20 February 2002

Officials, Economists Want Fresh Start for Development

Paradigm shift at the center of pre-Monterrey debate

By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- The ultimate objective of the upcoming Financing for Development conference in Monterrey, Mexico, is the creation of a mechanism for perpetuating development in poor countries, U.S. Treasury Secretary Paul O'Neill says.

As part of a roundtable discussion on "New Proposals on Financing for Development," O'Neill engaged participants in a debate on a U.S. effort to change the way of thinking about development and to design aid programs to boost poor countries' capacity and creditworthiness to the point where they are able to participate fully in the global economic system and attract investment.

The February 20 event organized by the Center for Global Development included government officials, private economists and representatives of non-governmental organizations.

O'Neill said the United States believes that focusing on results of development aid rather than on its size would bring recipient countries closer to sustainable economic growth than just increasing aid flows would. The United States has offered to increase its contributions to the World Bank's International Development Association (IDA) under the condition that certain benchmarks, primarily in education and public health, are met. It has also urged the World Bank to convert 50 percent of its development loans to grants.

While many participants agreed that new, innovative proposals are necessary to address the needs and aspirations of developing countries, they did not always share O'Neill's views on what has to be done.

Most additional financing for development has to come indeed from the private sector, said Hilde Johnson, Norwegian minister for international development. But private investment will not solve the problem of IDA's underfunding, she added.

The World Bank has identified circumstances where official development assistance (ODA) works best, said Joseph Stiglitz, a winner of a Nobel Prize in economics and professor of Columbia University. "We can double the money for ODA, and we know we can spend it well," he added.

But another economist cautioned against premature increases in ODA. Allan Meltzer of Carnegie-Mellon University proposed that multilateral institutions and donor countries move away from the emerging markets that can borrow money on private markets and give more money to the poorest countries that lack this ability. "Only then we will see if we need more assistance," he said.

Alan Larson, U.S. under secretary of state for economic, business and agricultural affairs, pointed to another aspect of the new approach to development. He said that tapping hidden domestic capital in poor countries, which he estimated at $1-2 trillion (trillion equals 1,000,000 million), would bring more money for development efforts than foreign investment.

Larson said that poor countries should create an environment based on the rule of law, enforceable contracts and transparency because only then they will be able to unlock domestic capital and attract foreign investment.

His view was supported by Mexican Secretary of Finance Francisco Gil-Diaz, who cited the Mexican housing market as an example of inefficient use of domestic resources. He said that thousands of people are forced to pay extra money to build houses with their own savings because enforcement of contracts is lacking and mortgages are scarce in Mexico.

Robert Zahler, former Chilean central bank governor, took a wider view of global financial markets, drawing participants' attention to guards against volatility and contagion as preconditions for development. While the existing mechanism works better than 20 years ago, at a time of financial crisis in Mexico, he said, it still lacks essential elements, including international lenders of last resort, a body supervising and regulating multinational banks and international laws protecting countries during financial crises.

George Soros, a financier and philanthropist, proposed an idea that he said combines better protection against instability in the financial markets with funding for development projects in poor countries. He suggested that the most industrialized countries could donate their special drawing rights (SDR) allocations to developing countries, thus increasing their foreign reserves. SDRs are like credit lines that the International Monetary Fund issues to its members according to a quota. These allocations would go to a trust fund that would be used for financing of public health, education and the strengthening of legal systems in developing countries.

While well received, this proposal drew some doubts among the participants because it relies heavily on independent panels to identify, approve, and recommend worthy projects to donor countries bypassing to some degree governments and country legislatures.