How can the GCF pursue ‘moon-shot’ investments and a different approach to country ownership? To answer this question, it is useful to look historically at the example of country-owned ‘frontier’ investments. These are investments in novel areas which hold the promise of high returns in the future but also carry high levels of risk.
Country-owned ‘frontier’ investments by domestic companies or corporations through an ‘industrial policy’ have been the cornerstone of the rapid industrialization and development of South Korea, Taiwan and other East Asian countries in recent decades.
A key aspect of these investments or policy has been the way in which the state has been able to control and use high rates of profit over a long period of time. In doing so, the state has been able to protect and nurture local firms to take risks initially in domestic markets and later in export markets.
This has often been done through an institutional architecture where domestic firms and state-owned corporations have been encouraged to compete in high risk/high reward areas. In this approach, the discipline of the profit/loss account is long term and incentives are put into play for competition, productivity and innovation.
Development economists such as Ha-Joon Chang of the University of Cambridge and the work of the late Alice Amsden of the Massachusetts Institute of Technology show how many countries have ample experience of country-owned pioneering investments in new sectors. In fact, this has been one of the main routes through which countries have stepped up onto the initial rungs of the ladder of industrialization and development.
The work of Chang and Dani Rodrik from Harvard University shows how forms of industrial policy, where the state has used tariffs, quotas and subsidies to protect and nurture domestic firms, has been a feature of how many countries have industrialized and is now once again back on the mainstream policy agenda.
Chang’s overarching argument is that countries have needed to defy their comparative advantage to innovate and upgrade. Instead, countries have needed to create a competitive advantage through protecting and supporting frontier investments in a similar way to how the Republic of Korea has done so successfully in a carefully sequenced set of steps within sectors such as textiles then electronics then heavy industry.
Alice Amsden’s work also offers clear examples of how East Asian countries used multiple institutional and policy instruments to create a competitive advantage. These included export incentive systems, targeted and concessional forms of credit, tax incentives, tariff protection, public investment in applied research and, importantly, performance-based funding allocations so that each country moved, step by step, up the ladder of industrialization and development.
How is this relevant to the GCF?
One set of findings from the IEU’s latest report on country ownership focuses on GCF country programmes. These aim to highlight the investment areas with the highest impact and paradigm-shift potential. But our report shows how country programmes are yet to realize this potential.
There is an argument here that GCF country programmes should focus more on existing national institutional arrangements for high-risk/high-reward investments in non-climate areas. In other words, to use and piggyback on existing forums for national industrial policy where these have a proven track record of innovation.
Second, the IEU’s country ownership report suggests that nominations for which actors should pursue special Direct Access Entity status have so far been guided mainly by short-term thinking. Instead, a longer-term strategic focus should match the developmental approach to industrial policy sketched out above. Nominations should look outside of the climate space towards national champions that have demonstrated frontier success in any sector.
Third and finally, the IEU’s report on country ownership highlights how, thus far, civil society organizations and other non-state actors have enjoyed limited engagement with climate co-ordination structures. In other words, country ownership has not always extended beyond national governments.
On first glance, this is not too surprising: non-governmental organizations and civil society groups often do better at maintaining and guarding existing investments and policies than precipitating new ones. One example here comes from the work of Sam Hickey at the University of Manchester on the role of civil society in protecting social protection policies such as cash transfers.
The inclusion of a wide range of actors in climate coordination structures and climate investment platforms holds an intrinsic value in ensuring transparency. It could also offer secondary instrumental benefits in limiting the likelihood of cronyism or collusive behaviour.
The GCF doesn’t need to reinvent the wheel but should tap into the experience of countries which have experienced success in their own approach to innovation. This would place the GCF in a stronger position to achieve more transformative and paradigm-shifting investments.
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