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Irrational debt is defined as the provision and acceptance of a loan for which there is no logical evidence that the funds will be applied in a productive manner to achieve the stated objective. The requirement of adequately detailed evidence-based decision analysis is missing or inadequate. Decision analysis reports are required to establish the likelihood of achieving stated objectives subject to specified social, technical, economic and sustainability criteria.

During the last 30 years, the World Bank' use of economic rates of return analysis (ERR) has declined with now over 70% of projects being approved before any cost-benefit estimates are completed.
Post-Covid-19, low income countries need to terminate their participation in the globe's irrational debt spiral

Virtual workshop - Part 1
2nd-3rd May, 2020
John Penrose,
International Development Correspondent,
AgroInfoSys

A virtual workshop to identify critical institutions to help accelerate recovery in the agricultural sectors of low income countries has drawn attention to another epidemic in the reliance of too many low income countries on "irrational debt".

The result of two major evaluations of thousands of projects indicate that some major international loan institutions, during the last 30 years, have been rubber-stamping development projects without conducting prior estimates of economic rates of return. As a result environmental sustainability has had no chance to even have a role in determining optimized trade-offs to identify projects with climate-positive impacts".

This is a two part report. Part 1 deals with first day's coverage of general issues designed to hold the agricultural sector over and establish a lower risk production foundation for the future.

Part 2 will cover the second day's deliberations which covered the potential for remote technical support to reduce the costs of technical support to low income countries while, paradoxically improving project and policy design by lowering the likelihood of irrational debt and maximizing the sustainable development impact.

JP



Background

A weekend virtual workshops was convened by the Development Intelligence Organization to undertake an initial review of the progress of Covid-19 and to identify essential actions to create a positive environment for recovery in social, technical and economic terms within the context of sustainable development. This DIO workshop was organized to identify "packages" of practical solutions to minimize the economic costs of necessary changes to achieve steady recovery in agricultural production, with an emphasis on food, while mitigating the effects of Covid-19.

Whereas other forums have tended to hold back from proposals, because of uncertainty as to the overall impacts of Covid-19, it was agreed that there are some basic requirements that with, or without Covid-19, need to be strengthened. The following is drawn from the workshop conclusions contained in the DIO press release.

Agricultural sectors

Too many low income countries are over-dependent on imported food. In many cases, with the introduction or expansion of appropriate production systems, the associated risks of such dependency can be reduced while also raising the employment and income levels in rural areas. Imports are often regarded as the quick and easy short-to medium terms substitute for objective sustainable economic development strategies. What were short term decisions have become permanent operations exposing the countries concerned to the current risks of potential lack of food associated with Covid-19.

Strategic priorities

The ongoing experience with the evolution of the Covid-19 epidemic is exposing strategic weaknesses and areas of elevated risks to wellbeing related to the risk of death, necessary social distancing, unemployment and declining incomes and purchasing power and the depletion of strategic food stores where these exist. Covid-19 has served to refocus attention on a need for better defined strategic priorities and actions to implant production systems that are lower risk and sustainable in economic, income distribution and climate action terms. During the last 30 years, in high income and low income countries alike, the development models applied and the macroeconomic policy frameworks applied have become debt-driven as opposed to emphasizing sustainability. Above all, policies have contributed to rising income disparities accentuating inequalities.

Transitions in funding

Therefore, the current crisis has brought into focus the precarious nature of debt-based aid for recipient countries as well as the nature of private investment and trade contract agreements whose penalty clauses might be applied where governments are considered not to have taken decisions that comply with undertakings.

Major changes can be introduced to the way in which technical aid is delivered which can satisfy requirements while reducing costs significantly. This is important because across the board the budgets assigned to international development are unlikely to remain at the current levels and the national budgets from government revenues, within most low income countries, will fall.

The state of real incomes and cash reserves of some low income countries, which now have far larger populations, will revert back to the circumstances that prevailed in the 1960s. It is notable that with the first publications of the United Nations Conference on Trade and Development (UNCTAD) there was much more emphasis on practical solutions for the development of endogenous growth in low income countries based on import substitution and adding value to exports by moving from primary to semi and fully-processed output. UNCTAD has moved a long way from this perspective and has, as have many international agencies, transitioned towards the prioritization of financial flows, demand-based policy making and debt. The original deliberations and direction of UNCTAD, like those of FAO, had a more substantive input from experienced practitioners from low income countries and, as a result, contained much in the way of practical solutions.

Mutuals, savings and loans



Credits: World Food Programme; Photo by Mark Naftalin
There will continue to be a need to support another form of activity previously promoted within UNCTAD proceedings and subject to many excellent FAO publications in the 1960s. These relate to mutual or cooperative local initiatives associated with savings and loan activities. These systems remain effective within low income communities to the degree that they remain separated from the normal debt-based banking and other financial intermediation networks. One of the poorly appreciated realities of mutuals is that the fact that shareholders are the workforce of the mutual and bonuses come out of end of year performance results. This structure is far lower cost, in terms of operational unit costs and unit output price setting. Mutuals can compete with external shareholder owned companies and plcs by operating with higher real incomes for the workforce and around 15% lower unit prices for products or services supplied. This is one of the reasons the Real Incomes Approach to development economics has identified mutuals as one of the most appropriate operational structures to deliver the benefits of the production, accessibility and consumption (PAC) growth model.

Extension services

To further enhance the sustainability of mutual and community-based development of agriculture and related aspects of local development, including health provisions, the role of extension services needs to become a mainstream priority of national agricultural policies. One of the important roles of extension services is the evaluation of the efficacy of inputs available knowledge or products and services on the market, to help provide users, farmers and cooperative production system technical staff with independent advice and the ability to identify those inputs and production systems that can prove to be sustainable in terms of food, climatic impacts and financial resilience. This has become an essential because there is a need to introduce evidence-based due diligence procedures for extension services to establish standards of factual advice to farmers who often do not have the information to exercise an objective assessment of offers from commercial companies. The development of selected services by extension services can help subsidize their activities to sustain a viable independent advisory system for the sector.

The experience with privately-funded extension services has been mixed. There has been a tendency for these to concentrate on activities that feed a profit centre, in some cases promoting production systems whose input suppliers pay commissions to the service for placements. This has tended to mean a skew in services favouring larger export-oriented producers with higher cash flows at the expense of smaller producers.

Protection, improvement and preservation of traditional seed production systems

The overall trend of such processes has been, for example, a destruction of endogenous community-based seed production and distribution systems characterized by biodiversity and genotypes adapted to sub-regional and local microbioclimatic conditions. Where these systems have been replaced by major monopoly providers who promote higher cost production systems which are not usually sustainable because they have been promoted within communities who do not have the bioclimatic conditions nor cash flow potential to avoid the risk of lower-than-expected yields and chronic accumulation of excessive debt. This in many communities has created unacceptable social conditions and suffering.

The rise in monocultures as monogenotypes across multiple bioclimates and micro-bioclimates has resulted in greater concentrations of pests necessitating the increased use pesticides that have resulted in the reduction in pollinating insects, essential for normal and natural seed development. The reductions in seed viability is an evolving crisis and led to a strengthening of seed sales monopoly operations linked to production systems that are too input intensive. The result has been reduction in biodiversity of crops and associated fauna, higher levels of pollution arising from input chemicals same with deleterious impacts of producers and farm workers. In such cases payments are enforced by the law whereas the question of a lack of due diligence in the justification for such system on evidence-based information is not challenged. The social consequences of these trends has been disastrous for some communities.

In terms of sustainable development and constitutional principles there need to be major revisions in international and national legal frameworks to uphold the fundamental principles of public goods regarding legal and contractual provisions. Public goods are generally considered to be non-divisible, they are not costless but are maintained in order to protect the individual, communities and the nation.
Vouchers for seeds and other inputs

Some 400 farmers from 5 villages in Tanzania were granted trade vouchers by FAO to purchase the quality declared seeds and farm equipment from the agro dealers at the trade fair. Droughts in central Tanzania had challenged the food security of rural farmers, reducing availability of quality seeds and crop varieties, exacerbating poverty levels.



Local food market, Msanga, Tanzania

The Food and Agriculture Organization (FAO) launched the disaster response to the drought, funded by DFID, to provide stocks of seeds for farmers groups. Applying seed-based response mechanisms and good agricultural practices, FAO and DFID helped improve the capacity of farming communities to address climate variability.

This project covered 34 districts and distributed seed to 159 200 food insecure households to support production in an estimated 64 427 hectares.
Governments are frequently involved in negotiating investment and trading agreements and frequently agree to terms whereby changes in legislation required to protect employment, change minimum salaries where these exist or tax thresholds to respond to changed in macroeconomic conditions, become subject to sanctions and fines because of the impact on the business of foreign investors or traders. The effect of these contractual frameworks is to limit the degrees of freedom in governance to exercise decision analysis in line with public preference. Therefore such agreements undermine the ability of governments to manage the provision of public goods. Several so-called public private partnerships have contained clauses that guarantee the private operators set minimum levels of income irrespective of the conditions of consumption, in many cases this results in overall provisions becoming more expensive.

Substituting foreign exchange

In the place of foreign exchange-based trade there is likely to be a major growth in the establishment of cloud-based "trading floors" that operate exclusively on the basis of barter exchanges. The efficiency of these systems depends upon the range and number of national participants. In the past higher income country operators have tended to avoid barter systems but as the number of traders increases this can become a profitable activity. Reserve tokens or Bitcoin can be used to adjust physical mismatches in offered and required products.

Vouchers as exchangeable credits for the purchase of inputs or even securing food have an important potential role to play in raising liquidity free from interest rates and, in the case of agricultural output discounted in proportion of growth in the value of output.

Advanced technical aid

There has been a growing realization that international technical aid and development consultancy has become costly. The organization, contracting, travel and accommodation of international consultancy and evaluation teams can consume significant amount of funds assigned to projects. Time constraints concerning the time of highly paid consultants teams can result in insufficient time for in depth contributions to provided.

Evaluation at a crossroads

Evaluation assignments often suffer from lack of involvement of assessors in the initial phases of project because of the requirement for independence. Sometimes the evaluation cycles are extended and their purpose varied. In some cases the evaluation is solely concerned with simple ensuring that a budget assignment has been used up as opposed to making any contribution to the optimization of project design or effective implementation decisions. Many consider this to not be within the remit of evaluators. However, the very variable standards in organization of the administrative environments surrounding projects over the last 30-40 years, sees the same "lessons learned" reappearing and any process of embedding lessons into new projects is either too slow or ineffective. These issues were brought into focus by the OQSI report on OECD evaluation criteria.

Posted: 20200509
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  Author:   John Penrose:     penrose@agroinfosys.org         Source:   SDGToolkit:     secretariate@developmentintelligence.org

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