Chapter 5. Facing new challenges for development

The transformation of the global economic geography has fundamentally changed the world and gradually flipped many previously assumed development paradigms on their head. No unique path to development has ever existed. However, mainstream development thinking assumes that policy makers can put their economies on a convergent economic path with the most developed countries in the world by integrating a common set of previously successful policies that structurally favour growth. Countries need to adapt strategies that reflect their own endowments, cultures and institutions. They also need to navigate many new challenges that previously industrialising countries did not face. This chapter discusses such challenges in the context of economic, social and environmental pathways.

    

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No unique path to development has ever existed. Yet development theory has suggested throughout history that policy makers can put their economies on a convergent economic path with the most developed countries in the world by integrating a set of common policies that structurally favour growth. The global transformation of economic geography has gradually flipped many previously assumed development paradigms on their head. On the one hand, the growth of the People’s Republic of China (hereafter “China”) and other major economies since the 1990s has indeed helped pull many countries onto a convergent economic path with the richest countries of the world, and it will likely continue to do so. On the other hand, the development paths such countries are taking are increasingly unlike one another.

There is a growing realisation that the policies needed to continue growing and ensure better social outcomes also require an approach more reflective of local contexts, endowments and institutions. Much of the positive strides experienced by early industrialising countries (or countries that have more recently made a significant jump) cannot necessarily be attributed to a common development strategy with a pre-mixed recipe.

No one development paradigm has sufficiently reflected the complexity of development paths that countries have actually taken. Historical economic and social development paths have varied significantly across countries and regions of the world. Economic growth itself has not necessarily led to improved well-being or environmental sustainability. Moreover, early industrialisers were able to gain significant increases in well-being outcomes at relatively lower levels of gross domestic product (GDP) growth compared to today’s developing countries.

This chapter looks at the future. It first defines how development pathways are typically influenced by external factors and challenges, and why development strategies are therefore needed. It then explores new global challenges, and how they are redefining the way countries tailor their strategies. It ends by arguing that the ever-changing tide of a transforming economic geography has shaped and continues to shape and provide stimulus for novel development strategies to emerge, highlighting the additional challenge of their implementation.

Development is a state of continuous transition

Development is multifaceted, becoming increasingly complex as countries move up the development scale; differences in speed and type of transition become more pronounced, and countries take increasingly diverse paths. Countries have varied timespans for development for many reasons. First, development involves many moving parts, measured by more than economic growth. Chapter 3 showed how development is also about social outcomes and environmental sustainability, and the fact that countries face a variety of pathways related to these aspects. Second, countries benefit from a diverse set of endowments, culture and institutions, and therefore face and adapt to challenges differently.

Economic, social and environmental pathways evolve at different rates

Country transitions are not automatic. This is most evident from the large number of countries that have gained in income over the past 30 years, but which continue to experience low levels of social and environmental outcomes. As Chapter 3 already emphasised, the developing world is neither a homogeneous group of countries nor linear in its development path.

Middle-income countries exhibit the widest divergence across a variety of characteristics. In 2016, for example, average years spent in education ranged from about six in the Dominican Republic to above nine in Malaysia. Employment in agriculture varies between 0.6% in Argentina and 33% in Thailand. While almost nine out of ten Brazilians live in an urban area, only half of Chinese citizens do so. While South Africa faces an HIV prevalence of 19%, Peru and Mexico have rates below 0.5% each (World Bank, 2018[1]).

This divergence extends to environmental factors. Between 2002 and 2012, for instance, tropical forests suffered ten-fold higher losses through deforestation in Malaysia and Brazil than in Thailand and Peru (Carrasco et al., 2017[2]).

Economic pathways are often used to measure development, and are arguably the most straightforward way of doing so. The World Bank has been classifying countries into four income groups since 1979. It does this based on gross national income (GNI) per capita:1 low-income country, lower middle-income country, upper middle-income country and high-income country. Since 1990, 54 developing countries climbed into a higher World Bank income classification for the first time.

A broader measure of economic development is least developed country (LDC) status. LDCs are a group of highly vulnerable and structurally constrained economies. To graduate from LDC status, a country must reach a certain level of GNI per capita, a certain level of human resources (based on an indicator on health and education) and score below a certain level on the economic vulnerability index. 47 countries were listed as LDCs in 2018. Remarkably, only five countries have graduated since LDC status was created in 1971: Botswana, Cabo Verde, Samoa, Equatorial Guinea and Maldives. At the same time, the number of countries on the list has doubled since its creation. Such an outcome indicates that development is much more complex than GNI or GDP measures alone would suggest. Several economic outcomes may not be as linear as economic pathways. For example, Kuznets (1955[3]) depicted the link between income per capita and inequality as one where inequality first increases with development and then reduces, after a certain threshold is crossed.

Social and environmental pathways are much less straightforward to define. As Chapter 3 argues, development paths take on a variety of shapes. In fact, as far back as 1934, Simon Kuznets, the architect of the US national accounting system, cautioned against equating GDP growth to economic or social well-being (Costanza et al., 2009[4]). In 2008, the Stiglitz-Sen-Fitoussi Commission, assembled by then French president Nicolas Sarkozy, reassessed the limits of a GDP-centred indicator of development. It eventually called for an internationally comparable and multidimensional measure (Stiglitz, Sen and Fitoussi, 2008[5]). The OECD’s Better Life Index (BLI) attempts to define a social pathway by measuring well-being across countries. This process reflects the need to collect both subjective and objective statistics for shaping policy that impact quality of life.

Development is also about environmental sustainability and the ability to use, manage and preserve resources for today and tomorrow. Early industrialisers emitted few carbon dioxide (CO2) emissions in their industrial infancy, but as production was scaled up, emissions rose. It has become clear that future development must turn to lower carbon production to avoid catastrophic climate change, but it is not clear how new development paths must navigate environmental constraints. Environmental concerns have become a global issue, involving all parts of the planet, rather than only national concerns or localised areas. In fact, the pattern of emissions in emerging economies has not necessarily been as expected. Indeed, one could expect an inverted U-shape relationship evolving between GDP per capita and CO2 emissions: as countries get richer, they emit more, up until a certain point when they may begin to invest in lower carbon-emitting activities. This has been likened to an environmental Kuznets curve, reflecting Kuznets’ original depiction of the relationship between income per capita and inequality. But we know little about such a relationship in reality. Figure 5.1 depicts the relationship between GDP per capita and CO2 emissions and suggests that for Brazil, the Russian Federation (henceforth “Russia”), India, Indonesia, China and South Africa (BRIICS) as well as the United States emission intensity has been constantly decreasing since 1990.

Figure 5.1. The carbon intensity of economic output has been decreasing with GDP per capita
Relationship between CO2 emissions and GDP per capita (1990-2014)
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Note: The trails are the evolution over time of the CO2 emission positions for the BRIICS (Brazil, the Russian Federation (henceforth “Russia”), India, Indonesia, China, South Africa) and the United States.

Source: World Development Indicators Database (GDP per capita, PPP (constant 2011 international USD); CO2 emission (kg per 2011 PPP USD of GDP)), World Bank (2018[6]) (accessed in August 2018).

 StatLink https://doi.org/10.1787/888933857955

Nevertheless, the complexity of and interaction between economic, social and environmental pathways implies multiple ways for countries to develop. Such diversity is accentuated in light of the way countries face global challenges.

Countries face similar challenges along their development pathways

While the global development context has changed in light of a shifting economic geography and the rapid availability of new technologies, many of the general risks early industrialising countries faced remain today. A review of several sources detailing the most important global challenges for the future suggests that such challenges can be summarised along two main axes: global economic risks and the preservation of social cohesion (Table 5.1) (McKinsey (2016[7]); National Intelligence Council (2017[8]); the OECD’s New Approaches to Economic Challenges (NAEC) Initiative, 2013-2018; The Economist Intelligence Unit (2018[9]); World Economic Forum (2018[10])). While there is no easy or standard solution for facing and minimising such risks, today’s emerging economies continue to need to account for such challenges.

Table 5.1. Countries must navigate age-old economic and social challenges

Economic challenges

slowdown in global GDP growth, risk of new financial crisis

mounting protectionism, reduction in international trade, exposure through global value chains

fractioning of global governance system that enables economic exchange and growth

Social challenges

rise in inequality, loss of social cohesion

rapid population growth, urbanisation, international migration

extreme poverty, lack of social protection, health access

localised pollution, living accommodations, air quality

Economic challenges

Early industrialising countries grew on the backs of new technological advancements and societal change. However, it was not without economic risks, jeopardising macroeconomic and political stability. For example, the long depression in the United States and Europe from 1873 to 1896 and later the crash of 1929 dampened previous periods of relatively exceptional growth. This led to developments, for instance, in macroeconomic and trade management. Lessons were learned regarding trade protectionism and global risk management.

Today, the transformation of economic geography, the demand and supply of natural resources, the push for globalisation and the importance allocated to the multilateral system have all played roles in shaping and modulating the global geopolitical structure since the Second World War. The global governance system has come under strain as it did in the past. It took several decades for the world to regain global trade and migration rates reached in the 1920s, for instance.

Today’s emerging economies continue to deal with economic risks, amid current fears of a new financial crisis. In fact, the recent era of fastest growth and convergence during the 2000s ended with a major recession in 2008-09. Despite the slowdown in GDP growth and international trade in the last few years, there is some reason for optimism, buoyed by new manufacturing growth poles and South-South linkages (IMF (2018[11]); OECD (2018[12])).

Economic risks will nevertheless continue posing challenges for countries in the future. Concerns linger about the stability of the global financial architecture and the risk of another major financial crisis. Recovery from the 2008-09 crisis was facilitated by a significant drop in global interest rates, which now raises concern and uncertainty about the recovery’s sustainability once global interest rates rise back to historically normal levels. In addition, the risk of mounting trade protectionism has weakened global trade, making countries with ties and interests in global value chains vulnerable.

Importantly, the major economies (G20) devised a co-ordinated response to the crisis back in 2008 and 2009 (G20 (2008[13]), (2009[14])). Developing countries used their reserves and fiscal space to weather the crisis. Today, in the context of current narratives on protectionism and multilateralism, it is much less certain that countries will deliver a co-ordinated and co-operative response to a new crisis.

Social challenges

Growth in early industrialising countries was also met with rising inequality, stresses on social cohesion and demographic pressure, led by a relatively faster growing number of youth than older cohorts searching for jobs, fast and unmitigated urbanisation, and international migration as a response to the search for a better life. Each challenge was met with new policies and resilience. Tax systems were redesigned, cities were rebuilt and expanded to accommodate larger populations, health and education systems were reformed and security was prioritised.

Today’s emerging economies face similar challenges. In many countries, inequality is rising amidst fast growth (Alvaredo et al., 2017[15]). Many countries are quickly urbanising. Population pressures will be strongly felt in South Asia, Southeast Asia and sub-Saharan Africa over the next 30 years, where a youth bulge will bring pressure to cities, labour markets and international migration. Since the mid-2000s, most of the world’s population lives in an urban area, but this is not the case everywhere. While Latin America urbanised quickly in the 1980s and 1990s, most of the population in Asia and Africa remains in rural areas. Moreover, while international emigrant stocks relative to home country populations are comparatively high in Latin America and the Caribbean (5.8%), they remain the lowest worldwide in sub-Saharan Africa (2.5%) and South Asia (2.1%), meaning population growth in those regions could set in motion dramatic demographic shifts (UNDESA (2017[16]), (2017[17])).

Emerging countries will also need to increasingly deal with eroding trust in government. This has recently included rising scepticism of globalisation, particularly amongst the middle class. While technological change is a likely factor in this sentiment, as it was in the early industrial age, a general negative feeling against trade imports and foreign direct investments, as primary reasons for job insecurity and inequality, often prevails.

Technological change and reinforced multilateralism are enablers for development

In addition, the risks outlined above are not isolated nor mutually exclusive. They can intersect, compound the effect and even generate new risks. For example, protectionism and the weakening of global governance may fragment the global system and lead to a slowdown in GDP growth. Social and demographic pressures have fuelled governments to enact protectionist measures, further isolating countries and fracturing global economic growth (WTO (2018[18]); Evenett and Fritz (2018[19])). Such a global slowdown can then lead to fewer jobs, which then fuels more social ills.

The way and time taken by countries to navigate economic, social and environmental development pathways have changed. Part of this is due to changes in global development paradigms, which have influenced policy makers and the flow of development finance over time. However, challenges have also become more complex, with increasingly more constraints in play on national governments. Pathways were not the same for early industrialisers, nor countries like Korea and China that industrialised after the Second World War.

In comparing the experience of early industrialisers with that of today’s emerging economies, the issue of global governance becomes paramount. In the midst of the current wave of eroding multilateralism, it is striking to think of the importance multilateral co-operation has played in early industrialising development – either through trade, peace, security, migration or investment. The same can be said of technological change, which was viewed as a source of social stress, but in the end enabled beneficial development. That is not to say that global governance and new technologies will automatically render the best development outcomes for new emerging economies. In fact, the global, environmental and technological contexts have so drastically changed that emerging economies are facing challenges that many of the early industrialisers did not, and the lessons learned from the past do not necessarily offer a clear lesson forward.

Development is being challenged like never before

Today’s developing countries must face previously unseen challenges, several of which were not part of the development equation for many of the early or recent industrialisers. Such challenges can be broadly summarised as technological, social, environmental and economic in nature (Table 5.2).

Table 5.2. New global challenges

New technological challenges

• digitalisation and automation

• new materials revolution

• biotech revolution

• risk of cyber-hacking.

New social challenges

• continued rapid population growth for many developing countries vs. rapid ageing for others

• increased risk of pandemics because of more and faster international travel

• increased mobility, risk of “brain drain”.

New environmental challenges

• climate change

• pollution and air quality

• natural resource depletion, water in particular

• increased extreme weather-related disasters.

New economic challenges

• international economic environment more constrained by global rules

• faster economic changes because of deeper globalisation and greater interdependence between countries.

Sources: Authors’ compilation based on various sources including: McKinsey (2016[7])Urban world: Meeting the demographic challengehttps://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Urbanization/Urban%20world%20Meeting%20the%20demographic%20challenge%20in%20cities/Urban-World-Demographic-Challenge_Full-report.ashx; National Intelligence Council (2017[8])Global trends. Paradox of progress, https://www.dni.gov/files/documents/nic/GT-Full-Report.pdf; OECD New Approaches to Economic Challenges Initiative (2013-2018); EIU (2018[9])Cause for concern? The top 10 risks to the global economyhttp://pages.eiu.com/rs/753-RIQ-438/images/Top_10_risks_to_the_global_economy.pdf; WEF (2018[10])The Global risks report 2018, 13th editionhttp://www3.weforum.org/docs/WEF_GRR18_Report.pdf.

Technology is disrupting development paths

Advances in technology have underpinned many other trends such as economic growth and globalisation, as well as environmental stress. They have also been behind increases in productivity, reductions in transportation and communication costs, diversification in products and services, new energy sources, and improvement in health and life expectancy. Disruptive advances in digital technology, bio-technology and nano-technology are permitting the capture and use of information on virtually anything. They also create new materials, with profound implications for economic and social interaction (Rothkopf, 2017[20])

The confluence of these technologies has been called the “Fourth Industrial Revolution” by the World Economic Forum (Schwab, 2015[21]). Some key trends are leading to advances in automation, artificial intelligence (AI), big data analytics, blockchain technology, the Internet of Things (IoT) and 3D printing. These have implications for developing countries, ranging from the future of work (e.g. greater pressure on incomes from low-skilled jobs, higher skill requirements), competitiveness of countries and the location of economic activity to privacy and security (OECD, 2017[22]).

Big data technology

Although no agreed definition of big data currently exists, its characteristics are often described along three “V”s – “volume”, “velocity” (the real-time speed at which data is created, processed and stored) and “variety” (the complexity of data types) (Laney, 2001[23]). Recently, two additional Vs, namely “veracity” and “volatility”, have been added to the list. These latter terms refer respectively to the noise in the data as the biggest challenge to extracting value and validity and to the challenge of ever-changing technology and business environments. Unlike statistical data that are compiled for specific purposes, big data is a by-product of administrative systems, social networks or Internet of Things devices. Big data refers to the growing ability to generate, manage, analyse and synthesise data to create and destroy different forms of value. For example, big data can increase a company’s ability to understand and target its customers by providing a detailed view of their preferences, values and behaviour.

The dimensionality of big data on all fronts, as well as the educational skills and technological capabilities required to bring big data to use, pose great challenges to many countries. Specifically in a developing country context, however, a lack of connectivity, storage and processing capacity means that even relatively small volumes of data cannot be managed effectively and efficiently (Taylor, 2013[24]). The lack of technical capacity in developing countries creates barriers to fully reap the opportunities of big data which are continuously unfolding and range from failure prediction of oil pipelines to improving disaster mitigation and preparedness. The latter has, however, so far proven to be the most impactful application. In the aftermath of the 2015 Nepal earthquake, for example, relief workers collected data from deployed drones relying on 3D-printed maps to get supplies to affected survivors and map reconstruction efforts (Sharma, 2016[25]).

Internet of Things

The term “Internet of Things” has evolved from an initial supply chain management meaning to a keyword covering a wide array of applications like intelligent transport, smart health care and smart utilities, all interconnected. This promises a plethora of opportunities for developing countries, ranging from road accident mitigation due to smart vehicular systems amid increasing traffic numbers to better social security management for underprivileged parts of society (Miazi et al., 2016[26]).

However, with more devices becoming “smart” and interconnected, challenges in terms of security and privacy arise. These devices become vulnerable to cyber-attacks and hackers from around the world. Water pumps, power plants and electricity grids can be hijacked or shut down by outside parties, crippling vital processes important for societies and economies alike. This may further be exacerbated by a lack of knowledgeable personnel or unreliable power supplies for rising IoT demands.

Blockchain technology

Blockchain technology, a use of records protected by cryptography (techniques used for secure communication) and stored on a decentralised network, is another potentially significant disruptor to the global economy. By 2027, 10% of global GDP will be stored on blockchain compared to 0.025% in 2015 (WEF, 2015[27]). For developing countries, this secure technology may provide many benefits. For example, corruption and fraud can be reduced by providing development finance for services without intermediaries. The World Food Programme, for instance, is trialling blockchain-based cash transfer systems in refugee camps in Pakistan and Jordan. As of October 2018, more than 100 000 people residing in camps have redeemed their financial assistance through the system, thereby keeping secure in-house records of transactions and achieving both greater privacy for refugees and a significant reduction in transaction fees (WFP, 2018[28]).

Blockchain also enables higher efficiency in trade and supply chain finance and generally better contract or property rights enforcement. However, challenges for developing countries to fully exploit these benefits remain. Weak digital infrastructure, high energy consumption from servers or conflicting to non-existing regulatory requirements, for example, are obstacles (Kshetri, 2017[29]).

Unprecedented population growth and increased risk of pandemics raise new social challenges

Changing patterns of population growth have posed new social challenges. Rapid declines in death rates with advances in preventive medicine and the spread of health and sanitation practices led to rapid population growth after the Second World War. The labour force also grew rapidly. While population growth in developed countries slowed, populations continued to grow in most developing regions.

Today, declining population and labour force growth are asymmetrical in most developed regions and in some large developing countries such as Brazil, China, Russia and Viet Nam, while population and labour forces are still rapidly growing in developing countries. This is particularly the case in Africa where economic growth has slowed considerably in the last decade, but its population growth is expected to remain much above the world average through 2100. By 2030, its share of the world population is expected to be around 19% compared to 16% in 2015 (UN, 2017[30]).

These asymmetries in population growth put new challenges on countries with rapidly ageing populations such as Japan, most of Europe, but also China. They also pressure countries with labour forces that are growing much faster than the availability of productive jobs, like most countries in South Asia and Africa. This asymmetry also raises pressure for migration from countries with growing populations and limited employment opportunities to countries with declining populations and better living conditions.

Another new social challenge is the greater risk of pandemics due to greater population movements across countries. For instance, the scope of the 2014-16 Ebola virus outbreak in West Africa and beyond was attributed to an unprecedented mobility of people across borders (UNDP, 2014[31]). Pandemics have been a constant of history. However, with greater globalisation and faster travel as well as larger urban agglomerations, they can propagate faster. This increases the threat to developed and developing countries alike (Campbell, 2017[32]).

High environmental stress on the planet implies higher standards for all countries

The most important environmental challenge is climate change, which is generally accepted across the world and was agreed to by governments in the December 2015 Paris Agreement. However, countries’ commitments to nationally determined contributions are not enough to reduce greenhouse gas (GHG) emissions sufficiently to keep the rise of global temperatures below the agreed 2°C goal. In addition, the United States withdrew from the accord in 2017, further limiting its potential achievements.

While climate change is a long-term threat, it requires action now. The shorter-term effects of climate change include extreme weather events such as hurricanes, floods and droughts. The frequency of extreme weather events has increased markedly over the last four decades (EASAC (2013[33]); Swiss Re (2018[34])). These put populations and economies at risk due to high volatility in harvests and unpredictable swings in crop prices. Poorer countries particularly have a more limited capacity to cope.

Other key environmental challenges relate to pollution and depletion of natural resources. Air, water and soil pollution tend to increase with industrialisation until countries enact policies to address them. Deforestation and fresh water depletion are major challenges for developing countries that rely heavily on natural resource extraction for their growth.

The global economic environment is different

Early industrialising countries, as well as those that developed in the wake of the Second World War, faced a different global context regarding the use of industrial policies and rules and standards. In fact, advanced countries practised many types of industrial and trade policies that are now forbidden by the World Trade Organization (WTO), as well as provisions in regional and bilateral trade and investment agreements. These include infant industry protection through tariffs on imports, large state subsidies, local content rules, market reservation for national firms and preference for domestic firms in government contracts (Chang, 2002[35]). Today’s developed Western European countries and the United States, for instance, levied high tariffs on manufactured products in their early stages of development. They even continued to do so when they were ahead of their competitors in technological terms (Bairoch, 1993[36]).

The rapid and massive insertion of China into the global economy and the rise of new technologies are also transforming the economic environment. China has occupied most of the traditional space for labour-intensive manufacturing exports that were so critical for the development of Japan; Hong Kong, China; Korea; Singapore and Chinese Taipei. At the same time, the rapid development and spread of automation technologies is undermining the low-labour cost advantage of developing countries. Developing countries therefore need to find new drivers of economic growth.

In addition, with the increased globalisation of trade, finance, travel, transportation, communications and digital technologies, everything is happening faster in real time. This has increased the speed at which everything occurs and how events in one part of the world affect other parts. It puts greater pressure on economies to respond to rapidly changing events such as financial or economic crises or increased competition from other parts of the world.

Challenges are interconnected

All these challenges, if not addressed properly, threaten the ability of developing countries to further progress on their sustainable development path and may derail envisaged national development strategies. On the one hand, all challenges demand independent consideration to fully understand their individual characteristics and to prepare contingency plans for efficiently containing negative effects. For instance, despite relatively precise projections of temperature increases and precipitation until the end of the 21st century, large levels of uncertainty remain regarding temporal and spatial variability of events. Countries with a large agricultural sector need to adapt crop cultivation to more extreme weather conditions.

On the other hand, all challenges are intricately linked, reinforce or alleviate each other, and thus require a holistic and systemic approach to find appropriate answers. In spite of all its risks, factoring in the potential mitigating effect of technology will be part of the solution.

In 2018, one billion people still live off the electric grid and lack access to reliable power in developing countries. Additionally, nearly three billion depend on wood and biomass for cooking and heating (World Bank, 2018[37]). The resulting indoor and outdoor air pollution exacerbate climate change and cost the life of millions each year. AI through mobile payment systems such as M-Pesa can provide loans to buy solar panels for heating, thereby helping to improve health levels and mitigate climate change.

Developing economies particularly in parts of Asia, the Middle East and Africa will be confronted with water scarcity and water shortages that will impact agricultural, industrial and energy production. Higher temperatures due to climate change will also increase the aridity of land and reduce the productivity of labour and add tension to social challenges. New technologies may ease the constraints imposed by climate change and water shortages through smart irrigation systems.

Such solutions, however, demand a clear development strategy, involving concerted efforts of national governments and civil society with support from both international partners and the private sector to overcome technical and institutional barriers.

What do future challenges mean for development strategies?

The trends outlined above imply the need to adapt development strategies to achieve real improvements in the quality of people’s lives. This section looks at technological, environmental, demographic and global governance challenges that development strategies need to address, before presenting an assessment of how well current national development strategies incorporate such challenges.

Disruptive technologies are undermining tried and tested growth strategies, but also providing new opportunities

The development and dissemination of new production technologies raise many issues (Dahlman, 2017[38]). The disruptive nature of these technologies will depend on several factors. These include the speed of their development, as well as how fast they disseminate and impact the production and use of goods and services. A study of the dissemination of 15 technologies in 166 countries over the last 200 years, for instance, found that on average countries adopted technologies after 45 years (Comin and Hobijn, 2010[39]). This varied across technologies and countries. However, newer technologies such as cell phones diffused more quickly and were adopted more broadly than earlier technologies such as steam or reciprocating engines to power ships, railways and cars.

The factors influencing new technologies present both challenges and opportunities. Automation and new production technologies, for instance, mean labour represents a smaller share of total costs. This makes it harder for developing countries to compete based on low-cost labour. Developing countries may remain competitive only in sectors where low-cost labour is still important. One such case is production for domestic and regional markets that is not yet exposed to international competition.

At the same time, the ecosystem required to use new technologies, such as the Internet of Things and Industry 4.0, is becoming more demanding. Required elements of future technological ecosystems may include advanced logistics, high-speed Internet connectivity, sophisticated infrastructure, and specialised skills and standards that require capacity that is currently lacking in many developing countries. Even technologies common in developed countries for many years are uncommon in developing countries (e.g. access to fixed broadband). More generally, developing countries have weak innovation systems.

Services, many of which are facilitated by the digital economy, are becoming a more important part of production and consumption. Thus, developing countries need to improve the breadth and competitiveness of their service sectors. However, most important service sectors depend on high-level skills and sophisticated infrastructure that developing countries often lack so far.

Human capital remains weak in developing countries. Overall attainment and quality of education are lacking. Similarly, specialised skills needed to adopt, adapt or develop new technologies are often missing (World Bank, 2018[40]). Developing countries lack resources to support workers displaced by new technologies. Many developing economies are also making a labour transition from agriculture to manufacturing and services. In addition, many have large labour force growth, for which it will be difficult to find productive employment.

The traditional growth paradigm in developing countries of labour-intensive manufactured exports seems to have reached its limits (Hallward-Driemeier and Nayyar, 2017[41]). This is exacerbated by globalisation and the strong performance of China in manufacturing and exports. In 2015, China accounted for more than 50% of world manufacturing employment, 25% of world manufacturing and 13% of all world merchandise exports. In addition, China is rapidly adopting robotics and is expected to have the largest number of robots installed in any country by 2020 (Hallward-Driemeier and Nayyar, 2017[41])

The shares of manufacturing value added (in GDP) and of manufacturing employment (in total employment) are now peaking at lower levels of per capita income (Rodrik, 2015[42]). Furthermore, the commodity super-cycle that spurred the growth of natural resource-exporting developing countries is over. Therefore, new drivers of growth and development need to be found.

Automation and its impact on the future of work are concerns in developed and developing countries alike. McKinsey (2017[43]) analysed the potential impact of automation technologies, including artificial intelligence and robotics on jobs. It concluded that while half of all work activities globally have the technical potential to be automated by adapting currently demonstrated technologies, the proportion of work actually displaced by 2030 will likely be lower because of technical, economic and social factors that affect adoption (McKinsey, 2017[43]).

The proportion of automation varies by country. Advanced countries are more affected than developing ones because they have higher wages and therefore greater incentives to automate.

The dominance of robot use in sectors higher up on the skills ladder implies greater difficulty for latecomers in attaining sectoral upgrading. This may limit their scope for industrialisation to low-wage and less dynamic (in terms of productivity growth) manufacturing sectors such as textiles and apparel. Furthermore, it could seriously stifle these countries’ economic catch-up and leave them with stagnant productivity and per capita income growth (UNCTAD, 2017[44]). On the other hand, the Central European countries are cause for optimism; as the most robotised countries (Figure 5.2), they managed to beat the middle-income trap and have recently reached high-income status.

Developing countries have distinct experiences with automation. India has more modest potential for automation because of its relatively low wages. However, it also has a great challenge to find productive jobs for its labour force, which is expected to grow by 138 million by 2030 (McKinsey, 2017[45]).

China is more likely to benefit from automation because wages have been rising faster than in other countries and have reduced its competitiveness in manufacturing. China is rapidly replacing workers with robots and already has the largest installed robot base in the world (Hallward-Driemeier and Nayyar, 2017[41]).

Development and deployment of automation technologies would displace an estimated 118 million jobs in China. However, trend line growth and the changing structure of the economy in China would create 231 million jobs (McKinsey, 2017[45]). While the number of workers employed in manufacturing would increase slightly, the bulk of the increase would be in services. This is particularly true of accommodation and food services, health care, and retail and wholesale trade.

The labour force is projected to fall by 90 million in China by 2040 because of an ageing population (World Bank, 2015[46]). As a result, unlike for most other developing countries, automation would be positive due to projected overall labour shortages. However, China would have the largest number of workers needing to switch occupations, up to 12% of the labour force under a rapid switch to automation scenario. Therefore, a key challenge would be scaling and reimagining job retraining and workforce skills development, and providing income and transition support for workers. More generally, China needs to maintain robust economic growth to support job creation, and improve business and labour market dynamism and mobility.

Figure 5.2. Advanced and middle-income countries are more exposed to automation than developing economies
Relationship between share of exposed sectors to automation in employment and share of manufacturing in total employment, by country (average 2010-14)
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Note: The horizontal axis reflects the share of manufacturing in total employment in 2014. The vertical axis reflects the share of the automotive sector, of the electronics sector and of the rubber, plastic and chemical products sector in manufacturing employment as an average for the period 2010–14 over the years for which data are available. The sample includes all 91 economies for which data are available.

Source: UNCTAD (2017[44]), Trade and development report 2017. Beyond austerity: Towards a global new deal, https://unctad.org/en/PublicationsLibrary/tdr2017_en.pdf.

 StatLink https://doi.org/10.1787/888933857974

Some new technologies offer opportunities for developing countries to improve competitiveness and to address critical social needs. Yet, taking advantage of such new technologies may be difficult for some developing economies. Many lack the necessary supporting elements of the broader industrial ecosystem. Therefore, it may be difficult for developing countries to adopt full-fledged Industry 4.0 factory automation.

Developing countries can often adopt many discrete elements of new technologies and adapt them for critical needs across different sectors of the economy. Examples in manufacturing include using 3D printing to overcome the constraints of scale as well as the lack of well-developed component supplier industries and logistics. This would move these countries closer to world supply chains (Ishigoma and Mtaho, 2014[47]). Developing countries also can use robots for part of their production even if they do not adopt fully automated Industry 4.0 factories.

New technologies such as artificial intelligence and the Internet of Things can overcome knowledge constraints in key sectors

Artificial intelligence (AI) systems and the Internet of Things can overcome some knowledge constraints in manufacturing, agriculture and services.

In agriculture, electronic sensors and trackers can improve drip irrigation, harvesting, and distribution of agricultural products, among other applications (Cornell University, INSEAD and WIPO (2018[48]); Lee and Choudhary (2017[49])).

In services, new technologies can help overcome constraints in the financial, energy and social sectors. Within the financial sector, the Internet has helped develop mobile money systems such as M-Pesa in Kenya and Tanzania to reach people without access to the formal banking system. Internet-enabled systems have also expanded lending to under-banked populations in Bangladesh. Internet-enabled platforms and the sharing economy, such as Uber for transportation, AirBnB for accommodations and Taskrabbit for freelance labour, can also increase use of scarce capital or mismatched labour.

Within the energy sector, the Internet of Things can extend electricity to off-grid communities through solar energy hubs in India and various African countries.

AI is being used to extend Internet access to African countries through equipment in helium balloons in stratospheric orbits (Simonite, 2015[50]).

Within social sectors, the Internet and electronic devices can extend education and training to millions of users in low-income countries. New, simple, low-cost diagnostic techniques and medical AI systems can also extend services to isolated rural communities in sub-Saharan Africa and South Asia.

Harnessing knowledge can enhance productivity

Many opportunities to access and harness existing knowledge exist to enhance productivity.

Cirera and Maloney (2017[51]) argue that developing countries have tremendous potential to increase productivity by adopting technology, but are limited because of poor management capability at the firm level. Labour productivity in developing countries is generally less than 10% of that in developed countries. With few exceptions (most notably China), the productivity gap has been increasing over the last decades (OECD, 2014; Hallward-Driemeier and Nayyar (2017[41])).

There are many ways to access global knowledge on productivity. Attracting foreign investment can bring more advanced technologies, management and business organisations. Developing countries can import capital goods and services that embody the new technologies or buy foreign technology and management assistance. For instance, China has raced ahead in AI start-up funding and patents. In 2017 alone, China’s global equity funding share for AI accounted for 48%, leaving the United States as the second largest market with 38% (CB Insights, 2018[52]). They can also access the knowledge, management skills and finance of diaspora populations in more advanced countries. Other examples include studying and working abroad; copying and reverse engineering; and using electronic and other means to access technical and management knowledge (OECD, 2014[53]).

Some countries have been more successful than others in accessing global knowledge. China’s efforts to access knowledge have achieved impressive results. However, China’s path is not easily replicable, given its special type of government and the advantage of its large market size.

Other countries have developed effective strategies for accessing global knowledge and to address local needs. These include Korea and Singapore in Asia, Chile in Latin America, and Ethiopia and Rwanda in Africa. In addition, many new technologies can address local needs, including in many low-income countries in Africa and elsewhere.

Commitment to high-tech education is critical

Quality higher education in science and technology is critical for embracing innovation-based development. Developing science and technology capabilities needs good support for research-based education, and participation of researchers in the world's science and technology community. Research-based universities also need the ability to diffuse technology to firms, especially small and medium-sized enterprises.

Global linkages are essential, but firms need some capacity to absorb new technologies to reap the full benefits from technology transfer and technology diffusion from foreign direct investment, licensing and imported capital. Firms also need high-quality managers and employees to master technologies and improve them. Therefore, a well-educated population is fundamental to all spheres of development. Prominent examples are China and India. Their high abundance of IT and software skills has been key to transforming their countries into research hubs for US multinational companies (MNCs) and attracting disproportionately high patent and research and development (R&D) investments. During 2004-14, R&D expenditures of US MNCs’ foreign affiliates grew by a factor of four in China and 25-fold in India (Branstetter, Glennon and Jensen, 2018[54]).

Addressing the digital divide is an important tactic to reduce inequality and promote inclusive sustainable development. The application and adaptation of technologies in the 21st century rely largely on the availability of information and communication technology (ICT) infrastructure and access to it. However, this infrastructure must be affordable, resilient and reliable, and complemented by efficient services.

Efficient transportation, financial, information, computer and telecommunication services are also critical for firms to compete in the global market. Hence, services trade policy must balance efficiency and job creation.

Climate change is creating an imperative to transition to low carbon, climate-resilient economies

Development strategies can be an essential tool in the global effort to reduce greenhouse gas emissions and address other environmental challenges.

Responding to climate change requires immediate action on both mitigation and adaptation. Planning decisions taken now can either open up pathways to low-carbon, resilient futures or lock countries into high-emissions trajectories. Development strategies based on copying old ways of modernising economies through carbon-intensive energy systems and industrial processes will guarantee that the goals of the Paris Agreement will not be met.

Transitioning to a low-carbon economy will require new infrastructure to support decarbonised electricity systems, energy efficient processes and low-emission and clean transport systems (OECD, UN and World Bank, 2018[55]). This in turn will require a supportive policy environment that creates the right incentives. Putting a price on carbon and reforming fossil fuel subsidies, for example, can help change behaviour and reorient investment decisions. Notably, the cost of renewable energy is declining, and an increasing number of countries are integrating renewable energy sources into their energy mix (IEA, 2018[56]).

In addition to the positive environmental impacts, the greening of the economy in itself can be an effective strategy for economic growth and job creation (OECD, 2017[57]). China, for example, has recognised the enormous potential of the renewable energy market and aims to be a leader in the field. Importantly however, renewable energy is mostly focused on electricity, which constitutes a small (less than 20%) share of global energy consumption. There is large room for growth in renewable energy in the heat and transport sectors (IEA, 2018[56]).

Development strategies also need to include measures to prepare countries for the effects of a changing climate. The effects will be wide-ranging, touching on water security and water hazards (e.g. flood protection), infrastructure (e.g. risks to coastal infrastructure), public health (e.g. changing patterns of infectious diseases), agriculture (e.g. impacts on crop yields), and energy security, amongst others.

Given the inherent uncertainty around climate impacts, adaptation planning needs to be flexible and follow an iterative risk management approach (OECD, 2015[58]). Development strategies need to plan for a range of possible outcomes rather than one most likely projection. They also need to draw on knowledge about the risks from climate change based on national assessments.

Demographic challenges differ across regions

Generally, Europe and some developing countries such as Brazil, China, Russia and Viet Nam are projected to have decreasing populations. Conversely, most countries in Africa, particularly sub-Saharan Africa, will face rapid population increases. Asia’s annual population growth has been growing below the world average since 2000, stands at 1.0% in 2015 and is projected to be negative by 2060. By contrast, Africa’s population growth is expected to grow much above the world average through 2100.

Population growth and decline both bring challenges. Countries with shrinking populations will face fiscal pressures from an increasing old age dependency burden, healthcare costs and slowing growth. Increased labour force participation of women, higher retirement ages and greater use of automation may ease them. Those with growing populations could receive a dividend of lower dependency burdens and higher growth.

Countries with a growing population will face special challenges, including how to leverage the demographic potential, and deal with rapid urbanisation and migration.

Countries will not benefit from the demographic dividend unless they can provide education and productive employment for growing labour forces. Some countries with rapidly growing populations may reduce population growth significantly. They may even achieve a demographic transition, with growth falling to less than the replacement rate by 2030. However, the number of persons already born will still swell labour force growth. This would put strong pressure on the labour market and social stability.

Rapid urbanisation also poses multiple challenges and opportunities, including:

  • incorporating and providing services to millions of new entrants

  • planning urbanisation with climate change adaptation

  • increasing attention to energy efficiency in terms of location of residential and work areas, mass transportation and green buildings

  • developing viable intermediate cities to absorb labour leaving agriculture

  • addressing challenges of social cohesion and migration.

World urbanisation rates vary widely across regions (Figure 5.3). These rates increased from 30% to 50% over 1930-2008. They are projected to reach 60% by 2050. However, the projected rate of increase will be lower for North America, Oceania and Europe, which have been mostly urban since 1950. Asia and Africa, which were less than 20% urban in 1950, are expected to urbanise rapidly through 2050.

Figure 5.3. Urbanisation will constantly increase across regions
Share of population living in urban areas, by region (1950-2050)
picture

Note: Projections start in 2018.

Sources: World Urbanization Prospects 2018 Database, UN (2017[30]), World population prospects: The 2017 revision, key findings and advance tableshttps://population.un.org/wpp/Publications/Files/WPP2017_KeyFindings.pdf (accessed in July 2018).

 StatLink https://doi.org/10.1787/888933857993

The population growth challenge is most acute in Africa. Like some Asian and Latin American countries, Africa could tap into its demographic dividend to support and accelerate economic growth and development. The population in Africa is expected to more than double between 2015 and 2063. Creating enough productive employment for new entrants to the labour market is one of the biggest challenges for the continent. While many countries and regions have experienced rapid population growth as they pass through the demographic transition, the scale of population increase in absolute numbers in Africa is unprecedented.

Global governance is becoming more complex and fragmented

Since the end of the Second World War, a global architecture has been set up to govern relationships amongst countries. This has included the UN system and its specialised agencies to deal with security and many global issues. The International Monetary Fund was created to address the balance of payments crisis. The WTO was formed to deal with trade issues. And the World Bank and various regional development banks were established to provide development finance and advice. Despite the Cold War that lasted until the fragmentation of the Soviet Union in 1991 and various wars involving specific countries, a major global war has not occurred since 1945. In addition, the global architecture for trade and investment has been generally open. It has supported the rapid growth of trade that benefited the world economy and helped many developing countries reduce their poverty.

More recently there have been signs of growing dissatisfaction with multilateralism (OECD, 2018[59]). Complaints have included the slow pace of response to emerging issues (e.g. the refugee crises), a lack of effectiveness in ensuring that all parties play by the rules, a mismatch between countries’ weight in the global economy and their voice in multilateral processes, and more broadly a perception that the benefits of globalisation have not been widely shared.

In parallel, China and other large emerging economies have created multilateral institutions that supplement existing global governance arrangements. For example, on the economic and aid front, China founded the New Development Bank with the BRICS (Brazil, Russia, India, China and South Africa), as well as the Asian Infrastructure Investment Bank.

These dynamics pose challenges and opportunities for countries when designing development strategies. On the one hand, strategies must astutely position countries in an increasingly complex and fragmented global governance architecture. On the other hand, the greater diversity of development finance institutions, for example, increases access countries have to international finance and options for development co-operation.

Table 5.3 summarises the implications of all these different changes on development strategies. Strategies must be crafted to the specifics of country characteristics, institutions and capabilities.

Table 5.3. Implications of changes for development strategies

Change

Implication for development strategies

Acceleration of change in technology, economy, society.

Build capacity to respond more quickly. This implies need for greater capability in government and business, which includes more education and training, and institutions supporting flexibility.

Increase in uncertainty.

Build more flexibility into strategies, which implies more global scanning, monitoring, assessment and adjustment.

Different context for growth of developing countries

- pre-emption of labour-intensive manufactured export strategies because of dominance of China and of labour-saving technological change

- stronger rules of the global trading system

Find new growth strategies, taking advantage of new technologies:

• improve productivity of agriculture, including subsistence agricultures since many people will continue to be rural

• develop agro industry

• develop rural industry

• develop rural services

• continue to develop manufacturing in products that can be competitive

• develop service sector, including by using digital technologies.

• Develop non-traded sector, including water, sanitation, health, education, physical and digital infrastructure, housing, business and government sector.

Rapid development and dissemination of new disruptive technologies.

Pay more attention to technology and develop greater capacity to take advantage of existing and new technologies. This requires more investment in technical skills through both formal education and lifelong learning. It also requires a more effective national innovation systems, as well as greater support for entrepreneurship and for the start-up of new technology-based companies.

Pervasiveness of digital.

Invest more in digital infrastructure, skills and digital capabilities in government and business.

Fall in social cohesion, increasing inequality.

Incorporate explicit focus on increasing cohesion, reducing inequality and increasing social protection.

More pronounced population asymmetries, declining vs. growing populations.

Address explicitly the implications of population dynamics

Declining: increase labour force participation, especially women; increase retirement age, increase immigration and automation.

Growing: provide health, education and skills; provide productive jobs to youth bulge.

Rapid urbanisation without productive jobs.

Improve urban planning to make it more energy efficient, develop intermediary cities, provide more productive jobs; improve the efficient delivery of services such as water, sanitation, sewage, etc.

Risk of significant negative effect of climate change if more is not done globally to reduce greenhouse gases.

Include explicit environmental goals into strategy in terms of environmental conservation and green growth. In addition, given insufficient mitigation of climate change, developing countries need to adapt more and take defensive action. This could include moving populations away from low-lying areas near the sea or prone to flooding or droughts; or developing more weather- resistant agriculture, infrastructure, etc.

Shifting global governance arrangements

Pay attention to changing geopolitics and think how to position country for changing global alliances and implications for trade strategies, energy, commodity prices, international finance, etc.

Current national development strategies may not be future proof

This section presents an analysis of a nearly 40 development plans from developing countries (see Annex Table 5.A.1). While the sample is not exhaustive, it includes countries from across the developing world that show interesting regional differences.

Plans for economic growth focus on diversification, but few have comprehensive strategies for technological upgrading

While nearly all plans emphasise the aim of economic growth, 75% mention the importance of diversifying their economies and almost 60% focus on the need to move up the value chain. Strategies to achieve these goals include expanding physical infrastructure (80%), but only slightly more than half include the expansion of and access to digital infrastructure.

Attracting foreign direct investment for technology is on the agenda of 66% of the plans. Yet planned interaction with the private sector remains weak in under 40% of plans. Only 40% seek to increase domestic savings, and less than 25% mention improving government finances.

Nearly all mention the importance of improving innovation, but only 60% plan to increase R&D. Roughly 66% of plans emphasise the upgrading of higher education and the improvement of vocational training. However, less than 50% mention promoting lifelong learning, strengthening the curriculum or concentrating more on science, technology, engineering and mathematics.

Most plans recognise the need to look beyond economic growth

Encouragingly, most plans focus on inclusiveness and environmental sustainability in addition to economic growth, although few develop how they will achieve these specific goals. Social and environmental issues rank high in roughly three-quarters of development plans. Social issues targeted fostering inclusive growth and reducing inequality, with less emphasis on strengthening social protection.

The focus on the environment is mostly on environmental protection, disaster management and the energy transition. Less than half of plans have explicit objectives for reducing greenhouse gas emissions. A major exception is China, which does focus on green growth and has detailed plans for reducing CO2 and developing non-carbon energy resources.

The historical analysis in Chapter 3 shows that inclusiveness and environmental sustainability are important elements for development strategies. It argues that economic growth alone does not necessarily lead to good performance on key dimensions of well-being. Scope exists for policy to improve performance on social and environmental outcomes, even delinked from economic growth.

Short time frames and a lack of strategic foresight may hamper resilience

Few plans seem aware of mega trends and the associated challenges and opportunities for development, or consider the uncertainty of how these trends may evolve. Yet, countries should take this uncertainty into account in developing their plans. Their economies need greater flexibility and resilience to adjust to rapidly changing conditions.

On average, plans are expected to be implemented within seven years. The planning horizon tends to be longer in East Asia and sub-Saharan Africa than in Latin America.

In addition to a short timeframe, the plans tend to lack contingencies for significant changes. These changes could range from global economic conditions (such as a financial crisis), changing geopolitical conditions (such as trade wars) or disruptive technology. Only 15% show awareness of the need to prepare their economies for significant changes on technology or digitalisation, as well as the geopolitical environment. The major exception is China. It has ambitious plans to lead in ten major new disruptive technology areas, as well as to improve the whole performance of the economy through innovation.

Many plans seek to improve governance

Nearly 60% of the plans mention the need to improve government capability. This also includes addressing corruption, lack of government accountability and overall transparency. This contrasts with targets to improve the rule of law or reduce bureaucracy and red tape in less than 50% of plans.

Finally, the gap is large between planning and implementation. Only five of the plans assessed discuss any explicit implementation strategy and only two discuss the budget necessary to execute such strategies.

Turning challenges into opportunity

The future tailwinds of a shifting economic geography will likely keep the process gradually moving forward. In so doing, it will positively support implementation of development plans through favourable demography, continued urbanisation, lower commodity prices, rising wages in China and the passing of the torch to India, as argued in Chapter 2.

India has taken the lead over China in terms of GDP growth (but not per capita). In the future, the transformation of economic geographymay well benefit from a twin-turbo, China and India. This would be good news for convergence and the world economy. India is forecast to contribute almost 10% to global growth, which would exceed the European Union (EU) contribution. The twin-turbo support to the world economy, however, remains subject to the continuing existence of an open trade system and multilateral co-operation.

Three factors will contribute to higher savings and investment in Asia: a favourable demography outside China, lower dependency ratios and a rising labour force that is employed, even informally. Longer schooling and better education, particularly for girls, will reinforce these favourable trends. Rising urbanisation in dual economies will help raise productivity because of people and talent moving from low-productive occupations to higher productivity ones, as has happened in China.

Lower commodity prices have been providing significant headwinds to commodity exporters in Africa and Latin America in the 2010s. The rebalancing of China also provides tailwinds, albeit gradually, to net commodity importers. The effect of China’s rebalancing on low-income countries should be positive: countries best placed to export consumer goods to China, including agricultural products, will benefit most from China’s more balanced growth.

To the extent that rising wages in China will lead to higher unit labour costs, China’s external competitiveness in low-end manufactures will be eroded. The relocation of low-end manufacturing from China should reinforce positive income effects of lower commodity prices in oil-importing countries. This suggests a shift away from a traditional focus on securing natural resources towards opportunities for a manufacturing hub, and ultimately more democracy and better governance.

Few of the development plans reviewed provide details about implementation

Countries have all sorts of plans, even long-term ones (see Annex Table 5.A.1). However, most plans are not implemented anywhere near what is outlined in them. In fact, the term implementation was observed by Albert Hirschman as understating the complexity of the task, which is highly susceptible to initial ignorance and uncertainty, and embodies in reality a steep learning curve across varied domains (Hirschman, 1967[60]).

Four key reasons explain the implementation gap: a lack of capacity, a lack of financial means, weak capacity for political economy reform and a lack of contingency planning.

Governments often lack the capacity to implement their plans

First, and perhaps the most common reason for the implementation gap, is governments’ lack of capacity. Too often much effort is allocated to developing and announcing the plans, and not enough to implementing them. Key questions need to be addressed when designing development plans. What will government do? What will the private sector do? What is to entice the private sector to do what is wanted (e.g. create jobs, upgrade technology, etc.). Where are the resources coming from? What policies and regulations need to be changed or improved? What special programmes are needed? Who will carry them out?

These obstacles suggest that countries must increase the capacity of their governments through training, better transparency and accountability of their civil servants. One way to do this is through formal study locally or at institutions abroad. In addition, many kinds of mid-career specialised training exist, including through blended programmes of face-to-face interaction and Internet-based education. Furthermore, countries can draw on twinning arrangements with specialists from other countries and also hire experts to help implement programmes.

Governments often lack the financial means to implement their plans

Financial considerations are often a major constraint, but one that can be overcome. Key questions related to financial capacity include what is available from the government budget, whether government revenues are to be increased through tax collection and whether the government will be able to issue sufficient domestic foreign debt.

What are the adequate and available sources of financing? Can the government obtain additional foreign exchange by expanding exports, by attracting more remittances or increased foreign direct investment or portfolio investment, by getting international loans or by issuing foreign bonds? For low-income countries, can they get increased overseas development assistance?

The issue of governmental capacity, noted above, is related to the issue of financing, as training public servants needs to be financed. Some of the training can be financed through bilateral assistance or through technical assistance programmes from multilateral development banks, as well as from other development institutions. Large private firms with an interest in helping develop local expertise could also provide some financing. In China, for example, Motorola invested millions to help train managers for 1 000 state-owned enterprises. Avon also invested millions for key Chinese officials from the central and state governments and companies to take extensive study tours in the United States.

Governments do not experiment enough to overcome the political economy of reform

The political economy of reform is largely driven by the institutional nature of the country (North (1994[61]); Acemoglu and Robinson (2012[62])). However, there is little guidance on what determines institutional change to induce more favourable development outcomes. According to North (1994[61]), history matters. If a country does not have the right history, it will not become a developed country. This view is not helpful for policy makers or foreign aid agencies trying to stimulate development.

Pritchett, Sen and Werker (2017[63]) also acknowledge that institutions matter. Their political economy framework analyses what leads to growth booms and busts in developing countries as opposed to the steadier but slow growth of developed countries. Essentially, they argue that growth and structural transformation result from the interaction between “the balance and distribution of power between contending social groups and social classes on which any state is based” and the structure of economic opportunities in the economy. Such a framework posits that several factors affect development. These include the nature of the political bargain made between the ruling elites and the extent to which the ruling elite seeks legitimacy through economic progress. Equally important is how progress affects economic and political interests and how these interests, in turn, shape the political bargain. This gets at the essence of state power.

Addressing these challenges requires more explicit attention to the power of different stakeholders and how to create enough support to implement new policies and reforms. Andrews, Pritchett and Woolcock (2017[63]) outline a strategy they call problem-driven iterative adaptation (PDIA). It consists of “proposing strategies that begin with generating locally nominated and prioritised problems, and working iteratively to identify customised ‘best fit’ responses. Ang (2016[64]) goes even further based on her analysis of how China escaped the poverty trap. She argues the debate of whether good institutions lead to economic growth or vice versa is misconceived. She argues that “neither economic growth nor good governance come first in development.” She contends it is unreasonable to expect that poor countries can build modern effective institutions as argued by the proponents of the good governance approach to development. Instead, state and markets co-evolve. “States and markets interact and adapt to each other, changing mutually over time”. The key is to craft “environments that facilitate improvisation among the relevant players”

Shocks and disruptions can derail implementation plans without contingency plans

Successful implementation also requires contingency planning for shocks and disruptions, such as natural disasters as well as internal and external conflicts. Other factors include changing international circumstances such as a rise in global interest rates; a global financial crisis (or contagion from a crisis with neighbours); trade conditions (such as changes in commodity prices, increased efficiency of competitors or increased protectionism in key export markets); geopolitics; or disruptive technology. Dealing with shocks and disruptions requires building more resilience and flexibility in the economy at both macro and structural levels.

At the macro level, this means creating buffers in terms of fiscal space for increasing government spending, managing foreign exchange reserves and access to emergency lines of credit. This can offset any short-term changes in balance of trade or spikes in servicing international debt obligation.

At the structural level, it means increasing the flexibility of the economy to react quickly by improving the institutional regime, by increasing financial market development, by improving labour market efficiency, by investing in education and skills, by strengthening social protection, and by promoting innovation and infrastructure.

Development strategies are already adapting to a new global context

The review of development plans plus the insights from the preceding three chapters suggests that countries are indeed increasingly crafting new national development strategies.

Social protection coverage is no longer limited to the urban middle-class

While the transformation of economic geography has improved the economic prospects in developing countries, the number of people living with inadequate access to social protection and health services keeps rising. Less than half the world’s population has access to any social protection (ILO, 2017[65]), with coverage particularly low in Africa and Asia. At least half of the world’s population also do not have access to essential health services, and each year, large numbers of households are being pushed into poverty because they must pay for health care out of their own pockets (WHO, World Bank, 2017[66]). Much of these facts are coming to light as countries grow richer, and citizens demand more from their governments, which has pushed governments to explore novel ways of reaching hard to reach segments of the population, and roll out programmes while facing severe budgetary constraints.

The number of developing countries implementing social protection programmes in recent decades has significantly increased. This expansion has been driven by a realisation that economic growth alone is not sufficient to eliminate poverty and that a high proportion of individuals who emerge from poverty remain highly vulnerable to falling back. Spending on social protection can also mitigate increases in inequality associated with the structure of a country’s economic development.

Moreover, the evidence is strong that the impact of social protection extends beyond poverty alleviation; investment in social protection can generate improvements in beneficiaries’ human capital that might enhance countries’ long-term growth potential. Innovations in social assistance by countries such as Mexico and Brazil have made a robust case for the broader effectiveness of cash transfers, especially those targeting children; similar programmes are now being implemented throughout Africa and Asia. Often these schemes operate at large scale: India’s Mahatma Ghandi Rural Employment Guarantee Scheme provides support to more than 50 million households while approximately one third of South Africans receive a social grant.

However, gaps are enormous in coverage globally, while expenditure varies significantly between countries. Resource constraints combine with administrative challenges to prevent social assistance programmes from reaching all those in poverty, while pervasive informality in many developing countries means most workers are excluded from social insurance arrangements. Nonetheless, China has shown remarkable progress in expanding coverage of its contributory pension programme by providing low-cost and subsidised contributions for rural workers. Meanwhile, Indonesia is on track to achieve universal health coverage by subsidising the health insurance contributions of the poor population.

Migration is viewed as part of a development strategy

The international development community has, for the first time, included migration into the international development agenda, through the 2015 Addis Ababa Action Agenda, the 2030 Agenda for Sustainable Development and two Global Compacts for Migration and Refugees in 2018. These policy instruments acknowledge the positive contribution of migrants to economic growth and sustainable development, both in countries of origin and destination.

The number of migrants worldwide has increased nearly 70% between 1990 and 2017 from an estimated 153 million to 258 million (UN, 2017[30]). However, such numbers hide that the transformation of economic geography has increased the number of countries participating in global mobility. In the context of this development, the share of countries participating in emigration and immigration has increased for both metrics. However, this has been more the case for emigration than for immigration (Figure 5.4). This is because the gap between OECD and non-OECD countries, particularly on well-being outcomes remains large.

Immigration continues to be dominated by a select few richer countries. Migration to the OECD, in particular, is increasing faster than between any other group of countries (OECD, 2016[67]). Nevertheless, several developing countries have become local magnets for immigration by providing jobs in the wake of their economic growth and better living standards. These include Argentina, Costa Rica, Côte d’Ivoire, Ghana, South Africa and Thailand. A recent report confirms that immigrants generally have a positive, yet limited, impact on several developing countries (OECD/ILO, 2018[68]). However, demographic trends, unequal development patterns, ease of travel, hard-line migration policies in the North and rising incomes in the South will play an increasingly important role. As a result, immigration will become a phenomenon in several more developing countries. However, migrant integration continues to be overlooked in migration and development strategies (Gagnon and Khoudour-Castéras (2011[69]); OECD (2016[67])).

Figure 5.4. Economic growth has led to an increasing share of countries participating as countries of emigration, and less as countries of immigration
Cumulative distribution functions for emigration (left, Panel A) and immigration (right, Panel B)
picture

Sources: Authors' calculations based on the Bilateral Migration Matrix 2018, World Bank (2018[70]), Bilateral Migration Matrix 2018 (database)http://www.knomad.org/sites/default/files/2018-04/bilateralmigrationmatrix20170_Apr2018.xlsx; and World Bank (2018[71])Global Bilateral Migration Databasehttp://databank.worldbank.org/data/reports.aspx?source=global-bilateral-migration (accessed in June 2018).

 StatLink https://doi.org/10.1787/888933858012

A rise in the importance of global mobility should not be surprising in the context of a transforming economic geography. Migration requires a minimum level of income to cover the costs of moving. Higher income levels thus help relieve the financial constraints associated with migration and therefore, when GDP per capita increases in a poor country, the impact on emigration tends to be positive – for a certain time. When income levels reach a higher level, migrating abroad becomes less attractive and the emigration rate tends to decrease progressively.

A remarkable strategic shift has occurred however over the last 20 years with migration. Migration was definitely part of the early industrialisers’ development, both as senders and receivers. However, policy specifically leveraging remittances, return migration and diasporic involvement were scarce, and never part of an overarching national strategy.

Never in history have countries turned to migration for development objectives with the same breadth and ingenuity as today. In countries of origin, emigration relieves pressures on the labour market. Meanwhile, remittances, return migration and diasporic engagement spur investment in financial and human capital.

Public policies play an important role, and several countries have begun linking specific development targets using migration. However, non-migration policies in both countries of origin and destination, such as those for education, the labour market, agriculture and social protection, also matter (OECD, 2017[72]).

Linking migration with development is thus an issue of policy coherence, co-ordination and strategy. In the past two years alone, countries such as Albania (National Strategy on Diaspora and Migration, 2018), Armenia (Migration Concept Action Plan, 2017), Belize (National Migration and Development Policy, in discussion), Burkina Faso (National Migration Strategy, 2017), Georgia (Migration Strategy, 2016), Mauritius (Migration and Development Policy, 2018) and South Africa (White Paper on International Migration, 2017) have all drafted and/or begun putting into action strategies that link migration and national development in a variety of ways. In the Philippines, the government is considering creating a ministry of migration and development.

Territorial management is no longer just about rural and urban regions

Development strategies of the past tended to focus on the rural or urban nature of a region. However, emerging strategies reflect the reality that geography is a continuum, with a variety of endowments and challenges faced across a country’s territory. Intermediary cities for instance, those with less than one million people, play a key role in the urbanisation dynamics of low-income countries. They account for the highest share of urban population worldwide.

For instance, Asian intermediary cities with less than 500 000 accounted for 47 % of total urban population in 2015. They are also the fastest growing agglomerations, especially in regions like Africa, where intermediary cities with less than 300 000 in population accounted for 58% of urban population growth between 2000 and 2010. This growth process does not follow the classic rural-urban transition; instead in regions like Latin America, intermediary cities are hosting an increasing number of people and firms moving from capital and large cities. Intermediary cities are expected to continue growing, and it is estimated that between 2010 and 2030, intermediary cities will account for almost 40% of global urban populations (AfDB, OECD and UNDP (2017[73]); UN-Habitat and UNESCAP (2015[74])).

Intermediary cities are key in providing markets for rural products, as well as functioning as transit hubs to larger metropolitan areas. Further, they facilitate access to non-agricultural employment through seasonal work, therefore enhancing circular rural-urban migration; they process and distribute agricultural goods provided by rural areas, and absorb their skilled and unskilled labour (Berdegué and Proctor, 2014[75]). However, and despite their key roles, there is still a considerable knowledge gap concerning the mechanisms through which they contribute to development. This is one the main reasons why they are usually not considered as part of national development strategies. Further, there is a considerable gap in data availability when it comes to intermediary cities.

The underlying reasons for these knowledge and data gaps are numerous. First, there is a strong bias towards capital and large cities following their political power and the fact that they are equipped with better data and resources. Second, the common approach of national governments – as well as international organisations – is treating rural and urban areas in silos. Therefore, intermediary cities fall between the cracks of the rural and urban divide. This approach overlooks the central position of intermediary cities in the socioeconomic interaction between rural and urban areas, and on their potential for national economic transformation.

Intermediate cities are further challenged by a considerable financial gap. Local governments tend to have limited authority and capacity to mobilise resources and generate the revenues necessary for adequate public service delivery; this makes them highly dependent on financial transfers from central governments. For example, the size of local tax revenues as a proportion of total revenues across Asia, Latin America and Africa stand at 46%, 28% and 20% respectively (OECD/UCLG, 2016[76]). Across many African local governments, taxation rates are approximately estimated at 0.7% of household revenues (AfDB, OECD and UNDP (2017[73]); UN-Habitat and UNESCAP (2015[74])).

Effective development and planning of intermediary cities is imperative for ensuring long-term and sustainable development of low-income countries. This means establishing effective financing mechanisms for investing in public services and for ensuring that intermediary cities are well integrated into the wider urban system. Development plans should tap into the large potential of intermediary cities to function as locations for the development of agricultural value chains, through the establishment of agricultural goods processing systems, and to provide backward linkages for small-scale manufacturing industries. In parallel, intermediary cities are located in strategic locations for providing goods, services and infrastructure for surrounding rural populations.

The informal economy is now being relied upon as a productive part of society

The prevalence and persistence of the informal economy has always been a major development challenge. Informal firms do not contribute to the public purse and do not conform to rules and regulations, which limits the reach of the State. Moreover, informal workers do not receive social protection and remain vulnerable to violations of their labour rights. While policies should ultimately aim to reduce the level of informal employment in an economy, there is a growing recognition that informality consists of several tiers of productive workers and firms, many of which are more productive than those in the formal sector.

According to the latest comparable data produced by the ILO (2018[77]), 61% of global employment is informal employment, equating to more than two billion people worldwide. The share of employment that is informal is very high amongst low-income economies, where it concerns more than three quarters of the population. It is much lower amongst high-income economies, where it averages 18% according to the ILO. Informality stands between the two extremes amongst middle-income economies, with very large differences even for similar levels of income. Almost half of Panamanian workers is informally employed, while the corresponding share in Croatia (which has a similar level of GDP per capita) is with 13% considerably lower (OECD, 2018[78]).

The informal economy offers livelihoods to many. While the informal sector was once envisioned as a nuisance to an economy, countries today are finding ways to ensure that informal workers have some form of social protection and that firms have access to domestic productive value chains and more adequate incentives to register and declare to the State (Jütting and de Laiglesia, 2009[79]).

Novel forms of development finance will be key to solving future challenges

During the last decade, development thinking in a much broader context has transcended the circles of Western aid agencies as well as international or academic institutions. International co-operation has become a more global effort, embracing private philanthropy, governments and other stakeholders. While there has been much progress on development, efforts have focused on the “easier things”. Large-scale famines, pestilence and plagues, long the scourge of human existence, have mostly been consigned to history (Andrews, Pritchett and Woolcock, 2017[80]). Even interstate wars have become scarcer.

Many countries remain poor with limited financial capacity. As a result, designing and implementing successful strategies will be even more challenging given the magnitude of the tasks ahead. More international development assistance will be required, but what kind will be most effective? Some circles think while much effort has been spent on poverty alleviation, not enough has been spent on other critical issues for development: jobs, inclusiveness and the environment, for instance (OECD (2016[81]); Kharas and Rogerson (2017[82])). They argue that more official development assistance (ODA) should be directed to long-term development projects, such as infrastructure, utilities, agriculture, industry, and health and education services, rather than focusing mostly on short-term emergency responses, such as food assistance and reconstruction (OECD, 2016[81]). However, humanitarian relief is likely to grow as poverty and its associated ills are concentrated in failed states (Kharas and Rogerson (2017[82]); OECD (2016[81])).

Moreover, three additional trends emerge from the current development finance agenda (Kharas and Rogerson (2017[82])). First, there is the “populist road” towards “my country first” and against international institutions, trade and migration. Second, the greater engagement taken by the business community in development is an encouraging sign for developing economies. Third, a rising, more active and wealthy China is engaged in international development, and operating with different rules of engagement.

China’s growing footprint in global, trade, finance, direct investment, lending and development assistance does not have the same conditionality or link to governance issues as that typically of Western countries. This means that traditional OECD Development Assistance Committee (DAC) development assistance is facing strong competition. It needs to decide where to collaborate and where to compete with China. In fact, an OECD DAC high level Panel report recommended that the DAC should be more inclusive of and intensify dialogue with other development partners (OECD, 2017[83]).

The size, scope and reach of China’s Belt and Road Initiative (BRI) is a sign of the rise of Chinese international financial engagement. Using conservative estimates, the BRI’s total investment of USD 1 000 000 million surmounts every other comparable development programme in recent history in size, including the Marshall Plan. The Marshall Plan, in comparison, amounted to about USD 14 000 million between 1948 and 1951, which equates to about USD 142 000 million in 2018 (Table 5.4). The Marshall Plan was largely (90%) a handout by the US government (The Economist, 2018[84]). The BRI, in contrast, is financed by a combination of direct infrastructure investments from the Chinese government as well as by loans from predominantly big Chinese commercial and policy banks (Deloitte, 2018[85]).

By leveraging investments, trade and regional integration, the Marshall Plan was able to support Europe’s post-war recovery. Once its mission was filled, the Marshall Plan dropped its financial objective, and became a hub for international co-operation and knowledge-sharing, eventually under the umbrella of the OECD. Similarly, the significance of the BRI may go beyond its financial firepower. Ultimately, its greatest impact may rest in the transformative capability offered to developing countries through better infrastructure and productivity gains. An example is through technology transfer. China, for instance, has rolled out trials on 5G network technology, the fifth generation of cellular mobile communications, by partnering with telecom operators around the world. Since 2015, it has spent USD 57 billion more than the United States, the next highest spending country, in wireless infrastructure and has pledged to invest another USD 400 billion in 5G technology until 2020 (Deloitte, 2018[86]). Indeed, China is expected to become the largest 5G market globally by 2022, and many of its partners are located in developing countries such as Bangladesh and Pakistan.

Table 5.4. The value of BRI investments are larger than any other comparable programme in recent history

Programmes

2018 value in USD million

Belt and Road Initiative (conservative estimates) (2013-2049)

1 000 000

U.S. Recovery and Reinvestment Act of 2009 (2009-2019)

986 640

New Deal (1933-1938)

808 303

Alliance for Progress (1962-1967)

168 244

Marshall Plan (1948-1952)

142 201

World Bank Group lending (in 2017)

59 000

The Global Fund to Fight AIDS, TBC and Malaria (2002-17)

33 800

Afghanistan Reconstruction Fund (in 2017)

10 173

UN Expanded Programme for Technical Assistance (1949-1970)

4 764

Compact for Africa (in 2017)

3 786

Note: All 2018 values are calculated based on the average US consumer price indices per calendar year as provided by the US Bureau of Labor Statistics.

The relative size of different sources of development finance varies by region (Figure 5.5). For instance, in Latin America and the Caribbean, foreign direct investment (FDI) was the major external financial source to the region in 2016; relative to GDP, it consisted of nearly 3.5%, while ODA consisted of around 0.25%. This is in sharp contrast to sub-Saharan Africa, where ODA was equivalent to nearly 3% of GDP, and FDI and remittances, nearly 2.5%. In South Asia, remittances are the largest relative source, where migrants sent back amounts equivalent to nearly 4% of GDP, while ODA was less than 1% and FDI less than 2%. Such realities must reflect the strategies and development responses for each region. For instance, policies leveraging remittances can play a relatively larger role in South Asia.

Figure 5.5. The relative share of different forms of external finance varies by region
Share of financial inflows as a share of GDP, by type of flow and region (2016)
picture

Sources: Authors' calculations based on the World Development Indicators Database (Net official development assistance received (current USD); Foreign direct investment, net inflows (BoP, current USD); Personal remittances, received (curr. USD); GDP (curr. USD)), World Bank (2018[6]) (accessed in May 2018).

 StatLink https://doi.org/10.1787/888933858031

Remittances particularly have been highlighted as promising sources for new forms of development finance. As seen earlier, migration is on the rise and remittances, as personal income transfers, are an effective means to reduce poverty. China, however, is unlikely to play a major role in remittances. Data on remittances from China are only available up until 2014. However, given the wide gap between the biggest sources of remittance flows and China, such gaps may have remained in 2018. In fact, the numbers suggest that the major source of remittances has been the European Economic Area and the Gulf Cooperation Council (Figure 5.6).

Figure 5.6. China is unlikely to play a major role as a source of remittances in the short to medium term
Migrant remittance flows over time, by source region (in millions, 2005-14)
picture

Note: EEA stands for the countries of the European Economic Area, GCC for countries of the Gulf Cooperation Council (Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Bahrain, Oman).

Source: Migration and Remittances Data (Annual remittances data, outflows), World Bank (2018[87]); Annual remittances data (database)http://www.knomad.org/sites/default/files/2018-04/Remittancedataoutflows%20%28Apr.2018%29.xls (accessed in August 2018).

 StatLink https://doi.org/10.1787/888933858050

China’s outside-of-the-box past, present and future development strategies

The essence of China’s past development strategy has been slow and pragmatic reform in moving from a planned communist economy to a socialist economy with Chinese characteristics (Ang (2016[64]); Naughton (2007[88])). This strategy was aptly summarised in the famous phrase coined by Deng Xiaoping, the architect of China’s transition after Mao Zedong’s chaotic 27-year rule, “crossing the river by feeling the stones.” This strategy stands in sharp contrast to the advice of Western economists who urged Russia to move to the market with a big bang by reforming the whole economic system simultaneously. Key elements of China’s pragmatic approach have been extensive experimentation, acquisition of foreign technology and an implicit social contract with its citizens.

However, as China successfully focused on rapid economic growth, inequality has increased and the environment has suffered. Therefore, starting with its 12th Five-Year Plan (2011-15), China shifted visibly from high growth to the quality, balance and sustainability of that growth. Some key targets of this plan included shifting an emphasis from investment to consumption, and from exports to the domestic market, developing poorer rural and inland areas, reducing income inequality, a continuing emphasis on environment sustainability as well its reform to an open economy.

This plan successfully began rebalancing the Chinese economy towards more sustainable and inclusive growth. However, China is reaching the technological frontier in many areas. In response, the 13th Five-Year Plan (2016-20) has added new objectives, including an emphasis on innovation, greening the economy, moving from a one-child to a two-child policy and greater participation in international development.

Thus, China is becoming an increasingly important player in the international economy as well as an alternative development model, working alongside traditional DAC donors.

Protecting global public goods is becoming increasingly important for all countries

What happens at the global level significantly affects development prospects for developing countries. Low-lying island nations, for example, run the risk of being submerged by water, due to insufficient global action on climate change. Similarly, trade protectionism could have significant repercussions on third-party countries, affecting their own exports and imports. In fact, the slowdown of trade liberalisation and the rise of protectionism are already impacting trade flows and international co-operation (Evenett and Fritz, 2015[89]). Support for globalisation has dropped considerably in some advanced countries and resulted in political backlash (Rodrik, 2018[90]).

A number of global public goods benefit the world and are worth preserving for greater overall global welfare, including trade of goods and services, global financial infrastructure, foreign direct investment, international migration and the flow of knowledge and ideas. It is also worth expanding global governance into other domains, including on security, the environment (and climate change) and public health (avoiding pandemics).

Preserving and even expanding global public goods requires investment, co-operation and a willingness to cede on narrow national objectives, however. Without such concessions, global outcomes will be worse for all nations, rich and poor. Without a more concerted effort to counterbalance certain negative trends, the global system could be further fragmented. Thus, an active embrace of globalisation and multilateralism not only fosters a developing nation’s economic prosperity, but also can have a multiplying effect for societal well-being – an objective worth pursuing. Globalisation and enhanced trading opportunities through global demand spur economic wealth through income and employment in developing countries.

Changing the negative trend around the value of global governance requires a major public communications campaign. This is particularly true in some of the advanced developed countries where the leadership and substantial public opinion are turning against such global efforts.

Development strategies should be context specific, but based on a set of common principles

The rules of the game have changed. Development thinking today takes place in a much broader and institutional context. What was once an exclusive circle of Western aid agencies, think tanks, academic institutions and international organisations, has now become a more global effort. It includes state and non-state actors and experts from the developing world. This expanded group has made available an increased amount of development data and information. It has made the discourse surrounding development topics not only more complex, but also more contested. Consensualisation of generated development knowledge has therefore assumed even greater importance (Turner (2001[91]); Berger and Esguerra, (2018[92])).

Today’s global context also includes institutions like the WTO and the United Nations Climate Change Conference (and the Conference of the Parties). These provide new benefits and constraints within which countries need to find their path. It also occurs within new challenges with respect to, for example, automation, digitalisation and climate change. Whatever worked 100 years ago will at the very least need to be adapted towards new strategies and new forms of co-operation.

Perhaps a single global development paradigm cannot be generalised, but principles on which to create a positive path for countries can be deciphered. Good practice suggests that strategies should be multisectoral, participatory, location-specific and within the context of multilateralism (Figure 5.7).

Figure 5.7. Core elements of a development strategy
picture

Strategies should be multisectoral

National development strategies need to be multisectoral to successfully respond to the multifaceted and cross-cutting challenges that countries face. In isolation, policies addressing sector-specific issues rarely bring expected benefits. Furthermore, rather than being a compilation of sectoral plans each developed in a silo, truly multi-sectoral strategies take into account the complementarities and interactions across policies, identify the sequencing of policies needed to remove constraints to development, and catalyse co-ordinated actions across different ministries and actors (Rodrik, 2009[93]).

For example, reducing informality may be one objective of a national development strategy. As informality is a cross-cutting phenomenon, the possible causes and implications of informality touch upon many different areas of economic and social policy. Recent policy experiences suggest that acting upon informality through one lever alone, be it tax policy, labour regulation, social protection or business regulation, can only achieve limited results. For this reason, a multi-sectoral approach to the challenge of informality offers promise of more effective public action.

International co-operation can support countries to take a multi-sectoral approach when designing their national development strategies. The OECD’s Multi-dimensional Country Reviews are one such tool. The review’s holistic approach asks whether the issues that cause constraints to progress in one sector are also issues elsewhere and whether those issues are manifestations of the underlying sources of weaknesses. The methodology is also designed to support co-ordination across several parts of government, as in practice different ministries and agencies may have little experience of working together to reach common goals, and co-ordination mechanisms may be lacking.

Strategies should be participatory

Strategies should be participatory to engage people from all levels of society in defining their own development paths. In a developing country context, the interest in participation re-emerged as a consequence of the highly centralised development strategies in the 1970s and 1980s, which created a widespread awareness among activists and non-governmental organisations (NGOs) that development imposed on countries and societies was disconnected from the needs of their populations (Mansuri and Rao, 2012[94]). Granting the population a greater say in decisions affecting their lives, a “bottom-up” instead of a “top-down” approach, resulted in a closer connection between policy makers and beneficiaries.

Participatory development (PD) in early industrialising economies resulted in better public services and greater accountability of local governments. In the United States, participation has encompassed national civil rights movements that aimed to transform the political process. In Germany and France, membership-based organisations such as trade unions have targeted the improvement of working conditions in certain industry sectors – reminiscent of craft guilds in the city states of medieval Europe (Wahl, 2018[95]).

There are examples of PD leading to better outcomes in developing countries as well. Following the Asian Financial Crisis, Thailand included community development into its Constitution in 1997. Emphasis has been put on the lowest community level, where close inter-personal ties exist and supporting networks can be tapped (Nuttavuthisit, Jindahra and Prasarnphanich, 2014[96]). In China, participatory approaches have also taken place at lower community levels since 1978, primarily in a consultative role through civil society organisations on policies implemented by regional governments (Caizhen, 2009[97]).

PD has also been adopted as a key policy tool for major donor agencies providing local communities with elements of direct control of their development. Community-driven development in China, which has been increasingly supported by the World Bank, has followed a ‘learning-by-doing’ approach and has made local communities collectively decide on how funds are used and what needs to be done to improve living standards (World Bank, 2012[98])

Strategies should be place-specific

Development strategies need to be place-specific, encompassing factors that go beyond the rural-urban divide in living environments. The complex development of regions, municipalities and even districts within cities is driven by a wide set of forces, affecting both the growth and gaps of well-being and income of their populations. These place-variant forces demand place-specific answers tailored to a location’s context, its historically grown economic and social structures as well as cultural specificities that condition the choices and behaviour of individuals.

National and regional discrepancies across development determinants are often mirrored at lower levels. For instance, as there is not a single Mexico and a single region Chiapas, there has not been a single Ethiopia. Chiapas in Mexico is poorer than the rest of the country, yet its capital Tuxtla Gutierrez is about eight-times richer than its poorest municipalities. Accessibility to markets by farm households in Ethiopia varies within regions as much as within the entire country (Koo et al., 2016[99]).

Examples that highlight the importance of place-based policies thus come at different geographical levels and at various points in time. They all have in common, however, that each place is characterised by different know-how, productive capabilities, educational skills or infrastructure and institutional constraints. The varying factors make up the ecosystem in which individuals can deploy their social and physical capital in productive ways, absorb new knowledge and thereby improve their overall well-being (Hausmann, Pietrobelli and Santos, 2018[100]). Policy making needs to support the process of constructing fertile ecosystems by abolishing place-specific obstacles to development.

Strategies should result from multilateral co-operation

Development strategies need to be multilateral to allow countries to play an active role in global governance. Developing countries keep their voices heard when engaging on a multilateral basis, transforming the formation of individual country agendas into a proactive shaping of global policies. Embedding national development strategies within a multilateral framework also broadens the scope of domestic policies, helping them to keep abreast of developments beyond national borders and profit from policy arrangements set at supranational levels.

A multilateral perspective in national development strategies allows for international consensus and collective action that is required to provide global public goods and create a level playing field among countries. For instance, effectively combating illicit financial flows and tax evasion, a key component of domestic resource mobilisation in developing countries, can only be achieved by relying on international agreements of information exchange such as the OECD’s Base Erosion and Profit Shifting (BEPS) initiative (OECD, 2013[101]). More direct levers to domestic development consist in the access to development finance through context-oriented funds or technical expertise from multilateral institutions.

Besides, harnessing the potential of international trade and finance to the benefit of developing countries is only feasible based on the multilateral establishment of a commonly agreed-upon system based on rules and transparency. Eventually, multilateral development strategies facilitate the co-ordination of policies to rein in major challenges or, in the worst case, to mitigate spillovers and fallout for individual countries.

Towards new forms of international co-operation

In retrospect, the Marshall Plan provided an important lesson, only appreciated well after its time: development occurs in a context of international co-operation. Indeed, the OECD was created to preserve lessons from international co-operation and the Marshall Plan after the Organisation for European Economic Co-operation (OEEC) was dissolved.

While international co-operation remains one of the best solutions for addressing the most complex development-related challenges, it needs to adapt to the evolving context if it is to be effective. If all countries are to achieve the goals set out in the 2030 Agenda for Sustainable Development, new forms of co-operation, and a new and better set of tools to assess challenges and implement solutions, are needed. New forms of co-operation can include South-South and triangular co-operation, improved knowledge sharing, technology transfers, and peer-to-peer policy dialogues. Importantly, access to international co-operation should not be dependent on a country’s income level. As this report has demonstrated, income-related measures like GDP per capita are too narrow to capture the complexities of a country’s development. Instead, a more inclusive system of international co-operation on sustainable development would help ensure better well-being and prosperity for all.

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Annex 5.A. National development plans
Annex Table 5.A.1. Developing country plans assessed for this chapter

Sub-Saharan Africa

Burkina Faso

PNDES 2016-2020

Uganda

Vision 2040

Botswana

Vision 2036

Ethiopia

Growth and Transformation Plan II 2015/16-2019/20

Côte d’Ivoire

Plan National de Développement 2016-2020

Namibia

Vision 2030

South Africa

NPD 2030

Senegal

Plan Sénégal Émergent 2035, Plan d’actions prioritaires 2014-2018

Middle-East and North Africa

Egypt

Vision 2030

Jordan

Jordan 2025

Morocco

Plan d’Accélération Industrielle 2014-2020

East and Southeast Asia

Cambodia

NSDP 2014-2018

China

China 2030, 13th Five-Year Plan 2016-2020

Indonesia

Acceleration and Expansion of Indonesia Economic Development 2011-2025

Lao PDR

NSEDP 2016-2020

Malaysia

Vision 2020

Thailand

Twelfth National Economic and Social Development Plan 2017-2021

Viet Nam

Green-Growth Strategy 2011-2020

Myanmar

National Comprehensive Development Plan 2011-2031

Central Asia

Armenia

Strategy 2014-2015

Azerbaijan

Azerbaijan 2020

Turkey

Medium-Term Program 2018-2020, Tenth Development Plan 2014-2018

Russia

National Economic Security Strategy until 2030

Kazakhstan

Strategy 2050

South Asia

Bangladesh

Seventh Five-Year Plan 2016-2020

Nepal

SDG Roadmap 2016-2030

Sri Lanka

Vision 2025

India

12th Five-Year Plan 2012-2017

Latin America

Argentina

PAI 2020

Chile

Productividad para un Crecimiento Inclusivo 2014-2018, Plan de Accion Nacion de Cambio Climatico 2017-2022

Colombia

Plan Nacional de Desarrollo 2014-2018

Ecuador

Plan Nacional de Desarrollo 2017-2021

Mexico

Plan Nacional de Desarrollo 2013-2018

Peru

Plan bicentenario hasta 2021

El Salvador

Plan Quinquenal de Desarrollo 2014-2019

Uruguay

Plan Uruguay 2015 – 2020

Bolivia

Agenda Patriotica 2025

Panama

Vision 2030

Brazil

Plano Plurianual 2016-2019

Note

← 1. GNI measures the total domestic and foreign value added claimed by residents, and comprises GDP plus net receipts of primary income (compensation of employees and property income) from non-resident sources.

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