Examination of Witnesses (Questions 21
- 39)
TUESDAY 14 FEBRUARY 2006
PROFESSOR ADRIAN
WOOD AND
MR SUNIL
SINHA
Chairman: Thank you, Professor Wood and
Mr Sinha. You have heard the first session here and we are grateful
to you for coming and giving your thoughts and sharing them with
the Committee. I am going to ask Marsha Singh to kick off. You
waited so long until the end of last session you can start the
next one.
Q21 Mr Singh: I am not sure who is
the best person to answer this question but it appears that there
is no correlation between growth and poverty reduction and various
countries have had different outcomes in terms of growth and poverty
reduction. We have got this new concept now of pro-poor growth
in terms of international development. What is pro-poor growth
and what are the factors that are linked in terms of pro-poor
growth?
Professor Wood: Thank you very
much. Just on your first observation about the lack of relationship
between growth and poverty reduction, I hope you will not mind
me saying that there is actually a very, very strong relationship
across countries between growth and poverty reduction. Countries
in which growth has been faster have consistently been the ones
in which poverty has gone down the most. If you try and explain
the variations of poverty reduction across countries over the
past 20 years or so, about 75-80% of that is explained by variations
in the growth rates, so it is extremely important. In regard to
your question of what is pro-poor growth, the simple answer is
that pro-poor growth is growth that benefits the poor, and that
means growth that pushes up the incomes of the poor. That depends
on two things. One is the overall rate of growth of the economy
and the other is the share of that growth that is going to poor
people. So we want to try and make the growth of the incomes of
poor people as fast as possible and that means trying to find
the set of policies that will yield the best possible combination
of a rapid overall growth rate and what is happening to the share
of the poor. The share of the poor needs to be going up but the
poor will be better off in a fast-growing country where inequalities
are widening a bit than they will be in a slow-growing
country where equalities are shrinking.
Mr Sinha: Just to add to what
Adrian has said. Firstly, we have got to say for a long time we
have used growth as a proxy. What we have been interested in is
exactly what Adrian was talking about, what is happening to the
incomes of the poor. If you take the MDG1 Target of exceeding
$1 a day, what matters is how fast the incomes of the poor are
going to exceed $1 a day. When you look at that we know, as Adrian
has said, that growth is absolutely a necessary condition and
very often the major factor in reducing poverty because it works
indirectly as well as directly. Growth will give more opportunities
for the poor. If you do not have growth the opportunities continue
to be limited. What we have also found is that the response of
poverty to growth varies tremendously. For 1% growth, what the
studies show is that you can get a 0.6% decrease in poverty, in
fact some studies show as little as 0.3% reduction in poverty,
or you can get a 4% decrease. So this is making us concentrate
on the outcome indicators that you are interested in, which is
the incomes of the poor and how fast are they growing, who amongst
the poor incomes is benefiting, because you can get some marginalised
groups whose incomes are not growing at all. That is the number
one thing. The second thing it has made us concentrate on is not
just pace of growth but the pattern of growth. You can have growth
which does very little for the poor. A typical example is the
so-called resource curse countries, the ones that discover oil,
diamonds and so on. The experience is that they can have short
periods of very high growth but that does not benefit the poor
because what happens is that the linkages between the sectors
that are growing and the rest of the economy are very weak and,
through something I will not bore you with called Dutch disease,
can reduce the incomes of the poor. The studies show that in that
kind of resource curse country what happens is that in the long
run growth is not sustained and surely you do not alleviate poverty.
Very often you get conflict and that will undermine growth anyway.
On the other hand, you can have a very pro-poor pattern of growth
where you have conditions like in China in the early 1980s, Vietnam
in the 1990s and so on, when you get the sectors in which the
poor are concentrated growing rapidly and sectors which can use
the assets of the poor—namely labour—are also growing
fast. You get an increase in farm incomes and an increase in non-farming
opportunities, so you get massive poverty reduction. We are no
longer saying it is pace; we are also saying it is pattern.
Q22 Mr Singh: Would you say that
India's rate of growth, for example, is mainly a benefit to India's
middle class rather than its rural poor?
Mr Sinha: There is a huge amount
of studies on India, as you can imagine. India's own intellectual
community is pretty rich. Also, lots of other people have done
lots of work on India. What they find is that whilst the overall
pattern you are talking about, especially in the recent growth
of some industries like ICT and so on, has been very beneficial
to the middle class, it is not true to say that growth has not
benefited the poor. It varies by state. For instance, the Marharashtras
et cetera of the world have had really high rates of pro-poor
growth. There are two critical things. One, the pattern of growth
has been very good in this way of having productivity of agriculture
growing and these non-farm opportunities in the industries that
the poor can move to. There have to be jobs of a skill level that
they can fill. Then you have high rates of initial education and
good health. The quality of the state is almost certainly the
decisive factor in the differences between states in India. Uttar
Pradesh and Bihar have very little growth and very little pro-poor
growth. Marharasthra and the Punjab, Gujurat, the western side
generally has much more pro-poor growth.
Q23 Ann McKechin: In speaking about
growth, obviously another factor is the inequality in incomes
between the poor and the rich in societies. Some people feel that
when you have a wider gap your ability to use growth in the economy
is constrained. If you agree with that assumption, how should
poverty reduction strategy be focused? Should it be focused on
growth and simultaneously empowering the poor to take the benefit
of it or should we promote distribution and reduce inequality,
or is it some magical combination of both these factors?
Professor Wood: It is not a magical
combination but it is fairly straightforward. What you need to
do is to give the poor more assets and more access to markets
so that they can participate in the growth process more. That
is giving you the best of both worlds. It is accelerating growth
because it is getting a larger proportion of your population involved
in the growth process and it is channelling some of the benefits
of the wider growth to poor people who are being more involved
in it. When I am talking about assets, fundamentally the most
important asset is probably education for poor people, to increase
the value of their labour and health also increases the value
of their labour. Access to credit and land through reform of tenure
schemes is very important. Improvements to rural infrastructure
are absolutely crucial in terms of giving poor people better access
to markets. To a very large extent, there is not any trade off
here. Strategies that involve more poor people in the growth process
are good for both growth and a reduction in inequality.
Mr Sinha: Inequality matters.
There is a triangular relationship between growth, inequality
and poverty. One of the determining factors for when growth is
most efficient in reducing poverty is that initial conditions
of inequality are low. One of the advantages in reducing poverty
in China was that the initial inequality was low. Where inequality
is high, because you have such a skewed ability to participate
in the economy, there is a tendency that growth will be less effective
in reducing poverty. What growing inequality will do is reduce
the effect of growth on poverty. I would like to echo what Adrian
said about there being no formula. One of the recent documents
which you might care to look at is a study done by the World Bank
called Growth Experiences—Learning from the 1990s[4].
For the first time, the Bank admits that there are no formulae.
All this elusive search for some Washington, Paris or other consensus
is not what it is about. It is about context. Context determines
what is required. In the middle income countries of Latin America,
where you have very high inequality, growth is very poor at reducing
poverty. You would need programmes and policies to address inequality
and particularly these policies are likely to have both an economic
and social dimension. Very often, those who are stuck in poverty,
those who are at the bottom of income distribution, tend to be
from particular social groups. The indigenous people of Latin
America, the Afro Latin or Afro Caribbean people, tend to be poorer
than others. There is a correlation there also between social
discrimination and economic discrimination and disadvantage. You
have to find the right context.
Q24 Ann McKechin: You have to adapt
your policies. Presumably in the case of China, it is now beginning
to see much greater inequality arising. They have to change their
policies to try and tackle that growing problem.
Mr Sinha: Absolutely. From about
the beginning of the 2000s China has hardly reduced poverty. Growth
has remained constant at 10%. The Chinese Government was very
sensitive to these things and has adopted a policy called "Go
West." It is too early to say whether Go West is working.
We only have anecdotal evidence. But they have seen that it is
not going to happen by itself. You need policies to address that.
Q25 John Barrett: Professor Wood,
you mentioned the importance of basic services, health, education,
access to credit, security of land tenure and how they were essential
in the promotion of pro-poor growth. These are all things which
DFID and others are supporting anyway. How do we make sure that
state involvement in these sectors is going to be pro-poor or
would that happen automatically?
Professor Wood: No, it does not
happen automatically. The governments of developing countries
around the world vary very greatly in the degree to which they
care about the poorer sections of their community. That depends
to some extent on whether the poor are a minority or a majority.
If they are a minority, it is more likely they will be overlooked
because the views of the majority will prevail, but it also varies
for any given proportion of poor people with the attitudes, background
and orientation of the government, as you will have observed.
Q26 John Barrett: Is there any way
that the state can play a useful role in making sure it is heading
in the right direction and that growth is pro-poor rather than
heading in the opposite direction?
Professor Wood: Yes. What a state
committed to making growth more pro-poor will do will be to make
sure that the poor are involved in the growth process in the sorts
of ways I have described. Equally, the state will also be committed
to achieving a high rate of overall growth. If I may refer back
to some of the questioning of Kurt Hoffman, the one point that
I think did not come through clearly in particular in relation
to the Chairman's initial question about Africa is if you want
growth in Africa you have to have high levels of investment. You
will only have high levels of investment if businessmen feel it
is worthwhile investing.
Q27 Chairman: It could be investment
by small businesses but an awful lot of them.
Professor Wood: I was talking
about the aggregate volume of investment. It could be by small
businesses, big businesses, rural businesses, urban businesses,
foreign investors. That is what is not happening and has not happened
in Africa. It has not been perceived as worth businesses' while
to invest. Look at the capital flight: 40% of Africa's capital
stock is held outside Africa. This is the growth bit of pro-poor
growth. The key thing one has to think about in relation to the
Chairman's initial question is how in this context aid can be
used to make investment less risky and more worthwhile for a broad
swathe of private enterprise in Africa. That seems to me to be
the central issue.
Q28 John Barrett: I was going to
ask if you could follow up the importance of the private sector
in that very investment.
Mr Sinha: To answer your first
question, what we know is that public expenditure is very often
not pro-poor. The studies that we now have that link the two—how
much was the expenditure? Who benefited from it?—show that
very often investment in health, education and infrastructure
is not pro-poor. That raises the real issues that we are beginning
to tackle and understand. It is the political economy and the
nature of the state that determines where this investment will
go. What was your second question?
Q29 John Barrett: It was to follow
up on that. If the public sector is not often pro-poor, there
is the opportunity for the private sector to make sure that it
delivers direct pro-poor growth. How does the private sector play
a key role in this?
Mr Sinha: I have spent my life
working on private sector development and therefore I have a certain
understanding about what the private sector can be and cannot
be expected to do. One thing that was very good when Kurt Hoffman
was talking was that he was not talking about large, international
business. The private sector is the vast majority of private actors
from farmers onwards. Mainly, it is the indigenous, domestic private
sector that is the driver of growth. FDI, Foreign Direct Investment,
plays a huge role but never the overriding role. Even in China
it is only 30% of GDI, Gross Domestic Investment. We have to set
the scene here. The second thing is that the private sector has,
through its drive for entrepreneurship and profit, an ability
to create growth. It responds to the environment that you set
for it. The regulatory environment, the investment climate, will
determine where it goes. Even in the worst governed country, there
will always be some sectors that it is worth taking the risk of
investing in because the reward to risk ratio is favourable. There
are people queuing up to invest in Sudan today in the oil sector
because the reward to risk ratio is good. You can always find
some investment for diamonds. The question is about deepening
that incentive for entrepreneurship and investment so that it
does get through to the broader sectors of the economy and the
smaller type of business which is almost certainly going to be
more disadvantaged from constraints in the regulatory environment.
This idea that the private sector steps in and cures the problems
of society frankly has a certain mileage but we have to see that
as more of a corporate social responsibility issue and not about
the broad base of creating appropriate incentives and regulatory
frameworks that work. That is the role of the state. You need
the state, the private sector and civil society interacting with
each other and having the checks and balances between them to
make sure that policies are pro-poor.
Chairman: The problem I think we are
discussing is the absence of the private sector, to a large extent,
from the equation.
Q30 Mr Davies: There is a contradiction
here that is very fundamental, is there not? Parliament has decided
to spend taxpayers' money on trying to relieve poverty in the
Third World, very rightly so in my view. Parliament set up the
Department called DFID and DFID, like other bilateral donors,
is a state agency. The multilateral donors are just consortia
of state agencies. We all recognise that in order to relieve poverty
what you have to do is create wealth. The only people in this
world who create wealth are in the private sector. Experiments
existed in the 20th century in Soviet Russia with the public sector
creating wealth and they were a uniform disaster. You have these
state organisations trying to create wealth but they themselves
know they cannot. DFID recognises at least in theory that the
private sector is key to resolving the problem of poverty and
desperately wants to spend some of its budget. Most of its budget
goes to other governments and so forth through direct budget support.
It wants to help the private sector as much as possible. It realises
that direct investment will not necessarily be very well targeted
or very well selected and will also cause distortions in the local
economy. The paper that DFID produced in December[5]
recognised that. Against that background, what are the lessons
we should be learning? What is the scope for DFID to affect, hopefully
positively, the wealth generation capability of the poor countries
that we are targeting? Are their policies vis a vis the
private sector currently well received? If there are not, what
improvements would you advocate?
Professor Wood: You make some
very good points there, particularly about the issue of how does
a public sector agency promote development of a private sector
in another country. That is a key issue. I do not think the contradiction
is as acute as you fear because, if you look at why investment
is so low in Africa, it is fundamentally to do with failures of
government in African countries. It is political instability,
conflict, lack of infrastructure, chaotic, non-existent or excessive
regulation. These are the things that are choking off investment.
Q31 Mr Davies: Let me stop you there.
The only way that DFID can affect most of those things, excessive
or badly conceived regulation for example, inefficiencies, excessively
large government machines, corruption and the rest of it, is to
use the leverage which conditionality gives one. One says, "We
will give you a certain amount of aid and budget support in exchange
for you changing your local policies." Are you telling us
that one of your answers to my question is that we should use
conditionality as effectively as we can to secure indigenous policy
change in the target countries?
Professor Wood: It has been shown
that using conditionality in a very direct form is not effective.
What is crucial is to find developing country governments that
are committed to taking this approach and then channel our aid
money towards them.
Q32 Mr Davies: That is ex post
rather than ex ante conditionality.
Professor Wood: It is. That is
a good way of putting it. The thrust of what I was saying before
is that there are many things for which aid money can be used,
channelled through the governments of developing countries. I
was not suggesting that the governments of developing countries
in Africa are too big. In many cases, in some senses, they are
too small especially in terms of adequately trained, equipped
and paid civil servants to run things like law and order
and to run infrastructural services. Fundamentally, you cannot
have high levels of private investment in a country where you
do not have an enabling and supportive government. This was a
truth that was recognised by Adam Smith and it has not changed
since then.
Q33 Mr Davies: We have to make sure
that those governments are enabling and supporting?
Professor Wood: Absolutely. We
cannot make sure but those are the governments we should be supporting.
Mr Davies: We have to influence the policy
mix of those governments.
Q34 Chairman: If you talk about budget
support, one of the arguments against budget support is substitution.
In other words, the government does not have the incentive to
generate its own successful economy to tax by its own revenue
because it is getting it from outside. There is a danger that
it lowers the pressure on that government to create a successful
economy. Secondly, if you recognise that the problem is you have
all this corruption, bureaucracy, inefficiency and so on, is the
right thing to say, "We would give you budget support if
you tackle these problems" rather than start giving budget
support and then trying to withdraw it where the leverage action
does not always work?
Professor Wood: DFID's policy
on this is very clear: that budget support and indeed aid in large
amounts is given only to countries which have relatively clean,
transparent and effective public administrations or show signs
of being committed to developing them. It is very important, but
I believe that to be part of DFID's policies already.
Q35 Mr Davies: DFID last year produced
a paper on conditionality[6]
which went back on that and said that they were no longer going
to get into the business of economic conditionality. The Secretary
of State has conceded in answers to questions from this Committee
that that is complete nonsense and, of course, it is very necessary
to continue with some degree of economic conditionality.
Mr Sinha: Conditionality has been
used for a very long time by the IFIs[7].
It is a very blunt instrument.
Q36 Mr Davies: It can be blunt; it
can be sharper.
Mr Sinha: I will show you why
it is a blunt instrument. You are saying to a government, "We
will give you money if you do X." Let us assume for a moment
that the government or the public sector official who signed the
loan or grant that he took from you agrees with that and believes
it is right to do what you should do it. There are still enormous
processes of change that have to be accomplished within that country.
The political settlement has to change within that country to
bring about that policy. If you need legislation, you need the
help of the legislature to pass that legislation. If you are going
to talk about regulatory change, you need the organisations involved
to sign up to that. What experience has shown us is that that
does not happen automatically and the lure of your money is not
enough. There have to be processes within that country that change
that. If you think the political settlement is basically okay,
there is good governance et cetera, it may make sense to
put budgetary support in. Even there I think DFID is now increasingly
saying that budget support is an instrument for dialogue, not
coming with no strings attached as it were. In countries where
the political settlement is generally very good you will get good
pro-poor growth anyway. Where you can make a lot of difference
is where that political settlement is not quite right, by putting
the evidence on the table, allowing policy processes to be evidence
based rather than the capturing of the state by vested interests,
by strengthening the voice of those who are representing the interests
of the poor. You can arrive at some change. This is not formulaic
and mechanistic. That is the engagement in which donors—even
public bodies—have a very important role to play. Their
involvement in the private sector I am afraid is not how Mr Hoffman
described it, as being sort of social entrepreneurs. We have had
over a period of time now a debate on private sector development
which is saying: do we concentrate on the enabling environment?
Do we intervene directly? What we have found is that direct intervention
without the enabling environment is frankly not very productive.
It is putting your finger in the dyke and sooner or later it breaks.
On the other hand, waiting for enabling environment change to
happen, which is a long term process, can make you miss out on
intervening where markets fail. In the developing countries markets
fail very regularly. There is a role for both but it is in a way
not to work directly at the level of enterprise, only to do so
on very rare occasions when you are trying to address other systemic
market failures.
Q37 Mr Singh: You were talking about
the enabling environment. I would like to ask you about the new
Investment Climate Facility which will be launched this year,
which is aimed at improving the business environment. I understand
that DFID has launched aid to state donors so far to this new
facility. Is it wise for DFID to be treading where no other states
have yet trodden? What value do you think this new facility will
add to the existing business environment and initiatives like
the World Bank's Investment Climate Assessments and Doing Business
reports?
Mr Sinha: The reason that is a
tough question is that the ICF has not been fully designed and
made operational. It is looking a little bit more from the theoretical
perspective, or at least an informed perspective of where we are
today. The World Bank has two or three windows where it intervenes
in the investment climate: the investment climate assessments
that you mentioned, the cost of doing business surveys and it
has an administrative barriers window as well. In general, these
things are driven in the way that I find interventions are driven,
with lots of conditionality attached.
Q38 Mr Singh: Which does not work.
Mr Sinha: Unfortunately, I am
the project director of a very large project in Nigeria where
we have this. Generally, it is very poor because it does not understand
the political economy of change. Investment climate changes are
not always win win. There are winners and losers. Very often,
if you have a very powerful vested interest that is losing, they
will block it. In some way or the other, because there are these
limitations, in some instances it works well when what is really
required is a technical solution, you have a willing government
and a willing state that wants to embrace change and the private
sector is keen on it. It will go through. But where you have problems
of some people blocking change you need something beyond that
conditionality and aid assistance that the World Bank provides.
In designing the ICF, it was DFID's hope that it would garner
more support from other participants in the state and from the
private sector. You hear from Kurt that private sector companies
are putting their money forward onto the ICF. The ICF was supposed
to be more responsive to local demand for change than the way
that the IFI programmes go in. It could also do things like strengthening
the demand of the voice of those who represent the interests of
the poor, who are marginalised, who do not usually have a voice.
Usually when you talk about this lovely public/private dialogue,
what actually is happening is you have a government and a large,
organised private sector and they are working out what the policy
priorities are and determining what the policy choices are. It
was meant to do a little bit around that, to change that dynamic.
I cannot answer more than that. I do not know how it is going
to work.
Professor Wood: I let Sunil speak
first because when I was working in DFID until last October I
was responsible for investment so I might have a slightly biased
view. On past record, there are an awful lot of things in which
DFID has been the first donor in the past which have been very
successful. A lot of other donors have come in and the fact that
DFID is leading should not necessarily be seen as a bad sign.
Q39 Chairman: The whole of this report
has been predicated on the basis that it is apparently now fashionable
that the private sector will lead countries out of poverty. I
am astonished to be told that this is newly fashionable. To most
of us, it is self-evident. The DAC[8]
is now saying that the private sector development should be the
central component of resolving poverty. You have described some
of the mechanisms but what should DFID be doing on a country by
country basis if that is the case? If growing the private sector
is the key to solving poverty in a specific way, what do you think
DFID should do in countries where it is pursuing or supporting
a national poverty strategy to change its programmes to deliver
changes? Do you think it can do that?
Professor Wood: Indeed it can
and indeed it does. The situation is going to vary from country
to country depending on the opportunities that are available for
intervention by an outside aid agency and depending on the nature
of the constraints that are holding back private sector development.
If you want to take the most basic example of something that is
holding back private investment, it is conflict. The involvement
of DFID in conjunction with the FCO and the Ministry of Defence
is absolutely crucial. Promoting in every way we can political
stability is essential because one of the things that the private
sector is worried about in Africa is that, if there is a change
of political regime, the basic business rules of the game are
going to change. Their investments will become valueless. If I
may just tell you an anecdote, which I am afraid is not going
to be about stoves—it is about Uganda—my colleague,
Christopher Adam, came back from Uganda last week very excited
because all the controversy in Uganda about Museveni and the third
term and various political uncertainties which are creating a
lot of worry and concern among civil servants the private sector
is paying no attention to. It is just going right ahead and investing
and that is fantastic. That is the situation you want to have
as in, for example, the UK where you can have tremendous political
turbulence of one kind or another but the private sector knows
that that is not going to change the basic business rules of the
game so they go on investing. That is what we need to achieve
throughout Africa.
4 World Bank, Economic Growth in the 1990s: Learning
from a Decade of Reform, April 2005, http://www1.worldbank.org/prem/lessons1990s/ Back
5
DFID, Working with the Private Sector to Eliminate Poverty, December
2005: http://www.dfid.gov.uk/pubs/files/dfid-private-sector.pdf Back
6
DFID/FCO/HM Treasury, Partnerships for poverty reduction: rethinking
conditionality, March 2005, http://www.dfid.gov.uk/pubs/files/conditionality.pdf Back
7
International Financial Institutions. Back
8
OECD Development Assistance Committee. Back
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