Economic Development Policy: Strategy and Challenges

Revaz Gvelesiani, Tbilisi State University, Full professor, Georgian – German Institute for Economic Policy, Director

Development policy aims to improve peoples’ living conditions.

It follows a long way of global development that maintains the modern generation development possibilities in a way that does not limit future generations’ opportunities. The purpose of global long term development precondition is to reach the following three intermediate goals: (1) Temperate economic growth, (2) Social justice and (3) Ecological firmness.
Recent experience of development has shown that reason of development success or failure in developing countries first of all lies in internal political and economic framework conditions. Following the USSR collapse new opportunities were open to consider them in central Europe. Authority of Federal Republic of Germany announced five important internal framework conditions to use development policy tools:
· Observing human rights;
· Citizens participation in political decision making
· Legal state system and maintaining judicial guarantees
· Establishing social market economy and
· Direction towards state activity development
Form the beginning of 1990’s developing countries have been constantly discussing and paid more and more attention to human rights, issues related to democratic state arrangement, multi- party system, market economy management principles. The countries that inherited socialist ideology (like china, North Korea) and those with Islamic fundamentalism (Iran, Sudan) are exceptions. Increasing real income per person is a priority for developing countries. It is the expression of increasing material welfare. Certain economic growth of gross domestic products, political or foreign trade goals make it more precise. On the contrary there are hints on social and political goals – safety, freedom and justice – that we meet only in political statements. Their implementation is quite often hindered by dominant elite’s claim on power. Besides, it’s worth noting that in number of developing countries (for example in Africa) social justice has a significant importance. It often opposes the affective aim directed to allocation, like for example demand on Bretton Woods institutions for years. Neo liberal dogmas presented by them that are to some extent under the influence of the US government – are the world order managing instruction till now. It is famous as ‘ Washington consensus’.
It is necessary to consider development process supporting world economic order framework conditions and processes in order to reach goals. Therefore, we shouldn’t be surprised to witness developing countries to have been criticizing the world economic order. They find major reason of their economic weakness in former and current forms of international division of labor. They follow theory of independence. Specific economic demands have been made during years, for example: stabilization of material prices in different commissions of UN. Final goal is a decision of main market mechanisms on world economic production distribution. It is a distribution problem that we have faced within our economics as well. At any rate, outcome of distribution should change; the only thing that remains vague is market mechanism. It’s about a decision: either price should be fixed (non-market conforming event) or support should be issued, equalizing taxes should be imposed. If prices are fixed, that are not balance prices, then it will lead us to unequal division of small enterprises’ means. Prices will lose their regulating function. Stronger division of labor would be an advantageous. It would bring positive outcomes not only to developing countries, but to industrial states as well. Accordingly, challenges that industrial states face (like growth of unemployment) cause difficulties to developing countries while integrating in the world labor economic division.
Even creating WTO did not lead to significant changes. The dynamics of the world globalization processes make us believe that developing countries will not get profit from economic growth. The fear is proved by the idea that importance of material decreases. Decreasing material insensitiveness in production reduces developing countries’ opportunities to be involved in globalization process. While cooperation from the development point of view, industrial countries should correspond their activities to their goals. At first their assistance to developing countries had a human goal as a priority, nowadays it is one of major economic goals. It’s a well known fact that economic cooperation should be useful for economics itself too, for instance in the sphere of employment.
Developing countries within the framework of European cooperation were allowed to use credits and financial support received from credit institutions of Federal Republic of Germany (KfW) to purchase goods or equipment in other countries too. It wasn’t necessary to relate to supplier. As for European Union, international rules should be imposed on programs and projects supported by them. Order should be given to enterprise from EU member state. Goals of industrial countries are finally directed to the system of their values. They follow modernization theories. Later specific socio-cultural and regional zones of separate EU states were taken into consideration.
It becomes obvious that system of goals show sharp political signs. Market economy order and democratic system condition each other. We may reach one thing : wide masses of population may be included in social and economic development. The final goal should be better living conditions for people. We should not forget while discussing goals that economic goals are means to contribute in democratization and observing human rights. Positive political activity will be supported. Violations are ‘punished’ by limiting or canceling support within European commonwealth. From number of possible goal conflicts I can give you several examples. We face them in developing countries as well as between the countries issuing and receiving support.
Conflict of goals take place in developing countries while establishing and implementing goal priorities. They emerge when they pay attention to limited state financial resources. Which sphere should be developed first: Education (beginner, secondary of university), health o material infrastructure? Decisions become complicated due to the fact that in many developing countries military expenditures are considered to be a priority. Lots of countries imposed taxes on financial support(for example in the sphere of education, health) , even donors advised them to do so, as state treasury was empty. This damages population being a conflict case of division policy.
While defining development cooperation goals and volumes conflicts emerge when different approaches on goals between the issuer and receiver of the financial support take place. Rising conditions (assisting is related to observing a certain condition) make developing countries that really desire to get support, to become ‘Subordinate’, conflicts become clear and obvious. Agreements are required here. Rationalization of development policy goals on lower stage of social infrastructure (school share, cases of illnesses, doctor assistance maintenances etc) is relatively simple. Economic and quantitative components with gross domestic product per person are quite well defined. Problems may occur while defining procured value surplus in informal sector. Qualitative Calculation of goals is also hard in political sphere. How should legal safety be measured? When do we have stable democratic system? Number of African countries on southern part of Sahara met democracy demands and introduced multi- party system in accordance with international donors’ expectations. In addition, no one put a question if ‘Western Democracy’ was an adequate model to African social and cultural reality. Goals are reflected in development policy of donor countries and organizations. On the one hand it is development progress in supported states and on the other hand, their contribution level may be defined according to the volume of assistance/support. We should take it into consideration that these are nominal units; it means that support for the development has significantly reduced.
Development policy highlights have shifted once again. Global goals characterizing certain strategies of development policy were divided into decades from the beginning of 1960’s. This is the way they looked in 1961-1970: 5% annual growth of gross domestic product, 3% of income per person, 8,5% of industrial goods and 10% of terms of trade improvement. The next decades’ goals demanded further improvement. The fourth decade of December 1990 was announced as ‘UN International Development Strategy’. It entered into force by the beginning of 1991. Some goals were not even included in decades, although they still had positive impacts: development policy was directed on pure rational issues and measuring their ‘outcomes’ was possible.
By the middle of 70’s main demands as strategies were propagandized. It was obvious that adaptation would have been possible for one more decade. The third decade (1981 – 1990) economic units were filed with social goals: decreasing children mortality, improving living conditions, supplying drinking water, overcoming hunger. This is the major orienteer nowadays with the changed form: overcoming extreme poverty is a precondition, ‘socially fair’, stable and peaceful for the development.
In 2000 the UN set development goals to 2015 partly in rational form:
1. Overcoming extreme poverty and hunger (half the number of people whose income is less than 1 USD per day)
2. Implementing general elementary school education;
3. Supporting the creation of equal conditions for men and women;
4. Reducing the children mortality, improving mothers’ health conditions, fighting against deceases (AIDS, malaria etc);
5. Strengthening ecological firmness
6. Establishing general cooperation (construction)
EU supports 77 countries of ACP (African, Caribbean and Pacific states) as part of European cooperation on the basis of Cotonou 2000 Agreement. It is designed to last for a period of 20 years and is based on four main principles:
1. Equality of partners and ownership of development strategies
2. Participation
3. Dialogue and mutual obligations
4. Differentiation and regionalization
Significant basis of the agreement lies in three major elements: 1) respect for human rights and main freedoms, 2) Democracy and 3) Jurisdiction state. Liability for state management is added to it. Transparency, management of human, natural, economic and financial resources is necessary for well analyzed development.
Cooperation between ACP States and EU will be directed to main goal – fights against extreme poverty. This goal will cover political dimension (managing a state with a high sense of responsibility) as well as trade and development policy. Partnership is directed to citizens more active participation in management, private entrepreneurship, supporting regional integration processes, affective and flexible usage of financial sources.
The right strategy is doubtless in a development policy. Together with creating cooperation among states as part of European cooperation – implementing projects and programs – there is a belief that support hampers private initiative. Better way would be reach a ‘take – off ‘ by including less developed countries in the world trade system. These relationships may be somehow compared to a saying: ‘Trade is better than Aid’.
Its worth noting that Cotonou Agreement includes both components for cooperation.
Number of countries has made their steps foreword in the sphere of agriculture. It affected villages and grown migration to Europe. better opportunities for using land do not only cover irrigation and fertilizers. Sometimes other means of production are necessary. In spite of possibility of improving the situation, the challenges facing agricultural development remains unsolved. Catastrophes following the drought, floods in Asia (in Bangladesh and in China) may serve as good examples. Its remarkable in countries producing agrarian goods that agricultural circle defines the development of entire national economy. For example, small economies in Burundi and Rwanda are depended on tee and coffee production. When harvest is sold, agricultures have liquidity means to purchase consumer goods. Demand on customer goods of the whole economy decreases and before harvest reaches the lowest point.
Improving the situation depends on a number of structural reforms:
· Land reform (land usage, ownership issues);
· Issuing credit to purchase seed, production means etc.;
· Ability of fertilization, watering and biological method of pest control;
· Organizing harvest and sale;
· Improving saving conditions;
· Supporting production sale;
Agriculture should be more intensively involved in development process. Rising affactiveness and decentralization of management may lead to positive results. Anyway, its precondition is a significant will of political decision makers.
Real exchange conditions have long been worse for developing countries. Developing countries receive less income with import in relation to exported coffee, cacao, copper, tin etc., According to the World Bank calculations, real exchange rate conditions have developed the other way recently that first of all had a negative outcome on African countries having low income.
Liberalization and globalization process does not enable to improve situation for developing countries.
Rush to development lead developing countries to foreign debts. They are obliged to put a big part of their export income in covering debts.
External (foreign) debt has become a hinder of number of countries:
· Credits are used for consumers and not investment purposes;
· Export incomes in developing countries have reduced with 50% for the last 30 years; therefore they do not own enough currency for serving debts.
· Interest rate was especially high in 1080’s.
Position of debts in the South of Sahara, African countries is quite high in relation to economic effectiveness. Although, there is a tendency of reduction. There are different reasons of it. Let’s say less readiness of industrial countries to issue new loans. No net capital inflow during recent years. Debts increased four times from the beginning of 80’s. South Asian and Latin American countries have to issue large amount of debts from export incomes. Although the amount has decreased for the last years. Country and region analysis show that poor and developing countries have big debts. If a country is not able to pay foreign debts, taken in foreign currency, then the issue of percentage or debt moratorium becomes active: interest or the debt itself stops for a certain period of time. Generally it means the loss of trust towards this country. Current and potential creditors become restrained regarding issuing credits. Although a country that has not paid for a debt, will do its best to cover in accordance with rules. There are number of possibilities to solve problems related to debts:
· Conversion of debts;
· Transformation of debts;
· Resolution on debts;
· Rising export capacity;
· Increasing direct investment;
Creditor companies almost at informal meetings at Paris Club with debtor companies try to resolve debt service issues. Discussions on socially guaranteed debts are held there, with the purpose of restoring debts service. They change the date of quick debts and resolutions on debts. In 1988 Paris Club states expressed their readiness to reject 30% of their demands (by affective cut off or decrease of debts) to the countries with low incomes and high debts. Since then lots of agreements have been conclude between creditors and debtor states. Debts turned into financial supports or they were totally annulled on bilateral levels. London Club covers nearly the same activities , with the slight difference: the club deals with the private sector.
In 1980’s there were various types of proposals to overcome debts international crisis caused mainly by Latino American countries (for example Mexico and Brazil 1982/83).
The Brady Initiative had an outstanding importance (the title stands for the family name of Minister of Finance).
In case of developing country with the average income and highest debt, industrial banks and debtor countries should voluntarily come to an agreement and liquidate debts. This opportunity was considered:
· Debt-Buy-Back – with this transaction a country purchases back debt liabilities from secondary market instead of treasury, where debt liabilities are sold on account. This decreases debt services. One of unfulfilled condition is the currency of debtor state.
· Changing debt liabilities on capital share – Debt-Equity-Swap. External (foreign) debts turn into a country’s internal share, for example as part of the country’s privatization program. Creditor’s advantage lies in the fact that they can put their loans in nominal size. As for debtor country, it has less external debt.
· Changing to other debt liabilities for a long period of time or with low interest rate – Debt-Bond-Swap. Creators don’t lose external debts. They are simply imposed low interest rates and issuing for a long period of time.
The World Bank expressed the initiative in 1996 to reduce debts of more than 40 countries with low income and high debts. Social aspects are considered as well. The countries like this take the opportunity to reduce their debts till available condition. The precondition of it is that the above mentioned countries implement not only economic reforms but also social reforms that aim to improve situation in the sphere of health and education.
At a G8 summit, Köln, federal government introduced an initiative on expanding writing off debts of poor countries. The initiative was adopted in autumn 1999 at the annual meeting of International Monetary Fund and the World Bank. Writing off debts concerns the countries, that take credit at World Bank with privileges and show the amount of debts that are 150% more than export incomes or 250% more than state incomes. These countries are free of all debts that exceed the above mentioned conditions. The supposed outcome of it is that the countries will cover less than 10% of export income. The total amount of free debts is USD 70 billion. The major goal of this initiative is to overcome extreme poverty and all the released means should be used for this purpose. The ‘Qualification’ that was spread on 40 countries, the countries should present a strategy of overcoming poverty in accordance with specifics of their countries. German share in the above mentioned activities amounts to more than Euro 5 billion.
Changing the debt dates and terms partly lead to the reduction of debt service share.
Creditors participates in the above mentioned procedure, as it will guarantee one part of debts and international finance risks will decrease. Overcoming debt crisis is depended on the debt policy of the liable country, as well as on its skill to manage credit structure improvement (more social and less private creditors) and on implementing other events (improving ability of export, increased direct investments). On the one hand, due to reduction of materials in developing countries’ production, and on the other hand due to instable political situation that do not have increased indirect investment precognitions should not expect for big volume of currency inflow. Finally, in our opinion, reform of international finance architecture is necessary due to the process of globalization.
The starting position is a serious problem for many developing countries. They are damaged not only due to geographic factors, but also due to not enough participation in the world economic development. Debts and debt services despite simplifications, still remains a hamper. The means that should have been used for equipment export is used got foreign debt services. The more instable a development process is, the more vague its success is. The issue of population increase is quite important from this point of view. With 2-3% of increase the population doubles in every 23-35 years in developing countries. The growth should be adequate in enterprise as well in order to keep current low consumer’s level. The importance of control on birth rate and planning families becomes obvious. In African countries it is influenced by high migration to neighboring countries. Migration increases to industrial countries as well. Accordingly, more should be done for positive and growing development.
The major challenge is insufficient level of education. Number of developing countries have poor resources. So, education and preparing staff is of utmost importance. Education is a significant but expensive product. The issue of employing graduates was solved by government administration. Nowadays it is not possible, as government expenditures should be decreased. Government often released employed people off their positions. It is a real trouble for labor market, and besides, resources are wasted. The process becomes even stronger when framework conditions’ improvement is stopped in private economic sector and the government doesn’t implement them due to losing influence spheres. Another issue is added to it: education system is often arranged as strong ‘humanitarian science’ and less ‘ natural and technical sciences’ and in the sphere of professional preparation workings are conduced either in theory or in practice. Elements of dual education can be met only is several countries (for example Marko took the German model direction by introducing dual system since 1997). Government should have a ‘new’ roe in the development process. It should create a stable framework condition for private enterprise activities 9financial order, legal order etc) and prepare the infrastructure. Although resources are quite limited for that. Therefore, it shouldn’t seem surprising for us that as a result of development policy several countries privatized government tasks through not only ‘internal belief’ but also due to financial limitations.
Still new direction was not understood by all government functioners or, they would like to follow this direction following their specific private interests.
While implementing economic and political goals problems occur from conflicts as well. Programs of structural correspondence, world liberalization policy following the US growing influence, is directed to affective arrangement of resources. Due to this, justice and social liability goals, occupying higher positions in number of developing countries, are in conflict. Market economy should be understood not only a simple goal, bus as a means as well in order to better realize social and political objectives.
State occupies a leading role in overcoming social and institutional growth challenges. It is confirmed in population motivation structure, les profitability in investing many necessary infrastructures and lack of subjective assurance in additional investments.
We believe it is necessary that state manages economic development at its early stage. Problems may occur in planning development process as well. The reason of it on the one hand is lack of data, planning methods and agreement while planning.
Planning development process was the kind of inspiration to a state. State had to manage and it was a huge mistake for many of the countries. It took a long time to correct the error. With the purpose of high development planning documentations were created. Low share of the implementation was shown later in number of countries.
Effectiveness of using mechanisms in developing countries are often broken due to lack of resources and poor state administration. Although the above mentioned state conciliation may lead to unequal usage of means.
Less coordination of supporters are shown in development cooperation. Quite often there are supporters’ interests behind them.