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Some aspects of the OQSI strategy to help close the main gaps in Agenda 2030 performance

In the recent article: Practical solutions to Agenda 2030 performance deficits - OQSI release performance, sustainability & climate impact criteria we gave the impression that OQSI has released their new criteria. Several readers informed us that there was no mention of this on either the GBF, Boolean Library or OQSI sites. In the meantime, the OQSI informed that the article was misleading because the criteria are only likely to be released later subject to a demanding schedule

In order to compensate we asked GBF if more informatuion could be issued in order to provide our readership with a more informed coverage on:
  • why these are being developed?
  • what are the main elements?
  • when the due diligence procedures will be released?
The GBF organized a video conference including key SEEL and OQSI people working on this issue. This lasted several hours but a considerable amount of interesting information was received. We present the relevant information below.

Why these are being developed?

As explained in the original article, the UN's 2019 Sustainable Development Report on the progress of Agenda 2030's 17 Sustainable Development Goals (SDGs) highlighted the fact that three SDGs were not performing well and appeared to be inversely correlated to economic growth. The SDGs concerned are Reduced Inequalities (SDG 10), Responsible Consumption and Production (SDG 12) and Climate Action (SDG 13).

SDG 10 Reduced inequalities

The reason this, in itself, is an important indicator is that it is additional evidence to add to the fact that current macroeconomic policies, based on data covering the last 35 years, and particularly during the last decade, have progressively reduced the real incomes of the lowest 40th percentile of the population in most countries and to a greater extent in low income countries. This is why there are difficulties facing SDG 10 when there is "economic growth".

SDG 12 Responsible consumption and production

The practice of economic activities is made up of the series of chains linking production with consumption and since, as yet, the change in practices towards more sustainable operations is so slow this is why SDG 12 is not correlated to economic growth. It should be noted that SDG 12 is actually what makes up the main components of the whole economy. In spite of SDG 12's central importance some 70% of the indicators under this SDG have not yet been specified.

SDG 13 Climate action

It is self-evident that if the main components of the economy in the form of microeconomic units are not moderating or reducing their impacts on carrying capacity, the climatic conditions will become progressively worse. Some confusion remains in this vital area as a resilt of the fact that some 65% of the indicators for this SDG have still not been specified.

In summary these three SDGs are parts of a vicious cycle which governments and development organizations are having difficulty in eliminating.

The Open Quality Standards Initiative (OQSI) Working Group on Due Diligence Design Procedures (WG3DP) is coordinating an effort to help resolve this challenge. OQSI is the quality standards unit of the George Boole Foundation which is working closely with SEEL whose function is to ensure that recommendations can be supported by appropriate information management systems such as the SDGToolkit. On the side of macroeconomics the Development Intelligence Organization (DIO) is contributing to ensure that procedures can support economic and financial feasibility as well as for governments to provide policy frameworks that can help reduce real incomes disparity

What are the main elements?

In summary, the OQSI and the DIO have concluded that the main elements of a solution include action to bring about:
  • Fundamental changes in development economics theory and practice to align policy frameworks with micro-economic, project and programme objectives under Agenda 2030 and sustainable real economic growth in general;
  • Fundamental changes in project design and implementation standards based on due diligence procedures to bake-in climate action.
REQUIRED CHANGES IN DEVELOPMENT ECONOMICS

Internal workshops organized by the George Boole Foundation over the last 10 years have contributed to significant advances in development economics. The main problem is that development economics is largely concerned with supply side components or production and supply components of the economy which, if organized appropriately led to employment and rising incomes as a function of the evolution in productivity. The most appropriate model for development economists is therefore the Production, Accessibility and Consumption Model (PACM) that provides guidance on possible policies to reduce income disparity, raise profitability while securing real economic growth.

However, many countries deploy macroeconomic policies founded on the Aggregate Demand Model (ADM) and also apply monetary policies pursuing the same ends of demand management based on the Quantity Theory of Money (QTM). The result is what has been described above, especially in terms of disparity in incomes.

Savings and debt-based "growth"

Although this is a process initiated in the 1970s, economic growth under conventional macroeconomic policies has been increasingly based on debt. Up until 2008, the debt was based on fractional reserve banking where the source of funds used as a reserve were from savings by constituents and companies. These funds are endogenous or generated from within the supply side of the economy. There was, as a result, a tenuous relationship between supply side growth arising from investments based on loans and savings.

Savings based investment and growth

Most who work in the sphere of development economics know that community-based savings and loan organizations, even involving very low income groups, combined with adequate levels of guidance provided by extension services have been a successful foundation for steady relatively inflation-free growth.

During the period 1945 through to 1985 much of the purchase of houses, by a range of income groups, was based on savings banks or mutual building societies paying savers a reasonable interest then adding a small margin to lend the saved funds to house buyers leaving the ownership of the house in the hands of the mutual as a guarantee until the loan repayment was completed.

However, the growth in financialization which started in the 1970s when the USA moved off the Gold Standard, and accelerated when Black & Scholes developed a derivatives pricing model to minimize risk, this resulted in increasing amounts of bank securities (assets) being derivatives. These were made up of collections of loan portfolios, such as mortgages and which generated a monthly income for whoever held these as "assets". Inappropriate risk classifications, or "ratings", exaggerated the ability of mortgagees to pay the premiums across a range of interest rates. However, a large proportion of mortgagees were at their ability to pay limit when they entered into these agreements. Therefore, when interest rates were raised these derivatives lost their value because mortgagees were no longer able to cover their premiums. This led to the 2008 banking crisis.

The destruction of savings

However, following the 2008 crash the broadly applied monetary policy was introduced as quantitative easing (QE) which lowered interest rates to close to zero. This has, effectively, destroyed the attractiveness of saving and indeed, many retired people and pension funds relying on interest on savings accounts as income, have since faced significant prejudice and difficulties. However, the overall impact has been that economic development has become now dependent on debt raised in banks.

The diversion of money into assets, including land and real estate
Assets, the missing QTM variable

M.V = P.Y ..... (i)
Where:

M is the total money in circulation; V is the velocity of circulation; P is the price level ; Y is real value of final expenditures.


The section below has been updated
to reflect the latest state
of knowledge on this topic

Introducing "a" as asset holdings and "k" as savings, that is, money not circulating but invested in assets such as land, shares and stocks, velocity approximates 1 and "k" at low interest rates tends towards 0, so the function changes to:

M = (P. Y) + (a + k) ..... (ii)


or:
M - (a + k)
=P . Y ..... (iii)

As can be seen as assets rise and prices are stable, real income falls because M falls.

See research document (pdf): A New Real Theory of Money


With low interest rates and investment being based on loans a diversion of such funds into assets and away from productive investment has occurred. A considerable amount of such funds have gone into land-intensive activities in low income countries similar to the land-grabs that are occurring worldwide to build select tourist attractions and accommodation as well as simply to hold land as an asset because it is often inflation proof. A considerable amount of the motivation for rain forest destruction is this economic drive because no matter what the land will be used for its value, once made more accessible, rises significantly. The land grab issues has been covered in an article on this site see: IWSAT 2019 conclusions. In higher and middle income countries investment in urban real estate has also locked up funds in such assets as well as in stocks and shares all funded on the basis of low interest loans.

The monetarism myth of demand led growth

One of the assertions for applying the combination of low interest rates was that this would encourage investment and generate demand leading to economic growth. This has not been the result of this policy over the last decade as a result of the diversion of funds into assets as described in the previous section. In fact the risks associated with land and real estate purchase of share buy backs are considered to be almost risk free whereas investments in agricultural production on small units is considered to be high. As a result, in spite of low base rates, banks are requesting the payment of high interest rates and, of course, land or real estate as collateral. This has created a resistance to investment for growth. On the other hand many small farmers who have taken on production credit (loans) from input suppliers have ended up losing their land as a result of yield variations, associated with tragic social consequences.

As a result investment has been lower than projected, growth has been relatively insipid, in spite of low interest rates and real incomes of the lowest 40 percentile have continued to decline.

Fundamental theoretical errors

The development work conducted under the Real Incomes Approach to economics has revealed that the reason that QE did not generate the expected results is because the monetary model used to justify this policy is flawed. This model, the Quantity Theory of Money (QTM) makes use of a formula but the formula does not contain any variable that represents assets (see left). Therefore, as asset holdings increase, thereby withdrawing these funds from the existing "money volume" in circulation in the supply side, real incomes decline in the rest of the economy resulting in lower consumption and lower economic growth, and, as a result, little or no inflation.

REQUIRED CHANGES


OQSI have estimated that the necessary training in improved due diligence procedures for project, programme and policy designers can be accelerated and overall costs radically reduced using cloud-based analytical tools.

This can contribute to significant improvements in project, programme and policy sustainability and performance

It is apparent that the ADM approach has been associated with disjointed development, uncontrolled asset growth, monetary growth based on debt as opposed to supply side productivity, a persistent problem of income disparity with very low purchasing power within the lowest 40th percentile of populations. Within that segment of the population it is not feasible for them to save from their disposable incomes. Therefore the ADM presents problematic foundation for development economics applied to low income countries.

The DIO in collaboration with the George Boole Foundation will be publishing a foundation document containing an explanation of an alternative development economic model based on the supply side PACM approach. The PACM approach has no connection to what is known as supply side economics which in reality is a fiscal scheme founded on ADM principles. The PACM model was developed by the Real Incomes Approach to economics. This approach gives full recognition to the fact that 80% of real economic growth arises from learning, technological and technique changes arising from the acquisition of tacit and explicit knowledge and the process of practical innovation.

This document will be released around the end of June 2020 through the Boolean Library.

FUNDAMENTAL CHANGES IN PROJECT DESIGN AND IMPLEMENTATION STANDARDS

The OQSI was established by the George Boole Foundation in 2010 to review and develop improved standards for the management of project cycles. In 2011 McNeill and Belko published their paper, "Towards more effective Project Management" which revealed numerous fundamental shortcomings in conventional project management systems and guidelines. The OQSI made use of these findings to help focus attention on specific gaps. There has always been a constraint associated with the lack of availability of qualified professionals able to manage the multidisciplinary details essential for development projects in the domains of agriculture and renewable resources which take adequate account of environmental and ecosystem impacts. Therefore the approach by OQSI has been two pronged:
  • The development of due diligence procedures for project, programme and policy design as well as implementation management
  • The development of cloud-based analytical tools for applying these procedures enabling a low cost delivery of the required capabilities
The cloud-based tool development assignments have been managed by Navatec.com and SEEL.

In 2015 the UN introduced Agenda 2030 and the 17 Sustainable Development Goals which created difficulties for a large number of design teams in how to relate the national indicators, where they existed, to multi strand and sometimes multi-project solutions to the national challenges. The human resources constraints factor was made more apparent. As a result, it was decided to switch from a fully integrated analytical tool structure developed at Navatec.com to a tool library to provide more flexibility and accessibility to these tools globally and, in particular, to small teams in lower income countries. In this way teams can work with any other management system. Therefore the SDGToolkit was developed to help generate the required information for all critical considerations necessary in well structured project designs.

CHANGES INTRODUCED

There are practical difficulties associated with the fact that there are deficits in data series, many indicators are not specified and there is an absolute deficit in human resources able to handle the wide range of specialized topics necessary to design sustainable projects.
OQSI Evaluation criteria 2020
within the climate action critical path



The critical path lies within the green frames
Such projects need to be economically and financially feasible while contributing to the mitigation of climate change. As a result a wide range of projects are in train and supported because of their potential contribution to sustainable development and reducing climatic impacts but they often contain inadequate evidence to demonstrate any synergy between performance, sustainability and climatic effects.

To assist project teams, the OQSI has developed a due diligence protocol that includes sustainability as a performance criterion and then linke sustainability to equilibrium criteria to establish the state of carrying capacity, to indicate associated climatic impacts. This is achieved by imposing a critical path across the whole of the due diligence design procedures that includes climate action as a function of carrying capacity.

The OQSI has introduced more practical bases for project evaluation by adding "coherence" and "resilience" to the standard OECD DAC criteria but OQSI do not consider the OECD's new element of "cohesion" to be useful since it is difficult to apply this in a quantitative or data specification sense. Coherence is easier to handle in terms of cross-compliance to common standards applied across multi-project programmers, a common requirement in the SDG initiatives. Resilience was added in order to enable assessments of risk and sensitivity arising from known dependencies on critical factor or environmental constraints. Currently, none of the OECD citeria account for risk and uncertainty. In terms of sustainability criteria OQSI has added "carrying capacity" as the critical link to climate action. The criteria for acceptance of a project in terms of climate change is carrying capacities that are neutral or growing by reducing climatic impacts. Negative carrying capacity is a basis for project rejection on the basis of the design being defective. In terms of implementation evaluations, negative outcomes would rank the project as a failure.

Responding to evaluation cycle transitions

During 2018/2019 OQSI evaluated the OECD DAC criteria. In the guidelines the OECD state that their criteria are normative but that evaluators should apply them according to their own discretion as they see fit. In order to improve the effectiveness and utility of evaluation criteria the OQSI has a different approach. This is because what is being evaluated changes according to the stage of the project cycle. The OQSI are drawing up guidelines which will be posted online covering the following cycle stage targets:

Distinct phase-specific evaluation targets in project cycle


The OQSI is completing an online reference for the procedural guidelines for the application of performance criteria for each type of phase-specific evaluation target


ERR-Economic Rates of Return

In the recent DIO-GBR report, "The impact of trends in the international development environment on project performance", is is stated that by 2000 the complexity of projects in terms of the needs to analyse and understand the interactions of an increasing number of factors had increased significantly over the state of affairs in 1960. The Millennium Development Goals (MDGs) integrated a range of factors in project design which increased the complexity still further and then in 2015 the Sustainable Development Goals (SDGs) increased the complexity of required analyses during project design phases. On the basis of a simple Systems Complexity Index (SCI), between 1960 and 2010 project complexity increased by a factor of 6 and the percentage of projects being subjected to ERRs fell by a factor of 4.75. In other words in 2010 only about 20% of World Bank projects were subject to ERR before approval. One of the justifications provided for the reduction in cost-benefit analysis (CBA) is that many associated project outputs and impacts are difficult to calculate in terms of “market prices”. In such cases the preferred methods is to measure cost-effectiveness (CEA) or the least outlay of resources input to secure some quantified output. The World Bank reports do not, however, provide statistics on the numbers of projects subjected to CEA. There are legitimate reasons for rejecting this notion justifying the substitution of CEA for CBA.

According to SEEL, and based on some 50 years of project evaluation and appraisals, the proportion of projects subjected to cost-effectiveness analysis remains insignificant. It is estimated to have varied at around 20%-30% of projects over the same period, As a result, CEA has not compensated for the decline in application of CBA and ERR. The outcome has been a significant decline in the quality of project designs and feasibility assessments across the board.

Based on the World Bank Evaluation Group’s assessment of the state of project assessments of those reviewed and which had been subjected to CBA only one appears to have been executed correctly. The required training and capability to conduct such procedures and in particular, in the application of appropriate decision analysis techniques, is inadequately developed within economic development project design personnel and current project cycle management procedures do not cover these adequately.
The decline ERR applied to development projects: 1960-2010


Source: "The impact of trends in the international development environment on project performance", DIO-GBF, 2020


The graph on the right hand side shows these trends. As can be readily appreciated not only has the essential economic justifications for projects been radically reduced, the complexity and need for more complex analyses has increased significantly.

The OQSI has reintroduced ERR as a basic requirement of all projects.

RRE Rates of Return to Environment/Ecosystem

In order to impose quantitative comparative measure the OQSI has introduced a Rates of Return to Environment (RRE) relating to the state of the environment and ecosystem. Rates of Return to Environment (RRE) are essentially the physical and eco-community impact of a project in terms of the dynamic status of physical and living system components.

Delivering climate action and economic development while avoiding project failure
How practical is all of this?

We are arranging for authorization to post a recent article by Nevit Turk, the economics correspondent of APE-Agence Presse Européenne.

This contains an interesting recent interview on the ramifications of the new OQSI evaluation criteria and likely benefits with Hector McNeill, Director of the George Boole Foundation.

In a short virtual media event the OQSI spokesperson explained that the trade-off between ERR and RRE when applied using the OQSI 3DP avoids over-ambitious and under-ambitious project designs, both of which are destined to have disappointing development impacts, including failure. Project failures account for around 35% of projects representing around $75 billion annual losses each year and associated environmental damage or failure to implement sustainable actions. The OQSI due diligence approach is designed to raise the probability of designs addressing climate action requirements while remaining economically and financially feasible and, as a result, delivering substantive development impacts.

Posted: 20200331
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  Author:   APEurope Development Economics team:     devecon@apeurope.org         Source:   DIO Policy Task Force:     strategies@developmentintelligence.org


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