MDGs Vs DIGs

I had blogged sometime back about the fact that our development discourse favors the wealth-redistribution way to poverty eradication over the wealth-creation path. In this context, the distinction drawn by Erik Reinert between "development economics (i.e. radically changing the productive structures of poor countries) and palliative economics (i.e. easing the pains of economic misery)" assumes relevance.

The most high-profile symbol of the wealth-redistribution or palliative economics are the UN's Millennium Development Goals (MDGs). It focuses on the provisioning of eight social sector services and relies on foreign aid to contribute a substantial share of its financing needs. Harvard Professor Stephen Peterson has a very relevant article that throws in a word of caution on the obsessive pursuit of the MDGs. His thesis reads,

"The Millennium Development Goals (MDGs) are not the best bet for the bottom billion: they have never been adequately funded, are unlikely to be adequately funded, are fiscally unsustainable, and not the best investment for poor countries in terms of level and certainty of return. The global economic crisis requires a rethink of development, a return to fundamentals, a return to growth and a return to fiscal probity."

He illustrates this with the example of education Vs roads,

"The MDGs are not the best investment decision in terms of pro-poor growth multipliers. Investment in education, for example does not have a clear impact on growth whereas, there is considerable evidence that tertiary roads have significant growth multipliers and pro-poor outcomes."

His alternative proposal is

"The MDGs should be replaced with the following strategy: DIGs (Decadal Infrastructure Goals). DIGs has four components:
• DTGs: decade tax goals
• DAGs: decade agriculture goals
• DRGs: decade road goals
• DPGs: decade power goals

... The DIGs reduce the risk of development as we know how to design, implement, and finance them and their value and impact are certain."

He also advocates that foreign aid should be utilized for meeting DIGs and not MDGs,

"Social services are long term liabilities (principally salaries) and should be funded by domestic revenue not volatile foreign aid. A 'better bet' for using foreign aid in Africa is to have it focus on the DIGs (revenue, roads, power) which have proven growth multipliers that can in turn expand domestic revenue for social services. If African societies want social services, then they must rely on their own pockets, not those of foreigners — taxes are the price of living in a civilized society."

His opposition to aid-financed social sector investments is two-fold - its benefits are questionable (mostly diffuse and long-drawn out) and it creates assets whose maintenance requires massive recurring expenditure (salaries, O&M costs, consumables etc) which are left to the host governments (and who are most often unable to bear the burden). In addition comes the reality of developed economies facing a decade or more of belt-tightening when the already miniscule aid flow are likely to decline further. And, in any case, the MDG-fulfilling aid requirement was too large for current aid trends to make any meaningful dent.

I am inclined to agree with the underlying premise behind all the aforementioned, though not the sweeping tenor of the generalization. While I agree that the focus should shift to DIGs, it should not be at the expense of MDGs. In many respects, they are inter-related. A healthy and well-educated population is a pre-requisite for any wealth-creation.

In particular, the focus on roads and electricity cannot be over-emphasized. They are the fundamental building blocks for success with any development or governance intervention and literally the oxygen of economic growth. A "Big Push" in either has the potential to be the closest to silver-bullet interventions in poverty eradication.

Prof Peterson is also right to highlight the importance of revenue mobilization and the need to revamp public finance systems in developing countries. Foreign aid can at best be small complements, the bulk of the massive resources - for achieving both social sector and infrastructure goals - have to come from domestic tax and non-tax revenues. And there are numerous opportunities for quick-wins by improving the revenue mobilization machinery with easy and commonplace intiatives.