Toward a New Global Development System for the 21st Century (17/10/2015)

 Dr. Kazuo Takahashi, Former Professor, International Christian University, Tokyo, points out the emergence of a twin structure of development cooperation, i.e. the traditional Bretton Woods-DAC regime and a new system consisting of the AIIB, the New Development Bank and the Chinese bilateral cooperation system.


Toward a New Global Development System for the 21st Century


Dr. Kazuo Takahashi,
Former Professor of the International Christian University, Tokyo

Summary Presentation of the concept
to the JCK Trilateral UN Academic Associations of Japan, China and Republic of Korea,
Fudan University, Shanghai, 16-18 October 2015


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 Contents

 1. Emergence of a twin structure of development cooperation

 2. Historical process of the Bretton Woods-DAC regime and its characteristics

 3. Accomplishments and unfinished tasks of the Bretton Woods-DAC regime

 4. Unique operation of the Japanese development cooperation system

 5. AIIB and the BRICS Bank(the New Development Bank)

 6. Toward a new global development system for the 21st century

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 1. Emergence of a twin structure of development cooperation

 Against the background where market forces are becoming increasingly dominant in the world economy, interactions between the Bretton Woods-DAC regime and the emerging AIIB-BRICS Bank system will be the major drama in development governance in the coming 10 years. Search for a framework in which consultations for a constructive relationship between the two being the first step for a mutually positive engagement, it is important for this process to ensure participation of recipient countries. It will soon be recognized that the United Nations offers a proper environment for this consultation which will be conducted together with all potential recipient countries with a maximum level of transparency which is an essential requirement for the establishment of legitimacy of a new global system of development cooperation.

 Once a framework for the consultation is agreed, the next step is to look for a basis of the discussion. While a number of options should be examined, one promising possibility is the Japanese development cooperation. Based mainly on yoseishugi (request based development cooperation), its operations involve elements of both of the twin structures of development cooperation.

 It is important to conduct this consultation in an inclusive manner, in particular, by inviting international civil society organizations and the business sector. Being already the major actors in development cooperation, they will become even more prominent in development cooperation in the course of the 21st century. Without their participation from early stages of the consultation, any new global system of development cooperation will suffer from inefficiency and be seen to lack legitimacy.

 2. Historical process of the Bretton Woods- DAC regime

 From 1875 to 1935 around 75 percent of investment in transportation, energy and communication in the present developing countries was pursued by British investors, mainly private individuals. The World Bank (IBRD), after some heated discussions among the leadership through 1945-1947 about proper areas for its investment activities, standing–in for British investment, which had been reduced virtually to zero, in newly independent countries was recognized as the main target which bridges between the public domain and the private investment. A term was coined for this area, economic infrastructure. Therefore, IBRD’s original activities were largely concentrated in investment in economic infrastructure and gradually established its legitimacy both in the government circles and in the banking community[1].

 Bilateral aid activities were gradually organized through DAG (Development Assistant Group of OEEC) and then DAC(Development Assistant Committee of OECD) in the course of the 1960s. Technical cooperation and infrastructural development in industry and agriculture were the main areas of operation. The concept of ODA was elaborated during this period.

 Interactions between the World Bank Group, IMF, the regional development banks and DAC intensified through mutual attendance at their meetings and close contacts of their staff members in the course of the 1970s and the 1980s. Policy orientations of these institutions headed gradually toward “soft” areas and poverty alleviation[2].

 Consequently, the proportion of investment in infrastructure has progressively been reduced, a trend that has been accelerated in the 21st century. The main actor in the field of infrastructural development in the developing world, the World Bank, now invests in this area only 12 percent of the whole portfolio[3].

 3. Characteristics of the Bretton Woods- DAC regime

 On the surface, Bretton-Woods-DAC donors began to recognize the importance of the initiatives of recipient countries in the course of the 1980s. Intensified North- South dialogues in the 1970s contributed significantly to this change. In fact, however, they continued to believe that they know the issues, problems and even answers of developmental challenges of each developing country better than the developing country itself. Huge research mechanisms on development issues in these organizations seemed to guarantee this assumption. Accountability of development cooperation activities to the Board of the organization, to the tax-payers and the credibility of the market are believed to be secured by the judgment of the staff backed by these research activities. Therefore, there is a gap between the official proclamation by the Bretton Woods-DAC organizations about the ownership of developing countries with regard to development projects and the reality of the operations of these organizations. Numerous principles, guidelines and rules that have been created by these organizations based on the assumption that they know the developmental challenges better than developing countries themselves have come to build up a development cooperation architecture. A development cooperation professional tends to be defined as someone who knows the ins and outs of this architecture rather than the one who is conversant with real challenges, and difficulties of development itself.

 4. Accomplishments and unfinished tasks of the Bretton Woods-DAC regime

 Close to 70 years of development cooperation by the Bretton Woods-DAC organizations have produced a number of positive results as well as many unfinished tasks at this moment in history. They have been promoting structural changes in the global power balance and continue to confront the world community with extremely difficult challenges.

 A series of positive outcomes have made it clear over time that a combination of three factors contribute critically to successful developmental performance ; proper policy mix combined with management capacity, use of market forces domestically and internationally, and support of development cooperation partners. Successful cases have been observed in four waves so far and will continue in the coming period.

   NIEs (Newly Industrializing Economies) : 1970s
   East and Southeast Asia (Asian Miracle) : late 1980s-mid-1990s
                   China: 1990s-
                   India: 2000s-

 One uncertain category of seemingly successful developing countries is the ones which are dependent on exports of natural resources. Historically most of them have failed to sustain a high level of developmental performance. Most probably this trend will continue.

 Unfinished tasks are many. One major category of countries that have been left behind is now conceptualized as fragile states. It started as MSACs (Most Seriously Affected Countries), so named by the United Nations in 1974, reflecting severely negative impacts on these developing countries from the first oil shock. Many of them recorded negative results from Positive Adjustment Policies of the 1980s. The tectonic shock of the end of the cold war brought many of them to civil wars in the early 1990s. Weak performance of peace building efforts for these countries in the mid-1990s resulted in resurgence of domestic conflicts in a number of them. Globalizing impacts of market forces which were intensified by the surge of conservative governments in many industrialized countries from the late 1990s undermined social stability of many of these vulnerable states. These countries have become focal points of international cooperation from toward the end of the 1990s, resulting in the concept of fragile states. While a number of studies and reports have been produced on them, annual States of Fragility reports of OECD have become most influential in the international community. States of Fragility 2015, Meeting Post-2015 Ambitions, revised edition[4], lists 50 states and 67 states have been listed on one factor or another in this report. According to this report, 53 percent of ODA have been directed to this category of countries since 2007. Five dimensions are examined in this report: violence, justice, institutions, economic foundations, and resilience. Serious efforts will continue to be focused on this major category of countries as an unfinished task of the international development cooperation community in the coming period.

 5. Characteristics of the Japanese Development Cooperation system

 In order to provide a possible basis of consultation for building a cooperative arrangement between the interventionistic Bretton Woods-DAC regime and the emerging non-interventionistic AIIB-BRICS Bank system (to be elaborated in the next section), historical experiences of the Japanese Development Cooperation system will offer a useful example for the international community. Unlike other donors of the Bretton Woods-DAC regime, the Japanese development cooperation system recognizes the importance of the sovereignty of a recipient country. This approach originated in the fact that both of development cooperation and of reparation for World War II started in Japan in 1954 and that they were sometimes delivered in a linked manner. In this situation, it was considered proper for Japan, a defeated country, to observe initiatives of the partner countries. Over time, intricate arrangements where the relationship among recipient governments, Japanese trading firms and the Japanese government was elaborated became effective tools for development cooperation. The arrangements require that proposals for ODA from Japan come from the potential recipient government, ensuring that the will of the recipient government is at the center of the whole operation (yoseishugi). In the Bretton-Woods circle, this practice was considered rather odd and sometimes criticized as an approach which escapes primary responsibility of a donor. These arrangements have, however, contributed to providing an enabling environment for officials of the recipient countries. Such assets as intellectual know-how for the management of the project and the global reach for its products are provided by trading firms with, however, an assurance that a final decision is made by the recipient government. A strong sense of ownership of the project by the officials in charge is encouraged. While it is widely recognized that a strong care must be taken to avoid corruption in this system, a high development performance of Asian countries has begun to attract the attention of development specialists world-wide in recent years.

 6. AIIB and the BRICS Bank

  For some time China has been active in development cooperation through enhanced operations of bilateral activities and also through attempts to increase capital bases of multilateral financial institutions. Going through international political processes, Articles of Agreements were agreed in June this year for the Asian Infrastructure Development Bank and in July this year for the New Development Bank (formerly the BRICS Bank). While their operational characteristics will evolve over time, a strong concern over sovereignty of recipient countries is expressed for both of them. For example, Article 21 of the Articles of Agreement of the New Development Bank (Operational Principles) states as follows.

 ”The Bank shall not finance any undertaking in the territory of a member if that member objects to such financing.”

 It may reflect uneasy feelings of recipient countries toward interventionistic operations of the Bretton Woods-DAC organizations. Ownership of development having been a basic principle since the Bandung Conference of 1955 for developing countries,(thus the centrality of the concept of independent development), this Article may be a natural declaration for successful performers of development who have now become donors.

 6. Toward a New Global Development Cooperation System

  A twin structure of development cooperation is emerging in the world community: the traditional Bretton Woods-DAC regime and a new system consisting of the AIIB, the New Development Bank and the Chinese bilateral cooperation. The Agreement on the New Development Bank clarifies its character in Article 1 as “complementing existing efforts of multilateral and regional financial institutions”. And the official announcement of the President-designate from the Multilateral Interim Secretariat says that “AIIB will complement and cooperate with existing MDBs to jointly address the daunting infrastructure needs in Asia”[5]. However, it is obvious that there will most probably be an increasing cleavage between the two systems when it comes to conditions of financing. The Bretton Woods-DAC regime has already accumulated a large number of principles, guidelines, and rules, whereas the broad orientation of the AIIB- New Development Bank is to maximize ownership of development by recipient countries. One can easily see a collision course between the two, undermining each other. At the time when the needs of developing countries are considerable and increasing in relation to infrastructure and fragile states, it is essential for the world community to bring the two structures of development cooperation to a constructive whole rather than to a mutually undermining operation.

 A consultation between the two should start as soon as possible. It is important that experiences of development cooperation of close to 70 years in the world community should be reflected in this process. Views on these experiences being different from each other among various players, an inclusive arrangement for the consultation is an essential requirement, whereas the main actors are the two systems themselves. The only existing framework may be the United Nations where practically all nation-states are members. This approach should ensure involvement of recipient countries and guarantee at least some level of transparency of the consultation.

 An important consideration is to include the private sector and the civil society. Based on existing mechanisms for inclusion of the private sector and the civil society, it should be possible for the United Nations to expand opportunities for them to join the efforts to construct a new development cooperation system, addressing mainly to unfinished tasks and new needs (mainly infrastructural development of relatively successful developing countries) of development cooperation. Both of the New Development Bank and the AIID make it clear that they will operate on the basis of sound banking principles. Cooperation of civil society organizations is clearly an essential requirement for any effective developmental activities. A new global development cooperation system requires a constructive engagement of market players and civil society activists from the early stages of the consultation.

 One important lesson of the development cooperation system is to equalize a knowledge basis among all the stake holders, minimizing interventionistic tendency of donor organizations. While some attempts have been made toward this direction, the consultation process should highlight this concern on a priority base. Research capacities on development and development cooperation should be considered as global public goods which should be financially supported by the emerging global system.

 A number of options of the relationship between the two may be examined. However, it is essential for this consultation process to arrive at a measure of common understanding about the roles of donors while confirming critical importance of the wills of recipient countries. For this purpose Japan’s development cooperation, which was the top donor of ODA in the world community in the course of the 1990s, should offer a useful basis for consultation.

 An emerging global development cooperation system should be so organized that it is the symbol of a success of development cooperation. Former recipients of development cooperation becoming donors, this system should ensure flexibility where any successful developing country in the coming period can be integrated into it as a donor, enriching successful experiences in development efforts in the global community. Tripartite initiatives among China, Korea and Japan at the United Nations may be the first step toward this direction.

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[1] Mason,E.S, Asher,R.E., The World Bank since Bretton Woods, The Brookings Institution, Washington D.C.,1973, p.153.

[2] Kapur,D., Lewis, J.P., Webb, R., The World Bank, Its First Half Century, Vol.1 History, Brookings Institution Press, 1997,p.215 et seq.

[3] Minato, N., “The Challenge of the AIIB”, SRID Journal No.9, August 2015.

[4] OECD, States of Fragility 2015, revised edition.

[5] Multilateral Interim Secretariat, The Statement of the President-designate.

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