29 January 2002

State's Larson on Global Poverty, Development

Sees Mexico meeting as central to development efforts

The United States hopes the March world summit on Financing for Development in Monterrey, Mexico, will be a "turning point on international development issues," says Alan Larson, under secretary of state for economic, business and agricultural affairs.

Larson, who will be attending the meeting, told the Catholic Council of Bishops in Washington January 29 that progress in eliminating global poverty is in the national interest of the United States because few issues can be contained within national borders.

Larson explained that industrial countries must be involved in development issues because the poorest countries tend to be "incubators" for disease, drug production and trafficking, terrorism and international crime.

The United States, he said, needs to help address these problems by building a coalition of countries at all levels of development.

But he emphasized that poor countries themselves have to bear the main responsibility for their development and, with help from the international community, create open, democratic, inclusive and accountable political systems.

Within the framework of such systems, Larson said, it should be possible to release latent entrepreneurial energies and financial resources from the inside and attract investment from the outside of developing countries.

Identifying free trade as "a powerful force for development", he said that in the new Doha Development Round poor countries will gain even greater access to developed country markets.

To elevate the fight against global poverty to a new level, however, the quality and effectiveness of development assistance need to be improved, Larson said. Specifically, he said, the global partnership for development should:

• increase and improve technical assistance aimed at developing market and trade capabilities in poor countries;
• focus assistance on educational and health programs;
• provide assistance in the form of grants rather than loans to avoid worsening poorest countries' debt problem;
• withhold all but humanitarian aid to countries with corrupt or oppressive regimes;
• monitor and assess developmental programs so that the best of them can be imitated elsewhere.

Larson said that the expansion of development aid should be conditional on the evidence that it is being used effectively. The United States is willing to increase its contribution to the International Development Agency (IDA), he said, if certain performance benchmarks are met. IDA is the World Bank affiliate that provides highly concessional loans to its poorest member countries.

Following is the text of Larson's remarks as prepared for delivery:

Financing For Development: The Role of the Global Economy in Combating Poverty
Conference on "Humanizing the Global Economy"
Catholic Council of Bishops
January 29, 2002
Catholic University

Good evening. I am honored to join you for this conference on the global economy.

We meet at a pivotal moment. In the last five months, the international community banded together to fight international terrorism. If we are to promote development and human dignity, we must defeat terrorism.

Terrorism demeans humans by sowing death, destruction and fear. Development uplifts humans by sowing hope where there is despair, opportunity where there is deprivation and freedom where there is oppression.

To defeat the terrorist, we need to win not only the battle of arms but also the battle of hearts and minds. We need to build a coalition to promote development and affirm dignity.

In March, President Bush will attend the world summit on Financing for Development. The U.S. government is working hard, with partners throughout the world, to make this meeting a turning point on international development issues.

I hope some of you will be able to attend the Monterrey Conference. You have much to contribute.

Development is not exclusively, or even primarily, an economic concept. Rather, development is about creating the conditions that make individuals as free as possible to realize the potential God has given them.

Economics, nevertheless, is a vital tool. It teaches us that economic growth and human development are mutually reinforcing.

Economic history makes clear that when economic development has endured over several generations, it has been in countries where property rights have been protected, where contracts have been enforced and where stable, responsive and efficient governments have been in place. In short, development has thrived in countries practicing market economics and enjoying good government.

The expansion of the global market economy can be a powerful tool for deepening and spreading development. It allows people throughout the world to cooperate by exchanging goods and services, capital and labor, technology and ideas.

As the global economy has expanded, impressive development progress has followed. In the last decade, especially in East Asia, hundreds of millions of people have been lifted out of poverty. The percentage of people in East Asia living on less than one dollar a day has fallen from nearly 27% to about 15% in one decade.

In other parts of the world, progress has been spotty. Poverty levels in sub-Saharan Africa are hovering at 46%. In South Asia, while falling, poverty levels remain high at 40%.

Faster progress in eradicating global poverty not only is a humanitarian imperative, it also is in the national interest of the United States.

In a global community, everyone is our neighbor. Desperately poor countries and communities tend to be incubators for disease, drug production and trafficking, terrorism and international crime. Intelligently conceived and effectively implemented development policy can advance both our values and protect our interests.

To promote development, we need an honest, clear-eyed partnership among countries at all levels of development.

Developing country leaders increasingly accept that they bear the primary responsibility for their countries' development. They need to rededicate themselves to achieving political systems that are open, democratic, inclusive and accountable. The international community should provide technical help to leaders seeking to strengthen their domestic governance systems.

In most developing countries, even many of the poorest, domestic savings can be an important source of finance for development. It is important to establish financial markets that permit even a poor household to finance the purchase of a house and that enable a small entrepreneur to finance a business start-up.

We must bring to life what Hernando de Soto has called "dead capital". This may mean strengthening laws on the enforcement of contracts, including foreclosure, and helping small farmers gain clear title to agricultural land.

We must urge developing countries to operate open economies. Export growth has been a powerful force for development in a number of countries, including Chile and Mexico. The African Growth and Opportunity Act is showing that even poor African countries can develop export-oriented industries that create jobs and opportunity.

President Bush recently proposed negotiating a Free Trade Agreement with the countries of Central America. By doing so, we can raise living standards of our neighbors on this continent.

The United States and the European Union already import over $1 trillion in goods from developing and transition economies. These revenues are twenty times larger than development assistance flows, and they create jobs and support families around the world.

In the new Doha Development Round, developing countries will gain even greater access to developed country markets. Liberalization of trade in agriculture could provide developing countries at least $100 billion in lost annual income. Full liberalization of merchandise trade, would raise baseline incomes of developing countries by well over $500 billion in just over a decade. Liberalization of services could add nearly $1 trillion to that baseline income.

Developing countries stand to benefit most from the expansion of South-South trade. South-South trade is already 40% of developing country trade. Merchandise trade among developing countries could grow by some $400 billion following the reduction of their own trade barriers.

Within an individual developing country, trade liberalization will help its own households, who often pay too much for basic goods, and its own entrepreneurs, who often see capital and labor bid away by favored, protected industries. There is little doubt that the stifling effects of trade protectionism are a major cause of persistent poverty in countries like India and Egypt.

We also need to encourage developing countries to establish business climates that attract productive investment, especially foreign direct investment. This does not mean offering tax holidays or special privileges; rather it means maintaining clear rules and transparent procedures, including through international agreements.

Foreign direct investment to developing and transition economies increased sevenfold between 1990 and 2000. FDI brings capital, technology, management and access to foreign markets; it has been the most stable form of international capital flows.

As developing countries mature, they can consider other forms of foreign capital, including portfolio investment. Before doing so, however, they should take steps to ensure that they have effective systems of domestic financial regulation and debt management.

As we strengthen international rules on trade and investment, it is also important to strengthen rules in the area of core labor rights and the protection of the environment.

We also need to help developing countries maintain peace and security so their people do not live in fear or danger. Insecurity is the enemy of development. People cannot save or invest if their property or lives are at risk. It is no accident that many of the poorest countries in the world are suffering from war.

I know from my experience in Sierra Leone and Congo how devastating conflict can be for people already living on the edge. Sierra Leone now ranks dead last on the UN's Human Development Index, with life expectancy at 38 years and literacy optimistically estimated at 32%.

To take our battle against global poverty to a new level, developed and developing countries will need to improve the quality and effectiveness of development assistance.

First, we need to increase and improve technical assistance programs aimed at helping countries operate market economies and develop the capabilities to export and attract investment.

Second, we need to focus assistance on programs that invest in people. In particular, we should create in developing countries a long-term capacity to continuously raise their educational and health levels.

We need to harness innovations in wireless information technology, so we can reach into even remote villages to provide enhanced basic education, strengthening people-to-people linkages.

Third, whenever possible we should provide development resources on a grant basis, especially to the poorest countries, to avoid worsening their debt problems. In particular, we believe that half of these resources that the World Bank provides to the poorest nations should be extended on a grant basis.

We support the enhanced Heavily Indebted Poor Countries ("HIPC") initiative and believe it is important for the savings from debt forgiveness to be used for poverty reducing investments, especially in health and education. Where this happens, HPIC's effectiveness can produce remarkable successes, as we have seen in Uganda, Mozambique and Madagasgar.

A greater emphasis on grants would enable the poorest countries to avoid worsening their debt problems. I hope you will give us your support as we pursue our grant initiative.

Fourth, when governments are fundamentally corrupt or oppressive, we should withhold all but humanitarian assistance, or direct it through NGOs. Doing so is simply a matter of husbanding scarce developmental resources.

Finally, we need to monitor and assess development assistance programs. In this way, we can replicate and expand what works and avoid wasting money on programs that don't.

This year should be the occasion for launching a concerted attack on global hunger. Some 800 million people, including 250 million children, are malnourished.

New technologies, such as agricultural biotechnology, can be adapted already to raise productivity of staple crops such as cassava, sweet potatoes and cotton. Investments in agricultural research, which have fallen in recent years, have high rates of economic return in developing countries. It is time for a second "green revolution."

If we can show that development assistance resources are being used effectively to help people help themselves, we can make the case for expanding these resources. The United States will commit to annual increases in our contribution to the International Development Agency (IDA) if agreed performance benchmarks are met.

A full-scale global development effort will demand much of all of us. It will require that developed countries make room for growing trade with developing countries, improve the quality and, most likely, increase the quantity of development assistance flows, and enhance the participation of rising economic powers in international decision-making.

Much will be required of developing countries as well, including in the area of improving governance and economic policies. Development means sacrifice, where the efforts of one generation create expanded opportunities for the next.

The United States is committed to working on all fronts with developing countries. The U.S. is the second largest provider of development assistance and the largest provider of food aid and humanitarian assistance. U.S. has increased bilateral assistance, including its contributions to the Global HIV-AIDs, TB and malaria Fund.

We are also the largest source of private capital flows to developing countries, including far and away the largest source of private philanthropy, such as from faith-based institutions. We are the fastest growing developed-country market for the exports of developing countries.

Relative to past centuries, the development progress that has taken place is impressive and rapid. Yet, too many have not yet shared in this progress. To do better, we will have to focus on what matters and what works.

In particular, we will need to ensure that there is a place in the global market economy for all countries that want to be there. While it can be tumultuous and on occasion harsh, it is a powerful force for opening opportunities, expanding freedom, creating wealth and generating development.

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