Sunday, 29 July 2012

MGG Public Lecture (30 July 2012, at GDI/DIE)
Shifting wealth: rising powers and the new world order (in 16 paragraphs)
1.      How has the global development scene changed by the rising powers, or as we at the OECD Development Centre call them, the convergers? It has diversified the pool of actors, aid instruments, capital, trade and tax revenues to low-income countries; it has allowed low-income countries to switch to the growth engine that works; and it has loosened up the policy and paradigm monopole once solidly occupied by the old donor cartel around Bretton Woods institutions and the DAC. While overall it has been good news for poor countries,  it has been rather bad news for aid bureaucracies, for compliance with global soft law, and for donor (& NGO) rethoric and posture.

2.      Strong shifts in net international investment positions and sustained superior growth rates of large middle-income countries are reshaping the world economy – a phenomenon the OECD Perspectives on Global Development refer to and define as “Shifting Wealth”. The recalibration of the world economy – Shifting Wealth – can be interpreted from a stock and from a flow perspective.

3.      The stock perspective: The global current account imbalances of the past decade – which to a large extent reflected a high external US saving deficit financed increasingly by China and oil exporters - have given rise to a significant shift in wealth distribution toward surplus countries linked to fossil-fuel production or high savings and exports. Rich OECD countries are being financed by countries which until recently played no substantial role as international investors. The United States is now the world’s biggest debtor. Joint with Japan, China has extended its position most as the world’s international net creditor.

4.      As long as the rising powers remain ‘immature creditors’, they retain a strong contingent currency risk incentive to switch from acquiring foreign financial to buying foreign real assets. Investment vehicles such as sovereign wealth funds that mostly (with the notable exception of Norway) originate in emerging countries have grown in asset size and prominence. Western debt relief has given way to Eastern export credits. The switch from Western to East and Southern sources of finance translates into a higher share of state-sponsored capital supply as opposed to pure private-sector sources. Many newly cash-rich countries have different political regimes from the countries that previously dominated international investment.

5.      The flow perspective:  Sustained growth that large emerging countries have experienced over the last decade have conferred them a considerable growth advantage over OECD average. The world has seen a switch in the engines of growth, since the late 1990s with a continued rise of global growth being driven from outside the OECD area. Combined with very large populations, these growth differences translate into a new world economy. From 2015, we project the non-OECD economies to exceed the OECD area in terms of PPP-adjusted GDP. The world’s economic mass – production, consumption, wealth – is moving East toward India and China, realigning with the world’s demographic mass.

6.      Apart from falling trade cost and expanding global production networks that are driving global trade, the greater role of emerging countries has induced a much finer degree of international specialisation than occurred previously when North-North trade predominated. Global trade has witnessed the return of comparative advantage in connection with Shifting Wealth. Foreign direct investment (FDI) has been a crucial vehicle in building global production chains and has been usually characterised by a predominant North-South direction, which is slowly changing direction South-South and South-North.

7.      Apart from the stock and flow definitions of Shifting Wealth, its geopolitical dimensions have moved very much into the forefront. The substitution of the G8 for the G20  as the premier global economic policy forum, the gradual rise in inclusion, representation and voice in international organisations such as the Bretton Woods institutions and higher political ‘power’ in particular of the BRICS are noted features of their shifting geopolitical stance on a global scale. However, the majority of smaller emerging countries (Colombia, Egypt, Thailand, e.g.) still submit to the Pax Americana[1], as is for example visible in the ca 60 countries that engage with the OECD in one way or other. And within the BRIC group, there are considerable economic and geopolitical divergences, with China the only true superpower.

8.      For international monetary governance, the prospect of the renminbi and perhaps other emerging-country currencies entering reserve-currency functions aside key OECD currencies has gained momentum.  In global trade policy, Shifting Wealth translates into higher retaliation and bargaining power for the rising powers. Finally, the growing importance of non-OECD countries may translate into acceptance of a different intellectual paradigm underlying cross border collective arrangements and lower effective compliance of standards and best practices defined and scripted by the advanced economies, not least in the global aid architecture. Building a Global Partnership for Effective Development Cooperation has been agreed at the High-Level Forum on Aid Effectiveness, in which governments of many emerging countries signed as donors for the first time. Note that China, India and Brazil only signed as ODA recipients as they do not accept Paris Aid Effectiveness principles to apply to South-South cooperation.

9.      Despite many assertions to the contrary, the positive growth performance of low- and middle-income countries can be explained to a large extent by China’s growth; in other words, emerging-country growth has been endogenous to China’s growth to a certain extent.  We (2012)[2]  have produce findings that do indeed suggest that poor countries, oil and non-oil, have been changing their growth locomotive during the 2000s, from the G7 countries to China. To be sure, GDP growth in itself is not of much help if it fails to bring down poverty .  The number of people living on less than 2$/day/capita started only to decline from the 2000s, in the era of Shifting Wealth.  During the period 1981 and 2008, the number of people living in extreme poverty  (1.25$/day))decline by 650 million people to 1.29 billion, despite a rise in world population by more than 2 billion people over the three decades. Most of that global poverty reduction occurred in China where the number of extreme poor melted down by half a billion. But even correcting for China, the eradication of extreme (and less extreme) poverty has gathered speed during the last decade.

10.  Taking the evidence on growth links discussed above, it is fair to say that China has not only helped reduce local, but also global poverty, despite the much-noted rise in Lewis-Kuznets type inequality in most middle-income countries. While the rise of Africa’s emerging partners has been widely analysed in terms of a scramble for African resources, the more recent rise of manufactured exports from sub-Saharan Africa to China and other emerging countries and by foreign direct investment from emerging countries that has reached Africa’s non-oil countries (in proportion to their respective GDP) not less than it reached oil and raw material producers; in contrast, OECD-country imports from Africa remains as biased towards oil as the FDI flows from OECD to Africa (AEO 2011, ch 6).

 11.  Development cooperation programmes of emerging countries, not just China, focus more on infrastructure and other structural bottlenecks to growth than DAC donors who have prioritised aid toward poverty reduction and health in the past. China, India, and Brazil in particular offer alternative modalities to finance development[3]. ODA is a component of  wider package of economic cooperation (e.g. the Chinese model of development cooperation - turnkey projects, package deals, Angola Mode). Aid is only one element of their engagement toolbox, reflecting striking differences in engagement philosophies between traditional donors and emerging partners.  This blurs the borders traditionally drawn between investment and aid; trade and aid; and between private and public sector involvement. Western “charity” focuses on “assistance” seeking poverty reduction and social welfare, but it is predicted to change toward the “Asian” model[4]. The “Asian” model for co-operation emphasises the partner’s potential and seeks mutual benefits. In fact, it quite resembles the way Japan once practiced cooperation with China[5]. Western aid emphasises policy conditionality, Eastern cooperation project selectivity and control.

12.  How then can we envisage cooperation between traditional and emerging donors going forward? Before I turn to that difficult issue, let me first quote the DAC Outreach Strategy 2008, in oder to understand how NOT to envisage that cooperation: “Outreach constitutes an essential element of the work of the DAC ... Enhanced Engagement aims to bring partners closer to the OECD and what it stands for by engaging them closely in OECD processes while supporting their own reform processes through the adoption of OECD practices, policies, guidelines or instruments. Many representatives of Western donor agencies (and industry lobbies) seem to think that a new world order can be fundamentally addressed by including China and other rising powers in existing arrangements that the advanced countries have built since the Second World War. The semantic corollary of such thinking is reflected in the term ‘outreach’ for a while employed by the West when trying to establish a dialogue with the new donors. It was assumed that the new Eastern donors could be assimilated to Western-built international soft law.
13.  The world is perhaps more likely to become bipolar rather than multipolar. I personally think that the US might be the big stumbling block for cooperation between donors old and new. Hillary Clinton’s warnings on China in Africa[6] as representing the “new colonialism”, or the US push for the Trans-Pacific Partnership Agreement (TPPA) to counteract China’s ascendancy through US “economic and military statecraft”[7]  in the Pacific support my fears that the US will find it difficult to engage the rising powers in a constructive way.  The main geopolitical fault line in the next few decades will be the West and China.  Imposing our norms and standards is a non-starter simply as China, India, even Brazil will not accept standards that the West has developed over decades. In a world of increasing competition for exhaustable resources and in a world of inexhaustable protectionism, Policy Coherence for Development (PCD) will have a tough life. The current bureaucratic struggle between aid agencies – using PCD to escape their narrow aid focus through getting a voice in other cabinet issues such as education, food, trade or energy  - and those who want to mainstream development through outsourcing traditional aid items to education, trade and other ministries may turn out to be quite pointless in the era of Shifting Wealth[8].

14.  True, global soft law offers more effective ways of dealing with situations of uncertainty and diversity where hard law would fail. Soft law is easier to achieve than hard law, less expensive and more flexible, especially when actors are jealous of their autonomy.
The OECD and other international organisations have developed mechanisms to raise the compliance with soft law, the major instrument being the peer review. Under what conditions can peer review and peer pressure work in terms of bringing about compliance with a given set of standards? Factors influencing the effectiveness of peer review: value sharing; adequate commitment; mutual trust; credibility; and thightness of policing a soft-law instruments[9]. While a richer China, it is hoped, might move closer to our values, this is not a foregone conclusion. The distribution fight for nonrenewable resources acts to limit adequate commitment for effective peer reviews. And mutual trust, as seen from the Chinese perspective, has suffered not risen over the past years.

15.  In practice, peer reviews have often led to rather weak and incomplete compliance. DAC peer reviews are not excluded from this criticism. Shortcomings of peer reviews also become apparent in other organisations. The failure of IMF surveillance with respect to the US financial system in the run-up to the 2007-2009 global crisis, for instance, may point to another requirement for soft-law effectiveness: limits on the degree of political influence, especially with superpowers. Bear in mind, though, that a new world order is still likely to resort to soft law and peer reviews precisely because harder global  laws and more effective enforcement mechanisms would not be accepted.

16. Western soft law and its edifice of standards, best practices,  norms and policy ‘insights’ built up over the past 50 years was essentially formed in a market economy and in a decentralised and unauthoritarian setting. The recent Western history of development is quite different from the policy lessons and paradigms of the rising powers and low-income countries. For example, China’s practice of packaged cooperation deals in which aid cannot be isolated and computed with any precision makes transparency hard to establish; the components of the package are not individually priced and it is difficult to separate aid from economic cooperation in general. The transparency issue must be dealt with in more intelligent ways than just asking China to become a member of a joint transparency initiative as postulated by the G8 in the past.  A genuine synthesis of approaches  of packaged cooperation that the recipient countries can compare based on hard empirical evidence and social-economic cost-benefit analysis, as opposed to the inclusion of rising powers into existing fragmented Western approaches,  is required but will imply hugh changes in the behaviour of DAC actors. Are they ready?

[1] See Thomas Fues, “Multilateral politics: At a crossroads”, D+C, No 53 (7-8), 2012, on who signed DAC agreements and who didn’t  at the Busan conference 
[2] Garroway, Chris, Burcu Hacibedel, Helmut Reisen and Edouard Turkisch (2012), “The Renminbi and Poor-Country Growth”, The World Economy, 35.3, 273-294.
[3] See, e.g., Mwase, Nkunde, and Yongzheng Yang (2012), “BRICs’Philosophies for Development Financing and their Implications for LICs”, IMF Working Paper 12/74, March.
[4] Kharas, Homi, and Andrew Rogerson (2012), Horizon 2025: Creative Destruction in the Aid Industry, ODI, July.
[5] Dahman Saidi, Myriam and Christina Wolf (2011), “Recalibrating Development Cooperation: How Can African Countries Benefit from Emerging Partners?”, OECD Development Centre Working Paper No. 302, July.
[6] Reisen, Helmut (2011), “China, Zambia and”,, 19. June.,
[7] Clinton, Hillary (2011), “America’s Pacific Century”, Foreign Policy, November. For a geopolitical analysis of the TPPA, see Kelsey, Jane (2011), The TPPA as a Lynchpin of the US Anti-China Strategy”, scoop, 21 November: “China will be increasingly isolated, as a critical mass of APEC countries signs on to the “gold standard” deal, and may ultimately subordinate itself to the TPPA’s US-designed “international norms”.
[9] Paulo, Sebastian, and Helmut Reisen (2010), “Eastern Donors and Western Soft Law: Towards a CAC Donor Peer review of China and India?”, Development Policy Review, 28.5., 535-552.

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