2016 Australasian Aid Conference

Speech

Speaker: Secretary of the Department of Foreign Affairs and Trade, Mr Peter N Varghese AO

10 February 2016

Prior to the integration of Ausaid and DFAT in November 2014, I had been on the periphery of aid policy issues for some 35 years. 

Like many on the periphery, I had strong views. 

I was a sceptic about the historical record of development assistance. 

Indeed I had some sympathy for the view that aid was, for the most part, an area of policy failure paved with the best of intentions.

These days I do not have the luxury of armchair pontification. 

The more I have been involved in aid policy as head of the Department responsible for its delivery, the more nuance has crept into my views. 

The balance sheet today looks less stark. 

The policy challenges are genuinely complex. 

It is still my view that the most important ingredients of economic success for poor countries are good policies and good leadership. 

No aid program can compensate for their absence. 

But well thought through aid programs certainly can contribute to their presence.

Today I want to focus on three things.

First, I want to address three conceptual issues which are central to our aid program. 

I want to address the link between private sector led economic growth and poverty reduction. 

I want to explore the links between security and development. 

And I want to say something about the anatomy of that difficult task of state-building.

Second, I want to talk about how we are addressing these concepts in the very different contexts of Asia, the Pacific and globally.

Finally, I want to say something about innovation and why we want it to have a more prominent place in our aid policy thinking.

Economic growth, the nature of that growth and poverty reduction

Let me start by exploring the links between private sector-led economic growth and poverty alleviation.

This is important because too often the debate about growth and poverty reduction turns into an either/or choice between poverty and growth.

This is a false dichotomy.

Generating growth in developing countries is always a balancing act between supporting overall economic development and supporting the poor to participate in that development.

That’s why in Australia’s aid program there continues to be considerable investment in human and social development, in social protection, in women’s empowerment and in disability inclusive development. 

The empirical evidence on the centrality of economic development as a driver for poverty reduction is clear. 

China is the obvious example.

More comprehensively, a 2013 World Bank analysis of growth and income changes across 118 countries over four decades shows that incomes of the bottom two quintiles in the population grew at about the same rate as the average annual incomes. 

The report found that economic growth lifts people out of poverty and leads to shared prosperity on average.

It also helps to explain how the rapid growth in the developing world in recent decades has led to such dramatic poverty reduction.

What is also becoming clearer is that poverty in a country acts as a handbrake on growth. 

In an American Economic Review article from a few years ago, Georgetown University Professor of Economics Martin Ravallion, found that poorer countries experience lower rates of economic growth. 

In other words: poor countries grow slower.

Part of the solution comes with an emerging middle class.

A larger middle class makes growth more poverty-reducing – the handicaps faced by poor countries in their efforts to become less poor are very difficult to overcome.

Part of the population is caught in a poverty trap and doesn’t have the basic capabilities to respond to the opportunities that economic growth presents. 

Finally, there is growing acceptance that countries with less inequality experience faster and more durable growth. 

There is a clear consensus that sustainable job growth can only be delivered by a larger private sector. 

There is also an emerging consensus on the importance of focusing on women’s empowerment and supporting women’s engagement in the economy and society. 

It generates more growth — and growth that is more poverty reducing and more sustainable. 

Recent McKinsey analysis suggests that if every country were to advance gender equality as well as its best performing neighbour, global GDP would increase by around $12 trillion or 11 percent over the next decade. 

Indeed, the very first line of the McKinsey report sets out exactly what’s at stake:

‘Gender inequality is not only a pressing moral and social issue but also a critical economic challenge.  If women – who account for half the world’s population – do not achieve their full economic potential, the global economy will suffer.’

Importantly, supporting economic development involves much more than development assistance alone. 

The Howard Government decision in 2003 to remove tariffs and quotas from imports from Least Developed Countries has seen imports from those countries grow at an average rate of 16 percent per year over the past decade. 

In 2015, Australia’s two-way merchandise trade with countries with which Australia has an ongoing bilateral development partnership was valued at about $33 billion – more than ten times the value of the development assistance. 

The Government’s economic diplomacy agenda recognises that the deployment of our foreign policy, trade and development instruments in an integrated manner delivers a better overall result. 

Aid-for-trade investments without focusing on stronger market access make little sense. 

The link between security and development

The relationship between security and development has come to the fore over the last 15 years. 

As the then UN Secretary-General Kofi Annan said in 2005: ‘We will not enjoy security without development, we will not enjoy development without security, and we will not enjoy either without respect for human rights.’

The issue was the focus of the World Bank’s 2011 World Development Report on Conflict, Development and Security, which produced this startling finding: 

The average cost of a civil war is equivalent to 30 years of GDP growth for a medium sized developing country.

In our own region, we too have seen the costs of conflict.

Fiji’s economy dipped immediately following the 2006 coup.

Conflict and instability that began in Solomon Islands in the late 1990s had a devastating effect on the country’s economy.

It was only following the arrival of the Australian-led Regional Assistance Mission to Solomon Islands that the economy began to recover.

For investors, stability is crucial – it’s a competitive global marketplace out there and conflict is a turn-off.

In the absence of security and rule of law, economic development falters.

Much of the evidence from post-conflict expenditure patterns suggest that the international community has under-invested in establishing security and rule of law – particularly at the early stages of post-conflict. 

This under-investment has, in turn, reduced the effectiveness of investments in social and economic development. 

For me, the complexity of the relationship between security and development assistance highlights the importance of an integrated response. 

Security, diplomatic, trade and economic and development interventions need to be deployed in a coordinated way.  

Again, RAMSI is a good example.

RAMSI rescued Solomon Islands from economic and political collapse through a combination of security, economic and governance assistance.

Sequencing to build effective States

Let me now turn to that vexed question of state building.

In his 2014 tome, Political Order and Political Decay, Francis Fukuyama – history might have ended but academia survives – argues that the three components of a modern political order are a strong and capable state, the state’s subordination to the rule of law, and government accountability to all citizens. 

But when the state is weak and unaccountable and service delivery is poor – when each of these three components is missing – it is far from easy to determine where exactly we should focus our attention. 

The international community has, understandably, put a lot of focus on free and fair elections – but what is the point if the public administration doesn’t have the capability to implement the policies of the winning party? 

It could be argued that a focus on elections alone could simply lead states to engage in rent-seeking behaviour or a spoils of war approach, especially if you are resource-rich – as Fukuyama argues is the case in much of Africa.

Should the international community undertake service delivery through and with the national government – even though this may give it a legitimacy that it doesn’t warrant?

What weight do we put on bolstering civil society – including NGO’s and other organisations that strongly support the representation, accountability and transparency?

Or should we undertake service delivery through a parallel process that weakens both the legitimacy and the capability of the national government?  

There are no easy answers.

What makes our challenge all the harder is that there is an aspiration and expectation that development assistance – or even a broader integrated approach across our foreign and trade policies – can support the creation of a modern political order within a few years or a decade. 

Yet the creation of modern political orders has taken generations to create and refine.

A final point on this. 

For much of the last 70 years we have been focused on trying to transplant traditional British or European notions of the state across the developing world. 

It may be that we need to start understanding better the nature of the social contract in the societies in our region so that the nature of the state reflects that social contract. 

So what does this mean overall for our aid investments?

So what does all this mean as we allocate taxpayer funds to meet Australia’s national interest? 

The first conclusion we can draw is that we need an approach that is deeply rooted in the local context, particularly the local political context. 

Put simply – we have learnt that the project based approach is broadly flawed and donor or Multilateral Development Bank-led approaches don’t necessarily deliver sustainable results. 

From these experiences, the international community has distilled core principles of a development effectiveness agenda that have remained broadly consistent over the past decade:

  • Local ownership
  • Focus on results
  • Inclusive partnerships
  • Transparency and accountability

This principles-based approach is art, rather than science – neither is it deterministic.

The international community now has 70 years of evidence to inform these decisions. 

What this does do is highlight the importance of retaining and developing our expertise and capability in aid programming and management – we need to be able to make these judgements and draw on external resources to help us with these judgements. 

The reduction in size of the aid budget required a reduction in the size of the workforce to manage it. 

But we recognise that delivering a high quality aid program requires a strong mix of generalist and specialist skills. 

This is why we are strengthening our workforce planning to enable us to recruit and retain development professionals and sector experts.

We are taking steps to improve our knowledge capture and transfer between staff, and to refine our extensive program of training and mentoring of DFAT staff.

How do these issues play out in our region?

I now want to turn my attention to how these principles translate into what we actually do with our aid program.

Our starting point is that the challenges in our Asian region and those facing the Pacific are quite distinct – and so Australia must tailor its responses accordingly. 

We are also part of the global community looking at responses to global challenges.

Rapidly growing Asia

Rapidly growing Asia has seen dramatic reductions in poverty, but there are still major concentrations of poverty in middle income countries in our region.

Nevertheless, the expectation is that growing Asia will increasingly have the fiscal capability to meet the needs of their societies. 

By 2025, several major aid recipients in the region are projected to reach levels of per capita income at which Australian aid ceased in the past. 

The nature of economic growth is critical in growing Asia and will become more so. 

There are risks that countries fall into middle income traps where they stagnate with most of the population out of poverty, but not continuing to develop into a broader middle class.

So the choices that these governments make about their public spending will dwarf the impact of aid spending. 

And with urbanisation likely to remain a growth driver, planning and spending around infrastructure will be key.    

So what does this mean for our development assistance and broader engagement? 

First, we must recognise that the growing resources available to these countries necessitate change in how aid is delivered in order for it to remain effective. 

This means moving away from directly financing development activities such as service delivery, towards investments aimed at systemic improvements that allow partner governments to effectively utilise the increasing level of non-ODA resources available. 

How quickly we move in this direction will, of course, depend on country context, particularly the economic growth trajectory in the country.

This also means that our standing as a partner of choice will be determined by the quality of our assistance, not the quantity.

Here Australia is well placed to support the economic reform and development agendas in the region. 

Australia’s economic and broader public policy institutions are internationally recognised. 

Building on the partnerships at the institutional level between our economic policy makers and regulators and those in the region is a great opportunity for Australia. 

In what will become an increasingly contested space there will be even more premium placed on being a reliable partner. 

The Pacific

The context in the Pacific is very different.

Pacific Island States have specific challenges because of their size, geographical dispersion, remoteness from markets and higher risk of natural disasters. 

Outside of Papua New Guinea, the growth prospects for most Pacific Islands remain modest – even with positive supportive environments, good economic agendas and benign external conditions. 

Only a handful are projected to be able to generate real per capita growth rates above two per cent per annum in the medium term. 

This provides us with a different set of challenges than in growing Asia.

And it means that we need to entertain different options and ways of engaging. 

It is in the Pacific where we clearly need to deploy our foreign policy, trade, economic and development tools in an integrated fashion. 

Australia is likely to have an ongoing role in supporting some service delivery and in ensuring that the benefits of growth are broadly shared. 

And we will continue to have a key role in the security domain. 

There is an increasing appetite to try things differently across aspects of regional integration. 

There is a growing recognition that small Pacific states do not have the fiscal capability to produce the range of services expected of a modern state – and that some services could and should be provided regionally. 

There are examples of integration from other regions that could be considered. 

The Organisation of Eastern Caribbean States has adopted a common currency, a shared Central Bank and a shared Supreme Court. 

Finally, labour mobility will be part – but not all – of the solution. 

The Government has recently expanded the Seasonal Worker Program and there needs to be ongoing consideration of how this program develops.

Global issues / global public goods

While bilateral relationships are the bedrock of our foreign policy – and development policy defends best practice as country led and country owned – the importance of global public goods is integral to how Australia uses its aid program to contribute to a global rules-based system.

Climate change mitigation, infectious disease control, refugee management and countering the rise of violent extremisms are global challenges that require international cooperation through a mix of multilateral approaches and organisations.

These tools and organisations have evolved and changed as our awareness of the challenges has changed. 

In some cases also as our ambition has grown – witness new UN organisations and new vertical funds dedicated to ending HIV, polio, and malaria.

And of course the previous MDGs and now SDGs represent a core part of the 2030 Agenda that spans human development, economic growth, environmental sustainability, peace and governance, and inclusiveness.

Development assistance alone will not be nearly enough to realise this ambitious vision. 

As the Addis Ababa Action Agenda on Financing for Development makes clear, private sector investment and domestic revenue will be key elements in moving from the billions to the trillions that will be needed. 

This breadth of ambition and the associated financing needs simply reinforces the importance of an integrated response from Australia across the security, foreign policy, trade and development assistance dimensions. 

The importance of innovation

I would like finally to offer some thoughts on innovation.  

The Government’s commitment to the innovation agenda is clear. 

We need to be finding ways to do things differently and better. 

We need to recognise the fiscal realities that make cost efficiency so central.

And we need to recognise that the business as usual approach will not meet the Government’s objectives and aspirations. 

Equally we need to recognise that both in the development assistance space and more broadly there have been examples of highly innovative practice in the past. 

The integrated approach adopted in the RAMSI deployment a decade ago was recognised internationally as creating best practice in post conflict missions. 

Two decades ago Australia took the lead in the UN intervention in Cambodia – the first time the UN had taken over a state and functioned as its interim government. 

More recently, Australia has been recognised as a world leader in disability-inclusive development, co-chairing GLAD, the Global Action on Disability Group.

Equally importantly our role in innovation may be supporting the environment that fuels innovation. 

Arguably the change that has made the most difference in the Pacific and PNG in the last 20 years has been the introduction of mobile telephony.

Governments and donors had almost nothing to do with funding this, but they did support or allow policy reforms that enabled the private sector and consumers to make this change – and banks, with donor help, are now driving a second wave of changes through mobile banking, bringing huge numbers of people into the modern economy by giving them the opportunity to save and borrow. 

It isn’t that we were never innovative and must start now. 

Rather it is that innovation needs to become core to our business.

That is why the Foreign Minister announced the creation of the innovationXchange in March last year, which has been a catalyst for innovation across DFAT. 

We know that effective states supporting inclusive economic development is the only way to make sustainable and tangible differences in the life of citizens – and that this is a long game. 

But there is also an imperative to deliver results that make an actual difference in people’s lives today.      

We need to think about risk in a different way, and trial new approaches as we try and meet both these short term and long term objectives. 

The short term, activity level innovations are easier to trial and test. 

They lend themselves to using the Silicon Valley “fail fast” approach. 

We need to be doing more of these. 

And when they succeed we need to have the architecture and relationships in place with partner governments and the private sector so we can scale up these approaches. 

The innovations designed to support long term transformational change in partner countries are of a different order. 

Supporting economic reforms and institutional and capability development are slow burn investments and the results do not come in a predictable fashion. 

The Australian aid program’s support to the Coalitions for Change project in the Philippines contributed to the introduction of new tobacco taxation with major revenue and potential public health benefits, gaining an unprecedented 58 per cent increase in the health budget, and approximately AUD $644 million directed to more accessible health services for about 45 million people. 

Success in these sorts of project often seems to rely on luck. 

But as Seneca says, “luck is where preparation meets opportunity”. 

Identifying when these investments are failing and when they represent effective preparation – that is, ready to pounce on the opportunity – is not straightforward. 

These decisions, like much foreign policy, rely more on art and judgement.

The ability to make the right choices in a world where there is limited evidence and much uncertainty reinforces the importance of ensuring that we have both the right internal capability and the ability to harness external capability. 

It is why our current focus on capability is so central. 

Conclusion

Everyone involved in the aid and development business knows that it is no science, and that wishing for an automated direct relationship between a given set of inputs and a set of desired outcomes is a path to almost certain disappointment and possible ruin. 

Every person in this room will have tales to tell of hard lessons learnt the hard way.

But at the same time, we must remind ourselves - and remind those who would pour scorn on the capacity of cleverly directed and delivered aid to make a difference – that we do know some things about the preconditions for successful development. 

If we accept that, we can be confident that we can continue to learn more and build on past successes.

If old ideas haven’t worked, or no longer work, we must abandon them for new ones. 

That’s why the Foreign Minister has such a deliberate focus on innovation and testing new paths for the delivery of effective and targeted aid. 

And why she has encouraged DFAT to think creatively, to experiment and to take some judicious and considered risks.

And that represents a great opportunity for all those with deep development expertise to participate in a new type of discussion.  


Last Updated: 10 February 2016
Peter Varghese AO, Secretary, Department of Foreign Affairs and Trade