacked a focus on developing much needed state capacity, which many developing countries lacked. He added that the main international aid agenda, that of meeting the the Millennium Development Goals (MDGs), dealt with the symptoms of poverty rather than its causes.

While Piebalgs was clear that under the Lisbon Treaty the objectives were to alleviate and eradicate poverty, it is reasonable to deduce that Kattel's critique implies that poverty alleviation is emphasised over poverty eradication. If as Piebalgs said, aid cannot be provided indefinitely, then more weight needed to be given to poverty eradication. Poverty alleviation, while needed, may not on its own reduce aid dependency. Poverty eradication offers a solution and would mean developing and distributing productive capacity in poorer countries so that they can take care of themselves.

Building productive capacity is about wealth creation, or what Prof. Erik Reinert's work refers to as increasing the size of the economic pie, rather than redistribution of what is already there.

The contrast between the current strategies of poverty alleviation (MDGs) and its successful eradication (e.g. the Marshall Plan in post-World War II Europe) is stark – what is measured tells this tale in a compelling way. MDGs indicators include measures like increased access to water, reduced mortality, etc. The Marshall Plan focused on what and how much was produced in a country, prices, employment levels, etc. While it is tempting to think that the world is too much changed from the post-war time, the failure of the adopted strategies based on MDG-type welfare clearly indicate otherwise (unless of course blame is cast exclusively on the recipients themselves).

Poverty eradication, and the need for ending aid dependency, demands a focus on building up the capabilities of poor countries to increasingly provide for their own needs while the symptoms of poverty are dealt with. This points to the need for a fine balance, and this directionality certainly matters for the EU's aid strategy. As Prof Erik Reinert points out, productive capacity is what needs to be distributed around the world as a wealth generating machine. But this is precisely where coherence is lacking between Piebalgs and the EU's DG of Trade. But that is another story...

The winning essay for the first essay prize competition by Jonathan Brough

2010-11-18T16:03:00.001+02:00

Does China’s promotion of Clean Energy provide an example of deployment within an opportunity space?

by Jonathan Brough ^*

October 2010 has seen accusations from the United States that the Chinese government is following illegal trade practices in the promotion of it’s Clean Energy and Green Technology sectors. Following a petition from the United Steel Workers Union and the American Association of Manufacturers, the White House’s Trade Representative initiated an investigation under Section 301 of the 1974 Trade Act. This may, after a 90 day fact-gathering period, lead to consultations with the Chinese government and referral to the World Trade Organization.

Whilst determining whether WTO regulations have been violated is the domain of experienced lawyers, this essay examines whether this dispute illustrates how an economy can emerge from the Turning Point of the ICT technological revolution in a profitable and equitable manner. It then goes on to consider whether the US are right to be concerned about China’s growth within the clean energy industry.

China is the emergent super power in waiting, expected to overtake the US in terms of GDP by 2030, with it’s 1.3 billion inhabitants and accumulation of the world’s largest foreign currency reserves. Whilst embracing western style capitalism in the 1980s it is yet to open up to western style democracy, being run by a central one-party committee that is actively engaged in managing the economy. Policies of import substitution and the export of manufactured goods have lead to a rapid urbanization to the coastal cities, with the proportion of city dwellers growing from 15% to 40% since the 1970s and expected to match western economies at 75% by 2050. A serious side effect of this growth has been air pollution and other environmental degradation. With 77% of China’s energy coming from coal-fueled power stations, a ‘pea-soup’ smog that often blankets major cities, gaining notoriety in the lead up to the 2008 Beijing Olympic Games.

China’s Five year plan for Environmental Protection determined to undertake “the synchronization of environmental protection and economic development”, recognizing the necessity to “persist in innovating institutions and systems, depending on scientific & technological progresses, enhance environmental legal framework and mobilize the initiatives of all forces of [the Chinese] society”. This philosophy places the state at the centre of efforts to reduce dependence on Coal, through innovation and production rather than through the importation of technology. It appears to follow Carlota Perez’s prescription that neither market forces nor environmentalism alone can achieve a switch from the mass production paradigm to one of energy and resource sustainability. Instead a change in business and government strategies are needed together, spurred on by economic and societal concerns respectively.

In order to capitalize on the infrastructure built up by the Dotcom boom prior to 2000, an opportunity space for innovation needs to be opened up between expanding the demand and supply spaces. This parallels with Julian Wong’s analysis of three Chinese strategy “pillars”: to create markets; to finance RD&D; and to build infrastructure. The 5 year plan’s aim to “Mobilize Social Forces to Protect the Environment” and to “Actively carry out international environmental cooperation” are aimed at expanding the market. Meanwhile, plans to almost double the railway network and deploy an advanced electricity grid, are facilitated by the allocation of 37% of 2009’s stimulus package, amounting to $221billion, to green-related technology. This commitment to expanding the supply space contrasts with the US commitment to the financial market, and are fueled by ambitious targets such as cutting consumption per unit of GDP by 20% over 5 years and having 20% clean energy capacity by 2020.

Around this opportunity space a triple nexus is expected to feature sources of demand directionality, sources of demand volume and generic technological infrastructure. Perez suggests that the Green Technology direction can be expanded by the volume from emerging global markets, and be made possible through the use of the now cheap ICT infrastructure. The Chinese government appear to have recognized how “environmental threats offer an explicit directionality for using that creative potential across the globe in a viable manner” by capturing a large proportion of the Californian market. Belatedly the US executive is drawing attention to this need to position green technology as a driver for development, with President Obama’s attempts to provide stimulus funding for infrastructure showing a wish to expand the opportunity space, and support for the USW petition hoped to stem encroachment into the local market.

The success of China’s focus on clean energy is evidenced by their installed generation capacity of over 50Gw being only slightly less than that of the US. This includes installation of 10% of the world’s wind generation capacity, 4^th only behind the US, Germany and Spain. The fastest rate of Nuclear power construction supplements the world’s largest fleet of hydro-power stations that includes the Three Gorges dam, which is the world’s largest and most productive power generation plant of any kind. Though solar capacity is not on this scale, with nearly 30% of the global photovoltaic cells export market, much of it to the US, fiscal and trade assistance for large local companies such as Suntech Power Holdings, Yingli Green Energy Holdings and Trina Solar is the main source of concern for US industrial members and regulators.

The USW petition sets out 5 violations of trade regulations, namely “restrictions of access to critical materials, prohibited subsidies contingent on export performance or domestic content, discrimination against imported goods and foreign firms, technology transfer requirements for foreign investors, and trade-distorting domestic subsidies”. Whilst US commentators acknowledge that public funding is permitted and politically necessary for assisting the green technology industry, the export of assisted production is the main area of concern. This concern may stem in part from the US realization that deployment of green technology will rely upon economies of scale and scope, and on the recognition that Chinese firms are poised to dominate this supply.

A key question for the industry however is where innovation will stem from, and to this end the petition’s concern over technology transfer requirements may be more pressing than fears of low priced imports that are stimulating demand in the market.

East Asian development typically follows a path that starts with labour intensive import substitution of western technologies, is followed by process innovation to efficiency improvements through the use of ICT and streamlining organizational structures, and culminates on occasion with product innovation and licensing of such innovations to foreign manufacturers. At present China is improving the processes and economic viability of existing products, but it remains to be seen whether expansion of this capability into product innovation to compete with US and German manufacturers will be achieved.

Atsushi Sunami charts Hong Kong’s efforts to build a National System of Innovation in relation to green technology dating back to 1981, such as the then British colonial administration opening The Center of Environmental Technology for Industry back in 1986. He admits that their incubation programs transferring technology from university to industry is encountering difficulties and not working well as expected, and that commercialization of environmental technology is more complex than had been expected.

The OECD support this view, suggesting that not enough is being invested in basic research. Whilst the number of papers and patents is increasing, not enough of these can be considered inventive when contrasted against those of the foreign firms operating in China. Bloomberg New Energy Finance meanwhile reinforce the conclusion that Chinese firms will not necessarily dominate the technology, stating that “innovation levels at US PV cell and module companies remain high. This suggests the next big break through in solar technology could come from the US”.

The current trade dispute may escalate over the coming months, signaling an unlikely return to 1930s-style protectionism and creating unease within the financial markets. Whilst the Chinese belief that this episode is mere posturing by the US in advance of their upcoming mid-term elections may be correct, moves such as the recent tightening of raw metals exports will doubtless aggravate the situation further. Irrespective of the eventual outcome in this case, it appears clear that both China, and increasingly the United States, view the manufacture and export of clean energy technologies as the next area of industrial growth. Whilst the US may be better placed in terms of it’s National System of Innovation to lead this industry, the Chinese government’s central role looks likely to erode this advantage over time, if left unmatched.

Student of Technology Governance at the Tallinn University of Technology. This article is published under the Creative Commons conditions 1) Attribution — You must attribute the work in the manner specified by the author or licensor (but not in any way that suggests that they endorse you or your use of the work), and 2)Noncommercial — You may not use this work for commercial purposes.

Aid is not charity, should “benefit the giver”, Piebalgs- EU Commissioner for Development

2010-11-12T17:04:00.007+02:00

Aid is not charity, should “benefit the giver”, Piebalgs- EU Commissioner for Development

Updated 12 November 2010

11 Nov 2010, Tallinn (Riaz K. Tayob & Aleksandrs Cepilovs*) - EU Development Commissioner Andris Piebalgs said that EU aid was regulated by the Lisbon Treaty, and that it was not charity. Later he also explained what was meant by reports that EU development aid “should benefit the giver” and also provided an example of what he meant by “value for money”.

Piebalgs was the main speaker on a panel at Tallinn University (Estonia) with discussants Marina Kaljurand (Estonian Ministry of Foreign Affairs), Indrek Tarand (Member of the European Parliament), Evelin Andrespok (Estonian Roundtable for Development Cooperation), Dr. Leif Kalev (Tallinn University) and Prof. Rainer Kattel (Tallinn University of Technology).

During question time, Piebalgs was asked to explain what he meant by the statement that “the giver must benefit” when it comes to aid given by the EU. He was also asked whether this implied a seismic shift in EU aid policy. He replied that he had the legal obligation to eradicate poverty under the Lisbon Treaty. “So whatever I should do is not charity”, it is for a purpose, to achieve the treaty obligations. He could not just give money because it was nice to give. There was a need to answer to the citizens of the European Union on achievements with the money, and this is what is meant by benefits. He did not think it was a shift, but said it was now spelt out much more clearly.

The panel discussion also addressed issues related to China's role on aid, the relationship of the Development Commissioner and other entities, the lack of a focus on industrial policy in EU aid and the problem of fragmentation of European aid.

Europe should focus where we have particular expertise, like energy. This is what he meant by value for money, it was not some clever measurement, Piebalgs said.

Piebalgs complained that the voice of the EU was not being heard, and referred to the fragmentation in EU aid delivery. He asked whether had a role to play? Europe gave 60 per cent of the development aid and its voice should be heard more strongly, he said. He also urged member states to honour their pledges on aid. The problems faced in the poorer nations are worse than at home.

Piebalgs added that development aid cannot be forever, there will have to be finality in aid. By achieving results, countries should then not receive aid because their level of development would allow them to deal with their own problems. Alluding to the Millennium Development Goals (MDGs), he said, it is a daunting task even though progress has been made. EU members like Estonia could shape the position on aid, and would get a hearing.

Aid must bring real value for money and make a value added contribution, he said.

Piebalgs recommended that countries engage with the recently released Green Paper on Budget Support which requires tough decisions because priorities need to be found.

During the panel discussion, Prof Kattel of Tallinn University of Technology said that the problem with the MDGs was that they address the symptoms of poverty and not the causes. He explained that a search for the terms 'industrial policy' and 'productive capacity' on the EU Aid website reveals no results. This indicates that the EU is behind the curve even compared to the World Bank which is trying to find how to develop industrial capacity in developing countries. He suggested that the EUs Green Paper on Development, referred to by the Commissioner, be looked at from this angle.

Kattel added that the EU should reconsider its Free Trade Agreements (FTAs) with poor countries. This is not only important for agriculture but also important for building capacity of the least developed countries (LDCs). Under global rules, LDCs can apply for infant industry protection and the EU can help with finding out what areas they can specialise into.

Kattel reacted to EU proposals for investments into the private sector, entrepreneurship and public-private partnerships and said that these arrangements lend themselves to corruption. What is lacking in many developing countries is basic governmental capacity. Instead of pushing for partnerships with industry, which many countries cannot handle adequately, the EU should support this basic capacity, Kattel said.

Kattel applauded the EU for its structural funding to members within the EU. Although these had been criticised for being cumbersome, he said that this was needed funding.

During the question and answer session, Piebalgs was asked about his relationships with other entities.

First internally with Baroness Ashton (High Representative for Foreign Affairs and Security Policy), second with the EU Parliament, and, third civil society from Africa, Caribbean and Pacific countries engaged in free trade area negotiations (Economic Partnership Agreements).

[Recently the DG EuropeAid (AIDCO) and DG Development (DEV) were merged to form a new Directorate-General which is known as DG DEVCO: EuropeAid Development and Co-operation Directorate-General. Where responsibility lay for final decisions was somewhat unclear according to some reports.]

Responding to the “who is the boss?”, Piebalgs said that the bosses are Indrek (the European Parliament) and Marina (member states). Neither he nor Baroness Ashton could do anything if they did not agree. He said he was responsible for development policy formulation, programme action inside External Action Service and implementation. But when proposals were made about programmes, like country strategy papers, he needed full endorsement by Ashton as the super-boss of external relations. Ashton was the one able to say, 'you can deal with this country but not with that country because of the human rights record.' This was a simplification (of the process) he explained. Ministers of foreign affairs should also endorse (the proposals). But for development objectives, implementation was fully his responsibility. Whenever there was a proposal, agreement was needed with Baroness Ashton, but then both needed agreement from parliament member states. He said he was trying to make “a more determined system”.

On relations with civil society, Piebalgs was asked whether the EU was committed to its obligations in the Cotonou Agreement as Kenyan and recently (in June) East African groups had criticised the EU for failing to meet these consultation obligations.

He did not share the accusation that there was no consultation. Piebalgs said that the Cotonou Agreement was rather complex, and the EU had been “in full complementarity” with the agreement. “If we would have broken (the) agreement we should be called to justice. This accusation has no grounds.” To give one example, mentioning the Green Paper, has said he had been meeting with the ACP ministers to have consultations.

A question was asked regarding the relationship between the Commission and the EU Parliament, as Parliament had passed a resolution that states the Free Trade Agreements (FTAs) with poor countries should not hamper access to medicines. The Commission, however, continued to make demands in FTA negotiations that hamper access to medicines. What was the relationship with the Commission to the Parliament as “the voice of the people”? This issue was not addressed.

And the role of China was raised twice.

First, the representative of Germany said that Africa would be the centre for aid for the considerable future. He thought Africans were grateful for European Aid, because what would they do without the help of the Europeans? But there was another player on the continent, China, who had quite a different approach. Sometimes their role could be looked at in a critical way, he said. He asked what Piebalgs thought about their role and whether he would be open to dialogue with the Chinese.

Second, Piebalgs was posed with the issue of EU cooperation or conflict with China in Africa. When two elephants fight, like China and EU, the Africans say that the grass suffers. But when elephants make love the grass also suffers.

He said this comparison was wrong. Europe was not an elephant and expressed that he would like to see the grass benefit. He could not say what Chinese development objectives were or how they formulated them. On the formulation of development policy, for the US it was national security. For Europe it was not. It was poverty alleviation and eradication.

He said Europe does deal with China. In the G20 process there is a development arm, which is the “right process”. The involvement of China is more on a multilateral basis. With the US Europe has developed much more closer ties, there are road maps on food security, climate change, MDGs. He explained that with China there is not a budgetary strategy. But this could come if the G20 process brings us closer. “I believe the Chinese are not engaged in the debate for a very simple reason because they don't feel we are relevant, if they feel we are relevant. Because we are dispersed. We are everywhere. And we are not the same type, the same magnitude,” Piebalgs said. “So they don't feel us.” He added that they are where the resources and transport infrastructure are. Their aid visible was made visible. Speculating he asked, 'but what is the longer term?', this was not the point (for them). He said that they did not think the (recipient) country was at fault. The philosophy is different. The Chinese provide very clear developments which he would call investments, as it is not development aid. Development aid would be different, he opined.

He did state that Europe should learn two things from the Chinese, size and focus. Piebalgs said that the size of the budget that is under his control was small relative to that of China. And the EU has established an investment facility blending loans with grants, which was much bigger. And because of the size, focus was needed. He recommended that the focus be where Europe has particular expertise, and that is energy. That is what he meant by value for money. It is not some clever measurement. “I believe that this is the right thing to do,” he said.

Indrek Tarand (MEP) said 84% of Estonians supported humanitarian aid. He said that some research indicated that 55% of EU development aid was spent on administration and control, and that this needed to be checked. He added that there is a dilemma on whether to assist countries where there are human rights concerns. Other countries like China have no problem with human rights and because of this Europe looses competitiveness (in these countries). He said on agriculture that modern agricultural techniques are introduced in countries but Europe refuses to open its markets to other countries. He also emphasised the opportunity of a role for Estonia in the new state that is to be created in Southern Sudan.

Kaljurand from the Estonian Ministry of Foreign Affairs said that their development aid would prioritise countries in the east of Europe because this is what their partners expect of them.

It was also emphasized by Peibalgs that the new members of the EU, like Estonia or his home Latvia, could share their experience of remarkable success as transition economies. He also mentioned that Estonia has already used it’s expertise in reforms and practical knowledge in remarkable way to help such countries as Ukraine and Armenia and he encouraged and supported this fully.

Andrespok, for the Estonia Round-table of NGOs, said that while it is said that development aid was a selfish enterprise, we all benefited from better development in other parts of the world, poverty reduction should be kept as the main objective. Gender also needed to be prioritised. Anderspok also said that many countries have not kept their promises on development aid and needed reminding. Coherence was also needed on development and trade policy.

Dr Leif Kalev of Tallinn University said that Europe should not be hesitant because of colonialism when it focuses on effective aid or cooperation. Europe should not be ashamed of promoting democracy.

Students of Technology Governance at the Tallinn University of Technology. This article is published under the Creative Commons conditions 1) Attribution — You must attribute the work in the manner specified by the author or licensor (but not in any way that suggests that they endorse you or your use of the work), and 2)Noncommercial — You may not use this work for commercial purposes.