Arrested development

October 12, 2017 Development

International development often disappeared from the headlines during the political upheavals of the past year that culminated in the sweeping electoral victory of Emmanuel Macron. But Brexit and Donald Trump’s isolationism offer a game-changing opportunity for France and Europe to take the lead on the global stage, says TSE and World Bank economist Stéphane Straub.

The arrival of a centrist and ardent pro-European in the Elysée Palace has lifted hopes that the tide is turning against populism after recent successes for opportunists such as Donald Trump and the leaders of the Brexit campaign. Many of Macron’s supporters believe his success has avoided bleak near-term prospects for the EU. But it is striking that international development has largely been absent from the debate.
The new US government is retreating from commitments to multilateral organizations and withdrawing support for aid projects. Meanwhile, Brexit is likely to deal a blow to DFID, the UK development agency which is widely recognized as one of the best of its kind. This context might be a historical opportunity for France, and the European Union, to take the lead. The stakes are high, given the need for solutions to destabilizing conflicts and mass migrations, especially in neighboring regions in Africa and the Middle East.

Fighting poverty

Controversy over the efficacy of development support is unlikely to disappear anytime soon. No one can be content today with generic policies, such as the UN’s 0.7% target, that pledge a small portion of national GDP to foreign aid. Such commitments are rarely honored, and the development equation is too complex to be solved by just pouring money into often inefficient and corrupt regimes.
A modern development policy for France and Europe must recognize first that there is no development without a strong, efficient state to provide the legal, regulatory and institutional framework that allows economic agents to thrive.
This is a prerequisite to address the enormous demand for infrastructure to improve the provision of water, sanitation, electricity, transport, education and health in developing countries. There are already plenty of projects that have made a significant difference to the lives of the world’s poorest. Indeed, effective policies have stimulated a dramatic decline in overall poverty over recent decades.

Magical solutions vs targeting efficiency

Next, development agencies should not be swayed by the current hype about attracting the private sector to finance projects such as roads, sewers or energy networks. Leveraging scarce public and concessional funds to harness trillions of dollars from pension funds and other institutional investors is touted as a magical solution to the problems of the poor.
True, there are important and complementary roles for public and private actors in driving forward projects, from screening the good from the bad, to monitoring implementation. But the private sector only provides about a tenth of infrastructure investment in developing countries. And that’s if you ignore that many public-private partnerships involve large taxpayer contributions, in the form of direct payments or guarantees. When public investment falters, the track record of private investors suggests they are unlikely to step up.
As my colleagues and I have argued in a recent World Bank report on infrastructure in Latin America, the true source of new financial, human and institutional resources lies in battered and inefficient public sectors. Depending on how one crunches the numbers, a modest 10% improvement in the efficiency of each dollar spent by public sectors could be equivalent to doubling private investments.
It’s not just about “spending better”. We also show that targeted measures to address the market failures that plague developing countries, from construction to service delivery, may have a disproportionate effect on policy effectiveness. Helping to secure such improvements needs to be at the heart of development agencies’ agenda.

Realigning incentives

Incredibly hard-working and knowledgeable professionals staff most development institutions. But the incentives to implement and follow up projects are often misaligned. The main problem is the focus on rewarding the volume of lending and quantity of projects realized, rather than actual results and impact.

Changes must be made to the way project leaders are evaluated, and project selection and planning should be completely disconnected from implementation. A simple and powerful idea might be an independent agency to coordinate the appraisal of potential projects with local authorities.

Lessons learned

Finally, development agencies also need to nurture the crucial synergy with research institutions to understand what works and what doesn’t. In recent years, development economists have refined a large and invaluable set of tools: from theoretical models that expose market failures, to empirical models that can handle huge datasets and randomized control experiments that allow objective evaluation of projects. Academic expertise, combined with development agencies’ experience, will be essential to design internal reforms and incentive schemes, and to choose and implement projects more efficiently.
Lessons learned through rigorous, fact-based policies and evaluation can have huge benefits for policymakers, researchers and partners in the developing world. They also generate valuable spillovers that help address problems in developed countries, which are no strangers to poverty and inequality.
It is time for France and Europe to seize the chance to rethink international development, enhance their own security and prestige, and improve the lives of the world’s most vulnerable.