*EPF413 02/07/2002
Transcript: Larson Interview on Financing for Development
(Unlocking resources in poor countries critical, he says) (4930)

During the upcoming Financing for Development conference in Monterrey, Mexico, the United States will emphasize the importance of tapping all available sources of capital to spur economic growth, says U.S. Under Secretary of State for Economic, Business and Agricultural Affairs Alan Larson.

In a February 2 interview with the Washington File, Larson said he views trade, foreign investment and the domestic financial resources of poor countries as key sources of sustainable development.

He cited trade in agriculture as especially important to developing countries, and noted that World Trade Organization (WTO) members had made a strong commitment at their November 2001 meeting in Doha, Qatar, to negotiate freer trade in agriculture.

Larson said that equally important is reduction of trade barriers among the developing countries themselves, pointing that these barriers are significantly higher than those among industrialized countries.

Governments of the developing countries should create a business-friendly climate to attract foreign investment, he said. But they should start by unlocking their own "dead capital" through the establishment of basic financial institutions and markets.

Larson said the United States views aid more as an enabling tool than a substitute for other forms of investment, and stressed that aid should be used to help countries improve their capacity to participate effectively in the global economy.

The United States will be selective "to the maximum extent possible", in focusing its aid efforts on countries whose leaders are committed to development, he said.

Aid programs and projects should be monitored and assessed, Larson said, so the most effective can be replicated elsewhere and those that are ineffective discontinued. That is why the United States has started emphasizing specific development goals, he added.

Larson pointed to the World Bank as one of the most important mechanisms for promoting and financing development, and said the United States is trying to encourage the Bank to focus on the productivity generated by its programs.

Larson said that the Bush administration wants the World Bank to provide more aid to the poorest countries in the form of grants rather than loans, so that the additional assistance does not increase the debt burden of these countries.

Following is the transcript of the interview:

(begin transcript)

Question: The March Financing For Development Conference in Monterrey, Mexico is one of the four major meetings this year elevating development as a key theme - the others being World Food Summit, G-8 Leaders Meeting, and the World Summit for Sustained Development. What does the U.S. expect to achieve at the March meeting and how will this gathering differ from the meetings that follow?

Larson: We see this series of four meetings as an opportunity that has to be seized, an opportunity to really turn a new corner on development issues.

Monterrey is focused on the financing for development. So we want to emphasize the importance of tapping all available means of financing development. That means, to be sure, some emphasis on development assistance because it can be very important in some of the weaker countries.

But far more important -- quantitatively and qualitatively -- as sources for development are trade, foreign investment and tapping the domestic financial resources of the developing countries themselves.

So we need to work hard to make progress in all of those areas.

Q: More specifically, how will Monterrey be different from the meetings that follow?

Larson: Well, each one has a somewhat different focus. The World Food Summit will focus, of course, on food and agriculture.

And I hope that there can be a very serious effort to come up with programs and approaches that will make a serious dent in world hunger, that will help turn around a situation where today we have 800 million poorly nourished people in the world, almost 80 percent of whom are women and children.

The G-8 focus is particularly on agriculture. Last year a number of leaders from developing countries, especially from Africa, met with the G-8 leaders.

And President Bush and the other leaders agreed that we should have a real focus at this year's summit on Africa and the opportunities for partnership with the African countries. So that has a particular African cast.

The last of the four -- the Summit on Sustainable Development -- really brings together everything. It really is the place where we will be emphasizing that environmental protection and social advancement and economic development all go hand-in-hand. And we will want to be underscoring that message in as many specific ways as we can.

Q: Do you see the U.S. approach to aid as representing a new paradigm towards development?

Larson: I think we showed in the launch of the new trade round in Doha that active diplomacy, working closely with the developing countries and responding to the diverse interests and needs of the developing countries, could produce win-win results.

I believe we got the launch of new trade negotiations in Doha precisely because the United States and others were reaching out to cooperate with developing countries.

I think in Monterrey we want to achieve something of the same type of success. But this time by responding to the range of needs and aspirations developing counties have when it comes to financing their own development.

I'm very pleased, for example, that we have an agreement already on the text for the meeting. That means that leaders don't have to go to Monterrey worried about negotiating the communiqu? which is one of the least productive ways to spend the time of leaders. They can talk about how we're actually going to get this done.

Q: Sustainable development is a term that is being increasingly used by aid officials. What does this term mean to you?

Larson: To me and I think to others around the world, it is meant to underscore a coming together of three important factors.

One is environmental protection. Because development is not sustainable over the long run if it comes at the cost of degrading the environment.

We believe, on the other hand, that development done in the right way actually improves the quality of the environment. And that it's really underdevelopment and abject poverty that often can be environmentally degrading.

The second component of sustainable development is social advancement. Here, too, we think this is very complimentary. We think that social advancement through education, through gender equality, through raising health standards for people is not only something that is good socially, but it's something that is really an investment in the economic sense, that it's something that improves a society's ability to grow economically and improve the lives of its people.

Third, we think that economic growth is the third pillar of sustainable development. We think that it's very hard to sustain progress on the environment or to raise social standards in a sustainable way unless one has a growing economy that spins off more resources towards those ends.

Q: How can measures in support of this approach fit in with the traditional foreign aid?

Larson: Well, one way they fit in is that foreign aid is seen more and more as an enabling tool, something that we use to help countries improve their capacity to participate effectively in the global economy, to trade successfully, to attract investment and to help them develop the sort of national plans that allow them to raise educational standards, to achieve goals like universal primary school education.

So we see aid as playing an important role, but it's a facilitative role. It is a role that helps countries be in a position to use other tools more successfully.

Q: You and others in the Bush administration have said that an essential ingredient of the new approach is country ownership. That is a conviction that poor countries themselves are responsible for their economic and social development, and that development is most likely to be achieved through national based efforts. How is the U.S. to apply this principle in its aid strategy?

Larson: Well, it's not only how we apply it, but also how developing countries themselves apply it.

One of the most heartening things to come out of some of the reflections of developing counties in the last year or two is the increased emphasis they themselves have given to their responsibility, their need for leadership and accountability in advancing development prospects in their own countries.

I think that's very healthy and it's something we need to reinforce and support through all of the programs that we can bring to bear on development.

What it means, first of all, is that we should use our assistance dollars to help other countries help themselves; that is to build capacity for them to take on educational reforms, not to do educational reforms ourselves; to build capacity for them to be successful traders in the world economy; build capacity for them to attract productive investments.

In other words, it's making sure that aid is used to enable progress rather than to substitute for these other forms of investment.

And I think probably in the last instance it means that we have to be very selective in our assistance.

We need to focus our resources to the maximum extent possible on countries and in places where the leaders themselves are committed to development and are doing the necessary steps that they have to do.

Q: Can you be specific as to what countries or regions you feel that we should emphasize in the coming months and year?

Larson: I think we're going to need to emphasize working with those countries and those leaders who have shown through the policies that they've put in place at home that they are making themselves a serious commitment to development.

Now, I'm not going to go and give you a long list of winners and losers. But let me just say, in Africa, which is one part of the world where poverty levels are higher than in any other part of the world, we've seen through the Africa Growth and Opportunity Act that even some of these very poor countries can see some new life injected into their economies through the opportunities that trade affords.

We're seeing some new factories built in places like Mauritius. We're seeing countries like Mozambique that went through a decade of civil war responding very positively to some new opportunities.

Those are the types of countries that one wants to try to be in a position to help as much as possible so they can take advantage of the opportunities to trade and to attract new factories that employ their workers.

Q: How does a lack of democracy and good governance in least developed countries inhibit growth and hamper international aid efforts and aid effectiveness?

Larson: A number of studies have suggested that in some countries a very large portion of assistance flows is rendered ineffective because of poor governance or, worse yet, outright corruption.

There has also been some interesting work by accounting firms that points to the fact that a lack of transparency can be a significant barrier to investment.

In other words, countries where corruption is rife or where regulations are unclear, where the rules are not specified, simply don't get the investment they otherwise could be expected to get because -- as frequently is acknowledged -- capital is a coward.

Capital goes where it seems to be safe, where its welcomed. If the environment looks risky or uncertain, potential investors will be weary of sending their money there. And governance is what really lies at the heart of problems -- lack of clarity in the rules, lack of transparency and lack of integrity.

Q: What can be actually done to encourage more transparency in less developed countries?

Larson: I think you have to work on it in at least three different ways. One, there are a lot of self-help efforts on the part of developing countries to participate in anti-corruption groupings.

There has been an Organization of American States (OAS) anti-corruption treaty that's been negotiated in the last few years. The OAU -- Organization of African Unity -- is working on something of the same sort.

There was an initiative by the Global Coalition on Africa to get countries to sign up to 25 anti-corruption principles.

Those are all things that we should encourage.

The second thing we can do is help build structures that promote integrity. It's another issue of capacity building. How can we help countries establish a professional civil service? How can we help promote watchdog organizations, like Transparency International? How can we build a culture of integrity in those countries?

The third thing we can do is to make sure that we're not part of the problem. The United States has campaigned very, very strongly for initiatives like the OECD Anti-bribery Convention because we think it is a crime -- literally a crime -- if rich country business leaders go into a developing country and offer bribes in order to get or retain business.

We've outlawed that more than 20 years ago in the United States in the Foreign Corrupt Practices Act. We successfully negotiated a couple of years ago an OECD agreement that extended that principle to more than 30 countries. Now we need to make sure that it's implemented.

You know, until recently many countries actually offered tax credits for bribes that their businesses paid overseas. It's an absolute scandal. It still goes on in some places. And this is the sort of practice we need to bring to an absolute halt because it is literally a shame if we have rich country businesses contributing to a lack of integrity and to corruption in developing countries.

Q: What do you see as the critical tool for mobilizing financial flows to poor countries?

Larson: Well, I should say it's not just financial flows to them, but also financial flows from within them. Because the starting point, I think, is making sure that countries unlock their own resources.

I taught school in Africa. And one of the things I remember very vividly seeing was half-built houses.

And the reason you had half-built houses in Africa when I was teaching school 30 years ago was that poor people who saved a little bit of money couldn't put it in the bank safely and they couldn't use it to get a mortgage to borrow money to build a house.

So what they did was, one block at a time, put their money into the construction of the house. And it meant that perhaps for 10 years, they didn't have any asset that was working for them.

They had what Hernando DeSoto calls "dead capital". It's capital that is sitting there and is not being used for any productive purpose.

No one was able to live in that house. No one was able to use the money that was being saved to borrow it to start a business. It was dead.

And so part of what you have to do in a developing country is bring that capital to life by letting people find a safe place to save their money so someone else can borrow it to start a trucking company or to improve their farm or something like that.

And if they've saved enough money, then to let them have access to the financial markets themselves so they can borrow money to build a house.

This is the starting point. But then beyond that, you've got all the things that governments and societies can do to increase their ability to trade and to attract productive foreign investment.

Q: How do non-traditional approaches to financing development, such as those directed toward microenterprises, fit in the overall U.S. development strategy?

Larson: We talked earlier in the conversation about unlocking the potential within countries.

And a lot of that does have to do with small, medium-sized business, as well as micro-sized businesses.

In many cases it is an access to capital issue. And sometimes you get down to some very practical things here.

You know, can a person own his or her house? Because if you're a very small businessperson, your house may be your collateral. It may be what you need to get a business loan.

So if there's a bad housing market and it's hard for you to own your house, it may in turn make it hard for you to get access to business capital.

There's also an issue about foreclosure. I mean, no one likes the idea of foreclosure on a small business.

And yet if there is not a legal system that enforces contracts, including contractual provisions on disclosure, the result is people can't borrow in the first place.

And so you have to have the sort of system that allows small business people to get access to capital. And I think that's where the emphasis on small, medium and micro-sized businesses really comes to bear.

And one other aspect to this is regulation and over-regulation. Hernando DeSoto, whom I mentioned earlier in the conversation, has done a lot of interesting work on how hard it is in many countries to set up a business. You have to go through 25 steps.

And if you're running a very, very small business and you have to go through 25 steps and at each step the bureaucracy can delay the license or the approval that you need and, in a corrupt society, ask for a pay-off before you get the license or the approval you need, it means that these small businesses don't get set up.

And that's why a flexible, light regulatory structure can sometimes be very, very important in unlocking that potential that one has within a society.

Q: What role do the international financial institutions have in this process?

Larson: They play a critical role. The World Bank is one of the most important mechanisms we have for promoting and financing development.

The United States is making some proposals to try to increase the effectiveness of the World Bank and the other multilateral development banks.

One of the things we would like to do is encourage them to focus on productivity because it is only when societies produce more that they generate more income.

And so we hope that all of the banks' activities will be judged by the yardstick of the contribution they make to increased productivity.

We've made some very specific proposals, as well. We've suggested that half of the resources that the World Bank makes available to the poorest countries should be extended on a grant basis.

We think that when the bank is deeply involved in issues like infectious diseases, post-conflict situations, or sanitation and public health, that we shouldn't be expecting that these countries repay those resource flows. They shouldn't be loans.

Most of the resources that the United States makes available within our country for these purposes are made on a grant basis.

So we believe that by having those types of things financed by loans we risk adding to the debt burden of some of these poorest countries in the world.

And so we've made a proposal to change that with 50 percent grants.

We've also said that we're prepared to increase the amount of our contribution to IDA -- the International Development Association -- which is the part of the World Bank that provides resources to the poorest countries -- year by year if we can show that there are measurable improvements in the way that development is being promoted through the programs of IDA.

So we not only think the World Bank is important. We're very actively involved in trying to improve it so that it can be a more effective tool of development.

Q: Some might argue that grants lack accountability. Is the U.S. approach accepted by other donors?

Larson: We're in active discussions and negotiations with developing and developed countries about this particular proposal.

I've heard some questions raised about the grant proposal. Frankly, I remain very unpersuaded by these questions and criticisms. We know that in our own assistance programs, which used to be on a loan basis, we decided years and years ago to simply move to grants.

So we are practicing what we preach in our bilateral programs. Also I think the accountability issue is not a persuasive issue.

I think we're going to achieve accountability in these programs by monitoring them and assessing whether they're achieving their real purposes.

The loans that IDA is extending now are extended on very low interest rate terms with long grace periods so the distinction between a loan and a grant has been blurred.

Unfortunately, though, it is still a loan. There is still an obligation of repayment. It is still on the books of the country as part of their debt burden, and it still ultimately needs to be repaid.

I think the accountability problem runs in the opposite direction, actually.

I think that by virtue of having these big debts out there, there is a moral hazard created for the World Bank to keep lending money to the countries that are particularly indebted to it to make sure that these countries keep repaying their loans to the World Bank.

I actually think the accountability argument is there, but it works in a different direction than many of the critics claim.

Q: Should there be specific indicators or benchmarks to measure the effectiveness of aid provided to poor countries?

Larson: Well, I think there definitely should. I think any time you're using taxpayers' money you need to show that you're getting results for it.

And that's why we believe that specific programs and projects should be monitored and assessed and that in areas where we're thinking about expanding our effort we should be particularly careful to assess what works and what doesn't work.

For example, the United States has pledged up to $500 million for the new Global Infectious Diseases Fund. President Bush launched this last year with a contribution of $200 million.

One of the things that we've pushed very, very hard for, as the governance structure for this new fund was set up, was a mechanism that would make sure that as we do projects in developing countries all around the world that we build into that an assessment process that helps us understand how effective this money has been in saving lives from infectious diseases like HIV-AIDS, tuberculosis and malaria.

Because the Global Infectious Diseases Fund in particular has a very, very clear benchmark, it is saving lives. And what is the most effective way of doing that? Is it a particular type of prevention program that has been underway in Botswana?

And if that is a particularly good program, how can we replicate that in other places? We need to know what is working and we need to know what is not working so we can wind ineffective programs down.

Q: What role is official development assistance (ODA) going to play in the new development strategy, and what can we say to those countries that claim that the U.S. isn't serious about supporting development because it has not been supportive of raising its ODA from 0.22 percent of GNP to 0.7 percent goal supported by many other countries?

Larson: I think the first point is that we have never believed that the emphasis should be on an input target. We've always thought it should be on results and the output target.

That's why we've supported the new emphasis on development goals like getting all primary school-age kids around the world into school, drastically cutting the number of people who are malnourished and achieving gender equality in education.

We think we need to really focus on the bottom line and these are aspects of the bottom line. The bottom line isn't how much money we're throwing into this, the bottom line is how much development we're getting out at the other end.

The other point I would make on this issue of aid levels, though, is that we are trying to increase our levels of assistance. I think our numbers are edging upwards. That's not true everywhere around the world.

A number of countries are finding that budget pressures are pushing them in the opposite direction.

The last point I would make on this is we do think that there's a need to focus on what I would call a total engagement in development.

ODA levels are one part of that. Market access is another. The U.S. imports over $500 billion worth of products from developing and transition countries in the United States alone. That alone is more than 10 times larger than the total flows of development assistance in any one year. And yet that $500 billion provides jobs and income for families all around the world.

We also need to look at the flows of private investment. The United States is the largest source of private capital flows to these developing countries, far more important quantitatively and qualitatively than ODA.

The United States is the largest supplier of private philanthropic funds to developing countries. And -- though this may be controversial in some quarters -- the United States is the most important force for security around the world.

Now, anyone who thinks about this for very long will acknowledge that security is essential to development.

And I think any fair-minded person will agree that the security role that the United States has played ever since World War II has been enormously important in fostering the stability in Europe and Asia, for example, that has contributed to hundreds of millions of people rising out of poverty.

We don't count that as development assistance. It's not development assistance. But it is a contribution to development.

And so when you look at the role that the United States plays in the world as a market, as a provider of security and a provider of capital and development assistance, I think Americans can be very proud of what we're contributing.

Q: You've mentioned two or three times now the importance of trade. What more can Japan, the European Union and the United States do to open up their markets, particularly in sensitive areas like agriculture and textiles that are so important to developing countries?

Larson: We are pushing very hard for a vigorous launch of the new round. We got the political agreement to new trade negotiations in Doha last year. Now all of us need to move forward on those negotiations.

One of the things the United States fought hardest for in Doha was very strong commitment to negotiate freer trade in agriculture, an end to export subsidies, the drastic reduction of import restrictions and domestic supports.

This is going to be very important for developing countries. I think a number of estimates have suggested that developing countries lose at least $100 billion a year in potential income because of agriculture trade restrictions. And those are particularly high in Europe and in Japan.

So we think that a multilateral reduction of trade barriers in agriculture will be very beneficial to the developing countries.

We are prepared, as well, to work in this new round to see further reduction in trade barriers to manufactured products that can be very important to developing countries, as well.

The other thing that's important for developing countries is a reduction of their own trade barriers. They, on average, have significantly higher barriers than the developed countries do. And they are hurt by their very own trade barriers. There could be a much greater expansion of trade among developing countries if these barriers come down. I think they will come down as part of the new round we're now engaged in.

Q: We started off by talking about the four development meetings this year. Nine months from now when these four meetings are over, where would you like to see the United States, the world heading on development issues?

Larson: Well, I think that a year from now we should be seeing signs that this was the year that really made a difference.

And it made a difference in that people didn't just talk about new approaches, but they began to put in place some new approaches that raised productivity levels of farming in developing countries, that there were some concrete actions underway to increase research and development, that the fruits of that research and development were being made available to developing country farmers, that there were fields that were being planted in agricultural biotechnology, and that biotech cotton and biotech cassava and biotech sweet potatoes were being grown in more and more fields -- first on a test basis and then on a more commercial basis.

And if you just take that microcosm of issues that relate to agriculture and apply it to education, and apply it to the rapid implementation of the infectious diseases trust fund, and apply it to capacity building in the area of trade and the area of investment, those are the types of activities that you would want to see happening a year from now so that in two or three years you would begin to see the people who have jobs that they didn't have before in the agricultural sector, and see kids who are in schools that are working more effectively that weren't there before.

It starts slow. But it starts because you don't just have a vision, but you have a plan that backs that vision up.

(end transcript)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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