The Pin Factory Blog

For all the hotly contested issues of the General Election, one area of cross-party consensus is to spend more on development aid. The campaign manifestos of Labour, the Conservatives and the Liberal Democrats all commit themselves to a “United Nations target” of at least 0.7 per cent of national income on aid and to make that legally binding.

A 0.7% target makes no sense now and never did. It looks not outward at what might help the poor but only inward at the resources in rich economies. It offers to increase aid as an input without considering what results might be. A new paper published today by International Policy Network, “The Ghost of 0.7%”, dismantles the cross-party consensus target and demands a radical rethink for the next government.

The report documents how the 0.7% target was first tabled in the 1960s and has been endorsed by campaigners ever since. Yet the methodology behind the target, based on the “gap” theory, has been discredited.

Even if the justification were sound, recalculating with up-to-date statistics shows the “capital need” in poor countries has fallen to below 0.05% of national income in rich countries – less than 10 per cent of the aid that is currently being spent under the Labour government, which is still £2 billion less than it would be compelled to spend should a legally binding target of 0.7% be introduced.

This hasn’t stopped rock star “economists” from telling us that our money still needs to be thrown away. Bono said just a few months ago that the pledge to make a 0.7% target legally binding “is not just a great announcement, it is transformative of real lives … and the next step is making sure this becomes law as soon as possible, in 2010."

The rapid and welcome economic growth in Brazil, China, India and many other countries (with insignificant amounts of aid) is the most effective anti-poverty campaign in history, thanks to sensible policies in the countries that actually are developing rather than stagnating under aid-dependency.

UK development policy must reject input targets and assess outcomes and evidence of what really works.

Alec van Gelder is Project Director at International Policy Network.

To protectionists and Sinophobes, the news of China recently surpassing Germany to become the world’s largest exporter represents yet another nail in the coffin for manufacturing in “[insert Western country]”. But China’s exports include Apple’s ubiquitous iPods and countless other products designed in the West. More than a reflection of China’s growing economic might, this is testament to the erosion of economic, political, physical and technological barriers to production. The fall of the Berlin Wall and the collapse of communism as a viable model, together with containerised shipping, GPS, just-in-time supply, and other technological marvels, has spawned a global division of labour and production that defies traditional analysis – and trade accounting.

Typically, Chinese producers are at the final node of an assembly line that snaps together raw materials (say, minerals from Australia) and components (say, microchips from Taiwan), using software developed by teams in Redmond and Bangalore, while implementing designs from Cambridge (Massachusetts and England); all thanks to capital raised by consortiums based in New York City and Sao Paulo.

Two important points are worth making: “Chinese exports” are underpinned by valuable activities elsewhere, and product assembly adds less value than other activities along the production chain. For example, a recent University of California study concludes that the Chinese value-added embedded in a 30G Apple iPod accounts for only $4 of the total $150 cost. The fearmongers see the entire $150 chalked up as a Chinese export, and miss the money flowing back to Cupertino in the USA.

One of many local examples that follow a similar production pattern is Cambridge Audio. Its products are designed by teams of well qualified and richly-rewarded engineers here in the UK and are assembled cheaply in China. This offers Western consumers better quality at cheaper prices and allows the company to invest more in product development, which will ensure competitiveness, promote innovation and sustain high value-added jobs in the UK.

Don’t be afraid of China’s booming exports. In today’s economy, we all have a stake in their success.

Alec van Gelder is Project Director at International Policy Network.

The government’s response to the financial crisis has been a shambles. It has coddled “British" firms (such as Indian-owned Jaguar) with tax-payers’ money and restricted foreign lending of some of Britain’s biggest banks (whose UK clients work around the world). It trumpeted the G20 meeting in London, where leaders committed themselves not to indulge in protectionism, and have gone away and broken this promise, most notably through government-driven Buy Local “stimulus" packages triggered by Barack Obama’s “Buy American."

These moves illustrate how trade policy is so out of touch with the reality of 21st Century commerce.

A generation ago, the factory floor was bound by four walls and usually by national borders too. Today, a product might be designed by a team in Bristol and Bangalore, have raw materials from South Africa, Peru and Thailand, and then be assembled in Slovakia or Taiwan, from where it will then be shipped around the world. This has been made possible by dramatic reductions in trade and investment barriers, and revolutionary changes in communications and transport, which have unleashed a truly global division of labour, specialisation and exchange that would have astounded the great Adam Smith – and certainly reaffirms his insights.

Trade can no longer be characterised as a competition between national producers – or “Us" versus “Them". Instead, it is now a competition between collaborations of some of “our" producers and some of “theirs" – to our mutual benefit.

Take the iPod. It begins life in Apple’s design lab in California. Components from Singapore, Taiwan, Korea, and Japan are then assembled in China, before the finished product is shipped around the world. The biggest winner from each iPod sold is Apple because they add the most value through design and marketing. The Chinese, who manufacture almost everything, actually add the least value.

This new commercial reality demands policies that welcome imports and foreign investment and that minimise regulations or administrative obstacles – all based on misconceptions about some vague or ill-defined “national interest."

The only stimulus package that will work is removing trade barriers.

Alec van Gelder is Network Director at International Policy Network. To read IPN's latest report by Dan Ikenson, No Longer Us versus Them, click here.