How the US is helping the world's poor
Alan Larson, undersecretary for economic, business and agricultural affairs at the US State Department, outlines the Bush Administration's view on development.
By Sudip Roy
EM: How much influence does the State Department have over the IMF and World Bank?
AL: Secretary Powell and I are strong supporters of the Bretton Woods institutions. I take very seriously the responsibility I have under our law to serve as the alternate governor to the World Bank. We work in partnership with Secretary Snow and the team at the Treasury. Together we try to make sure that these important institutions play the role that we think they ought to play promoting global growth, promoting financial stability and supporting broad-based development. We have an inter-agency process where important decisions regarding the Bretton Woods issues are deliberated and the Secretary and I participate in those important deliberations.
EM: What more do you think the multilaterals should be doing to help achieve the Millennium Development Goals? Do you think there is a danger of overlap?
AL: The starting point is that none of these institutions on their own can generate growth, reduce poverty or achieve the international development goals. For all of us, the starting point has to be providing support to the sustained efforts of the people and the governments of each of the developing countries. One of the most important things the rest of us have to do is to encourage those countries to follow the types of development policy that has shown to work. The IMF has core strengths in the areas of monetary policy, exchange rates policy, fiscal policy and financial markets. It is logical that it should focus on those areas. The World Bank has core competencies in areas such as education, health, economic infrastructure, the reform of business climates and so on. Those are the areas that the Bank can focus on.
The other lesson is that we need to be selective and concentrate on areas in which we do well and also be selective in the sense of working with those countries that are pursuing effective development-oriented policies. We have to be much more rigorous in treating development transfers as investments and investments from which we want to get a real return – not necessarily a financial return but a return in the form of major development outcomes. That's the way we're going to produce more sustained progress towards the international development goals.
EM: Do you think the Millennium Development Goals need to be revisited?
AL: I don't think the picture is unremittingly bleak. If you look more closely at the data the World Bank has put out, it's clear that some countries in some regions are making relatively good progress towards the achievement of these goals. In other places there's less progress being made. Countries like India and China have made significant progress over the last generation. If you look selectively in Africa, countries such as Uganda have made enormous strides in attacking HIV/ Aids, and Mozambique in reducing poverty. Our view is that each country bears the primary responsibility for the achievement of these international development goals. Our approach is to try to learn from the successes in some places and try to encourage those practices elsewhere, where progress has been slower.
EM: Do you think the targets can still be met by 2015?
AL: President Bush announced our support of these goals more than two years ago when he announced the Millennium Challenge Account and we continue to work towards them recognizing there has to be a partnership between developing and developed countries.
EM: How do you respond to James Wolfensohn's criticism in Shanghai earlier this year that the developed world's interest in global poverty “is near a low point” and that not much will change while the War on Terror and Iraq take centre stage?
AL: For the United States, the War on Terror has brought a new focus on the imperative of promoting opportunity and development around the world. In the immediate aftermath of the terrorist attacks of September 11, 2001, the US played a leadership role in launching the Doha Development Agenda. About a year after September 11, President Bush unveiled the National Security Strategy, which made development, along with defence and diplomacy, one of the three main pillars of our national security policy.
Since September 11 the president launched the Millennium Challenge Corporation, which promises to increase our official development assistance (ODA) by 50% annually once it's fully operational by 2006. It also incorporates very innovative ideas about how to make development assistance more effective. In addition, the president has implemented a $15 billion HIV/Aids initiative. So when you take all of this and other programmes together, US development assistance is targeted to be 75% higher by 2006 than in 2001. We've shown that we can be very engaged in the War on Terror and still make dramatic increases in our commitment to development.
EM: US commitment to development is at 0.2% of national income, which is short of the 0.7% target set by the UN. Why?
AL: It may be a target set by the UN but it was never a target that the US government ever subscribed to. The point is that US assistance levels are up sharply. We are exceeding the goals and promises that we set out. We're not just providers of ODA; we provide more private development assistance than any other country in the world. The key point is that in our system the Congress appropriates development assistance, and it would have to be the Congress and not the UN that sets any targets for the future. Beyond that, the focus on input targets actually distracts attention from what we think is important, which are the outcomes. It is the real development outcomes that matter to people and because of that President Bush has associated the US with these international development goals.
The other point that needs to be constantly emphasized is that development assistance, as important as it is, is far from being the most important source of development finance. The savings of developing countries are vastly larger; these countries' export earnings are in excess of $2 trillion a year and have the possibility to grow rapidly; foreign direct investment into these countries is about $140 billion a year; even remittances from individuals sending money back from developed to developing countries is between $80 billion to $90 billion a year. The key, as was stressed in the Monterrey Consensus, is that all of these sources of financing for development are brought together as effectively as possible in support of development, and that's what we're trying to do.
EM: Even so economists such as Jeffrey Sachs have criticized the development efforts of the US government?
AL: Well I'm proud of what the US has been able to achieve and I think the 75% increase in ODA between 2001 and 2006 is a remarkable achievement. Moreover, the way to achieve even higher levels of development assistance is to show the American people and the Congress that we are producing good development outcomes from the financing that is already available. That's really what we're trying to achieve in some of the president's most important initiatives, like the Millennium Challenge Account and the HIV/Aids initiative.
EM: So you don't think that 0.7% should be adopted?
AL: It's not a target my country has adopted. What we are doing, through the support of Congress, is raise significantly the amount of funds made available by American taxpayers to support development. We're also trying to use other tools – including trade liberalization, support for foreign investment and support for the private sector in developing countries as additional tools for achieving these international development goals.
EM: On trade liberalization, the Administration has been criticized over the 2002 Farm Bill, which, according to Oxfam, raised US agricultural subsidies by 80% a year for 10 years. How does that fit in with your development agenda?
AL: The US is playing a leading role in promoting the elimination of agricultural export subsidies and is achieving a drastic reduction and harmonization of those domestic agricultural subsidies that are distorting trade. This is a position we have been fighting for the last two years on the Doha Development Agenda, and if we achieve it, which I think we can, it will be a great victory not only for the trading system but also for development. Frankly, your numbers on the Farm Bill are off the mark by a long way. Our farm subsidies levels have been basically flat since the passage of the Farm Bill. The vast majority of the subsidies that we do provide, some 80%, are designed not to increase production or exports but rather to protect the environment.
As for those subsidies that do affect trade, we are fighting to get them reduced. Our trade distorting subsidies are much lower than those of the EU and Japan. I'm not saying that in defence of them but stressing the point that a solution has to be one that involves major political effort by all countries that have trade distorting subsidies, and particularly by Europe and Japan. We are ready and we have made some ambitious proposals to eliminate export subsidies and make drastic reductions of our domestic trade-distorting subsidies.
EM: Isn't the key point that it's important to have fair trade not just free trade?
AL: The whole point of the Doha Development Agenda is to create more opportunities for developing countries to prosper through trade. The World Bank has made clear that the bulk of the benefits of a successful Doha round would accrue to the developing world. Some of those benefits would also come about through a reduction in trade barriers in the developing countries themselves. They pay large duties on the trade they conduct with each other. To move forward on trade will require a significant effort on the part of all the developed countries, ours included, as well as the developing countries. What we are striving for in the Doha round is trade that is freer and fairer – and is fairer because it's freer.
EM: How do you think countries can help reduce poverty?
AL: There's no real silver bullet. It is very difficult to have lasting reductions in poverty without sustained economic growth. So achieving sustained growth is a starting point. But economic growth alone won't necessarily reduce poverty in all cases. I've been influenced by the work of economists such as Amartya Sen, who wrote about “Development As Freedom”. Expanding opportunity and freedom to the level of the individual, family and small firm is one of the most important things that governments can do to promote growth and fight poverty.
I'm very pleased that the secretary-general of the United Nations commissioned the study that resulted in the report “Unleashing Entrepreneurship” to meet the needs of the poor. I think this is opening up a new and important avenue as we consider how to work with countries to alleviate poverty. The creation of businesses in developing countries and the fostering of trade and investment are absolutely essential. It's not to say that health and education aren't important but unless you're creating strong and growing economic activity and strong and growing businesses in developing countries, you're not producing the wherewithal to finance the investments necessary in health and education.
EM: How do you foster an entrepreneurial climate in, for example, a poor, war-torn country in Africa?
AL: I was impressed that at the Sea Island G8 Summit, which President Bush hosted, many of the African leaders present highlighted the importance of promoting small business in their countries. So they see it as an important element in their development strategy. The work of the World Bank in support of small business and microfinance lending is one important tool. One of the main reasons why some parts of the world have not made progress on reducing poverty is conflict. This is something we're seeing in Darfur. We've also seen in countries such as Sierra Leone and the Democratic Republic of Congo painstaking efforts on development being washed away by violence. We need to make sure we are doing everything we can to provide a security environment that makes development and poverty eradication possible.
EM: One thing the US Administration has proposed is grants instead of loans. Won't that hit World Bank lending?
AL: We believe very strongly that the international community needs to get away from a cycle of lend and forgive. We don't believe it's right to saddle desperately poor countries, whose debts we've already been forgiving through the HIPC programme, with new loans that they have to pay off in the future. There is no reason why a move to grants for HIPC countries should reduce net resource flows to them. The crucial thing is for the multilaterals to achieve real and tangible development outcomes through the transfers that they make. If that had been uniformly true in the past then countries would have generated the economic growth necessary to repay the loan that we are now forgiving. The key is to be very straightforward and honest about this – to provide grants to highly indebted countries; to make sure that those transfers are used as effectively as possible to achieve long lasting growth and development.
EM: Why are you urging a write-off in Iraq's debts but not for other impoverished countries?
AL: Of course we are doing the same for other impoverished countries. In the case of HIPC countries we are arguing not only for debt write-offs so that they can achieve debt sustainability but we also are forgiving 100% of the bilateral debt that they owe to the US. That is more than some significant creditors are doing.
In the case of Iraq, we are urging that Iraq's debts be forgiven to an extent sufficient to achieve debt sustainability. Because Iraq was a country that appeared to have oil wealth, massive loans were extended to Saddam Hussein's regime and the debt that was incurred because of these loans is clearly unsustainable especially after three wars, 12 years of UN sanctions and economic mismanagement that left the GNP level at less than one-fourth of what it used to be. The IMF has done a debt sustainability analysis that clearly indicates to us that deep debt reduction is going to be necessary. The G8 countries at Sea Island agreed to provide Iraq this year with debt reduction sufficient to achieve sustainability. Our position is quite consistent.
EM: What do you think will be themes of this year's Annual Meetings?
AL: One of things I hope will be discussed significantly is the role that investment plays in promoting economic growth and in the achieving poverty reduction. The private savings of developing countries constitute a vast potential financing source for development. Finding ways to make sure those savings are used effectively and that the citizens of these countries can put their money to work in their countries and not have to send it outside in order for it to be safe are important priorities. The Paul Martin and Ernesto Zedillo report that was prepared for UN Secretary-General Annan highlighted that there is arguably $9 trillion of assets owned by the citizens of developing countries. So if this was put to more productive use it would be an important force for development.
Therefore, we ought to be looking at how we can ensure more investment in developing countries by the citizens of developing countries as well as considering what should be done to make developing countries a more attractive destination for investment from firms in developed countries. These are very important contributors to development – more important quantitatively than official development assistance. And because the private sector – individuals and firms that have ownership of these assets – is guiding them, they will make sure there are good returns on investment, whether it's public investment or private investment.