15 November 2012

Emerging Economies to Take Off, What Does that Mean for Aid?

The global economic map in 2060 will be radically different from the one today, predicts the Organization for Economic Co-operation of Economic Development (OECD). A report released by the organization shows that developing economies, led by China and India, will eclipse the major powers in the next fifty years.

Such gains indicate a rebounding global economy and giant strides in the global South. "The shifting balance of long-term global output will lead to corresponding improvements in living standards, with income per capita expected to more than quadruple in the poorest countries by 2060," said OECD Secretary-General Angel GurrĂ­a. "The increase could even be seven-fold in China and India. With these gains, the gap that currently exists in living standards between emerging-markets and advanced economies will have narrowed by 2060"

The most stunning growth is expected to take place in India which will see the highest average growth as measured by both GDP and GDP per capita from 2011 to 2060. India's economy will grow to eclipse the size of the EU's economy over the period.

The data relies on a series of assumptions to make the projections, including the belief that many countries will return to pre-recession unemployment rates and the global economy will experience an average 3% rate of growth. Another tie-in for the projections is education. Bloomberg explained:
Education and productivity improvements will drive growth in both developed and emerging economies, with productivity gains being the most powerful driver. Countries with relatively low productivity today — such as India, China, Indonesia, Brazil and many nations in Eastern Europe — will experience faster productivity growth than the more developed economies as technology uptake and better business governance lead to convergence with advanced countries.
For some lower-income countries with comparatively low levels of average education — India, Turkey, China, Portugal and South Africa — the build up of skills will also add to growth. With most OECD economies — and also some emerging economies, such as China — expected to be hit by aging and declining working-age populations, labor is not expected to make major contributions to growth. Longer working lives will partially offset the decline in working-age populations.
If the assumptions and projections are correct, the OECD data should serve as a bit of a challenge to the aid/development industry.Overall income gaps will remain between countries, but the report says little about internal gaps. Some express concerns that economic development can leave many behind while concentrating wealth at the top.

The role of education in supporting economic growth is hard to ignore, but becomes more complicated when looking into the conditions that lead to improving education. Health advocates will rightly point out that children who are malnourished are shown to have lower IQ rates and argue that children need to be alive to make it to the classroom. That would require efforts focusing on the health of mothers and children so that both are able to provide the best outcome for children.

Others will talk about the education systems themselves and then there are the conversations about jobs. Then there is the matter of donors and investments. The United States is approaching its fiscal cliff with the main discussion point surrounding how to get the country's economy back on track. Maybe it is time to start having conversations about the ways that the US can support and invest in emerging economies. Maybe take that money that would go into the farm bill and invest it in the agriculture sector of a country in southeast Asia.

The report comes at the same time that the UK announced it would officially shift its focus in India away from aid and towards trade. The public debate over aid to India stretched over a good part of 2012, but the Greening administration announced its intention to end aid to India by 2015.

International Development Secretary Justine Greening said in a statement, ""We have agreed that the UK's programme of financial grant aid to India will end. From now, all new development co-operation programmes will be either technical assistance programmes focused on sharing skills and expertise, or investments in private sector projects focused on helping the poor. We will finish existing financial grant projects responsibly, so that they all complete as planned by 2015."

India appears to be on the same page with the decision. Foreign Minister Salman Khurshid recently said, “Aid is past, trade is future.” The projects from the OECD report should give India further confidence in its ability to continue rapid growth and move away from relying on aid. A report in the New York Times today suggests that the shift in support for aid to India may be linked to the British political landscape.
Some Indian analysts argue that the decision has less to do with India’s development than Britain’s own political and economic compulsions. In recent years, Britain has become home to a strong anti-aid sentiment, with a section of the political class arguing that India, which has its own space program, no longer needs aid from Britain, itself in the throes of an economic slowdown. 
In a poll by The Guardian newspaper, which asked if Britain should stop granting aid to India “in response to its former colony’s ‘rapid growth and development progress’ over the past decade,” 89 percent responded in the affirmative.
CGD Europe head Owen Barder reacted to the announcement writing that aid and trade are not mutually exclusive goals. He wrote:
I’ve read the DFID press release carefully, and while I see the section on “aid is the past”, I did not find anything about the UK living up to its responsibilities to ensure that “trade is the future”. 
The eighth Millennium Development goal includes a commitment to a “an open, rule-based, predictable, non-discriminatory trading and financial system”, yet the wealthy and powerful countries have failed to agree a development-friendly multilateral trade agreement. Nor have rich countries lived up to their commitment to introduce duty-free, quota-free access for least developed countries. Indeed, if anything EU trade policy is moving in the opposite direction, with growing protectionism, and is taking what ODI calls the ‘wrong approach’ to the role of trade in tackling global problems. We are increasingly preventing skilled Indian IT professionals from working in our markets, and we limit India’s ability to sell us services. 
What is DFID offering? A ‘focus on sharing skills and expertise in priority areas’. Technical cooperation always sounds nice: but while there are dozens of independent evaluations of technical assistance which find that it has not worked, there are practically none which find that it has. If India wants technical expertise, it can buy it in the marketplace. 
‘Trade not aid’ is lazy thinking. There is no reason why we should not do both. We should do more to enable developing countries to grow and trade their way out of poverty. And we should provide aid to help the people of those countries in the meantime.
The changing global economy will force more donors to reconsider their relationships with developing countries. There is no question that the aid landscape will be radically different in 50 years, the question is if aid will find ways to support and strengthen the coming growth by adapting to the evolving needs of each region.