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What Would Taking Economic Growth Seriously Look Like for the FCDO?

Anneliese Dodds, the UK’s minister for international development, has repeatedly stressed that the UK’s “modern approach to international development” means taking economic growth in lower income countries seriously. It was one of the four priorities she listed in her earliest public communications, and it featured—though less prominently—in her agenda-setting speech at Chatham House in October.

Taking economic growth seriously matters, as some of us have already argued. But it will also be difficult. It is not within the UK’s gift to wave a magic wand and triple investment in poor countries, or to remove the political barriers that make growth-enhancing reforms so difficult to progress in many places. The UK is, on the other hand, capable of purchasing a hundred thousand vaccines and setting up an infrastructure that reliably gets most of them delivered and used by the people who need them most. Even in domestic policy, when a government has control over a wide range of policy levers, the equivalent level of grip to deliver growth simply doesn’t exist—if it did, the last decade and a half in the UK would have looked rather different. That difficulty is multiplied for donors, who cannot directly pull the levers of economic policy, more rarely directly invest in firms, and cannot lend any market or policymaking credibility they have to the partner governments they work with.

Nevertheless, there are concrete steps the UK can take if it is really serious about helping lower income countries deliver growth. We outline four below. Though ambitious about what partnerships can achieve, they require humility about the UK’s role in this process (and indeed in the world); realism about what can be achieved; clarity of thought and discipline in prioritisation; and innovation. If the UK’s Foreign, Commonwealth & Development Office (FCDO) is serious about listening to partners, it will pay attention here: jobs, growth, and concerns over economic management are routinely cited as the top priority of leaders and citizens.

Growth, of course, does not matter uniquely to leaders and citizens. Achieving growth will also sometimes depend in part on addressing other problems, including conflict. But in lower income countries, there is also no conceivable path to addressing citizens’ concerns around jobs, incomes, or public services without sustained economic growth.

Help reset the narrative

The first thing the UK can do is simply support lower income countries in articulating a development agenda that prioritises the things that matter most to them (and indeed to take understand, take seriously and amplify their already-articulated domestic policy agendas). Chief among these are jobs, growth and state effectiveness. This might seem like a minor ambition, but it has large implications.

The first is that it recognises the primacy of domestic policymakers in determining their national economic outcomes. As Cramer, Sender and Orqaby put it (in the African context) in African Economic Development “the keys to generating sustained economic growth and development lie within African countries, in the form of policy and investment strategy decisions.” These will be different in different places, but all of them will require careful and directed attention. The factors which prevent economic growth are not necessarily complicated, but they are difficult to progress on. Solving these issues, particularly in places where state capacity is constrained, means directing attention to these domestically determined priorities rather than those imposed or heavily suggested from outside.

Ken Opalo has bemoaned the culture of policy extraversion endemic in African capitals, where “the adoption of policies that mainly reflect priorities and metrics concocted elsewhere” (in a thinly veiled jab at the UN’s Sustainable Development Goals) is undermining the kind of localised policy making and experimentation that has been vital to historical development success stories. Todd Moss has even more pointedly complained about the gigantic waste of time and effort embodied by performative decarbonisation policymaking, imposed by donors on low-income countries for which there is no possible world in which their efforts on decarbonisation will either materially affect global climate change or represent a better use of scarce policymaker attention than the pressing problems of growth (and indeed, adaptation to climate change, of which growth is a key example).

We are not suggesting that a concern for decarbonisation is necessarily in direct opposition to concerns for economic growth. As Moss has gone on to point out, in a country like Kenya that has abundant geothermal energy, those goals may be well aligned; in a country like Senegal that has abundant reserves of natural gas, much less so.

The key point here is that if the FCDO is serious about supporting locally articulated economic development agendas, then the FCDO would need to let go of preconceptions of the exact pattern and form growth should take. A commitment to support economic growth so long as growth is always and everywhere just, democratic, equitable, climate smart, and nature positive does not constitute a genuine commitment to locally led growth.

Using its voice in both public and closed-doors decision-making fora in the multilateral and bilateral system in which it plays a role, the UK should advocate for—and actually act on—a partner-led development agenda that puts growth first, and puts partner country needs first. It should support countries in developing (and financing, which we will come to below) home-grown plans for growth, including infrastructure, energy and human capital development. Of course these plans need to be consistent with the global need to contain anthropogenic climate change, but that is completely feasible without the kind of performative mimicry and policy extraversion Moss and Opalo complain about, and will look different in different places. A plan for growth in Nigeria and Malawi will both require a plan for energy abundance; a donor funding and supporting this should be willing to pay more for them to be as green as possible, and this willingness to pay should be higher in Nigeria than Malawi (given their relative importance for global emissions). But the sequence matters: start with the plan for growth, and what the energy needs of such a plan are, and then work out how to make it as green as possible. As Opalo has repeatedly said, “poverty is not a climate strategy.”

Of course isomorphic mimicry can happen with growth plans, too. So, part of the UK’s approach here will need to involve political engagement, understanding and working with local political constraints and judging when the proposed growth plans amount to more than empty posturing and are in fact compatible with the constraints to action the pro-development forces in the country face. The UK can directly contribute to this, both through high-level engagements, organised through diplomatic channels, that bring together the key reform-minded actors to discuss what strategies for growth are possible given power dynamics and through technical-level assistance, for example in designing strategies and navigating relationships with the multilateral development banks (MDBs) and other donors, an area some partner countries will still welcome UK support in. It also means being fleet-of-foot and nimble. There are firms and businesses with growth potential in lower income countries, but their needs are diverse and not always obvious (and not always easy to meet). FCDO officials in-country need to invest in getting to know the firms in the places in which they work, and being creative in getting the right support to them at the right time. This means less emphasis on “world-beating” UK brilliance, and greater emphasis on understanding the local context and networks, facilitating discussions and judiciously selected technical and financial interventions.

Get the most out of its financing offer

To get behind these growth plans, the UK will need to work out and maximise its own financial offer. This is not a call for a return to giving 0.7 percent of its economy as aid, at least not in the short term. (That is clearly not on the cards, and doing better doesn’t depend on it.) Instead, the UK can focus on using what it does have more effectively. This will be necessary because countries that do not have deep local currency markets but do have a realistic growth plan will need to get much more external financing. We propose three specific things the FCDO can do to support this.

First, shift British International Investment’s (BII) focus to support growth much more explicitly and effectively. BII has, for mainly bad reasons, been given very large capital increases in recent years, so it has the capacity to scale up its operations. It has also been on the defensive about its direct poverty impact for many years, and has responded by crafting a portfolio that is defensible on these grounds, and which pursues a loosely conceived idea of “development impact”. We suggest BII be reoriented to focus much more ruthlessly on growth, without shifting towards already-richer countries, given the need for additional investment in poorer places. That means less investment in private healthcare or education, which may score well on development impact as measured, but is rarely high on the list of near-term growth constraints. Instead, BII should focus on specific constraints in growth, infrastructure and support to firms with growth and export potential. The details will need to be ironed out, but in the spirit of using instruments for what they are best for, BII should not be a second-rate direct poverty reduction institution, but a first rate growth-focused investor. Getting there may require working more closely with national development banks.

Alongside this, the UK should look at its UK Export Finance (UKEF) model and consider whether there is something to learn for its development activities. UKEF offers guarantees to UK exporters to help them win contracts and fulfil orders, in theory mitigating some of the risks they face in operating in difficult markets. It also makes money for the Treasury, being a truly self-financing government institution. A similar, partly aid-funded, UK Import Finance programme (an idea already used in Germany and Switzerland) that helps firms in lower income countries access the UK market would be good for UK consumers, economic security (when it diversifies suppliers and reduces reliance on single providers), and the exporting firms, for which access to export markets have a causal impact on productivity. More broadly, bringing greater coherence and growth-focus to the UK’s portfolio of non-grant instruments will be helpful. UKEF has itself recently considered its role in development for the first time, and the Government should build on this.

Secondly, the UK should take on a leadership role in developing financing instruments and compacts that protect vulnerable countries when adverse events occur. This includes pandemic financing, natural disaster financing (including through well-designed insurance schemes) and counter-cyclical finance to minimise the scarring effects of response to negative shocks. Dealing with these problems can set growth plans and performance back disastrously, or force countries to choose between growth plans and humanitarian or human development support. We should be looking to minimise these choices. Beyond this, the UK should be supporting as many mechanisms that make low-cost, long-term capital available to lower income countries, recognising however that supply is not always the binding constraint; a little judicious use of technical assistance to help in project origination and development may be highly effective.

Finally, the foreign secretary, David Lammy, has already announced his intention to tackle illicit financial flows. Given the UK and its territories’ outsize role as a haven for dirty money, making a serious dent in this problem could have direct and indirect effects on finances available for development and growth. Matthew Collin has already set out the first steps Lammy could take.

Research and technology

The sooner the “billions-to-trillions” idea is given a decent burial the better. No amount of grandstanding about the volume of private sector investment public funds will “leverage” into the market can hide the meagre track record to date. The public sector has always struggled to make the private sector invest where it wants to. Meanwhile, the role that research and development and technological change can play in driving investment behaviour has been underemphasised. For example, Chinese investment to drive down costs is the real "billions to trillions" story when it comes to solar technologies, not sophisticated blended financing structures.

The UK should focus more on investing in technological change and innovation that is underprovided by the market and which can change the relative prices the private sector faces. Innovations with payoffs specific to lower income countries are underprovided by the market. If the UK (and other donors) are serious about trying to get the private sector to make socially-valuable investments, rather than using grant financing to change the rate of return on specific investments, it should invest in the technological changes and innovations that make those socially valuable investments privately attractive. This approach then affects the payoffs and decision-making of both local and international investors, rather than requiring engagement at the level of the individual deal or instrument. The UK has previous in this field. Possibly the best investment DFID ever made was around £1 million to support the development of and regulatory advice governing M-Pesa in Kenya, kickstarting the mobile money revolution that has transformed African finance.

This approach makes particular sense for large climate investments. Making these investments directly is usually a poor use of grant aid; a smaller amount of grant aid used to incentivise investments in innovation can have a much higher return per dollar spent. There are already a number of candidate sectors for such spending.

Reforms in the UK itself

Two of the ideas already expressed have been UK-focused: tackling illicit financial flows and the establishment of a “UK Import Finance” institution. But this is just the tip of the iceberg. Of all the levers that the UK can use to affect growth opportunities beyond its borders, UK policy itself is the one it has most direct control over. There are a number of UK-focused reforms that will influence the viable economic development path of partner countries.

The first, and most obvious, is through migration. While the discourse around migration remains heated in the UK, there are specific areas in which opportunities can nevertheless be crafted. The first is through “green-skilled” migration, which creates opportunities for migrant labour and relaxes labour constraints in specific sectors necessary for the achievement of the UK’s own net zero ambitions. These migrants will typically be building long-term infrastructure in the UK, either domestically or industrially, and given their valuable skillset and the services they provide are likely to be an easier political sell than broader migration restrictions.

But the movement of people for economic gain is not only migration. The UK should also look at current practices relating to “Mode 4 services”, which are provided across borders through the presence of a person. Mode 4 trade in services can be mutually beneficial for the UK and partner countries, with the UK able to control the terms of their stay, but also benefitting from an economic exchange—one that service providers from other countries also benefit from. There may be limited scope to expand Mode 4 service trade with lower income countries, but what scope there is should be explored.

Along the same lines, the UK should also look at making trade in services with lower income countries as easy as possible. Post-COVID changes in how clients and businesses engage with each other (notably the rise of videoconferencing) make the possibility of trade in services larger than ever before. It is not clear to what extent regulation and licensing laws have kept pace. There is no reason that UK businesses or individuals should not be able to hire accountants, auditors or solicitors from, say Kenya, as long as there are some protections in place for clients. Making such exchanges easier (while protecting customers) is another win-win, providing exports for less well-off exporting countries and cheaper services for the UK.

The UK should also make the most of its ability to export services: it has an outstanding university sector, and the possibility of generous scholarships. The UK should look at this as a possibility to foster ties with partner countries (giving ambassadors a few hundred thousand pounds of non-aid money to use for scholarships would give them a cheap but highly-valued soft power tool) but also to help partner countries fill domestic skills gaps. Existing scholarship schemes (including Chevening, an aid-funded scholarship) may meet demand; but if not, expanding them is cheap and valuable. More broadly, the FCDO should be looking at which UK services are in genuine demand abroad and how best to make connections to foster their provision—a listening exercise, in the first instance, ideally involving systematic data collection.

This is not an exhaustive list. But it is a starting point. Taking growth seriously means doing better than just increasing the share of the ODA budget going to support microenterprises or providing microcredit. It’s not about “fostering entrepreneurs” in poor countries (if there is one thing no poor country we have ever visited lacks, it’s entrepreneurial spirit). The danger for FCDO’s reputation is that it will talk a big game about growth but then just do the same old programming with the same mediocre results. The proposals here do not guarantee success, but they provide a template to follow, with better chances than more of the same.

We are grateful to a number of people for excellent and helpful comments, including Charles Kenny and Nick Lea. Any errors or omissions remain our own.

 

Dr Roli Asthana is a development economist. Over nearly two decades at DFID/FCDO, she did roles in Asia, Africa and the Middle East, culminating in postings in China and India. She has also worked for the UN, London School of Economics and think tanks. She is currently Senior Director for Economic Development at Abt Global in Britain.

 

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.


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