Monday, December 20, 2010

Challenges for South-South development cooperation

[Adapted from Ratnakar Adhikari’s article in Trade Insight magazine, vol.6, No.3-4, 2010. p.25-28]

The history of South-South development cooperation (SSDC) is nearly as old as the history of North-South development aid. However, this issue has come under the scanner of development practitioners only in the recent past due primarily to their increased significance in the backdrop of the global financial crisis, which was feared to result in a global resource squeeze. Although SSDC is not likely to replace traditional development cooperation, it is likely to be of tremendous significance in the days to come—thanks mainly, but not exclusively, to the growing economic prowess of advanced developing countries.

Growing salience

The evolving dynamics of cooperation among Southern countries and its potential to contribute to global prosperity constitute probably the single major reason to discuss the growing salience SSDC. For the least-developed countries (LDCs), handicapped by several supply-side constraints to take advantage of the growing global economic integration, SSDC offers an opportunity over and above traditional official development assistance (ODA). Although the burgeoning SSDC is often ascribed only to the growing economic clout of the emerging economies, there are several factors that have contributed to this phenomenon, some of which are discussed below.

First, SSDC should be seen in a broader context of the increased economic integration among developing countries. While the LDCs were largely reliant on developed countries for trade in the past, there seems to be a trend towards increased flow of South-South trade. For example, South-South trade has nearly doubled between 1995 and 2008 to reach nearly 20 percent.1 Similarly, South-South flow of foreign direct investment (FDI) has reached 16 percent, up from 12 percent in the 1990s.

Second, there is an expectation among the partner LDCs to learn from the economic and development success of Southern donors. At a general level, the United Nations Economic and Social Council (ECOSOC), for example, argues that many Southern donors have come up with successful development models or practices, which can be more appropriately replicated in other developing countries.2

Third, due to the inability of the traditional donors to live up to their ODA promises, the LDCs have found it necessary to tap into the funding offered by Southern donors. The LDCs find such assistance more practical and efficient in terms of disbursement causing fewer significant delays compared to that of traditional donors.3 SSDC is also presumed to be based on solidarity,4 and the principle of equality, as opposed to clientalism that characterizes traditional aid relationship. Some Southern donors are found to be more flexible and responsive to the national priorities of partner countries.5

Current status of SSDC

The Reality of Aid Management Committee has compiled the disbursement data of South-South ODA from various sources for 2008 (Table). It is, however, necessary to note that unlike North-South ODA data, which are prepared by the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), due to several difficulties associated with the collection of South-South ODA data,7 the data presented below should not be considered as authoritative.

Disbursement of selected South-South ODA flows, 2008 (US$ million)
South-South donor Amount % of GNI % of total South-South ODA
Saudi Arabia 5,564 1.5 40
Venezuela 1,166–2,500 0.71–1.52 18
China 1,500–2,000 0.96–0.08 14.4
South Korea 802 0.09 5.8
Turkey 780 0.11 5.6
India 569 0.05 4.1
Taiwan 435 0.11 3.1
Brazil 356 0.04 2.6
Kuwait 283 0.18 2
South Africa 194 0.07 1.4
Thailand 178 0.07 1.3
Israel 138 0.07 1
United Arab Emirates 88 0.6
Malaysia 16 0.01 0.1
Argentina 5–10 0.003–0.005 0.07
Chile 2–3 0.003 0.02

Source: Adapted from Reality of Aid Management Committee. 2010. A Challenge to the Aid System? Special Report on South-South-South Cooperation:South Cooperation. Manila: IBON Books.

South-South ODA from the top 16 countries for which data were available reached close to US$14 billion. Four major donors, namely Saudi Arabia, Venezuela, China and India, collectively account for over 76 percent. Saudi Arabia, a major aid donor since 1973 as measured by the ODA-gross national income (GNI) ratio, provided more than US$5.5 billion in development assistance representing 1.5 percent of its GNI. This figure is 40 percent of the total development assistance provided by the top 16 developing-country donors.

Although most assistance provided by the major South-South donors is in the form of project aid, there are also components of technical cooperation, budget support and humanitarian assistance. Among the top four donors, Venezuela’s case is unique in the sense that its oil deals assume the form of balance-of-payments (BoP) support.8 However, like Northern donors, the motives behind South-South ODA are not entirely altruistic.

Saudi Arabia’s official aid policy has an explicit objective of promoting its non-oil exports. Chinese commercial interests are mainly reflected in the desire to obtain an uninterrupted supply of energy and raw material resources from partner countries. For example, when providing aid to Angola, China does not directly provide funds to the government but mandates a Chinese construction company to build infrastructure and expects the government of Angola to provide Chinese companies operating in the field of oil the right to extract oil through the acquisition of equity stakes in a national oil company or through the acquisition of licences for production.9 Similarly, India’s ODA —particularly for the construction of infrastructure—mainly to Bhutan and to a lesser extent to Nepal is aimed at securing hydroelectricity and energy for itself.10 India’s pledge of US$500 million in concessional credit facilities to resource-rich African LDCs (Burkina Faso, Chad, Equatorial Guinea, Guinea-Bissau, Ivory Cost, Mail and Senegal) and one developing country (Ghana) shows Indian tendency to follow the Chinese model for resource extraction from Africa.

Similarly, geopolitical interests are reflected in the choice of partner countries. Saudi aid is mostly provided to Arab countries. Venezuelan aid mainly goes to Latin American and Caribbean countries. Indian assistance is targeted predominantly at South Asian countries with Bhutan receiving 46 percent of total aid, and the Maldives and Afghanistan receiving 19 and 16 percent respectively. However, China’s aid is much more diversified, with Asian countries receiving 40 percent, followed by Africa (25 percent), and Latin and Central America (13 percent).11

Saudi Arabia’s support predominantly to the Muslim countries in the Arab region (including relatively better-off countries such as Turkey and Egypt, themselves donors, and Morocco compared to poor countries in sub-Saharan Africa) and two Muslim countries in South Asia (Bangladesh and Pakistan and not to Nepal and Bhutan, despite the latter being LDCs) shows the influence of religious and cultural factors in its country-selection process.12 Similarly, Brazilian technical cooperation programmes in Portuguese-speaking African countries (77 percent of its total assistance to Africa) and East Timor (96 percent of its total Asian assistance) shows the significance of the language factor.13

Solidarity interest, together with geopolitical interest, is seen dominant in the ODA provided by Venezuela, a founder member of Alternativa Bolivariana para las Americas (ALBA). This initiative focuses on integration among Latin American countries, through a “socially-oriented trade bloc”14 proposed as an alternative to the Free Trade Area of the Americas.

Challenges facing LDCs

While the growing importance of SSDC is a reality the LDCs cannot ignore, SSDC is not free of all the problems that have dogged the issue of development aid in general, and also presents additional challenges.

Tied aid

While traditional donors have made significant progress in untying aid, assistance under SSDC, particularly by the major donors, is primarily tied.15 For example, in the case of Chinese aid to Africa, 70 percent of the infrastructure construction projects have to be awarded to “approved”, mostly state-owned, Chinese companies. Although the remaining 30 percent contract can be awarded to local companies, they too are mostly established in joint-venture arrangements with Chinese companies.16 Even the labour component of the contracts is fulfilled by imported Chinese workers in countries as varied as Mauritius, Nepal and Sri Lanka.17

Similarly, at least 85 percent of the value of South-South concessional loans granted by India under its India Development Initiative was meant to be tied to Indian procurement.18 Examples include a US$40 million credit line for railway reconstruction in Angola, and a donation to Sierra Leone of US$800,000 for the construction of 400 barracks.19 Similarly, Venezuelan BoP support is primarily tied to oil imports, and Korean bilateral aid is also predominantly tied.20

Lack of transparency

There is a serious lack of accessible and comprehensive information on South-South ODA. This could be because even the major Southern donors do not have central coordinating agencies to manage and monitor development assistance at the national level. The problem is further compounded by the deliberate secrecy on both sides of the partnership.21 This is particularly so in the case of Arab donors and China. For example, sloppy distinctions between Chinese investment, loan and aid on the one hand, and "proposed", "agreed", "under construction", "concluded", "realized", "(un)confirmed" nature of supports on the other, provided by China under China-Africa technical cooperation make it almost impossible to know the exact nature and magnitude of support extended by China.22

The result is, it is difficult to collect data and make an informed analysis for policy purposes. A more maligned outcome is the difficulty in establishing which Southern donor is funding which institution in which country for what purpose. There is also the question of debt-sustainability since it is difficult to ascertain how much the partner country owes to its donors. The democratic ownership of SSDC is also under question, because such aid tends to be mostly government-to-government with little involvement of the parliament and civil society.23

Limited ownership

Although SSDC, in theory, tends to promote country ownership at the programme and project development level, it is reported that some Southern donors have preferred to fund the construction of a stadium as opposed to the priority identified by partner countries for the construction of roads. Similarly, the focus of infrastructure development on resource extraction, rather than on building productive capacity at the local level, limited use of local inputs in the process of project implementation, and the lack of a clear mechanism for technology transfer leave much to be desired.

Inadequate monitoring and evaluation

There is little public information available on the monitoring and evaluation (M&E) procedures of Southern donors.However, country experiences suggest that these donors conduct significantly fewer missions to review project progress than Northern donors. Overall, M&E systems of Southern donors seem to be largely concerned with timely project completion.24

Unlike traditional donors, which are bound by the in-built DAC peer review mechanism with a strong M&E component, Southern donors are not subjected to any such M&E mechanism. Although proposals have been made by the Group of 77 countries and non-governmental organizations to strengthen the UN Development Co-operation Forum (DCF) to serve as an alternate platform for aid negotiations to DAC, there is limited progress in this direction, primarily due to the skepticism of the traditional donors and capacity of the under-resourced UN to handle these responsibilities.25

Non-applicability of Paris Declaration

In order to enhance the effectiveness of development aid in general, traditional donors as well as partner countries signed on to the Paris Declaration on Aid Effectiveness (in 2005), which defines a number of commitments, and a set of indicators to measure progress towards 2010. The Declaration is based on five common sense tenets of ownership, alignment, harmonization, result management and mutual accountability.

However, the Declaration is not applicable to SSDC, except for a few Southern donors such as Korea and Turkey which have signed on to it in view of their impending admission to the DAC. Although the Accra Agenda for Action, issued in September 2008, recognizes the important role of SSDC in international development cooperation and considers it as a valuable complement to North-South cooperation, it does not exhort Southern donors to become parties to the Paris Declaration. This effectively means that Southern donors are not even obliged to make efforts to overcome the challenges facing traditional development cooperation.

Issues for UNLDC IV

Since development assistance is a core development agenda for the LDCs, the issue of SSDC needs to be extensively deliberated upon both in the run-up to the Fourth United Nations Conference on the Least Developed Countries as well as during the conference itself. It is indeed surprising that this issue has not so far entered the discussions in the run-up to event. Therefore, based on the challenges discussed above, the following issues are worth taking up.

First, as tied aid does not contribute much to the development of the local economy and local human capital and prevents the partner country from sourcing inputs from competitively priced sources, a target—possibly of 2021—should be set, for the gradual untying of aid by Southern donors.

Second, although project financing has been the preferred mode of funding for Southern donors, they should gradually move towards a sector-wide approach and eventually towards budgetary support.

Third, SSDC should be brought under some global process of discussions, negotiations, target setting, coordination, reporting, and monitoring and evaluation. While there is a near consensus on the need for the same, there is a considerable disagreement between developed countries and developing countries on which platform should be used. As a compromise, it is proposed that a two-track mechanism be adopted whereby DAC would continue to coordinate traditional ODA matters and DCF would be assigned the full responsibility of coordinating issues relating to South-South ODA. DCF should begin its activities by preparing a framework like the Paris Declaration for coordinating and monitoring SSDC

Fourth, partner-country governments, on their part, should commit to use the resources received from Southern donors in a transparent manner and involve all the major stakeholders, including parliament, the private sector and civil society, in the process of programme design, implementation, and monitoring and evaluation.

1 Onguglo, Bonapas. 2010. A More Dynamic & Transformative South–South Trade. International Trade Forum - Issue 2/2010., accessed 04.11.10.
2 ECOSOC. 2008. Trends in South-South and Triangular Development Cooperation. Background Study for the Development Cooperation Forum. New York: United Nations Economic and Social Council.
3 ibid, p 29.
4 See Reality of Aid Management Committee. 2010. South-South Cooperation: A Challenge to the Aid System? Special Report on South-South Cooperation 2010 of the Reality of Aid. Manila: IBON Books, pp. 1–2.
5 For example, Venezuela, Arab donors and India have provided flexible budget and BoP support to select partner countries. (Note 2, p 28).
6 ECOSOC. 2008. Note 2.
7 ECOSOC. 2009. South-South and Triangular Cooperation: Improving Information and Data. 4 November. New York: Office for ECOSOC Support and Coordination Department of Economic and Social Affairs, United Nations.
8 Note 4, p 9.
9 Paulo, Sebastian and Helmut Reisen. 2010. Eastern Donors and Western Soft Law: Towards a DAC Donor Peer Review of China and India? Development Policy Review 28 (5): 535–552, p 538.
10 Reality of Aid Management Committee. 2010. p 12. Note 2.
11 Note 4, p 9.
12 Note 4, p 11.
13 Note 2, p 18.
14 Note 2, p 20.
15 Note 2, p 30.
16 Note 4.
17 The example of Chinese workers’ involvement in Mauritius is provided by Paulo and Reisen. 2010: 538. (Note 9). The example of Nepal and Sri Lanka is based on the author’s personal observation. See also Note 2, p 32.
18 Bijoy, C.R. 2010. India: Transiting to a Global Donor. In The Reality of Aid Management Committee. 2010. (Note 4).
19 ibid.
20 Note 2, p 29.
21 Note 4, p15
22 Note 9, p 538.
23 Note 4, p 16.
24 Note 2.
25 Note 9, p 549.