Full speech, including references, given by International Development Minister Shriti Vadera at the launch of the Doing Business Report 2008, 12 October 2007
12 October 2007
 Growth
and poverty reduction
I am particularly pleased to be in an audience of the top reformers in Africa
who are putting in place the regulatory environment needed for doing business.
Ghana and Kenya are in the top ten reformers world wide and Mauritius is the
highest ranked African country in the Doing Business Report. I join you all in
congratulating them.
I have been waiting for this sort of sympathetic audience since joining the
Department of International Development to talk about something I think the
development community could and should talk and do more about. And that is the
centrality of growth and wealth creation as routes to poverty reduction. I grew
up witnessing poverty in Africa and India and worked for 14 years in the City
and eight in the Treasury. Perhaps as a result, it’s in my DNA to see growth and
poverty reduction as part of the same equation.
As Gordon Brown said at the UN in July, 'perhaps for too long we have talked the
language of development without defining its starting point in wealth creation -
the dignity of individuals empowered to trade and be economically self
sufficient.'
Why are high growth rates essential to the MDGs?
At the halfway point of the Millennium Development Goals, we have a very
mixed picture - some great successes and some disappointments.
During this period foreign aid has grown rapidly, albeit not enough. And there
have been many innovative aid programmes implemented. But the single biggest
factor separating success from failure is economic growth.
Countries that are growing rapidly are on-track to achieve most of their MDGs,
and those that are not are failing.
Countries growing at 8% per year for a decade:
- enjoy a doubling of per capita income;
- are likely to see a reduction of infant mortality by over 40%; and
- an increase in real spending on health and education of over 130%.
The astonishing power of compound growth means that the gains from higher
growth rates lead to disproportionate gains in income levels.
According to Dollar and Kray, growth accounts for more than 80% of poverty
reduction, and has lifted 500 million above the poverty line since 1980, while
less than 20% was as a result of changes in inequality (1). This analysis has
generated much debate but the message is none the less clear.
In East Asia, where growth has averaged 9% per annum over the last 15 years, 300
million have been lifted out of poverty.
In 1957, Malaysia and Ghana had the same living standards. But by 2000 incomes
in Malaysia were 13 times as high as those in Ghana. Now Ghana is likely to be
one of the first African countries to achieve MDG 1 – to halve the number of
people living on less than a dollar a day – and is on its way to middle income
status.
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Perhaps for the first time we have a sense of optimism in Africa with many
countries growing at better rates than ever before, some of course fuelled by
commodity prices.
I am not arguing for a ‘growth alone’ model of development and return to
discredited trickle down economics. On the contrary, we know that the pattern of
growth, inequality and the distribution of opportunity are absolutely critical
for growth to lead to poverty reduction. But neither can we argue for purely
welfarist approaches to development. If the historical experience of the past
200 years has taught us anything, it is that sustained human progress in many
dimensions - in health, education, employment conditions, and living standards -
depends critically on increasing productivity, linked in turn to innovation and
the development of capacity.
So I am simply concerned that sometimes we lose sight of the simple fact that,
without growth, sustainable human development is a largely theoretical
proposition.
We also sometimes lose sight of the fact that the purpose of aid is to no longer
require it. Unchanging long term aid dependency should be a measure of our
failure. I do not know a single country that actually wants to depend on DfID to
provide for their people. As Paul Kagame, President of Rwanda, recently said, "…
we have to be honest about the consequences of aid dependence. Countries that
have used aid as a temporary support while domestic and foreign investment
stocks are built up have achieved lasting success." (2)
We know that as incomes grow, so a higher share of income goes into government
revenue and finances public spending on health, education, and other social
sectors. Private spending on these activities also increases.
A sustained 2% increase in per capita growth would bring forward the date at
which a typical low income country can domestically finance recommended health
expenditure by several decades according to Professor Venables. Growth is the
mechanism through which aid funded support for public services can be made
sustainable.
This is not a statement that should be misinterpreted to mean that aid is not
necessary in moral or economic terms, just that it is not sufficient. Nor should
it be interpreted to mean DFID will neglect human development, move away from
its White Paper commitments or that the focus of our aid expenditure will move
away from basic services. Human development matters in its own right – we are
committed to the Millennium Development Goals for education, health, access to
water amongst other things. Human development also critically contributes to
growth. And in particular to the growth that we want to see – inclusive and
environmentally sustainable growth.
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Do we know how to promote rapid and successful growth?
I think it would be fair to say we still have much to learn. What we do know
is no country has enjoyed sustained rapid growth without:
- First, macroeconomic stability.
- Second, security from predation in which I include political
instability and conflict, crime, corruption and weak contract
enforcement, all of which threaten potential returns and make investment
unattractive. Alan Greenspan said at a dinner in London recently that
the only real difference he saw between a developed and developing
country is the rule of law.
- And third, openness to the international economy. We know that no
country has grown on a sustained basis in recent times without
successfully integrating into global markets. Trade brings access to new
ideas, skills, and to international science and technology networks.
However, these conditions are not sufficient as they neglect the supply side
of the economy which has huge inelasticity in developing countries. The ‘drivers
of growth’ in low income countries include:
- Infrastructure - transport, and power especially (3)
- Skills
- Access to finance
- Access to technologies and information, especially in agriculture
- A supportive regulatory environment, promoting competition, ensuring
markets are contestable
Delivering these conditions requires a focussed and prioritised Government
effort. And this requires building capable governments and strong institutions
including a strong, meritocratic civil service, to establish the rule of law,
and to implement macro- and micro-economic policy.
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What strikes me is how similar the drivers of growth are to the ones we have
been grappling with in the UK and other OECD countries. At the Treasury our
over-arching ambition was to improve productivity in the economy, which
historically lagged behind that of our major competitors. The five drivers
identified by the Treasury were competition, enterprise - including better
regulation and access to finance, science and innovation, skills and investment
in physical capital (4).
The similarities are remarkable. Ndulu has suggested that it is Africa’s slow
productivity growth that distinguishes it more sharply from the rest of the
world (5).
What we are talking about is ensuring a supply response that has often been
lacking – and which explains much of the failure of many structural adjustment
programmes of the past. Liberalisation and privatisation did not overall deliver
the productivity improvements needed.
We also know from empirical studies of growth in the 90s that there is no one
unique formula to accelerating and sustaining growth. Policies and paths to
growth have been country specific as set out in the Commission for Africa
Report. Some countries will grow via manufactured exports; some via natural
resources; some via services. And over time the drivers of growth will change.
So, to succeed, countries need to formulate prioritised, sequenced and costed
growth strategies. These can only be country led and country specific, based on
both the constraints and potential of an economy. The long shopping lists, with
which we have become familiar, setting out endless actions and investment
required are not only impossible to implement, but they risk missing the point.
And we also need to assess the feasibility of, and incentives for removing
constraints. This means understanding the political environment and recognising
the unique role of political leadership in facilitating change.
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How do we make growth 'inclusive'?
High growth levels are necessary they are by no means sufficient. While almost
all growth benefits the poor, it is very rarely proportionately, and the extent
to which it translates into poverty reduction and improvements in life quality
for the poorest varies considerably.
Growth has been more powerful in reducing poverty in some countries than in
others. We know that high levels of initial inequality reduce the impact of
growth on poverty reduction, as does rising inequality over time. (Had
inequality not risen in Uganda in the 1990s a further 2 million people would now
not be poor.)
Contrary to popular belief - and my own intuition - growth does not necessarily
lead to increased inequality. Inequality and changes in income appear to be
uncorrelated. Evidence from the 80s and 90s suggests that there is a roughly
equal chance of growth being accompanied by increasing or decreasing inequality.
But there is more recent experience that the fastest growing economies are
experiencing rising inequality.
Countries differ in how well they translate income growth into human development
and well being. India's emergence as a high-growth economy is a good news story.
But unlike in many other countries, malnutrition is falling very slowly, from
52% in 1992 to 46% now. And slower growth Bangladesh has overtaken India in
terms of reducing child mortality.
Pakistan and Indonesia both grew at pretty much the same rate annually in the
60s and 70s but Indonesia reduced its shortfall in non-income components of the
Human Development Indicators by 50%, while Pakistan achieved about half that.
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The reasons are undoubtedly complex. Deep-rooted inequalities based
especially on gender but also on class, caste and ethnicity have proven very
stubborn.
It is interesting that those countries with higher scores on ‘ease of doing
business' in the Doing Business Report have larger shares of women in the ranks
of entrepreneurs and workers. In DRC, where I was this time last week, women
need their husband's permission to start a business. Only 18% of women there run
a small business. In Rwanda, the country with the highest level of women MPs in
the world, the figure is 41%.
So special focus needs to be given to including the poor in the process of
growth, not only because of the moral imperative, but because it makes economic
sense too. Where people are marginalised or have no political voice over the
decisions that affect them, they tend not to share in national resources or
equitably in the benefits of growth. Poor people have to be made the subjects of
development, not the objects.
Raising productivity and reducing risk in agriculture is one way to reach the
poor. In sub-Saharan Africa, 70% of people depend on agriculture for their
livelihoods, and over 90% of producers depend on rain. So we should be clear
that vulnerability is a problem, which is likely to increase with climate
change.
Farmers can be helped by interventions to help reduce risks from shocks and
protect their assets.
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Unprotected risk is a powerful constraint on productivity – and droughts are
a potent source of long-run poverty and disadvantage. Social protection is
important not just because it protects nutrition and health, among other things,
but because it can provide a platform for early recovery and prevent loss of
assets and erosion of productivity. This was of course one of the main purposes
for the creation of the welfare system starting in the 19th century in the UK.
That is why we should place social protection firmly as part of the growth
agenda. Ethiopia’s Productive Safety Net Programme (supported by DFID) reaches
some 2 - 3 million people and has enabled vulnerable households to protect and
build their productive assets. More broadly, social protection, improved rural
transport infrastructure and investment in water management are critical for
raising economic returns and reducing risk. Without these investments, poor
people will be unable to produce their way out of poverty – and we are left with
trickle down approaches.
Financial exclusion remains a barrier to all too many in the poorest countries.
Micro-finance is making great strides all around the world, and new developments
using mobile phones are astonishing. But about 80% of the population in the
poorest countries still lack access to a bank account of some form.
Poor people need access to labour markets, through getting the skills they need.
I think many of us in the donor community put insufficient emphasis on
developing effective skills and training programmes and need to do much more
work here.
Corruption is never pro-poor. And it is often much worse than theft. It can stop
growth in its tracks. It can stop competition, stop innovation, and reduce
efficiency. An important study of the Nigerian economy found that historically
not only had oil wealth been squandered but it fundamentally altered governance,
contributing to much lower long run growth by at least 0.5% a year (6).
Finally, I must address one other dimension of the quality of growth. Perhaps
the biggest challenge today is urgently to work out how the world is going to
secure the low carbon growth we need. Almost all countries have significantly
reduced the carbon intensity of their GNI, but not nearly enough. Reducing
overall global emissions will require rich countries to cross this carbon
transition, and we need to help poor countries find non fossil fuel intensive
paths to growth. This is a huge challenge and merits its own discussion. We need
to agree what carbon justice means and we need to get as much poverty reduction
as possible per dollar of growth.
Adaptation will be costly, so the arguments for the international community to
meet its aid commitments are even more compelling than ever. And you will have
seen that the Chancellor earlier this week confirmed that the UK is on target to
spend 0.7% of GNI on ODA by 2013, two years ahead of the EU target.
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What is the role for development agencies and how will DfID rise to the
challenge?
China and India are powering ahead - at 10% growth per year - with virtually
no help from foreign assistance in the case of China, and proportionately little
in the case of India. In both cases there are worries about human development
but in both cases they are generating increased resources to invest in their
people.
So what is the role for development agencies, such as DFID, and of aid in
helping to promote high rates of growth?
First, most low income countries don’t have the variants of capabilities, human
capital, saving rates, or scale of domestic market that China and India have
used to such great effect over recent years. Most African counties are still
lacking many of the basic prerequisites, particularly in the supply side of
their economies, for growth as I have already discussed. Development agencies
need to consider the investment priorities of their partner countries.
Second, development agencies can help countries make their growth more
inclusive. This can be done by:
- helping to build and protect the assets of the poor;
- promoting their access to markets - access to skills for job
seekers, access to finance for entrepreneurs, access to seeds, livestock
and fertiliser for farmers, and physical access via infrastructure
investment;
- strengthening property rights for the poor;
- promoting technology diffusion;
- and by protecting the poor from natural and man made shocks such as
crop failures.
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And it is not only about aid. We need to change the aspects of the
industrialised countries’ behaviour that harm growth and development - trade
distorting subsidies and other trade barriers, climate change, the arms trade,
excessive constraints on the flow of knowledge via intellectual property and
TRIPs, to name but a few.
I want to reassure those who might worry that more emphasis on economic growth
means a change in DFID’s policy on economic conditionality. On the contrary, my
own experience has been of a difference in emphasis between traditional donors
and the international community on the one hand recently focussing on a
predominantly social expenditure approach, and governments and people in
developing countries, on the other, emphasising their desire to grow and create
jobs and opportunity. I expect we will be listening more carefully to the
aspirations of our developing partners to grow and responding to their
frustration about the lack of emphasis on growth promotion in the international
development dialogue. This agenda only works with leadership from developing
countries. International donors are definitely only the supporting actors.
- We want to develop long term partnerships with countries that have a
commitment to grow, and a credible strategy for achieving it;
- We will support analytical work by countries on growth diagnostics,
which lead to prioritised action plans and investment programmes;
- DFID will therefore be more responsive to countries’ efforts to
increase jobs and improve incomes and stand ready to support them,
including by providing practical assistance on the development of
policies, on capacity and institution building for growth;
- We will support programs to reduce risks and help protect assets of
the poor;
- We will continue to work with our international development
partners, the multilateral development banks and bilateral donors to
improve our joint offer on developing and financing growth strategies
including infrastructure and skill;
- We will sponsor world class research into how to make growth more
inclusive.
Critically, we will continue aggressively to pursue international trade
agreements that allow low income countries to benefit from globalisation.
Successful completion of the Doha round is vital, as is securing EPAs which
catalyse development.
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The role of the private sector
There is no need, to this audience, to emphasise the role of the private
sector – you are the wealth creators. This Report is about how we as Governments
can enable you to get on with it, not least by getting out of the way much of
the time. The role of the domestic private sector is key but I would like to
also commend many foreign investors for their leadership on, for example, labour
rights, on the Extractive Industries Transparency Initiative, and increasingly
in the domain of climate change.
But I still hanker after a role for northern companies that moves beyond minimum
standards, beyond philanthropy, beyond corporate social responsibility into
making them long term partners in development. By increasing the level of value
and wealth that is created in the country of investment, by increasing the level
of revenue that is captured in country, through investment in domestic supply
chains and developing local business partnerships, through skills and technology
transfer and by bringing the unique approach to solving problems that the
private sector has. One example of this approach is the project we have funded
with Vodafone which uses mobile telephony to reduce the cost of transfers within
Kenya and has the potential to be used for international remittances.
We were delighted that more than 20 of the world’s leading companies, including
Unilever and Patrick Cescau personally and Citigroup, signed up to the
declaration on the urgency of meeting the Millennium Development Goals in July
this year. We are working with them to translate this commitment into reality,
developing ideas for partnership that are core to their business and skills and
transformative in terms of growth and development in poor countries.
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In closing
There are reasons to be more optimistic than in several decades, as world
growth remains healthy, and Africa’s average growth - at 5% for the past five
years - is higher than at any time since the 1970s. Countries like Uganda and
Mozambique were among the highest performing economies in the 1990s. Others like
Ghana and Tanzania are now showing very encouraging signs in terms of raising
and sustaining growth. Democracy is taking root across the continent, and
conflicts are declining. Macroeconomic stability is evident almost everywhere.
But Africa as a whole remains significantly off-track for achieving its goals
for 2015 - and it is vital that we all work together to redouble our efforts to
raise growth and improve its quality.
'Doing Business' is a remarkable endeavour. By providing some important metrics
year on year on a globally comparative basis helps us focus and prioritise on
what matters. It makes a distinctive contribution to assessing and addressing
the critical constraints to growth, and I am delighted to be here at its launch
today.
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Notes
(1) Dollar and Kray, 2002.
(2) Kagame, Time for Continent to Insist on Defining its own Future, Business
Day (Johannesburg) 2007.
(3) A summary of evidence of the full economic rate of return to infrastructure
in developing countries suggests returns of 30-40% on telecommunications, 40% on
electricity generation, and 200% for roads, with returns being higher in low-
than middle-income countries. Estache, Infrastructure: A Survey of Recent and
Upcoming Issues, 2006.
(4) Chapter 3 Budget and Pre-Budget Reports,
 http://www.hm-treasury.gov.uk/.
(5) Ndulu, Challenges of African Growth, 2007.
(6) Martin and Subramamian, Addressing the Natural Resource Curse: An
illustration from Nigeria. IMF Working Paper, 2003.
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