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Busan: Yes we could

30 November 2011

We’ll start with a close-up of a woman on her knees. She seems to be scrubbing some tiles. We track back and see that in fact she’s scrubbing the tyre tracks off a forecourt. Back a bit more and we see that she and her colleagues are in front of a huge conference centre. It’s covered with banners in Korean and English announcing the Fourth High-Level Forum on Aid Effectiveness, HLF4.  There’s a metaphor there somewhere, and it’s called Busan, the host city and the world’s fifth largest port.

Busan is like a life-sized lesson for participants in the Forum. As the Korean president Lee Myung-bak reminded delegates in his speech to the conference, when he was a child, this was one of the poorest countries in the world, and Busan’s harbour was used to import food to stop people starving after the civil war. In From Poverty to Power, Oxfam’s Duncan Green makes this point too, recalling that 50 years ago Korea’s main export was wigs made from human hair.

Aid played a part in changing this, and it’s worth looking at why Korea succeed in moving from being a recipient to a member of the OECD Development Assistance Committee, the donor group that oversees Official Development Assistance (ODA).

The first lesson is that ODA has to be stable and reflect a long-term commitment. Korea could count on the US and Japan, and knew from one year to the next what funding to expect. Volatility makes programme management harder, or even impossible. I’ve heard stories from the field of health, education, and other projects that were started, were going well and then had to be stopped because promised funding suddenly dried up. The OECD says that the value of aid is reduced by 15% to 20% when it is unpredictable and volatile.

For the outsider, one of the more opaque terms of the “aid community’s” particularly opaque jargon is “ownership”. What it means is that countries receiving aid take charge of the process. Korea didn’t always agree with its partners, but the results show that it knew best what strategy corresponded to its needs and resources. It wanted non-military aid rather than the guns, tanks and planes it was being offered, and it insisted on focusing on large enterprises rather than the small and medium-sized businesses foreign development experts told it were the key to success. If Korea hadn’t decided for itself, today Samsung and Sons would no doubt have been a great little shop for the latest Japanese and American gadgets.

However, to “own” the development process a country needs to develop a whole range of skills and institutions. For instance, if it’s going to export, it needs lawyers who understand international trade rules and port managers who can get the goods onto the ships on time. This is what’s meant by “capacity building”. Countries can’t be expected to acquire all these capacities on their own, but they shouldn’t depend on outsiders either. While over 1500 foreign experts were sent to Korea between 1962 and 1971, over 5 times as many Koreans received training abroad.

Another thing about aid programmes is that the best ones become useless because they’re no longer needed. In the 1950s and 1960s, practically all of Korea’s foreign funding came from grants, but by the mid-70s, grants only represented 11% of funds, the rest being loans. The fact that Korea respected repayment conditions reassured private finance and encouraged foreign direct investment in the country.

Korea also proves that it’s possible to recover from even the most desperate situation. At the end of the 1950s this was a mainly agricultural country still suffering from a war that had killed or injured over 2.5 million civilians. If conference delegates want to see a success story, they just have to look around them. And if they want a reminder that the fruits of economic success aren’t always shared equally, they can look at those women scrubbing the ground they walk on.

Useful links

OECD work on developent cooperation

4 Responses
  1. Kojiki M. permalink
    December 1, 2011

    Another thing that Korea did right was to ignore trade rules in areas like copyright and IPR. Most of the other Asian Tigers took a similarly casual approach during their development period, as did Japan after WW2 and the USA in the 19th and early 20th centuries. Sometimes I think that Africa’s developing states are too keen to be seen as “good boys,” perhaps because they are afraid of offending their Western donors.

  2. December 14, 2011

    And let’s not forget the private sector in the development debate. Multilateral and bilateral development banks have increased their financing of the private sector over the last decade from $10 billion to over $40 billion annually. This has been welcomed by most of the development community, although the debate on the balance between development assistance to the public sector and donor support of the private sector continues.

    At IFC we have steadfastly promoted the role of the private sector in sustainable development. Recently we coordinated with 30 similar institutions on a study–International Finance Institutions and Development through the Private Sector–which highlights the “virtuous circle” of public and private sector cooperation for development. This was timely, since at the recent Fourth High Level Forum on Aid Effectiveness in Busan the private sector had a seat at the table for the first time (with the OECD as a sponsor). This could be a turning-point, where we move from aid effectiveness to development effectiveness, while recognizing the mutually supportive roles of the private and public sectors.

    Governments continue to be essential for development. They provide public services and infrastructure, as well as the enabling environment for the private sector through macro-economic stability and the proper regulatory framework. They must guide economic development and ensure that it is shared by all segments of society. But governments can’t do the job alone—they are only part of the recipe for development and poverty reduction. It is the private sector that will generate most jobs, help improve public services, and provide the tax revenues that the public sector needs.

    So where do development institutions come in? As the IFI report points out, they play a critical role. Firms in developing countries need financing to expand their operations, as well as better infrastructure, improved business regulations, and skilled employees. Without these, they cannot grow. Development institutions have experience in these areas and can provide needed capital in risky environments, making projects sustainable and attracting other investors. Moreover, they can make private sector development more inclusive, and promote high environmental, social, and corporate governance standards.

    Of course, at a time of scarce resources, some ask: Can donor governments afford to support both the private and public sectors? The answer is yes, since development institutions are mostly self funded, using repayments from their investments to support new projects. While substantially increasing their investments in recent years, most have not had significant capital contributions. By contrast, aid to governments usually needs to be funded every year. Furthermore, since the enterprises supported by development institutions provide substantial tax revenues to their host countries, the need for assistance to the public sector is reduced.

    In summary, supporting the private sector with judicious investment is a win-win proposition for donor governments and developing countries. A small amount of initial capital, with some well targeted advisory services, can marshal the talents and finance of private sector investors to create economic activity that ultimately is self-financing. This should not be surprising–it is one of the historic paths to development.

    Oliver Griffith, Head of Public Affairs, IFC, Western Europe

  3. Rachel Kasumba permalink
    December 24, 2011

    Patrick, indeed the impact of capacity building is often understated, which is unfortunate. Why? Because it leads to self-reliance and ownership, thereby weaning people off dependence in all its forms, breeds personal responsibility, and accountability. When this happens, both donors and receivers are able to see the fruits of their labor and get encouragement from the fact that the funds, effort, time and other resources were not wasted or squandered on impossible dreams, as illustrated in Korea above.

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