22 February 2016
Shawn Clackett

DFAT: Mr Peter Varghese at the 2016 Australasian Aid Conference

10 February 2016

Peter-Varghese by India Down-Under

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

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.

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