Development, broadly speaking, describes the multi-faceted and demanding challenge of triggering a cumulative and self-reinforcing process of rising productivity, growing incomes and expanding markets. From an economic perspective capital accumulation, including social and physical investment, economic diversification and technological progress are the critical levers of this process. Closer integration with the global economy can, through trade and capital flows, help to continue and extend this virtuous development cycle.
Growth, however, is not enough for a healthy development process. If the additional resources do not help create new jobs or the rewards of successful development are captured by a privileged few it is unlikely that the process will endure. Rather, the benefits (and the costs) must be shared broadly across the entire community. The engagement of different groups adds an unavoidable political dimension to the development process as conflicting interests and trade-offs shape the policy mix.
One lesson that emerges from experience, both recent and historical, is that the process is unlikely to take off if left simply to market forces. This is not just because markets can fail, but because working markets rely on an array of other social institutions to support them, from legal frameworks and regulatory structures to central banks and social protection. Moreover, development is not just about prices, efficiency and competition -- the purview of markets -- but involves large structural changes, which are discontinuous and disruptive and can only be managed with a mixture of institutional arrangements.
It is pretty clear that there is a good deal of room for incoherence across these different components of the development process. I cannot begin to unravel these complexities in the short time I have here. So let me instead focus on the title of this meeting "From aid to Coherence".
I should state from the outset a certain reservation with this title, as it seems to suggest that aid and coherence are mutually exclusive components of development cooperation, which I don't think is the case. Let me give you a couple of illustrative examples. The first is the 0.7 per cent aid target. UNCTAD was very closely involved in defining this target back in the late 1960s. We did so by linking the financing of development to macroeconomic and structural constraints on a growth target for developing countries of 7 per cent per annum, set by the first UN Development Decade. The figure emerged from an integrated approach to the development challenge which looked at the investment demands of newly industrializing countries, their capacity to mobilize domestic resources given current income levels, the likely contribution of trade to generating foreign exchange, etc. So this iconic target comes from a truly integrated approach to development.
A second example, and familiar I am sure to this audience, of the link between aid and coherence is the Marshall Plan familiar. The Plan has been described as "History`s Most Successful Adjustment Programme" but it might be more accurate to call it the "only" successful adjustment programme because the track record of the more recent variants is very poor indeed. This is in large part because these programmes discarded most of the lessons behind the success of the Marshall Plan. Not simply a generous and quickly released level of resources mainly in the form of grants but nestled these aid flows in a coherent policy framework which aimed to mobilise trade and investment to a measured rebuilding of war-torn Europe.
The point is not to revisit the Marshall Plan here but rather to recognize that official aid cannot be effective unless it is seen as part of a wider framework of development cooperation. This is the right approach today as aid flows look likely to stagnate or even decline over the coming years. It is more important than ever to create a framework that can build mutually supportive linkages betweem aid, trade, finance and production in support of rapid and sustainable growth in developing countries. Sadly, in this respect there has been a tendency to retreat from the kind of integrated framework promoted by the Marshall Plan and to treat the different aspects of development cooperation separately. This separation is a major source of incoherence when it comes to forging more inclusive and sustainable development paths.
It is perhaps misleading to say coherence has been ignored in the recent development discourse and more accurate to say that it has been taken for granted because of a tendency to see market forces, in particular financial markets, as the ideal means for achieving coherence. Strong ideological backing for this proposition has come from conventional economic thinking about the rational and efficient nature of markets, which made the case for a hands-off policy approach applicable to most economic circumstances and challenges, including those involving development.
This ideological consensus has been attached in recent years to what I have called finance-led globalization which best describes the workings of the world economy over the past three decades. The rapid ascent of financial interest worldwide, following the extensive deregulation of the financial sector in advanced countries, the dismantling of controls on cross-border financial activities and the ensuing surge in capital flows marked a radical break with the pos-war international policy framework.
I have provided a critical assessment of its impact on trade and development in my report to the recently concluded UNCTAD XIII in Doha. My assessment suggests that current global arrangements are not capable of providing the financial and monetary stability to encourage productive investment, create sufficient employment or sustain the expansion of output that is necessary for inclusive and sustainable development.
The most visible sign of imbalance and incoherence under FLG is, of course, a systemic proclivity towards boom and bust cycles ending in financial crises, which result in reductions in income, employment and trade. But it is also the case that in the face of unregulated financial flows, the stability and appropriate alignment of various macroeconomic variable remains unresolved. To take on obvious example, the volatility in exchange rates can often offset any gains in domestic productivity and drastically alter international competitiveness.
By altering the relative competitive positions of various industries across countries, capital flows and currency movements unrelated to economic fundamentals also have the potential to trigger trade frictions and protectionism, damaging the international trading system. Destabilizing linkages between trade and finance also operate through the cost and availability of external financing. Since assessments of creditworthiness determine the costs and conditions of financing and payments arrangements for trade from both the public and private sectors, financial crises can make not only importing but also exporting more costly, even after large devaluations and improvements in competitiveness.
Quite apart from these destabilizing and deflationary feedbacks, there are also concerns that global arrangements contain systemic biases and asymmetries that constrain development. In particular there has always been a close interconnection between movements in prices of the main internationally-traded primary commodities and monetary and financial factors. But since the breakdown of the Bretton Woods system in the early 1970s, the interconnections have become more marked and have contributed materially to the instability of the international economic system. The financialization of commodity markets, and the damage this can bring to producers and consumers in the developing world, has been extensively researched by UNCTAD in recent years.
Despite this growing incoherence at the international level, the mechanisms for dealing with the resulting problems have been piecemeal and post hoc, at best. There was a glimmer of change following the considerable shock to the confidence of the developed world following the recent financial crisis which brought issues of coherence and coordination to the forefront of the international agenda; but this has proved short-lived.
The basic task as I describe it in my report to UNCTAD XIII is to rebalance the global economy away from one dominated by financial markets to what I have called development-led globalization (DLG) which can turn the tentative recovery from the recent crisis into an inclusive and sustainable future.
UNCTAD has consistently suggested a battery of policy measures and reforms at the national and the international level to support rising living standards in developing countries, build their resilience to external shocks, and help them pursue a more inclusive growth path and a more balanced integration with the global economy. Their aim is less "to get prices right" and more "to get development right", through a pragmatic, proactive and socially conscious approach to macroeconomic, trade and industrial policies.
Policy coherence in support of inclusive and sustainable outcomes will only happen if finance gets back to the business of providing security for people's savings and mobilizing resources for productive investment. Reforms are needed to replace unruly and procyclical capital flows with predictable and long-term development finance, to regain stability in currency markets and to support expansionary macroeconomic adjustments. Surveillance and regulation will need to be strengthened at all levels, and new institutional arrangements may need to be considered. Regional financial cooperation, despite the current difficulties in the eurozone, will, in particular, have a much larger role to play in a more balanced international architecture.
Stable monetary and financial arrangements are a precondition for making trade and investment work for inclusive growth and development. But rebalancing also requires that financial and other resources be channelled towards the right kind of productive activities. Industrial development remains a priority for many developing countries because of the opportunities it provides to raise productivity and incomes, and to get the most from international trade. But a wider sectoral approach, including a focus on the primary sector in many LDCs, is needed in order to ensure that measures to diversify economic activity are consistent with job creation, the security of food and energy supplies, and effective responses to the climate challenge.
The aid agenda has not, in recent years, supported this kind of structural transformation with a focus less on diversification and more on social goals aimed at mitigating extreme deprivation. While there is undoubtedly a place for those goals, rethinking of the aid agenda to ensure it is more supportive of building productive capacities has been a long standing UNCTAD demand. Doing so means looking at aid flows in the context of the wider international economy.
The crisis has confirmed UNCTAD's long-standing insistence on the importance of policy space. Its role in building new and more inclusive development paths cannot be understated. This is needed to allow governments - particularly but not only in developing countries - to correct market failures, promote collaboration among enterprises in areas of long-term investment, manage integration with the global economy, and ensure that the rewards from doing so are evenly shared. In order to do so, states must forge a coherent and inclusive developmental vision and build a strong compact with different interest groups to better manage the conflicts and trade-offs that change inevitably brings.
This should not, of course, be taken to imply that states never fail. Indeed, accountability, transparency and the rule of law are just as important for making states sufficiently representative as they are for making markets sufficiently stable. However, "governing the market" requires institutions… When we compare success stories from North America to Scandinavia to East Asia, we find that market economies can operate within a wide spectrum of social and political arrangements, and that, beyond a few core principles, there is no single model of state-market relations for others to emulate.
The fact that each country must still be able to experiment and discover what configuration of institutions and governance works best in its circumstances and in line with the expectations of its population, implies that the nation state continues to provide the essential governance functions of the world economy. But this does not mean abandoning international rules. The Bretton Woods regime, after all, had clear rules, though they were limited in scope and depth. The global economy has been muddling through since that regime ended, with rules remaining in some areas, such as trade, a decentralized free-for-all in others and ad hoc responses elsewhere.
Given the extent of global interdependence, we still need rules for the global economy that help countries of varying size, influence and dynamism to navigate around each other, and where required engage in collective actions to meets common challenges. So we should strive to attain a form of inclusive and sustainable globalization consistent with the maintenance of space for diversity in national institutional arrangements. This is still very much work in progress.
Annex on the Marshall Plan principles
First, it rejected shock therapy and acknowledged that policy-makers need sufficient time to discover what worked best in their particular circumstances. This approach guided the postwar liberalisation of trade and finance which if too rapid would have simply led to payments crises and political unrest. Second, it focused on structural constraints, on national targets for the main economic variables and on a sequenced approach to meeting objectives. This was the basis for a coherent aid effort. This attitude contrasts sharply with the aid discourse today which, despite much talk about partnerships and democracy, still behave as if they know what is best for the rest of the world and how to achieve it.
Third, it released aid in tranches as intermediate targets were met. Conditions were important to gain and sustain the support of the US taxpayer by ensuring aid was used efficiently, but these were more flexible and less intrusive that those required in the last 20 years or so by the international financial institutions. Fourth, it recognised that effective leadership was about taking difficult decisions with the minimum of delay. Aid was flowing to Europe in well under a year from Marshall's speech, a painful contrast with contemporary assistance which has been marked by unfulfilled promises, long delays in disbursement, and weak coordination among large numbers of donors with competing objectives.
Finally, the Marshall Plan encouraged a degree of united and cooperative effort among Europeans. This led to regional cooperation in areas where there were significant externalities, economies of scale and various trans-boundary issues requiring joint action. For most countries most of the time, pressing problems still involve their neighbours. The very fact of increased efforts to tackle these is itself a sign of increasing stability that can have a significant impact on economic activity and especially fixed investment.