Speech

19 January 2006

1st White Paper Speech, New Economics Foundation

Hilary Benn , Secretary of State for International Development

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Growth and poverty reduction - creating more and better jobs in poor countries

Stewart, Andrew, ladies and gentlemen, I am very grateful to the New Economics Foundation for organising this evening’s event, not least because your professionalism, dedication, and commitment are widely admired.

Although I remember the last time I spoke here I was a prisons minister – politics can be an uncertain business!

This is the first of a series of speeches I am making to launch the consultation on the government’s development White Paper to be published in the summer.

And you may well ask “what will it be about?”

Let’s reflect for a moment on what we achieved last year.

And by we, I do mean we. All of us. None of this would have been possible without the Make Poverty History campaign in the UK, and campaigns around the world.

None of this would have been possible without politics – the tide of people calling for justice.

Last year 15 EU states agreed to reach the UN 0.7% target by 2015; the G8 to $50 billion, with $25 billion to Africa by 2010. At Gleneagles we agreed a new target of by 2010 access for all to AIDS treatment. Free basic education and health care.

Later on, we saw an International Finance Facility for Immunisation launched, which aims to save 5 million children’s lives over the next decade, and the UN agreeing that states have a Responsibility to Protect their citizens, and that if they fail in this, we, the international community, must take on that duty. And we agreed a new humanitarian fund for places like Niger or to respond to the earthquake in Pakistan.

In essence this new White Paper is about asking ourselves these questions and trying to find answers. How do we turn all of this political agenda in 2005 into more children in school and fewer people dying of AIDS or malaria? What should we be doing in fragile states? What’s the best way to build country capacity? How do we ensure that the international development system works effectively to eliminate poverty? And what should DFID be doing in all of this?

Over the coming weeks I’ll talk about the main themes of the White Paper - reform of the humanitarian system; how we deal with corruption and governance; public services; areas beyond aid which are vital to development – trade, climate change, migration - and finally on the shape of the international development system we have created.

Your ideas will help us improve our own; after all, Government does not have all the answers. And I would welcome your response to our consultation document – available tonight and on DFID’s web-site – and to this series of speeches – in which I must confess I also aim to provoke.

This is the first speech – and it’s about growth and poverty reduction – creating more and better jobs in poor countries.

Why have I chosen this?

You could say, “It’s the economy stupid”, and you’d be right.

Poor people in poor countries want the same things that we do here - they want to have a decent job, to meet their basic needs, to lead a fulfilled life, take good care of their children and have a role in their community and in society.

In poor countries, very little of this is possible without a growing economy. Only by growing your economy can you secure employment for all.

Let’s imagine a poor farmer in Malawi. What do you think her chances are of a better life, and that of her children?

Almost no chances at all in an economy that is stagnant.

If she is lucky she’ll have a small plot of land, she’ll travel, say, 8 miles to buy fertiliser and better seeds, or to sell her produce.

Trapped in this kind of agriculture, with no other choice of employment, she can’t produce or buy enough food to meet the needs of her family, and decent healthcare and schooling for her children are simply not possible.

It should be no surprise then that half of Malawi’s children are malnourished, and their growth and development stunted, or that half of all children enrolled drop out of school at standard 5 unable to read, write or count. Nor that Malawi is one of the poorest countries in the world.

And this story is repeated across much of Africa where 70% of employment is in agriculture.

The only chance she and her children have of a better life, is if they have the chance to be part of a growing economy. The chance to live in a country with more and better jobs; ways of earning a living.

On current trends, poor countries, even with growth rates 2% per person per year, will take two generations to double the incomes of poor people. This is too slow.

Even with faster rates of growth, it’s going to be a long term process.

But there are grounds for optimism.

High and sustained growth in successful Asian countries has led to the greatest number of poor people being lifted out of poverty in human history.

The number of people living on less than a dollar a day dropped over the last 20 years from 1.5 billion to 1.1 billion – an incredible achievement, in one sense given that the world’s population grew by 1.6 billion during that time. China alone lifted 400 million people out of extreme poverty.

Vietnam has doubled the size of its economy in the last decade. This was accompanied by a fall in poverty from three-quarters in the late 1980s to under a third in 2002, with ‘‘extreme poverty” half that - the most rapid poverty reduction on record.

And growth rates have risen in many other poor countries, including in Africa where over the past decade, 16 countries have seen rates of over 4% - including 10 with rates over 5%, and 3 with rates over 7%.

Now I think that shows us progress is possible, but only if that growth can be sustained by the world’s environmental carrying capacity – a point I will return to later on.

The Make Poverty History and other campaigns last year focused on more and better aid, debt relief and international obstacles to trade – on education, on HIV/AIDS - all absolutely critical and where we have made considerable progress.

But I do feel that many of these campaigns say little explicitly about the creation of more and better jobs for poor people. I think there is little real debate about growth.

Amongst some there is even hostility to the idea of international integration into the global economy. Some argue that globalisation is a race to the bottom. And amongst others there is a mistrust of the private sector.

I say that because it reflects the meetings I have.

This is not in the interests of poor people.

Yesterday morning in Arba Minch in Ethiopia I drove up the mountain to visit a safety net project, coming down were people carrying bamboo poles and woven mats – taking them to market to sell. This is the private sector - 9 out of 10 jobs are in the private sector.

Poor people are the private sector, they are the farmers and small businesses that we are trying to help.

Ask poor people where the best prospect for escaping poverty lies – they’ll tell you it is through self-employment or business - a good job.

Making Poverty History will not be possible without more and better jobs in poor countries.

And by ignoring job creation and growth, poor countries will be relying on aid indefinitely. And that’s in no ones’ interest. And it’s not, on its own, a solution.

We have to do better.

Social justice should be provided, not at the expense of the economy, but founded on it.

A strong economy that provides everyone with a job or the chance of one; that helps the vulnerable who struggle to make an adequate living, and that can support free basic education and health care - is what is needed.

I think we need a better debate than this. I hope the White Paper process can help us do that, and I look forward to our discussion this evening.

I think there are seven essential ingredients of growth and poverty reduction.

The first is undoubtedly a stable macro-economy - with reasonably low levels of inflation and responsible and sustainable levels of public debt. Because stability is the precondition for growth. High levels of inflation hit the poorest hardest.

Here in the UK stable macro-economic policy and fiscal discipline has helped us achieve the longest period of economic growth in 200 years, low levels of inflation and high levels of employment. And what holds true here is no different for poor countries.

And we have seen real progress amongst poor countries in improving their management of the economy – where for instance, between the mid-80s and mid-90s inflation was on average 50%, it is now a tenth of that. This is encouraging.

However stability, whilst necessary both for growth and reducing poverty, is certainly not sufficient.

The second is through getting conditions right for the private sector and improving the investment climate.

The aim must be to bring products to market of the right quality and price, while at the same time creating more jobs. This requires a host of things as we know: building up educational and skill levels, becoming technologically innovative, improving productivity, and managing international integration. A tall order for any country!

I would like to suggest that the single most important thing a developing country can do to benefit from the trade and investment opportunities thrown up by globalisation, is to get their investment climate right. By that I mean the specific factors that create the opportunities and incentives for firms to invest, create jobs, raise incomes, create a better life. And where people earn, pay tax, and where governments can then spend and invest.

This is because improvements in the investment climate lead to increased rates of productive investment and economic growth. And in turn this leads to more and better jobs, and sustained reductions in poverty.

The investment climate is fundamental for both domestic and foreign investment – and we should remember that the bulk of investment in developing countries – some 80% - is domestic.

The basic conditions that are right for farms and small businesses, are also good for large firms, and multinational corporations too.

And I just want to look at two key areas - infrastructure, and a supportive financial sector.

The road I drove up yesterday is being extended. People said the road helps them get to the market quicker.

On a much bigger scale, if you compare a map of Africa with India, you will see their roads and rail connect resource-rich areas to the coast. India’s roads and rail join India.

So it is no surprise that the cost of moving a container between Accra and Lagos is three times the cost of moving it to Europe, and that transport costs in Africa are twice that of Asia.

No surprise that’s one reason poor farmers can’t improve their land – why? Because fertiliser is too expensive, in part, because of no roads.

The Commission for Africa noted that the major part of investments into the roads and railway networks that Africa needs must come primarily from public investment, including aid.

I agree – we went through a period where the world deluded itself that this should come from the private sector.

But that doesn’t mean the private sector can’t play a part too.

DFID supports several facilities that help governments harness private investment for infrastructure. We’ve spent about £100m over 6 years on these, and we reckon they’ve promoted some $1.5 billion of extra investment in poorer countries.

As an example, one of the facilities – DevCo - advised the Mozambique government on getting the best deal for the development of coal mining in Moatize. The result was that a Brazilian company agreed to invest some $2 billion in a venture that will create up to 5,000 new jobs and earn the government some $80m a year in royalties and taxes – and more money to spend on education and health.

Or telecoms - CDC – wholly owned by DFID, has helped to deliver mobile telecommunications across Africa through its investment in Celtel. Celtel has more than five million direct customers in 14 countries, and provides coverage for 30% of Africa's population. It’s the biggest tax payer in the Democratic Republic of Congo and has created 4,000 jobs across Africa.

And this technology is making a difference to poor people – think again of the farmer in Malawi – borrowing or paying to use a mobile phone means she can check prices at other markets and get a better deal – rather than accepting whatever price she’d be offered when she got to her nearest market. It would mean that if telephones were available in Arba Minch then villagers would be able to check whether it was worth the 8 hour walk to market, up and down the mountain.

Access to a bank – to credit or having an account - is another crucial part of the investment climate. While in the UK more than 90% of the population have access to banking services, in African countries this can be the reverse, with more than 90 percent of the population financially excluded.

This means that people cannot save money safely to protect against an unexpected crisis, and that farms and businesses cannot finance their expansion.

When I was in Kenya three days ago, one of the things people said to me was that access to credit was a serious problem because of extremely high interest rates.

Remittances, another financial service, are in some countries 40% of a household’s income, and have been shown to reduce poverty. Better access to lower cost remittances can make a real difference to peoples’ lives.

Getting the investment climate right also includes other areas too, such as property rights or market regulation.

Property rights do have a role to play. In Peru around 90% of businesses have no title to their property, making it very difficult to borrow money and hard to invest.

In Vietnam rural households got increased rights when land was de-collectivised, making it worthwhile for them to invest in their land, raising production and growth. Informal and customary arrangements in many countries mean that reforms need to take into account the interests of poor people, within a proper legal framework.

Now you also need regulation to address market failures such as monopoly powers of large firms, and ensuring that firms have an incentive to control pollution. Or to ensure that appropriate labour standards encourage job creation, but also jobs where people can work in dignity.

That’s why we do need decent work. That’s why we need free trade unions to turn work into a better life for people.

Some countries regulate too little, and others regulate inappropriately or too much, which imposes huge costs on the private sector. Red tape makes poor countries uncompetitive.

Let me give you an example, when I passed through Bangladesh on the way to the WTO meeting in Hong Kong, and was told that it takes 6 to 7 days to turn around a ship in the port, compared to 6 to 7 hours in Singapore. It takes 38 signatures to get your goods through the port and into Bangladesh, but only 2 in Singapore! These barriers to trade are not because of the WTO or a colonial legacy – and it’s not too hard for governments to do something about this.

The third is in raising agricultural productivity.

It is a simple fact that virtually no country – be it China, India, the USA or the UK - has achieved economic progress and improved the welfare of its people without first achieving progress in agriculture.

It was certainly the case in Asia where cereal production has tripled over the last 40 years, lifting millions out of poverty through increased incomes, cheaper food and more employment.

But perhaps most importantly, evidence from Asia and Africa shows that improvements in agriculture not only reduce poverty, but help the rest of the economy grow. In Zambia, each dollar of additional farm income creates a further one and a half dollars of income outside agriculture.

These gains beyond agriculture are particularly important with growing urbanisation - over half of Africa will be urbanised in twenty five years time - and so creating jobs inside agriculture, yes, but also outside of agriculture is a priority.

The fourth through trade.

Poor countries more than anyone else need a fair and transparent global trading system, and equally importantly they need to develop the capacity to take advantage of it.

More and better jobs will come from more trade and investment.

Getting the conditions right for farms, small firms and large business will help build the capacity of poor countries to trade and to benefit from the gains from trade.

Because without trade, they will have to try to make a living from small markets. And in small, closed, markets, there are no economies of scale, prices are higher, there is less choice. What is the biggest market after all? The world.

No country has developed without increased trade. To integrate with, and to compete effectively in the regional and global economy, countries need to manage a complex range of reforms - phased in different ways to meet different country circumstances. And this is what successful countries have done with their trade and development strategies.

At the same time, neither is this to say – as some NGOs do – that trade liberalisation is never the right thing for developing countries. The key point is that there are no “one size fits all” models – that’s why I introduced DFID’s new conditionality policy and why Labour’s last election manifesto committed us to no forced liberalisation, and why we have argued this in discussions on world trade.

China is the obvious example of the potential of trade to lift millions out of poverty, and Sub-Saharan Africa’s declining world share of trade - from 6% in 1980 to 2% in 2002 – costing some $70 billion a year – is an example of the reverse.

But trade reform – while leading to large overall gains – does involves winners and losers. That’s why we need to help countries address the costs of reform, and build capacity, and why the UK Government has committed to provide £100 million per year in aid for trade by 2010.

Now all of these issues are fundamental to the Doha Round, and this is the year the Round should conclude. And the truth is that all of us were disappointed with progress at Hong Kong, we need to do better - and I’ll talk more about where we go next in my speech next month.

A fifth area is in investing in people – providing decent and free basic education and health care, and income support for those who need it.

It’s simply not right that over 100 million children are not where they should be – in school. Nor that 30,000 children die each day from easily preventable diseases.

And the truth is good public services are vital for growth too.

In a globalised world, the number of years of education can be a proxy for income. An extra year of schooling for a girl can raise her eventual wages by 10 to 20 per cent. Expanded access to secondary education is linked to increased employment away from the farm. And Malaria, unless we beat it can reduce growth by over 1%, and AIDS by up to 1.6%.

Now income support – or “social protection” – or “safety nets” - can stop the Malawian farmer selling precious assets – her livestock, seeds for planting and tools – when she suffers a crisis, such as a drought or someone in her family becoming ill.

They can encourage her to take risks with higher yielding crops. They can encourage poor families to keep their children in school – as shown by successful schemes in Brazil and Mexico. All of which contributes to growth, but also to a fairer and more equitable society.

A sixth issue is environmental sustainability.

Because at the New Economics Foundation you know all about this, and I’m sure you’d agree that it’s a myth that developing countries can go for growth and worry about environmental sustainability later on.

Environmental wealth – natural resources - is one of the main sources of growth in developing countries, and central to the livelihoods of poor people.

But at the same time we can’t, and shouldn’t, deny poor countries the chance to grow their way out of poverty. More industries, more places where people can work, factories, agriculture, are good for poor people – it’s about more and better jobs. Poor countries will use more power, consume more resources – and they will need to, if they are to grow. But we can help countries develop better approaches, using assets – forests, water - more sustainably, and help them to manage the environmental impacts of their growth. This includes better environmental information for economic planning, and the use of more efficient and newer technologies – for instance, clean energy. And of course, we also need to focus on the global consequences of growth, because above all in the case of climate change, unless we do something about it, it will have huge negative consequences for us all, and especially for poor countries who are worst affected.

This illustrates a point that NEF has made: that the relationship between growth and sustainability is above all about equity and fairness. We know developing countries need to grow their economies. But we also know that all 6 billion of us can’t consume at the same unsustainable rate as those of us in the developed world.

And the implication I think is clear: if developing countries are to develop sustainably, then part of the deal has to be that we in the industrialised world reduce our carbon emissions and other unsustainable use of resources, if we are to stay within globally sustainable limits.

I want to come back in more detail to some of these challenges in another speech in February.

And finally, strong institutions and capable states

Perhaps more important than anything else, is the ability of governments to promote development – to prioritise wealth and economic growth and job creation.

Unless you have a capable and effective state it is impossible to make progress in the areas I described earlier. Strong institutions matter more than anything else in explaining the difference in growth performance between different countries.

It’s necessary for making markets work properly, for regulating markets. For example the interests of consumers and workers need to be protected along side the legitimate interests of producers.

This is not about privatisation, or multinationals taking over, but about getting the conditions right for poor people to earn a living.

These are the seven key areas that will drive growth and poverty reduction, but poverty reduction can be made faster if poor peoples’ participation in growth is increased. In other words equity is important.

Those who are excluded from opportunities to raise their incomes - from markets, from social and economic assets - have got to be included in order to maximise economic growth and social development.

Growth in Uganda between 1992 and 2003 was high at over 3% per person per year. But over the same period, inequality rose. Had inequality remained unchanged in Uganda, an extra 2 million Ugandans would have been lifted out of poverty.

If income inequality is high, or rising, or if poverty reduction is low despite growth, then more action should be taken to address inequalities in access – including to land, or to opportunities. It also means tackling the power structures that exist in these societies – so that people can have greater say in decisions that affect their lives.

Our agenda is about growth with equity, not either or.

Now all of this is easy to say, easy to describe, harder to do.

Because the trade-offs between promoting growth and promoting equity are complicated. And as with all policy choices there are winners and losers; and the status quo is also a policy choice with its own winners and losers.

We need to do more to help countries assess the impacts of such choices and weigh up the pros and cons, and take their own decisions about their future development.

We know that growth is key, but how to achieve these ends is more controversial than the ends themselves.

The Washington consensus approach is now in its death throes, and very few will mourn its passing. A “one size fits all” approach didn’t focus enough on reducing poverty. We have learnt more about the important role of governments in fostering development and investing in institutions and people, and more about the need to address the costs of adjustment.

And this does not mean in picking this subject, that I believe that business and investment alone will solve the problems of poverty. They won’t. The private sector needs capable states, needs a sound investment environment, needs infrastructure, governance, investment in human development and social protection.

The approach I have tried to outline, however is intended to stimulate debate. We want to hear what you think. Because in essence, it’s a part of the development story that we need to tell more often – the story of how growth should become a more central part of progress in poor countries. Question – do you agree?

Ultimately progress is in the hands of poor countries themselves, and while getting the economy right is fundamental to progress – it is political will that will deliver the changes necessary. “It’s the economy, stupid” is right, but underlying that is another truth. “It’s the politics, stupid”.

After all it was politics which achieved all those things in 2005. It is politics that decides levels of spending on health and education. It is politics that determines what kind of society it is we wish to live in and to create and hand on to another generation.

But that’s for another day and another speech.

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