Advisory Group for Southern Leaders Round Table (SLRT)

Advisory Group for Southern Leaders Round Table (SLRT) Shanghai, People s Republic of China, 17-18 October 2006 SOUTH-SOUTH DEVELOPMENT COOPERATION DRAFT PAPER FOR DISCUSSION BY ADVISORY GROUP

Introduction 1. While it is probably correct to assert that Official Development Assistance (ODA) will remain a central element in any broad-based approach to development cooperation (DC), the latter includes not only ODA but also other forms of transaction that facilitate international development. In recent years, the significance of ODA as a share of total financial flows to developing countries has diminished, although it remains a vital system of support for the poorer developing countries and especially Africa. ODA has so far been largely a North-South phenomenon, though there is a long history of assistance among developing countries. A substantial number of Southern countries are currently accumulating large financial surpluses, and mechanisms for channeling a share of these resources to productive ends within the South as a whole call for systematic exploration. This paper briefly examines the current state of development cooperation within the South, and makes suggestions aimed at improving and expanding South-South DC. The North-South model of DC, although still relevant, might not necessarily be an appropriate framework for the South. Development assistance could be appropriately defined in terms other than those advocated by the OECD s Development Assistance Committee (DAC). 2. The current paper is very much a work in progress. It is being presented to the Advisory Group for discussion purposes, and it will be modified and improved in light of the Group s comments and suggestions. Additional statistical analysis will also be attempted. ODA Concepts 3. ODA has so far been a concept largely elaborated in a North-South context. Since the 1960s, it has been recognized that development aid---both capital assistance and technical cooperation-- - should be made available to countries in the South, given their poverty, the consequent large gaps in their financing needs, especially with respect to external finance, and the existence of significant gaps in their technical capacities. It was precisely on this basis that the UN established the 0.7% target for ODA requiring that this share of each developed country GDP be allocated to official development assistance. Although the target has not been reached by the developed world as a whole, it continues to be a global norm. Ninety per cent of all ODA emanates from countries that are members of DAC, which was established in 1960. The task of DAC is to monitor ODA flows and other financial flows to developing countries. It has built up a solid statistical base to measure progress. It is a resource centre on ODA issues, exchanging experience among its members, evaluating their aid programmes, promoting best practices, setting norms and standards, and generally being an advocate for official development assistance. 4. The definition of ODA as consisting of intergovernmental flows of assistance with a 25% grant element is a creation of DAC. There are other flows that are excluded from this definition- --for example, loans from the IBRD arm of the World Bank, which is non-concessionary funding, and similar loans from the regional development banks. DAC has encouraged members to provide more grants than loans and to give up the practice of tying aid in various ways and linking it to commercial loans. It is also monitoring progress on allocating ODA to poverty reduction. DAC has established many norms and standards for ODA, and the Committee has indeed improved the quality of aid. It is noteworthy, however, that current ODA practices have evolved over a period of nearly five decades, and ODA in the past was much less povertyfocused and development-oriented. Numerous political, economic, strategic, and other conditions were attached to ODA, and even today ODA flows are not entirely free of explicit and implicit conditionality. Conditionality applies even to financing from the multilateral financial institutions and from the UN system. New York, October 2006 2

South-South Development Assistance 5. Considerable flows of assistance, amounting to about 5-10% of current ODA levels, or approximately US$3-5 billion, are taking place among countries of the South on concessionary terms. There are several groups of Southern donors. 6. The first of these comprises the relatively affluent emerging market economy countries that are already members of OECD but have not yet joined DAC---namely, Mexico and the Republic of Korea. The Republic of Korea has announced that it is aiming at reaching a US$1 billion aid programme by the year 2010. 7. The OPEC countries form the second group. This group has a track record of assistance starting in the mid-1970s. Oil price increases of the time provided the group s members with large pools of resources, part of which they have channeled to other developing countries. It is estimated that about US$2-3 billion annually have been provided from these sources, Saudi Arabia being by far the largest donor. The OPEC Fund for International Development is a significant player on the international scene and has been operating since 1976. Also noteworthy is the fact that the International Fund for Agricultural Development (IFAD) was established in 1974 largely as a result of OPEC countries agreeing to fund this institution together with the traditional donors. 8. A third group of countries from the South---South Africa, Malaysia, Thailand, Brazil, Chile, Venezuela and many others--can be categorized as a group of small donors, offering both capital assistance and technical countries to other countries of the South. These countries are not channeling huge amounts of resources, but the potential for further expansion can be recognized. 9. China and India have significant aid programmes, and they constitute the fourth group of Southern donors. China is a large provider of aid to North Korea and India provides significant assistance to countries such as Nepal and Bhutan. At the Millennium Review Summit in 2005, China made several commitments to expand assistance, including debt write-offs to LDCs. Within the next three years, China will provide US$10 billion in concessional loans and export credits, and expand assistance in the medical field. China offered to train, during this three-year span, 30,000 personnel of various professions from other developing countries. India, too, has its plans to expand its assistance. It is expected to increase loans tied to Indian procurement to African countries to around US$300-400 million annually. Several other initiatives are in the pipeline. 10. There are many instances of development assistance of a substantial scale from countries of the South. South Africa co-financed the US$2 billion construction of the Mozal aluminium smelter in Mozambique. India provided major financial assistance to hydroelectricity development in Bhutan, Nigeria has supported a trust fund in the African Development Bank with resources amounting to US$400 million. Brazil has established significant schemes for South-South cooperation. 11. There has also been a tradition of small-scale humanitarian assistance. In the aftermath of the tsunami in South Asia, many Southern countries provided assistance. Nigeria offered US$1 million while significant assistance was also provided by India and China, among others. New York, October 2006 3

12. Triangular cooperation entailing collaboration between Southern countries supported by a Northern partner or partners has become both important and increasingly diversified. Many Southern countries are associated with Japan in sponsoring third country training programmes. There are similar programmes involving Australia and South Pacific countries. The Canadian International Development Research Cooperation also pursues triangular cooperation for technical exchanges. The Future of Development Assistance in the South 13. The overall pattern of South-South development assistance briefly described above offers significant promise for expanded flows in the future. Many countries of the South have large financial resources that could be deployed through productive investment in other developing countries, although for this to happen new institutional mechanisms and systems of insurance and guarantees are likely to be needed. In keeping with previous practice of DAC donors, countries such as the OPEC group and China, India, and others could promote financial flows on a commercial basis while linking such flows to concessionary funding. There is also significant potential for ODA types of funds, especially for neighbouring countries, with such assistance being legitimized on grounds of promoting international security and establishing stable regional orders. 14. Technical assistance should surely be a most important component of South-South DC. Many Southern countries, with their technical and economic strengths, are in a position to offer concessionary forms of technical assistance to less well-endowed countries. There is a growing demand for training at the higher education level and in professions such as accounting, insurance, and shipping in most developing countries. In this respect, the most cost effective training abroad is likely to be found in other developing countries, especially neighbouring ones. Concerted action by countries in the South, entailing the participation of the business sector and professional umbrella organizations, is feasible and could be undertaken without heavy financial burdens. 15. Cross-border technical assistance among neighboring countries represents a significant area of opportunity for South-South cooperation. Cross-border trade, largely unrecorded, is a common feature of inter-country interaction within the South, and in areas such as South-East Asia, West Africa, East Africa, and parts of South Asia there are traditional forms of crossborder trade accompanied by interchange of experience and expertise. Such relations and linkages could be upgraded for mutual benefit. Business enterprise development could be costeffectively pursued, for example. But to identify and carry out such approaches to DC, a mindset detached from current North-South ODA practices has to be created. 16. Another area for developing country action is the humanitarian assistance sector. Many poor developing countries are hosting large numbers of refugees from other countries. They are also sources of humanitarian assistance as and when occasion demands. Humanitarian aid might be organized on a regional basis, with countries offering reciprocal facilities in the event of emergencies. 17. The current assumption that underlies most ODA is that it is a system of giving by the rich countries to the poor. While that type of ODA will continue to dominate the global DC scene for a long time to come, there are major opportunities for countries in the South, especially neighbouring countries and Southern sub-regions and regions, to develop mechanisms whereby they could assist each other in technical fields, in humanitarian emergencies, at the small and medium enterprise level in private sector development, and also through civil society New York, October 2006 4

collaboration across borders. At the field level many concrete activities of this type can be found and these need to be analysed to draw lessons. Development assistance between South and South needs to be defined more broadly than in DAC terms, and could include other nontraditional and less concessional approaches. There is no particular reason for ODA to be defined as always consisting of a 25% grant element, and discounted at a 10% rate of interest, which is the DAC requirement. Institutional Mechanisms 18. The DAC of OECD is almost the only organisation today that is dedicated to monitoring and analysing ODA and other financial flows. While other organisations---the UN system, the World Bank---collect ODA-related data and information, focussing on ODA is only a part of their total programmes. Currently it is the DAC that is taking major initiatives further to enhance the quality and quantity of development aid. It would like non-dac donors, including Southern donors, to report to it on their ODA and related activities and even to join the Committee when their ODA flows reach appreciable levels. In an article entitled Will Emerging Donors Change the Face of International Co-operation? that appeared in volume 24 (July 2006) of the UKbased Overseas Development Institute s Development Policy Review, Richard Manning, the current DAC chairman, has argued that while the DAC share of global aid flows will decline only slowly from the current historically high level, given the increase in the number of emerging donors and their growing impact, low-income countries now have before them a wider range of financing options. He sees three possible risks in this situation: recipients may prejudice their debt situation by borrowing on inappropriate terms; they may use low-conditionality aid to postpone necessary adjustment; and they may waste resources on unproductive investments. Mr. Manning calls upon DAC members to develop a constructive dialogue with non-dac donors within the framework of the recognition that sustainable development and poverty reduction should be the core purpose of all aid. 19. There should be no objection to such an approach. Southern donors should welcome the dialogue proposed by the DAC chairman and indeed, as indicated below in paragraph 22, an exploratory meeting between DAC donors and Southern donor countries took place in 2005. That being said, the potential for ODA and other concessionary forms of South-South DC is unlikely to be fully exploited if there is sole reliance on a traditional channel such as DAC. As advocated below, a Southern DAC needs to be considered. 20. The South has to build up its own institutions. It is primarily the North that led the establishment of the main multilateral financial institutions that exist today, and the North continues to dominate these bodies. To be sure, there is now a trend to offer key Southern countries greater power and influence in the institutions---witness, for instance, the reform moves in the IMF. The OECD also has a strategy of incorporating the major economies of the South and, as noted above, this also applies to DAC. While there should be no objection to this type of co-option of Southern countries, in order to maintain a stronger bargaining position, the South would be well advised to develop its own institutions, especially in areas where it is gaining strength, as it is doing with respect to financial surpluses. While the concerned Southern countries will continue to invest most of these funds through institutions based in the North, there are many opportunities for mutually beneficial financial transfers within the South on both concessional and non-concessional terms and through arrangements that combine the two. 21. The parallel document--- Southern Leaders Round Table (SLRT): A Concept Paper ---that is also before the Advisory Group at its Shanghai meeting draws attention to another major policy issue that need to be reiterated here: There is a continuing need for reducing the New York, October 2006 5

asymmetry that is inherent in prevailing donor-recipient relationships. A UNDP publication of 2002--- Capacity for Development: New Solutions to Old Problems ---recommended that steps be taken to strengthen the voice of recipient countries in debates about aid policy and also pointed out that while, on the international level, donors already had the DAC, there was no equivalent forum for developing countries to share their experiences, find common positions and develop aid guidelines from a Southern perspective. Southern forums on development and technical cooperation, the publication argued, could be an important platform for balancing the donor-recipient relationship. That this idea could resonate in the South was demonstrated at the 17th Meeting of International Cooperation Directors of Latin America and the Caribbean held in Caracas in May 2005. Mr. Roberto Guarnieri, permanent secretary of the Latin American Economic System (SELA), proposed at the meeting, which SELA organized, that an OECD of the South be established. Why not have an institution of our own, based on excellence and our best human resources? he asked. 22. The proposed Global South Development Forum (GSDF), if appropriately organized, could itself serve as a response to the aspiration to which Roberto Guarnieri gave his voice. The concept paper indicated above recommends that the Forum will need to keep in mind three significant issues and developments. The first is that triangular cooperation, as discussed above, has been growing in importance and is increasingly recognized as a strongly desirable form of global development cooperation. Initially, the role of the Northern partner or partners was essentially seen as that of financial support; while such financing remains vital, the substantivecum-financial participation of all partners is being recognized as the key to success. With Southern countries becoming more confident about their own capacities and stature in an increasingly interdependent world, arrangements with Northern countries and partners to collaborate in third countries in the South could produce mutual benefits and cost-effective advances in trade & investment, applied research, the provision of infrastructure and social services, and the fostering of knowledge-based development. 23. The second notable matter is the need to follow up on an initiative jointly taken by UNDP and DAC. In 2005, UNDP, principally through the Special Unit for South-South Cooperation, joined forces with the DAC secretariat to co-sponsor a meeting that brought together both Northern and Southern donor countries. The two groups expressed interest in advancing South- South and triangular cooperation in order to improve aid efficiency and effectiveness by emphasizing ownership and inclusive partnership. It would be appropriate to use the proposed Southern Leaders Round Table (SLRT) as an important instrument for follow-up. One possibility could be for the Round Table to spin off from the GSDF a round table that would operate as a Southern DAC---or rather a Southern Development Assistance Group (DAG), as this paper suggests---bringing together developing countries not only as recipients of aid but also as aid providers. Such an institution could indeed become a trailblazer in the area of global governance. 24. To turn to the third issue, we need to keep in mind that Southern donors are bringing a new dimension to development cooperation, as argued by Ad Melkert, UNDP s Associate Administrator, in an opinion piece that recently appeared in Asahi Shimbun. As he put it, A discussion on emerging donors must go beyond financial aid to international cooperation that includes trade, debt relief, and the transfer of new technologies, expertise, knowledge, good practice experiences, in-kind contributions and peer learning. Additionally, as Mr. Melkert also underlined, it would be desirable to avoid drawing Southern donors into a Northern paradigm built on donor-recipient relations. A successful Southern DAG could help to operationalise both these concerns. New York, October 2006 6

25. The Southern DAG would meet regularly inter alia to examine the status of South-South development assistance and explore opportunities to expand such assistance, including the creation of new mechanisms for financial flows within the South. Consideration might even be given to creating a South Bank, modelled on the World Bank and the regional banks but controlled by the South. The DAG will not confine itself only to ODA types of flows but will also be concerned with prospects for a range of diversified South-South flows. 26. A small secretariat should be established to support the Southern DAG. It would firstly monitor development assistance within the South. Its task in this regard would be largely statistical, obtaining from Southern countries information and data on their assistance to other countries of the South. This would include concessional and non-concessional forms of assistance, including technical assistance, and the aim would be to capture even relatively smallscale activities. Such information would be obtained not only from the main Southern donors, but also from the large number of countries that assist others, especially neighbouring countries, but do not regard such transactions as development assistance. A Secretariat capturing information of this kind is likely to stimulate greater flows of assistance among developing countries. 27. Where could such a secretariat be located? An ideal venue would be the Global South Development Forum Secretariat, if it were established, with the DAG secretariat forming a part of that larger entity. In the interim, it could be located in an existing institution either in the North or the South (one example that springs to mind is the Dag Hammarskjöld Foundation in Uppsala, Sweden, which has strong third world connections). The costs of this centre might also have to be met by traditional multilateral and bilateral donor institutions. And it should certainly establish a close working relationship with the DAC secretariat. New York, October 2006 7