A new paradigm in development assistance – harnessing the private sector

29 April 2014

In the history of nations few documents carry the significance of Magna Carta. It is rightly seen as a historic foundation stone of the English common law. Constitutional law, criminal law, even what we today think of as human rights – these all trace a lineage back to the agreement struck between King John and his barons in 1215. Originally drafted and signed as a means of limiting the executive powers of a monarch it has become one of the defining codes of Western Civilisation.

People, if asked, would hopefully have some awareness of the influence of Magna Carta on issues relating to personal freedom and the rule of law, however what is less well known is its influence on financial matters such as property rights, rents and succession. In other words, rights that secured economic livelihoods and provided a foundation for growth and social stability.

The first clause deals with the Church. The second and third clauses of the Great Charter deal with inheritance. The fourth and fifth do also, setting out the right of a guardian of an underage heir to derive an income from the heir's land, provided he, quote "shall keep up the houses, parks, fishponds, streams, mills and other things pertaining to the land."

The sixth, seventh and eighth clauses deal with marriage, perhaps the first women's rights in history – that a widow shall not be compelled to remarry, and that she "shall forthwith and without difficulty have her marriage portion and inheritance".

The ninth clause prevents the King seizing land or rent for any debt, as long as the debtor has the means to repay, and so on for another 50 or so clauses. The barons were, understandably, keen to secure their ongoing economic livelihoods.

Now the 21st Century is a long way from the events of Runnymeade, but one thing that has not changed in 799 years is the importance of creating an environment in which individuals can pursue economic opportunities to improve their standard of living and to fulfil what is a universal desire to live in peace and security. While serving as a foundation for personal liberty and putting limits on power, Magna Carta recognised the critical importance of economic freedom. The authors of this Great Charter clearly recognised the interdependence between personal freedom and economic freedom.

There is of course no such thing as absolute freedom, as we're all constrained in our choices by the law, norms of society and indeed by our own personal resources. The world's poor are more constrained in their choices than those that live in more prosperous societies. Extreme poverty prevents people from accessing sufficient food, pursuing work opportunities by travelling or relocating, undertaking education or engaging in the broader economy.

Implicitly, Magna Carta recognised that the ability to pursue economic opportunities was central to forging a sustainable social compact and ultimately, as we would see it today, the ability to lift standards and build stable, cohesive societies.

So tonight I will discuss a new paradigm in foreign aid or international development assistance, driven by the reform agenda of the Coalition Government. Our new approach to development assistance will reflect Australian values, and our commitment to reducing poverty and lifting living standards through sustainable economic growth.

Poverty is not just a tragedy in itself, in human terms it can undermine broader peace and stability, not only in a country and its region, but it can also undermine global security. A decade and a half ago both Britain and Australia were among the countries that signed up to a shared set of goals to reduce global poverty. The Millennium Development Goals were an unprecedented, historic achievement and international recognition that poverty was a global problem that could not be ignored. These goals were to eradicate hunger, improve child mortality, maternal health, communicable diseases and the like.

Next year, the world will be working to sign a successor agreement to the Millennium Development Goals. However the global development context today is very different to the one that forged the MDGs in the year 2000. Our understanding of the drivers of poverty reduction has evolved. In recent decades there has been an economic transformation in many countries, particularly in our Indian Ocean Asia-Pacific region, that has lifted – literally – hundreds of millions of people out of poverty.

Economic growth, driven by the private sector and supported by trade liberalisation, has been the key to reducing poverty on a large scale. The opening of China's economy to the world has been the most dramatic achievement – in terms of speed and scale – in the reduction of poverty in human history. The model of an open, export-orientated economy with a flourishing private sector gives developing countries the best chance of increasing prosperity and living standards.

Most of the world's poor today live in middle-income countries, not in low-income countries. Two-thirds of Australia's development partners in the Indo-Pacific region have achieved middle-income status. Rapid economic expansion has lifted national incomes in emerging economies, but not all citizens have shared in the growth.

The World Bank reports for example that Indonesia's Gross Domestic Product is almost $900 billion, on track to a trillion dollar economy, with a large and rapidly growing middle class. Yet it is also home to over 100 million people who live on less than $2 per day.

While Australia's development assistance program of over half a billion dollars per year to Indonesia targets those in need this represents less than 0.1 per cent of Indonesia's economy. Indonesia itself has a modest foreign aid program and recently provided support to Australia in the wake of Queensland's devastating floods.

This economic transformation has not reached all developing countries. In our regional neighbourhood, there are still many, particularly smaller economies, that have not seen the benefits of growth that has occurred more broadly around the world. For some of those countries, aid still constitutes a major proportion of national economic inflows and despite billions in foreign aid over recent years, some nations will not meet one of their Millennium Development Goals by 2015 – and in some instances have gone backwards. This cannot be allowed to continue. It is time to change the old ways of doing things.

We must recognise that globally, the economic transformations underway are having far-reaching implications. Aid flows into many developing countries are now dwarfed by foreign direct investment, equity flows and remittances. Middle-income countries have significant and growing domestic resources to finance their own development.

I believe that Australia's development assistance strategies need to reflect the fundamental changes that have taken place, as well as the differences between countries' economic growth, and that we should target key constraints to sustainable growth.

In response to these forces of change, and to shape future events, the Australian Government will embrace a new paradigm for its overseas development budget. First, we will promote prosperity by enabling the private sector to drive growth. Fighting poverty starts with economic growth. Sustainable economic growth driven by the private sector is the first element of what I see as the new paradigm. When economies grow, more people move out of poverty. The countries that have seen the most dramatic reductions in poverty in recent years are those that have had high growth and have been able to sustain it.

World Bank development indicators show that the private sector generates 90 per cent of jobs in developing countries, and funds over 60 per cent of the investment there. Over 80 per cent of government revenue in low and middle income countries comes from company taxes, resource rents and income tax paid as a result of employee wages. Private corporations provide a critical – and growing – share of banking, communications services, and also health and education services. And in almost every economy around the world the private sector plays the over-riding role as a driver of exports.

The private sector is – of course – primarily concerned with producing profits for its shareholders. It is not primarily concerned with the world's poor, although many corporations play a vital role through a commitment to social responsibility. This does not detract from the fact that a strong private sector will deliver higher growth and more jobs – which is central to reducing poverty.

A large part of our development effort needs to be about providing an environment in which the private sector can thrive. Australia's development assistance program will now respond to this reality. It will become a key plank of the overall government policy of 'Economic Diplomacy' that seeks to leverage all aspects of our international engagement in pursuit of trade, job creation and growth.

Just as the goal of traditional diplomacy is peace, the goal of economic diplomacy is prosperity. Economic development will be at the heart of Australia's aid program so that we maximise our contribution to sustainable economic growth and poverty reduction in our neighbourhood and beyond.

We will seek to identify the key constraints to economic growth and private sector development and focus on investments that target those constraints. This requires using our development assistance budget to explore innovative ways to promote private sector growth and to engage directly with the private sector in achieving development outcomes.

In the near future I will announce the detail of a new performance framework for the aid program that will drive the necessary change to link performance with funding – so we can reassure the taxpayers their money is spent on an aid program that is responsible, affordable and sustainable. There will be a strong focus on the results from our investments and value-for-money.

The role of governments and institutions should be clarified. In many countries, economic growth and private sector development are hindered by poor policy choices. They are held back by poor governments, weak governance systems, a lack of public accountability, corruption, personality-driven politics, and the threat of conflict. Precisely some of the issues that led to the drafting of the Magna Carta!

Consistent with the principals of the Magna Carta, three elements are central for growth and poverty reduction - the rule of law, property rights and a strong, credible business regulatory environment.

It is a fact that the institutions of law and justice support property rights, delivering community safety and providing non-violent ways of resolving disputes. Without the elements, private sector-led growth can't flourish. Finance, infrastructure and access to a healthy and educated workforce are also critical in order to attract investment.

I have also made the economic empowerment of women and girls a priority for our aid program. Expanding women's participation in the economy is a strong driver of growth. It is estimated that the Asia-Pacific alone loses around US$50 billion a year because of limited female access to jobs and an estimated $30 billion a year is lost because of poor female education. Investing in women is not just the right thing to do; it is the smart thing to do. That is why a focus of our program will be to empower women entrepreneurs in our region.

Market places are the centre of economic activity in many countries, particularly in the Pacific but local markets are often unsafe places for women.In Papua New Guinea, Vanuatu, Solomon Islands and Fiji we are supporting efforts to make markets safer places for women traders. On a recent visit to Lae, I witnessed our Australian Federal Police officers embedded with the PNG police patrolling the fresh fruit and vegetable markets – and the women told me their presence made a world of difference.

We also know growth must be shared across a society. However, poverty can persist despite growth in the broader economy and it's vital that barriers to economic engagement are reduced.

In these first seven months as Foreign Minister, one of my highest priorities in this area has been to adopt an 'aid for trade' policy which uses foreign aid to connect businesses in developing countries to regional and global supply chains. This includes provision of infrastructure, training and business support. It also involves helping countries reform their trade and economic policies and improve their capacity to negotiate trade agreements. On average, each dollar invested in aid for trade initiatives increases recipient country exports by eight dollars.

Our new development paradigm will involve new kinds of partnerships between the private sector and government. The private sector brings with it innovative approaches, and different business models, which may provide solutions for otherwise intractable development challenges.

Private financing can help bring development solutions to scale when public resources are not sufficient. I am already working with private sector partners in new ways to promote development. For example, Australia is contributing $20 million to the Philippines Public-Private Partnership Centre to help prepare, tender and award 26 PPP infrastructure projects, valued at over $7 billion.

This work is now informing a similar pilot scheme in Indonesia, as part of a project to tackle infrastructure shortfalls in the APEC region. It's estimated that $8 trillion worth of infrastructure will be needed for the APEC region alone by 2020. This infrastructure – like the Australian funded Cao Lanh Bridge in Vietnam – can transform local economies by enabling people to travel more easily to access education, employment, and markets for trade.

The Australian Government has entered into a partnership with Carnival Cruise, the cruise liner company that provides increased economic opportunities for the Pacific Island nations through the tourism industry. Now cruising is big business and Carnival brings over a quarter of a million tourists to the Pacific each year. Linking local Pacific Island industries to Carnival through this partnership is increasing local earnings. Locally hired staff, locally sourced bottled water and coffee, taxi drivers, cafes, local tourism operators and even fruit and vegetable growers are all beneficiaries of the tourism supply chain now.

Our new development paradigm will also recognise the changing source of finance for development. Large and growing volumes of finance are now becoming available to developing countries, with the majority of funds coming from the private sector, remittances and domestic taxation.

The relative proportion of Official Development Assistance is declining, as remittances, investment and tax collections are rising. In 2013, the Global Official Development Assistance was $134 billion, remittances were $414 billion, foreign direct investment was $697 billion and tax revenues in developing countries were $7.7 trillion. These facts challenge the traditional approach to development.

Our new development program will not be charity, rather an investment in the future of our region and as investors we must see a return. We will focus on promoting economic growth, trade, investment and financial flows as the necessary preconditions for a country funding its own development. ODA can no longer be seen as a panacea in isolation from economic drivers. Instead, it should be seen as a catalyst for leveraging other sources of finance.

In the health sector, for example, Australia is part of the GAVI Alliance, which is pursuing partnerships with the private sector to drive down global vaccine prices and so vaccinate more children around the world.

We'll target impediments to financial flows, including market failures, inadequate or underutilised financial instruments and poor domestic governance. We will also work with our partners to identify specific market failures, and address them through well targeted projects and programs to create governance environments that attract international, particularly private sector investment. We will seek to utilise a broader range of financial instruments, either ourselves or through our partners that help manage investment risks that prevent finance flowing to development projects.

Ultimately, we want developing countries to mobilise their own domestic resources for development. A broad and well-balanced tax base is vital for building vibrant, sustainable states. For example, our Regional Assistance Mission to Solomon Islands, which stabilised that country post conflict, has also supported Solomon Islands to improve revenue collection and tax compliance. Tax revenues of $379 million dollars were collected in 2003 but through Australian and New Zealand officials working with Solomon Island officials and improving governance, we saw that rise to $1.34 billion in 2011.

Australia's development assistance program will have an increased focus on helping countries strengthen their own tax systems. Work is underway with other partner countries, including Papua New Guinea where we're helping the government modernise tax collection systems.

As well as helping government spend money more efficiently and effectively we will put more effort into growing revenues so that our partners are more able to fund our development needs.

We also need the global community to help developing countries participate in international tax regimes, to tackle illicit financial flows and to ensure tax is paid in the locations where profits are derived.

Australia will place a higher priority on the issue of domestic resources available within country as part of the G20 agenda during our presidency in 2014, with a particular focus on international tax reform that will not only benefit advanced economies but developing economies as well.

In my view, this new development paradigm will emerge globally and in coming years it must be shaped to respond to these contemporary challenges and it must be based on shared accountability and mutual responsibility. No one country, institution or organisation will have all the answers but Australia will seek to play a prominent role in this debate.

We are already forming much deeper partnerships with other like-minded countries. Indeed, already the UK Minister for International Development, Justine Greening, and I have had numerous discussions on how we can work together in countries and on innovative projects where we have a mutual interest.

Supporting drivers of economic growth and poverty reduction in our region is absolutely in our national interest as well as in the interests of all our neighbours large and small. A well-targeted program will complement our diplomatic and security efforts to promote a prosperous, growing Indo-Pacific that is more stable and more secure. This is why I've merged our former aid agency AusAID with the Department of Foreign Affairs and Trade. Foreign and aid policies now align.

Our program will offer more economic opportunities, not only for the people in our region, but also for Australians and Australian businesses seeking new markets for our goods and services.

Soon I will be releasing the detail of our new development policy which will set out how Australia's aid program will be re-shaped to more effectively promote economic growth and reduce poverty. These new policy directions will be underpinned by a set of benchmarks, or performance targets – at the policy, program and project levels that will reinforce the change required and provide a more rigorous approach to achieving value-for-money and results on the ground.

In summary, the context for development assistance has changed dramatically in just the past decade. I am convinced that aid must be a catalyst to promote economic growth and reduce poverty through a strong emphasis on 'aid for trade' and building an enabling environment for the private sector.

We will develop new kinds of partnership models that leverage finance and innovative ideas from a wider range of sources to achieve better results. And we will design and deliver development assistance programs in a way that reinforces the responsibility of partner governments to lead their own development processes and provide, at the least, basic services to their citizens.

Aid must not displace core sovereign responsibilities. I recognise that countries are increasingly rejecting the old stereotypes of aid-donor and aid-recipient relationships – and they are talking in terms of economic partnerships, development assistance relationships – and labels do matter. There must be a mutual contract between parties that share a prosperous future for humanity.

Britain and Australia's shared history is built on common laws, prosperity, security, stability, innovation, enterprise of the individual, on a recognition of economic rights and freedom as a tool for an inclusive and successful society, emanating from Magna Carta.

My vision is for a world in which the benefits of economic activity reach into every corner of every society. Our aim must be for all of humankind to have an opportunity to live with dignity. My hope is that we can eventually declare there is no longer a need for foreign aid in our region as we have been successful in eliminating abject poverty and unnecessary suffering.

There are notable examples of countries transforming from an aid-recipient to an advancing economy.

I look forward to continuing to work closely with our friends in the United Kingdom, and other like-minded countries, to promote more effective international development partnerships, with a real impact on poverty.

This is the new development paradigm.

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