Written evidence submitted by ONE
OVERVIEW
DFID's commitment to reform CDC is both welcome and
vital to ensure its success as an instrument for stimulating inclusive
economic growth. In recent years CDC has been too profit-focused
in its investments and needs to recalibrate its approach to seek
greater returns in terms of poverty reduction. ONE recognises
that macro-economic growth, while necessary and important, is
not sufficient. CDC and other Development Finance Institutions
(DFIs) can achieve profits, growth and contribute to poverty reduction.
Recent reports show the relationship between poverty
reduction and economic growth varies depending upon existing characteristics
and inequalities in the type of growth in the individual country
(Kalwij & Verchoor, 2007; OECD, 2010). Indeed, in some cases
poverty levels have remained the same while inequalities have
actually increased with GDP growth (Kalwij & Verchoor, 2007;
Ravallion, 2001). Without policies to directly address inequality
simply supporting economic growth generation will not achieve
the desired results. Growth must be inclusive, raising the pace
of growth and enlarging the size of the economy, while levelling
the playing field for investment and increasing productive employment
opportunities.
To successfully achieve its development mandate CDC
must, with regard to its tax situation and investment in developing
countries, become a global champion of transparency. In addition
to this CDC must lead the world in its accountability to Governments
and civil society in the developing countries where it invests
and to Parliament and the public in the UK.
RECOMMENDATIONS:
To maximise its potential to support inclusive growth
and poverty reduction, CDC should:
- 1. Ensure investments align with developing
country priorities and align with national development and
economic growth plans.
- 2. Require investments to meet appropriate
international environmental and labour standards providing
"decent work" as defined by the ILO, in addition to
protecting fragile environments.
- 3. Invest in sectors for which there has
traditionally been private sector neglect, in particular agricultural
research and development, undertaken in country, for locally produced
staple food crops
- 4. Restructure the investment portfolio
to invest at least 50% of all funds in low and middle income
countries, ensure at least 50% of funds intended for Africa are
directed towards LDCs, and investments are used to build developing
country human capacity
- 5. Create stronger oversight and
disclosure mechanisms for DfiD, Parliament and the public
including better methods of formally consulting civil society
in the UK and in countries where CDC invests, coupled with the
establishment of a complaints mechanism for those impacted.
- 6. Commission regular public evaluations
to assess the impact of CDC investments on poverty reduction levels
based on minimum poverty reduction targets for all its investments
to ensure accountability.
- 7. Restrict the use of tax havens and
require timely and full tax payment for all companies in which
CDC invests to ensure that gains are re-invested into host
countries. As the private equity model gains prominence among
DFIs, it is essential that a new set of rules be developed to
reduce the use of tax havens.
- 8. Require all recipients of CDC investment
to publicly publish their accounts on
a country-by-country and project-by-project basis.
KEY AREAS
WHERE CDC SHOULD
FOCUS ITS
ATTENTION:
Inclusive Growth:
If CDC is to showcase how DFIs can contribute to
growth that is "broad-based, inclusive and sustainable; in
which all people benefit from the proceeds of prosperity"i
there needs to be an understanding of what this means. The World
Bank defines "inclusive growth" as rapid and
sustained poverty reduction that allows people to contribute to
and benefit from economic growth.ii CDC should look
for investments which support environmental sustainability, absorb
a large proportion of unskilled labour, employ the poor - including
the poorest of the poor - sustains employment and wealth creation
over the long-term, promotes rural economic development and contributes
to reducing inequality.
Inclusive growth improves economic security and investment
attractiveness. By building a diversified economy with a diversified
employment base, the economy as a whole is less susceptible to
failure in the event of major shocks within one sector. Reducing
vulnerability to shocks and stresses in a specific sector generates
an economy that carries lower economic risk for investors and
reduces economic inequalities. This has been shown to reduce political
risk incentivising future investment (Thorbecke & Charumilind,
2002). Inclusive growth should also permit increased access to
affordable food and health and education generating a healthier,
more educated and productive workforce (Thorbecke & Charumilind,
2002; ILO, 2002; 2005). Investments that consider and plan around
environmental constraints and long-term growth opportunities also
suffer less from economic and environmental shock and stress (Smith
& Petley, 2009).
Labour Intensive Industries:
Many countries, particularly in Sub-Saharan Africa,
have a large, growing labour force and an abundance of people,
particularly those under 25. However, foreign investors often
choose not to invest in this group due to a lack of required skills.
Instead these investors establish themselves elsewhere or bring
in experienced labour rather than train and educate the local
workforce (Te Velde and Morrissey, 2002; 2004). If unemployed
this local population is more likely to generate political unrest
and thus increase investor risk. CDC should focus on labour intensive
jobs which provide income for this growing workforce, particularly
agriculture and other secondary transformative industries such
as textiles and apparel and manufacturing.
Agriculture:
CDC should significantly expand its investment portfolio
in agricultural development because investing in agriculture reduces
poverty and leads to inclusive economic growth. Whereas CDC investments
in agribusiness made up close to 50% of all its activities in
the early 1980's, by 2009, this shrunk to just a mere 5% of total
investments. As the decline mirrors trends occurring globally
for investments in agriculture, which dropped precipitously from
18% of total ODA in the mid 1980's to under 5% in the early 2000s',
the CDC likewise should follow recent moves by donors to increase
investments to agricultural development.
In poor countries, the majority of which are agriculturally
based, reducing poverty cannot be done more rapidly and expansively
than investing in agriculture. Seventy-five percent of the "dollar-poor"
live in rural areas and projections suggest that more than 65%
will continue to do so until at least 2025.iii Agricultural
expansion also leads to broad-based growth, as it is labour-intensive
and has the capacity to employ 'untapped' labour, especially for
those who own no land or too little to actually make a living
from farming. Furthermore, agricultural growth reduces food prices
and acts as a multiplier in local economies, leading eventually
to higher rural wages and markets where farmers and workers spend
their earnings. Several country analyses show that with each 1%
increase in agricultural GDP - as compared with non-agricultural
GDP - income rises much more for the poorest households.iv
However, where, how and for what purposes investments
in agriculture are designed impact their return on poverty reduction.
Poverty has a lot to do with location and vocation. The severity
of rural poverty exceeds that of urban poverty almost everywhere
and rural populations in rain-fed areas are among the poorest
socio-economic groups. Living in remote, hard-to-access, areas
makes reaching these populations physically challenging. Roads
often are seasonal making year-round access limited. For farmers
in 45% of agricultural communities in poor countries, it takes
over four hours by car to get to the nearest market town.v
This presents a multitude of market access challenges as these
producers will face difficulties accessing reliable seed and input
markets, in addition to receiving any regular form of support
or information regarding advances in agricultural technology,
improved farming practices or market prices.
Reaching these populations that live in remote areas
and or work unfavourable, degraded lands with solutions that meet
their needs will impact returns to poverty reduction. Studies
show that in multiple African countries when smallholders produce
more food staples like cereals, roots, tubers, pulses, oil crops
and livestock and trade in rural markets, equitable growth is
more likely. In Rwanda, a 1% cent growth in gross domestic product
(GDP), driven by increased production of staple crops and livestock,
had a greater effect on poverty reduction than the same rate of
growth generated by export crops or non-agricultural sectors.vi
Thus, CDC should incorporate investments into its portfolio that
include staple food crops that are not solely intended for export.
REFORM OF
CDC PORTFOLIO COMPOSITION
The CDC committed in 2009 to invest more than 75%
of "new" Investments in low and middle income countries
and more than 50% of their funds in Africa. ONE appreciates this
commitment to shift focus to poorer countries, particularly in
Africa. However, CDC should go further to ensure that investments
are targeted at the poorest countries where they can have the
greatest impact on poverty reduction.
A stronger commitment to targeting poor countries
would be to invest at least 50% of all funds in low and
middle income countries. Of the 50% of funds intended for Africa,
a commitment should be made for at least 50% of these funds to
be reserved for investments in Least Developed Countries (LDC).
Compared to a "low-income" country (defined as a country
with a gross national income (GNI) per capita is less than $1000)
a LDC is a more comprehensive indicator of poverty drawing on
multiple criteria and indexes including:
- GNI of less than $900 based on a three-year average
- Measurements of human resource weaknesses based
on indicators of well being and development such as nutrition,
health, education and adult literacy; and
- Measurements of economically vulnerability based
on indicators of agricultural production; exports of goods and
services, importance of non-traditional activities (eg manufacturing
and services) to the GDP, and the percentage of the population
displaced by natural disasters.
Furthermore, CDC should seek to build in-country
capacity where possible. Through its lending practices CDC could
invest in building human capacity through committing using African
fund managers and other in-country staff to manage, oversee and
design its investments.
REFERENCES
i http://www.dfid.gov.uk/Media-Room/Speeches-and-articles/2010/Wealth-creation-speech/
ii http://siteresources.worldbank.org/INTDEBTDEPT/Resources/4689801218567884549/
WhatIsInclusiveGrowth20081230.pdf
iii IFAD (2002) "The
Rural Poor", Chapter 2 of the World Poverty Report, Rome:
IFAD.
iv E. Ligon, and E.
Sadoulet (2007) "Estimating the Effects of Aggregate Agricultural
Growth on the Distribution of Expenditures", background paper
for the World Development Report 2008.
v Sebastian (2009)
"Mapping favorability for agriculture in low and middle income
countries: technical report, maps and statistical tables",
Washington, D.C: Oxfam America.
vi X. Diao, S. Fan,
S. Kanyarukiga and B. Yu (2007) Agricultural Growth and Investment
Options for Poverty Reduction in Rwanda, IFPRI Discussion
Paper 00689, Washington, D.C: International Food Policy Research
Institute.
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