Policy for Economic Growth Policy for Economic Growth in SwEdiSh development cooperation, 2010 2014
Produced by: the department for development Policy and the Press and communication department, ministry for foreign affairs cover photo: Sean Sprague/Phoenix article no: Ud 10.034 isbn: 978 91-7496-420-8 Printed by: edita västra aros, västerås, 2010 additional copies of the booklet can be ordered on the mfa website: www.ud.se
Policy for Economic Growth Policy for economic growth in Swedish development cooperation, 2010 2014
Photo: Eric Miller/Phoenix
Table of contents Summary 6 1. Introduction 7 2. Policy context 9 3. Starting points, overall objectives and areas of activity 10 3.1 Starting points 10 3.2 Overall objective 13 3.3 Sweden's ability to contribute to economic growth in developing countries 14 4. Implementation 20 5. Division of roles and responsibilities 22 6. Monitoring 22
Summary This new policy clarifies the Government s views on the importance of economic growth as a means of promoting development and reducing poverty. It is clear that economic growth is absolutely crucial for poverty reduction. Experience shows that a market economy with free competition, in which relative prices are allowed to act as a main mechanism for the distribution and use of resources, is the economic system best able to create the conditions for sustainable economic growth through the flexible and efficient use of limited resources. Sweden can contribute to economic growth in poor countries through development cooperation and its overall development policy. The policy focuses on development cooperation in areas that can have a particularly large impact on reducing poverty by enabling poor people to take part in, contribute to and benefit from economic growth. The overall objective is: Improved conditions for sustainable growth processes in poor developing countries. The Government identifies three focus areas in Swedish development cooperation as being particularly important for promoting economic growth: i) strengthened conditions for poor people to take part in growth processes, ii) strengthened conditions for development of markets and entrepreneurship, and iii) strengthened capacity to adapt to change, threats and opportunities. 6 P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4
1. Introduction Economic growth is absolutely crucial for poverty reduction. There are no examples of countries that have successfully combated poverty without sustained economic growth. Economic growth is an essential prerequisite for long-term poverty reduction and improved living conditions. Similar growth rates can, however, have varying impacts on poverty reduction in different countries. The policy therefore focuses on development cooperation in areas contributing to economic growth that have a particularly large impact on reducing poverty by enabling poor people to take part in, contribute to and benefit from growth. Photo: Heldur Netocny P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4 7
Economic growth is defined in the policy as an increase in the production of goods and services and is a result of a combination of increased labour input, increasing capital stocks and improved productivity. The more a country is able to increase total production, the higher the rate of growth, and the more each individual produces with the given factors of production, the higher the productivity. Trust, predictability, the absence of corruption, strong protection of property rights, a functioning legal system, good health and education are driving forces of economic growth and fundamental for enabling economic actors to take steps so that the production of goods and services increases. An open economy is beneficial for economic growth. It follows therefore that macroeconomic stability, a liberal trade regime, a strong private sector, market economy incentives, a public sector with overall responsibility for health, education, environment and infrastructure are all important factors for economic growth. Moreover, the institutional framework is of vital importance. Experience shows that a market economy with free competition, in which relative prices are allowed to act as a main mechanism for the distribution and use of resources, is the economic system best able to create the conditions for sustainable economic growth through the flexible and efficient use of limited resources. The principle of internalising external costs is important to give the right price signals so that consumers bear the costs they cause and are given incentives to reduce these costs. Sweden can contribute to economic growth in poor countries through development cooperation and its overall development policy. The purpose of this policy is to throw light on the fundamental importance of economic growth for promoting development and reducing poverty. The policy establishes a number of fundamental principles that apply to the part of Swedish development cooperation, both bilateral and multilateral, whose main focus is to create or support the conditions for economic growth. The policy thus focuses on the role of development cooperation but also indicates the potential contribution of other policy areas. 8 P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4
cambodian student at a vocational training course. Photo: Sean Sprague/Phoenix 2. Policy context The policy is based on the policy for global development and its overall objective to contribute to the achievement of equitable and sustainable global development. Key themes of the global development policy are the rights perspective and the perspectives of poor people on development. The rights perspective means that the individual s freedom and rights are given a central position. The perspectives of poor people focuses on the individual by using their reality, experience and priorities as a starting point. The policy is also based on the objective of development cooperation to contribute to an environment supportive of poor people s own efforts to improve their quality of life, and the objectives of reform cooperation in Eastern Europe, which are: strengthened democracy, equitable and sustainable development, and closer relations with the EU and its fundamental values. The Government Communication Global challenges our responsibility (Govt. Communication 2007/08:89), which represents a re-launch and concretisation of the policy for global development, is also an important part of the context of the policy. The challenge of economic exclusion, which concerns the conditions for poor people to benefit from the opportunities of the global economy and promote increased economic growth, is of particular relevance. P O l i c y f O r e c O n O m i c g r O w t h i n S w e d i S h d e v e l O P m e n t c O O P e r at i O n, 2 0 1 0 2 0 1 4 9
3. Starting points, overall objectives and areas of activity 3.1. Starting points This is why economic growth is necessary No permanent poverty reduction has been possible anywhere in the world without sustainable economic growth. Economic growth not only has positive effects on poverty reduction as such; it is also the most important factor behind improved health and education in poor countries. Economic growth means increased income and thus a higher living standard. Economic growth also helps to enable the state to increase its revenues and thus its scope to invest greater resources in schools, health care, maternity care, social security systems and other services. This in turn promotes a healthier, better-educated and more secure population that can contribute even more to making the economy grow. The process can thereby become self-reinforcing. The key issue is that increased incomes help enable women and men to take charge of, and change, the conditions under which they live. Economic growth does not solve all problems, but we know that without growth, there will be no development at all. In poor countries, efforts to redistribute wealth and investments in publicly funded welfare cannot replace economic growth. To bring about positive development, growth must be economically, socially and environmentally sustainable in the long term, and characterised by a relatively equal distribution. The hallmark of economic growth Periods of markedly increased growth rates are characterised by structural changes, both in the economy and society as a whole. These changes occur in several dimensions, from urbanisation to increased productivity in certain sectors with rapidly increasing added value; normally a shift from production in agricultural sectors to the manufacturing and services sectors. Productivity growth in agriculture is essential, not only to secure food supplies but also to provide better opportunities for trade in agricultural products, for both local markets and export. It opens the way for increased added 10 P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4
the cities become economic centers as more and more people move in. in hanoi, vietnam the houses grow with the economy. Photo: Sean Sprague/Phoenix value levels in the agricultural industry and thus increased employment and higher incomes for the rural population. The private sector has been a driving force in this structural change and has served as the engine for economic growth. Very widespread and rapid urban transformation is under way in many developing countries. Cities are becoming important centres and drivers of economic development and reduced poverty. Conditions for economic growth The driving forces of long-term sustainable growth are numerous and differ from country to country. But a common prerequisite is the existence of a growth-promoting institutional framework. This consists of laws, regulations and organisations that create opportunities for the entire population to contribute to development. The state has a fundamental role as the creator and guarantor of the institutional framework. In a growth perspective, the following conditions are key: P O l i c y f O r e c O n O m i c g r O w t h i n S w e d i S h d e v e l O P m e n t c O O P e r at i O n, 2 0 1 0 2 0 1 4 11
Macro-economic stability and openness to trade and foreign direct investment are particularly important factors within the institutional framework. Macro-economic stability, with sustainable public finances and low inflation, is vital for creating conditions for growth. Macro-economic stability reduces potential future risks and thus promotes investment. To derive benefit from the opportunities afforded by the global economy, obstacles to trade must be removed through deregulation and reduced bureaucracy. The order in which various liberalisation measures are implemented has a major impact on the extent to which the results will promote growth. Unleashing the potential of individuals in productive employment requires the production of public goods such as basic education, health care systems and infrastructure. People s opportunities for employment and thus higher incomes are strengthened if they are educated, enjoy good health and are able to communicate. Women s ability to participate in economic development on equal terms is limited in poor countries, because of the lack of equality and integration of women into the economy. Poor women and men work primarily in the informal sector, which is characterised by poor working conditions, instability and high risk levels. The jobs they do seldom generate sufficient income to provide a decent standard of living. Fundamental working conditions, access to a functioning judicial system, recognised and stable ownership and user rights that can be used as collateral and bought and sold unleash people s productive potential. Mobility is extremely important social, occupational and geographical. The removal of various obstacles, including discrimination at entry to the labour market, and factors that hinder investment opportunities, are very important for economic growth. A stable, well-functioning financial system and investment climate. Savings and investments are necessary to enable the private sector to develop and contribute to a country economic growth. The level of investment, however, is uncertain as it is a consequence of the investment climate, which in turn is shaped by existing frameworks and investment potential. 12 P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4
Trust and confidence, through safeguarding the rule of law, equality before the law, market economy rules, including protection of ownership rights and contractual freedom. Corruption generates higher transaction costs and uncertainty, distorts incentives and distributes resources unevenly. Functioning ecosystems and ecosystem services, such as clean air and water and efficient environmental governance, all of which require the sustainable use of natural resources, constitute important conditions for long-term economic development and poverty reduction. Sustainable economic growth is conditional on environmental sustainability. Sustainable development cannot be achieved at the expense of future generations access to ecosystem services. It is essential to draw attention to the environmental impact of different production processes and consumption patterns, and that producers bear the costs that arise in terms of consumption of resources and wear and tear on the environment. 3.2. Overall objective The overall objective for the part of Swedish development cooperation whose main focus is to create or support the conditions for economic growth is: Improved conditions for sustainable economic growth processes in poor developing countries. P O l i c y f O r e c O n O m i c g r O w t h i n S w e d i S h d e v e l O P m e n t c O O P e r at i O n, 2 0 1 0 2 0 1 4 13
3.3. Sweden s ability to contribute to economic growth in developing countries A country s own policies are the key to its ability to create long-term, high levels of economic growth. It is a country s own responsibility to create an institutional framework that promotes economic growth. Sweden can help improve the conditions for economic growth through development cooperation, and our actions in other policy areas. Sweden s policy for global development lays down that all policy areas are to contribute within their own spheres of responsibility to the overall objective of the policy: to contribute to the achievement of equitable and sustainable global development. In its policies, Sweden is to strive to achieve coherence for development between different policy areas not only within Sweden, but also internationally, for example, in the EU. 3.3.1. The role and focus areas of development cooperation The measures and areas discussed below centre on low-income countries 1, i.e. the group that is the focus of the majority of Sweden s development cooperation. This is also where the greatest challenges and needs are found, since these countries by definition have not been able to create long-term high growth themselves, and poverty is widespread. Based on the conditions for economic growth described in 3.1 and on Swedish expertise and experience, three focus areas have been identified in development cooperation that the Government considers particularly important for promoting economic growth: strengthened conditions to enable poor people to take part in growth processes; strengthened conditions for the development of markets and entrepreneurship; and strengthened capacity to adapt to changes, threats and opportunities. 1 low-income countries are defined in accordance with the world Bank definition, which is countries with a gdp per capita of less than USd 935 in 2009. 14 P O l i c y f O r e c O n O m i c g r O w t h i n S w e d i S h d e v e l O P m e n t c O O P e r at i O n, 2 0 1 0 2 0 1 4
Strengthened conditions to enable poor people to take part in growth processes Photo: Trygve Bölstad/Phoenix Poverty reduction is achieved when poor women and men are able to take part in, contribute to and benefit from economic growth. Poor people work primarily in the private sector, from agriculture to handicraft/small-scale industry and services sectors, often in the informal economy. For the private sector to be able to contribute to economic growth, well-functioning markets are required. Special attention must therefore be given to markets that are of direct relevance to poor people s employment and income and that contribute to the structural changes that characterise growth, including greater added value and a shift from the agricultural to the manufacturing and services sectors. In view of the fact that a very large proportion of people living in poverty are economically active in agriculture and the informal economy, initiatives affecting these areas are particularly important. Increased agricultural productivity is often a prerequisite for positive economic development. Similarly, the sustainable development of cities and densely builtup areas is required to promote the participation of poor people in growing urban economies. Support that contributes to the development of local financial markets and micro-credits, increased productivity in agriculture, closer ties between the formal and informal economies and a formalisation of informal activities will be given priority. This is to be combined with the development of regulatory frameworks and institutions that create incentives to increase the number of jobs in the formal economy, while improving possibilities for informal companies to be formalised. P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4 15
Women are often discriminated against and have untapped potential with regard to influencing and contributing to economic growth. Increased gender equality is not just a question of rights, but also a factor contributing to economic growth. Development cooperation is to help enable women to take part in growth processes on the same terms as men, with the same access to technology, production inputs and land and credit rights. Its role is also to promote the impact of active gender equality policies in the growth strategies of partner countries. Strengthened conditions for the development of markets and entrepreneurship Functioning growth strategies must build on situation-specific analyses that show which factors constitute the most binding constraints to growth in a given country context. The sequence in which various initiatives are implemented to remove obstacles in a growth process is of central importance. Sweden is to support partner countries in developing methods and capacity for growth analyses as a basis for poverty-reducing growth policies. Sweden s development cooperation is to promote efficient, high-quality institutions. Support that helps build up an efficient administration, a noncorrupt legal system and stable conditions for ownership and user rights is important. An efficient public administration is based on a constructive interplay between the state, civil society and the private sector. iringa town in tanzania. also in developing countries more people get access to modern technology like cellphones, internet and cable tv. Photo: Jorn Stjerneklar/Phoenix 16 P O l i c y f O r e c O n O m i c g r O w t h i n S w e d i S h d e v e l O P m e n t c O O P e r at i O n, 2 0 1 0 2 0 1 4
Building up infrastructure that promotes local production, market integration and trade is important for functioning markets. Infrastructure is needed to ensure that producers have access to markets, to link markets within any given country and to link that country s markets with the international market. Good access to different types of infrastructure is not only a prerequisite for a high general level of growth; it also contributes to growth patterns that benefit poor people and neglected regions. Support to develop infrastructure, strengthen production capacity and develop the business sector and related market institutions is also important. A key aspect is helping developing countries to integrate the trade dimension into their poverty-reduction strategies. Trade-related aid is a central channel for supporting the development of markets and entrepreneurship. Strengthened capacity to adapt to changes, threats and opportunities In most cases, economic development and growth coincide with various forms of structural change. During this process, certain groups risk being excluded from development in both rural and urban areas. Development cooperation should not only support structural change but also help reduce the vulnerability of weaker groups, by such means as increased food security and promoting productive working conditions that develop people s potential, making it easier for people to take part in work on the basis of their own conditions and capacity. Further processing of both agricultural products and raw materials as well as increased skills and geographical mobility of the labour force improve the conditions for sustainable growth processes and poverty reduction. A well-educated, healthy labour force is better equipped to deal with changes and the need for adaptation. Support for the development of the human resource base is therefore an important area for development assistance. Given a situation with growing environmental problems and resource constraints, development cooperation is to endeavour to ensure that environmental sustainability permeates development contributions and partner countries growth strategies. Global challenges such as climate change constitute a serious threat to long-term growth and development and require both adaptation and global cooperation with the international community on the part of developing countries. An important task of development cooperation is therefore to P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4 17
assist developing countries in building up capacity to deal with these types of challenges and to strengthen the capacity of these countries to take part in efforts in the global institutions that are addressing these challenges. 3.3.2. Other areas that, together with development cooperation, can affect economic growth in developing countries International macro-economic and financial stability An international financial system that is stable and transparent also promotes predictability and creates incentives to invest in developing countries. It also contributes significantly to greater integration of developing countries into the world economy. Strengthened international regulatory frameworks and stronger monitoring will make it possible to prevent cross-border financial crises. International monitoring of macro-economic policy and financial markets is conducted to varying extents in international organisations such as the IMF, the OECD, the Financial Stability Board and the Bank for International Settlements (BIS). These organisations contribute to financial stability and the integration of developing countries into the global economy. In this area, too, development cooperation can play a significant role by supplementing, and thereby strengthening, initiatives taken at international level. This includes support for developing and implementing fiscal and monetary policy and for strengthening and deepening national financial systems in developing countries. Trade policy International trade and cross-border investment contribute to countries potential for generating high rates of growth. A trade policy that boosts poor countries opportunities for greater participation in international markets is thus an important instrument for promoting increased growth in these countries. Sweden is playing an active role in the EU to bring this about, by eliminating export subsidies and interventions, for example. Trade-related development assistance supplements a development-friendly trade policy by promoting the opportunities of poor countries to benefit from the market openings that a more liberal and rules-based trade regime entails. 18 P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4
Initiatives for utilising the contributions of the business sector Trade and investments enable companies to contribute to generating economic growth through increased employment, the development of technology and knowledge, and increased tax revenues. Experience shows that the Swedish business sector contains untapped potential for contributing to development in poor countries. The business sector s contribution to development is strengthened when companies support and work in line with international principles and guidelines for responsible business conduct with regard to fundamental working conditions, human rights, environment, gender equality and the fight against corruption. In this context, Swedish companies and business organisations are also important bearers of Swedish values and attitudes in the dialogue on development policy. It is particularly important to harness the knowledge and experience of local conditions of companies, agencies and organisations that are active in developing countries. This applies particularly to Swedish companies, including Swedish entrepreneurs of a foreign background. This can develop and strengthen Swedish development assistance in these countries while contributing to the Swedish development policy as a whole. The Swedish business sector s effective opportunities to contribute to growth and development in poor countries also require better collaboration between various policy areas. Promoting the development potential of migration Alongside trade in goods and services, labour force migration is an important and growing aspect of globalisation. The savings (remittances) that migrants send home to their relatives, friends and other networks represent an increasing proportion of international financial flows and are now estimated to amount to more than twice the value of total international development assistance. They make investment in better education, health and housing possible. Remittances are also invested in productive activities, which in turn create employment opportunities. Migration offers an opportunity to build knowledge and contacts that can promote trade between countries and the development of the business sector. Returning migrants contribute with their newly acquired knowledge. Sweden is working to facilitate the mobility of immigrant workers. P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4 19
hairdresser in namibia. that women participate in the labour market in different ways, as employees or entrepreneurs, is a strong development factor in most developing countries. Photo: Claes Herrlander/Phoenix 4. Implementation Development cooperation is pursued directly between Sweden and other states, via organisations in Sweden and other countries or via international organisations. All these channels are relevant for promoting economic development. Support to global and regional organisations plays an important role in promoting policy development, capacity building and analysis work in prioritised areas. Development cooperation contains three separate, but often complementary, instruments for promoting economic growth: Financial support Dialogue Capacity development 20 P O l i c y f O r e c O n O m i c g r O w t h i n S w e d i S h d e v e l O P m e n t c O O P e r at i O n, 2 0 1 0 2 0 1 4
These instruments can be used separately, but where possible, should complement each other to achieve the greatest possible impact. Lessons learned from individual projects may provide valuable contributions to a more comprehensive policy dialogue at national sector or macro level and in international forums. Equally, there is a clear need when planning initiatives at the micro level to take account of weaknesses in national plans and institutions. On a bilateral basis, general budget support is a clear example of when it is crucial to supplement financial support with a dialogue on both the focus and implementation of the partner country s economic policy. An analysis of power structures may be of great value in identifying obstacles to economic development, and thus provides an important basis for country-specific cooperation strategies. When cooperation strategies and organisation strategies are drawn up, this policy is a key starting point in selecting areas for both dialogue and financial support. The policy s three focus areas should, where relevant, permeate Sweden s work on multilateral organisations country strategies and overall policy documents and policies, as well as Sweden s work on EU development policy and European Commission development cooperation. One way of supplementing development cooperation is to support contacts with other relevant parts of Swedish society including the business sector, within the framework of the regular promotion tasks of missions abroad. To achieve results in development cooperation, support to economic growth has to comply with the principles of aid effectiveness in accordance with the Paris Declaration (2005) and the Accra Agenda for Action (2008). Broader ownership of countries reform efforts and greater donor coordination, including policy dialogues, are important for creating the conditions for economic growth. P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4 21
5. Division of roles and responsibilities A number of actors are affected by this policy. State actors primarily include Sida, Swedfund and the Swedish Trade Council, which are to integrate the policy into the parts of their activities deemed to be relevant. When implementing the policy, it is important to involve the Swedish business sector and draw on its experience and knowledge to improve general conditions for the private sector in developing countries. This is expected to be promoted through various initiatives such as the Council for Business and Development (NU). 6. Monitoring The policy is to apply until further notice, although no later than until the end of 2014. A mid-term review of how the policy has been implemented in activities is to be undertaken in 2012. This task also includes assessing any need for amendments and additions to the policy. 22 P o l i c y f o r e c o n o m i c g r o w t h i n S w e d i s h d e v e l o p m e n t c o o p e r at i o n, 2 0 1 0 2 0 1 4
The policy for economic growth is based on the objective of international development cooperation, to help create opportunities that will enable poor people to improve their conditions of life, and the Govenrment s policy for global development, with the overall goal to contribute to equitable and sustainable development.