25 October 2002
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22 October 2002
(USAID Administrator speaks in London) (4090) President Bush's new Millennium Challenge Account creates a "reward system to accelerate the development process by giving to the reformers in developing countries a powerful tool to use against those forces opposed to transformational change," Andrew S. Natsios, the administrator of the U.S. Agency for International Development (USAID), said in London October 21. This March President Bush announced the creation of the $5 billion [$5,000 million] Millennium Challenge Account, "the largest increase in foreign assistance in 40 years," Natsios pointed out. This new approach to development assistance "rewards past performance rather than future promise, the old system of conditionality which has not worked," and in most countries it will provide funding 5 to 10 times higher than existing levels of aid from the U.S. government, he said. Natsios dismissed as "myths" notions about development such as dependency theory, i.e., that poor countries are victims of wealthy countries; that income redistribution will solve the world's poverty problem; or that capital is the engine of development. "The reality is that certain economic policies and governance systems are far more important," Natsios insisted. Prudent economic policies and wise and just governing systems are more important factors than official development assistance in ensuring progress in the developing world, he stressed, adding that "capital will flow to nations with open economies and transparent legal systems." "Transformational change in a poor country cannot be imposed from the outside, not by the UN, not by the Banks, and not by donor governments," Natsios said. "There must be national leadership and local support for transformational change to remove the impediments to microeconomic reform, to clean up corruption in the political system, and to make public management more accountable and transparent." In awarding funds from the Millennium Challenge Account, the United States will look at factors such as the existence of policies that encourage economic freedom, private investment and entrepreneurship; good governance; and a commitment to investment in health and education, and effective delivery of services. Natsios also called attention to USAID's Global Development Alliance, "an attempt to marry private sector capital flows to the developing world with those from the public sector. Thirty or 40 years ago, 70 percent of the capital flows from the United States to the Third World were ODA -- official development assistance -- and 30 percent was private. It's the opposite now; 80 percent of the capital flows to the developing world are private, and only 20 percent is ODA. That is not because ODA has declined in absolute terms; it is because the private and non-profit sector has been dramatically increasing capital flows to the developing world." He concluded by saying that the Millennium Challenge Account and the Global Development Alliance "will remake the foreign assistance program of the United States government, so that a decade after it is fully operational the record of performance of foreign assistance in reducing poverty and creating prosperous democracies will be a lot better than what has happened the last two decades." Following is the text of his remarks as provided by the American Embassy in London: (In the text, 1 billion = 1,000 million) (begin text) London Embassy of the United States of America October 21, 2002 Andrew S. Natsios Administrator U.S. Agency for International Development CHALLENGING ORTHODOXY: CHANGING PERSPECTIVES ON DEVELOPMENT The revolution begun in U.S. policy development by President Bush's Millennium Challenge Account proposal is neither fully understood nor fully appreciated in Britain or on the continent. I would like to place this speech into historical context and suggest some of the thinking behind it. Three times in the past 55 years an American President has gone to the nation in times of peril and delivered a major address on foreign assistance. The first was Harry Truman on the March 12, 1947, with the Cold War looming. Truman appeared before a joint session of Congress and warned of the grave dangers facing Greece and Turkey. Three months later, Secretary George Marshall in his famous speech at Harvard announced this country's intention to restore normal economic health to the European states. The Marshall Plan was more than a transfer of U.S. funds to fight hunger, poverty, and desperation and chaos, as he put it. Equally important was the demand that the Europeans come together to determine their needs and design a program for their own recovery. Thus, the process of European integration was started, and the economic and political foundations were laid for the stable, prosperous, and democratic Europe we know today. The second President with an important international development initiative was John F. Kennedy. March 13, 1961, with the Cold War at its height, he announced the creation of the Alliance for Progress, a 10-year plan to address basic needs of the Latin American people. Nine days later, Kennedy sent a message to Congress that would lead to the creation of the United States Agency for International Development. A third President has now made a major statement on foreign assistance and its importance to the national security and foreign policy interests of the United States. March 14, 2002, with the events of September 11th fresh in the nation's mind in the midst of the war on terrorism, President Bush addressed the Inter-American Development Bank and announced the creation of a $5 billion [$5,000 million] Millennium Challenge Account. It is the largest increase in foreign assistance in 40 years. To quote from the President's speech, "The growing divide between wealth and poverty, between opportunity and misery, is both a challenge to our compassion and a source of instability. Even as we fight to defeat terror, we must also fight for the values that make life worth living; for education and health and economic opportunity." The President was clear, however, that the new funds would be used for countries "that root out corruption, respect human rights and adhere to the rule of law, as well as encourage open markets and sustainable budget policies." President Bush's recent National Security Strategy which has caused some controversy across the Atlantic contains in it a robust reaffirmation of the development principles in the MCA proposal, a commitment to continue to press forward with the initiative, and some important statements on the danger failed and failing states pose to the United States and other nations. In emphasizing these points, the President laid out a very new course for foreign assistance that is based on sound theory and solid practice and promises a more productive future for our foreign assistance programs. Disposing of myths Before we go to some other comments about the Millennium Challenge Account, I want to talk about some of the wrong-headed presumptions that have plagued development assistance for the past four decades. I'd like to emphasize that ideas count. If people think that the theories of people in think tanks or in universities don't count, all they need to do is look at the fact that people in the developing world and in the Northern countries as well use these theories to defend or attack ideas that they do or do not like. The first myth I'd like to deal with is the question that is a popular view among some developing world intellectuals (fortunately, a declining number of them) called dependency theory. Dependency theory argues poor countries are poor because they are victims of the craven greed of wealthy countries which prey on their economic and political weakness to extract wealth. For too long now, dependency theory has been used by some leaders in some countries as a convenient if dishonest escape from responsibility for bad economic policy and bad governance; if one is a victim, one need not accept responsibility for one's own failures. If there were a careful analysis of statements of leaders in the developing world making the most progress, dependency theory would not be found in their rhetoric. The converse is equally true. A second myth that follows from the first is that income redistribution from wealthy Northern countries to impoverished Southern countries will solve the problem of poverty in the world. The presumption of this school of thought is that there is a fixed amount of wealth in the world, and if the South has too little it is because the North has too much. This was an implicit axiom of some of those who were in the debate before President Bush's attendance at the International Conference on Financing for Development in late March in Monterrey, Mexico. Wealth, however, is not fixed. The total amount of it can be increased or reduced depending on the economic incentives and system of governance chosen by a country, rich or poor, North or South. The third myth is that the engine of development is capital. This is simply not true. The reality is that certain economic policies and governance systems are far more important. Until recently there has not been wide enough discussion of the values of societies that reward risk taking and business enterprise, that bring about an empowered entrepreneurial class and a favorable climate to the formation of new enterprise and job creation. These are microeconomic aspects of economic growth that deserve far more attention. The perception has been that official development assistance, whether it be from the United States or other Northern governments, can in and of itself ensure progress in the developing world. I would argue that prudent economic policies and wise and just governing systems are more important. Capital will flow to nations with open economies and transparent legal systems. Finally, the fourth implicit myth is that the United States and Western democracies have become wealthy because they are somehow better than others. That is simply not true. Human nature is fundamentally fallen. Political arrangements which ignore this weakness will fail. Democratic capitalism adjusted for the variations of local culture and tradition remains the preferred model for development. Democratic capitalism recognizes both the great strengths and the weaknesses of human nature, and it creates political arrangements which restrain the weaknesses and encourage the strengths. The central question which development professionals must answer in order to make the aid system produce better and more sustainable results is this: what structures, what systemic pressures, and what incentives will overcome the inherent characteristic of human nature in all societies that opposes transformational change because it can be so threatening? One of the sad lessons we have learned through painful mistakes is that transformational change in a poor country cannot be imposed from the outside, not by the UN, not by the Banks, and not by donor governments. There must be national leadership and local support for transformational change to remove the impediments to microeconomic reform, to clean up corruption in the political system, and to make public management more accountable and transparent. What causes this leadership to form and act should be a question of considerable interest to us. Part of the answer lies in the nature of the incentive system in the international aid community. Lessons from the Developing World Development as we see it at USAID is an attempt to compress what took a century for the United States and other countries to accomplish into a much shorter period of time. Ann Krueger's and Vernon Ruttan's study of South Korea in Aid and Development highlights the importance of that country's export strategy in raising the national standard of living dramatically in South Korea. It was one of the poorest countries in the world in the 1950s. It is today one of the most prosperous in Asia. Looking at South Korea during the 22 years following the Korean War, the authors found that foreign aid was an important factor in the first decade or so of the creation of the South Korean republic. In the late 1950s the Koreans undertook, however, their own very important series of steps to encourage economic growth. They reduced inflation, they decreased budget deficits, they liberalized the economy, and they supported exports. By the mid 1960s, interest rates had driven domestic savings to an extraordinary level, 21.7 percent by 1969, an unheard of figure in the United States and western Europe. By that year, led by the country's determined export policies, GNP rose by 15 percent in one year, averaging 8 percent over an entire decade. Some of the pressure for economic and later political reforms in these Asian tigers has been ascribed to the threat Communist China posed to the region. In some ways the fear of Chinese expansionism provided the very discipline needed for the oligarchies and mercantilists to support the reforms of their political system. Another very important book, The East Asian Miracle published in 1993 by the World Bank, points out that the four Asian 'Tigers' along with Japan grew more rapidly than others in the world between 1965 and 1990, with real incomes increasing more than fourfold, 400 percent. The World Bank study reported: "Private domestic investment and rapidly growing human capital were the principal engines of growth. High levels of domestic financial savings sustained high levels of investment. Agriculture, while declining in relative importance, experienced rapid growth in productivity improvements. Population growth rates then declined more rapidly in high-performing Asian economies than in other parts of the developing world." The report goes on to note two other factors: sound macroeconomic management which provided a solid framework for investment, and advances in primary and secondary education which generated rapid increases in labor force skills. Bill Easterly's recent book, The Elusive Quest for Growth, makes many of the same points and delivers a particularly scathing attack on those who persist in taking a capital requirements approach to growth and development. While he offers "no magic elixirs" that lead inexorably to growth, Easterly puts his focus on incentives. "If we do the hard work of ensuring that the trinity of First World aid donors, Third World governments, and ordinary Third World citizens have the right incentives, development will happen," he writes. "If they don't, it won't." The Millennium Challenge Account President Bush, in his March 14 speech, set a new direction for development assistance by insisting on performance, not mere promises, to determine which countries would qualify for assistance under the new Millennium Challenge Account. The structure of the Millennium Challenge Account as he has proposed it will create the reward system to accelerate the development process by giving to the reformers in developing countries a powerful tool to use against those forces opposed to transformational change. His proposal may have as much influence on decision making in countries which do not qualify as those which do. His proposal rewards past performance rather than future promise, the old system of conditionality which has not worked. The size of the reward is very important in understanding its potential over decision-making: we estimate in most countries the MCA will provide funding 5 to 10 times higher than existing levels of aid from the USG. The President proposed three standards to judge this performance: The first is the central importance of policies that encourage economic freedom, private investment, and entrepreneurship. It is an indisputable fact that the only way any country is ever moved from Third World to middle-income or First World status is by sustained rates of high economic growth over a long period of time. That is something we need to repeat over and over again because we get lost in the morass of detail and debate over many other things. Without sustained rates of high economic growth, poor countries will not become prosperous. Economic growth, in all cases with the exception of city-states such as Hong Kong, Singapore, and the Mauritius Islands, has been driven first by high rates of increase in agricultural production. Three-quarters of the poor people in the world, in Africa and Central Asia in particular, live in rural areas. Following the Marshall Plan's success in Europe, the greatest international development success was the Green Revolution in Asia during the 1960s. This was the revolution led by the transfer of technology developed through the CGIAR (Consultative Group on International Agricultural Research) network of agricultural research stations to the peasants and commercial farmers in Asia. Unfortunately, in the mid to late 1980s, funds to implement this research for agricultural development dried up. The gross disparities of wealth in Latin America versus the much more equitable distribution of wealth in Asia has been driven largely by different approaches to agriculture and rural development. In Latin America, the infrastructure investment in electricity, roads, schools and water systems, has been heavily concentrated in urban areas, ignoring rural areas. The Asian giants took exactly the opposite approach. They allocated investments evenly between urban infrastructure and rural infrastructure, and since most poor live in rural areas, it meant that the rural areas grew at similar levels. That is why Taiwan, for example, now has the best distribution of wealth of any of the industrialized countries. As USAID administrator, one of my goals is to revitalize our agricultural program not just for subsistence agriculture for domestic consumption, but also for export. That is why we created a new bureau called the Bureau of Economic Growth, Agriculture and Trade. We are focusing our experts in agriculture to bring about a renewal of this discipline within USAID and in our worldwide missions. Trade and investment are critical to economic growth. Many developing countries simply do not know how to take advantage of the opportunity the new global economy presents. The 49 least-developed countries in the world account for less than one-half of 1 percent of world trade. That is not a recipe for economic growth. USAID accounts for more than 70 percent of the U.S. government's trade and development training programs. We have already had success in Eastern Europe and the former Soviet Bloc countries in training in marketing, in developing export niches for their particular products. We want to emphasize this now in Africa and Central Asia. Our current trade capacity building programs help countries prepare to join the World Trade Organization; understand WTO regulations so they can participate in rules-based trading more effectively; and identify exports that can compete more effectively in world markets. We're also looking increasingly at programs that boost economic performance at the microeconomic level. In the last 20 years, our focus has been heavily in all of the international institutions and agencies on macroeconomic reform, which is an essential but not sufficient for rapid economic growth. Microeconomic reform focuses on tax policies that encourage local savings and investment, encourage the creation of new enterprises, focus on questions like training an entrepreneurial class. Many countries -- Bolivia is a good example -- have done what the international community said they should do in terms of macroeconomic reforms. Bolivia has had elections and a parliamentary democracy for 15 years now. It has implemented macroeconomic reforms producing low inflation rates and a stable currency. Still, it has not enjoyed economic growth. What has been missing is microeconomic reform to create a class of entrepreneurs who can build businesses. Not all investment is international investment. Not all businesses are run by people from other countries entering the developing world. Many of the Asian giants developed because they had an entrepreneurial class, even if it was small, to begin to build their own businesses, to run their own businesses in their own culture and their own society. Increases in production and productivity are required before a country can fully participate in free trade. One must produce something worth trading or trade will not occur. President Bush's second criterion for the Millennium Challenge Account is the central importance of good governance to economic growth and development. The President described it as "ruling justly." In this area, USAID has changed a great deal during the last 10 to 15 years. Now we do a significant amount to promote development of democratic institutions. We cooperate with the National Endowment for Democracy, the International Republican Institute, the National Democratic Institute - all democracy NGOs. Initially, our efforts focused heavily on ensuring free and fair elections. That is important, but it is not sufficient. Beyond promoting free and fair elections, we must help democracies to be effective at constraining the power of the state toward abuse. Corruption is one of the most serious problems we face in the developing world. A new focus at USAID is in programs to promote accountability and the rule of law, and to root out corruption.. We have been training investigative reporters in Eastern Europe. A group of them formed a consortium in Bulgaria very recently to do an investigation of how Bulgaria had been a base of support to international terrorism. The series of articles they produced has reached 1-1/2 million Bulgarian readers, and it has caused a real stir. A free press has been for a very long time a constraint on the power of political figures in our democracy and in other democracies. In addition to freedom of the press, other critical accountability functions for effective democracies include a meritocracy in the civil service and a separation between economic and political power. In many developing countries, the economic and political power are so entwined that oligarchies take control of the government, impose mercantilist or Marxist economic policies, and use political power to ensure themselves markets and suppress competition. Also essential for accountability is an impartial judicial system enforcing the rule of law and the sanctity of contracts. Businesses require predictability in their relationship to the state in order to invest. Business does not invest unless it has some guarantees. President Bush's third criterion for the Millennium Challenge Account is a demonstrable commitment by developing countries to invest in health and education and to ensure effective delivery of services. Countries with high rates of sustained economic growth have consistently invested in health and education services for their people, helping create a work force for a growing economy. It is in these last two social services where development assistance has made its greatest progress in the last several decades as literacy rates have risen and child mortality rates have dropped. We know that advances in primary education have major payoffs in other sectors. Studies in Africa indicate that, without any other changes, agricultural production increases when women, who dominate farming, have primary school education. Children are fed better and their health improves when their mothers have a basic education. We know that an educated citizenry increases the chances for nascent democracies to succeed. We have created in USAID what's called the Global Development Alliance, which is an attempt to marry private sector capital flows to the developing world with those from the public sector. Thirty or 40 years ago, 70 percent of the capital flows from the United States to the Third World were ODA -- official development assistance -- and 30 percent was private. It's the opposite now; 80 percent of the capital flows to the developing world are private, and only 20 percent is ODA. That is not because ODA has declined in absolute terms; it is because the private and non-profit sector has been dramatically increasing capital flows to the developing world. This is not just private capital from businesses. According to a new study by Carol Adelman, twelve percent of the gross national product of El Salvador is remittances from the Salvadorean community in the United States. The same study analyzes the total non-profit capital flows to the developing world from the United States amount to over $40 billion [$4,000 million] annually, more than 4 times greater than ODA. I was just with the Prime Minister of Lebanon at a lunch and he told me that 25 percent of Lebanon's gross national product comes from remittances from abroad. A study done by UCLA recently said that half of the microfinance lending that's going on in Mexico right now is from the Mexican-American diaspora in California sending remittances back to their villages. So there is a lot of microfinancing that has nothing to do with ODA. An important question is, how do we link into that in a way that can accelerate many of those capital flows in the private sector? Foundations send a huge amount of money to the developing world each year. Bill Gates, for example, sent $750 million to GAVI, the Global Alliance for Vaccines and Immunizations; USAID sent $49 million. The Millennium Challenge Account and the Global Development Alliance will remake the foreign assistance program of the United States government, so that a decade after it is fully operational the record of performance of foreign assistance in reducing poverty and creating prosperous democracies will be a lot better than what has happened the last two decades. (end text) (Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)