December 4, 2012
The recent Foreign Affairs’ Parliamentary Committee report entitled ‘Driving Inclusive Economic Growth’ presents an often confused mix of the old and new: poor regulation, weak transparency (and associated corruption), micro-finance, the innovative role of the cellphone in banking, etc. Much is interesting, some is worryingly ambiguous, but little is innovative.
The Committee should have focused on how Canadian support for the private sector can foster stronger, pro-poor, inclusive growth in CIDA’s low-income priority countries.
But their final text focused on a very limited range of options. They seemed to forget that local private sector activities are already central in developing countries. They concentrated instead on how Canadian private companies, notably those in the resource sector, might be helped (semi-subsidised) by CIDA or another official loan-giving agency, maybe a revamped EDC, to work in developing countries. Their developmentally ambiguous messaging led two opposition parties to formally reject many of the Committee’s policy recommendations.
The Report ignores a long history of donor private sector support. But past successes were largely indirect in areas such as better governance and regulation, transparency and support via local NGOs. As a recent World Bank study on jobs noted, an inclusive private sector requires the poor to have better access to basic education, vocational training and other public services to make them functional in the labour market.
The premise of using CIDA funding, however re-packaged, to foster specific Canadian investments is likely fatally flawed. We know from their own evaluation that 30+ years of CIDA’s INC (Industrial Cooperation Program) was largely ineffective at creating either jobs or sustainable investments. The resources needed to become a serious funder of public-private-partnership (PPP) would fundamentally distort the shrinking CIDA budget, as well as maybe breach international trade rules.
The Committee never discussed reputational risk which would seem high, not merely domestically, but worse with the trading partners we are chasing. They seemed to have an outdated premise that developing country businessmen and bureaucrats are passively waiting for our help. But today those individuals monitor Bloomberg, surf the net and carry their own Blackberrys.
Emerging economies function in a highly competitive environment. They don’t want aid money, but rather better access to our markets and financial services. They would be doubly wary of ‘free’ advice from any new CIDA-funded centre on how to make a country’s tax or regulatory system work better…. for Canadian resource sector investors. Most now welcome foreign entrepreneurs as partners, provided they are already successful, competitive and willing to act transparently.
Do the recommendations at least make sense as a strategy for CIDA?
The Committee needed to remind itself of some practical realities:
First, the Conservative-approved, mandate requires Canadian aid to be focused on ‘poverty reduction’. (ODA Accountability Act 2008). A new Canadian private sector aid strategy which was appropriately pro-poor, one creating meaningful unemployment for the young poor of the developing South, could meet the test, but not one driven by this Report’s conclusions.
Second, and more basic, the role of the private sector in a Mozambique or Haiti is structurally very different from that in Canada. Government represents a small share of the typical developing economy whilst its private sector is broader but fragmented and weakly competitive. A cloned Korean-style model from the 1960s might be very appropriate, one concentrated in micro- and small-scale enterprises, most with fewer than twenty workers. But few Canadian entrepreneurs have the skills or business ambition to partner at this scale in a CIDA country of focus. Even larger-scale investments such as garment factories are not a natural interest for Canadian businessmen.
The approach in the Parliamentary report will fail to maximize employment creation. Unfortunately most foreign-based private investment, including in extractive industries, tends to be large-scale and capital-intensive. Moreover the Committee’s second focus of using scarce Canadian ODA to sweeten public-private-partnership loans is bad development policy and financially unattractive to our own private banks.
Meanwhile, Nobel Prize winning economist Joseph Stiglitz and USAID are both warning that more often than not resource-rich developing countries gain few net benefits, not even low-paid jobs, for their poor, who instead often end up displaced from their homes and traditional livelihoods to make way for a new mine or plantation.
To be true to the ODA Accountability Act, CIDA needs a private sector policy framework that fosters strong ownership by the partner-country and local affected communities, with explicit safeguards to ensure substantive and sustainable benefits to the poor. A recent OECD Peer Review of Canadian aid warned CIDA against mixing its development goals with commercial interests.
The Committee’s work is not to be totally dismissed. It reminds Canadians and particularly our business community of the complexities and the longer-term opportunities in the developing world. But to succeed in today’s developing countries as a donor or in business we need to support a mutuality of interests, a real partnership, listening to local needs and understanding their weaknesses, even as they seek to have their own private sector take the lead. CIDA is best placed to contribute indirectly by supporting efforts for better governance and upgrading workers’ skills, rather than offering ODA contributions for corporate social responsibility that undermine its credibility as a development partner. Moreover such ‘dependence’ on CIDA handouts will not impress prospective local partners of Canadian companies. With a mandate centered on poverty reduction, CIDA should focus its efforts on helping local job-creation. A strengthened EDC could deal with our resource and PPP interests in countries such as Indonesia or Brazil.
Minister Fantino echoed much of this report in a recent Toronto speech, then found himself only days later clarifying from Haiti, a country really in need of jobs for its poor, one in which CIDA does not plan to partner with mining companies.
More confusing ambiguity?