*EPF216 03/05/2002
Transcript: No Development Without Growth, State's Larson Says
(Private sector initiative, resources viewed as critical) (8200)

Poor countries cannot achieve sustainable development without productivity-driven economic growth, Under Secretary of State for Economic, Business and Agricultural Affairs Alan Larson says.

Consequently, he said, they have to use all financing sources to increase productivity and keep their economies growing.

Speaking February 28 at the London Business School in London, Larson pointed to untapped domestic savings and money tied up in inefficient enterprises as potentially the most plentiful sources of capital for development. He said that these resources can be unlocked when strong legal and financial systems with enforceable contracts and property rights are created.

Full liberalization of trade could give poor countries access to another major source of financing for development through increased exports, Larson said. But to make it happen, he added, rich countries have to open their markets to products, especially agricultural products, from developing nations. To assess the potential of trade opportunities, Larson said, one only needs to realize that rich country agricultural subsidies are five to six times the amount of development assistance.

He said that the United States is trying to expand access to its markets through preferential programs that amount to one-way, free trade for the poorest countries.

It is also important that developing countries reduce trade barriers among themselves, he said, because some 70 percent of the burden restricting their manufactured exports results from the trade barriers of other developing countries.

But the more general problem of agricultural protectionism can be attacked only in the World Trade Organization's new global negotiations, to which the United States is "very committed," he added.

The contribution of official development assistance (ODA) to the general financial flows to developing countries has been consistently falling, but ODA can still play an indispensable role helping these countries to tap into private financial flows, Larson said.

He said that the Bush administration wants multilateral development banks that administer ODA to put more emphasis on productivity-driven economic growth and good governance. And donor countries need to be more selective in their assistance, Larson added, because in countries with poor policies assistance can do more harm than good by, for example, crowding out trade and investment.

Larson also addressed a U.S. grant proposal that has created a controversy in other countries. The Bush administration has proposed to convert 50 percent of concessional loans provided by the World Bank's International Development Association (IDA) into grants. European countries have criticized this proposal arguing that without repayment obligation on the part of aid recipients and clear commitment to replenish it from major donor countries, IDA will dry out as a major source of assistance.

Larson called these fears "misplaced." He said it would be foolish to base IDA's future financial viability on reflows from the world's poorest countries because loan-repayment obligations only increase their already unsustainable debt burden.

"To a degree that hasn't been fully appreciated, the debt burden of the highly indebted countries is a result of the lending policies of the international financial institutions," Larson noted.

He said, however, that the U.S. pledge to increase its IDA contribution is a clear indication of a commitment to fully support IDA on the part of its largest shareholder.

Nevertheless, Larson emphasized that thinking about development has to shift from calls for more official assistance to focus on development results that the international community can get from development aid.

"It is important to aim for the goal lines, not for the headlines," he said.

Larson said that new approach is necessary because only if donor countries can show that development aid brings real results can they ask their citizens and legislators for more assistance.

Following is the transcript of Larson's remarks:

(Note: In the text "billion" equals 1,000 million and "trillion" equals 1,000,000 million.)

(begin transcript)

REMARKS BY UNDER SECRETARY OF STATE FOR ECONOMIC, BUSINESS AND AGRICULTURAL AFFAIRS ALAN P. LARSON

The London Business School
February 28, 2002

TURNING THE CORNER ON DEVELOPMENT
A Private Sector Growth Strategy

Good Morning. I am very pleased to be here and to have the opportunity to share some views on the important issue of development policy. I would like to also congratulate my former colleague and friend, Laura d'Andrea Tyson, on her appointment here and congratulate you on having the wisdom to bring her.

This morning, I would like to offer a few American ideas on the issue of the role of the private sector in driving economic development.

President Bush is committed to expanding the global circle of prosperity and freedom. That is one reason why he's going to be attending next month a very important United Nations Conference in Monterrey, Mexico, on the Financing for Development.

Our message in Monterrey is clear. There can be no sustainable development that is not grounded in productivity-driven economic growth of developing countries, and that the most important engine of growth is the private sector. In fact, in order to make significant progress on poverty alleviation in the developing world, we are going to need to see GNP [gross national product] gains on the order of 6-8 percent each year. That's a very ambitious but also necessary objective. In order to reach and sustain those growth rates, developing countries are going to have to increase productivity.

While growth and productivity rate increases are the objectives, this is really just the means to get to the bottom line - and, as business executives, you all know how important the bottom line is. In the development area the bottom line really is achieving development results. How many people will be lifted out of poverty; how many children are in school; how many people learn to read and write; how many children escape childbirth death; how many mothers survive childbirth and lead healthy lives; how many people around the world are able to live in a clean environment.

To order to achieve those goals, developing countries are going to have to use all the financing sources that are available for them to keep their economies growing.

That is one reason why, when we think about development, we start with the universe of financing sources: the domestic savings of the developing countries themselves, trade and investment, private-public cooperation, as well as foreign assistance. Our perspective reflects the radically changed global financial realities: forty years ago, 70 percent of the financial flows to the developing countries was foreign aid; today that's only 20 percent. The majority of the flows by far are private flows.

Developing country leaders increasingly are recognizing that they bear the primary responsibility for the development of their own countries and that begins with good governance.

Sustainable development requires good governance and we have seen historically that planned economic growth and poverty eradication have occurred over long periods of several generations, it has generally been in situations where governments are open, democratic, inclusive and accountable.

The most important resource for financing development is the hard work and initiative of the people of developing countries.

People in developing countries produce goods and services valued at between 6-18 trillion dollars annually; last year the World Bank estimated that domestic savings of developing countries to be almost $2 trillion. So, the first and most basic task of development policy is to make sure that this vast outpouring of effort, hope, and sweat produces lasting gains.

The poor can make lasting gains only when they can save safely and can invest profitably in the future. They need legal systems that confer reliable, enforceable title to land and other assets.

The Peruvian economist and Nobel Prize nominee Hernando De Soto has estimated that in developing countries, 75 percent of all real estate parcels lack formal title. The absence of clear title cuts off access to finance for poor families that want to buy a home, for small farmers who want to improve their land and for entrepreneurs who want to start a business.

When legal and financial systems are weak, those who do manage to accumulate capital often resort to capital flight. The United Nations has estimated that Africa's private sector holds nearly 40 percent of its wealth abroad. This amounts to some $360 billion or roughly the amount of Africa's external debt. By working with developing countries on domestic legal and financial systems, we can help them put their capital to work at home.

Now trade is another important means of financing sustainable development. Developing countries exported close to $2 trillion last year. Full liberalization of trade could dramatically increase their exports. That is one reason why the United States is fully committed to the Doha Development Round.

In this new round we need to offer developing countries better access to our markets. And in particular we need to provide better access to our agricultural markets. Rich country agricultural subsidies amount to $1 billion a day and this is 5 to 6 times the amount of development assistance. And since 3/4 of the world's poor live in rural areas, opening up agricultural markets offers one of the best and quickest route out of poverty.

It's also important for developing countries to reduce their own trade barriers because already trade in non-developing amounts to more than 40 percent of world trade and the World Bank has estimated that some 70 percent of the burden on developing countries' manufactured exports results from the trade barriers of other developing countries. So trade liberalization by developing countries is also an important part of the development strategy.

Foreign investment flows to developing countries and among developing countries amount to $180-200 billion annually. Foreign direct investment is important because it brings not only capital, but also technology, management techniques, good environmental practices and knowledge of foreign markets. Foreign investment flows to developing countries have grown exponentially and they could increase even more as countries put in place strong investment policies.

Official development assistance, at $50 billion annually, is much smaller than these other financial flows. Nevertheless, ODA can play an indispensable role, especially if it helps countries tap into these larger flows.

That is why the United States has increased to over $500 million annually our programs that strengthen countries' capacity to build market institutions, to attract investment and to participate effectively in the trading system. The United States is also increasing our assistance in other areas that we think are absolutely essential to sustainable development. These include education, health and agriculture. At the same time we are working hard to better measure development outcomes so that we can assess the effectiveness of our assistance.

The Multilateral Development Banks are among the most important mechanisms for channeling resources and know-how to developing countries.

We believe that the MDBs can make an even more effective effort in reducing poverty. We would like to see them organize their work tightly to give primary emphasis to balanced, productivity-driven economic growth led by the private sector.

We endorse the World Bank Group's Private Sector Development Strategy, particularly its proposals on conducting systematic investment climate surveys to identify features in an economy that most enhance productivity and income growth.

We would also like to encourage the Multilateral Development Banks to increase their direct support for private sector trade and investment, along the lines of the European Bank for Reconstruction and Development (the EBRD), which is based here in London. The MDBs need to help countries seize the benefits of trade through capacity building and help countries make the fiscal and structural policy changes that are necessary for them to take advantage of emerging new opportunities in the trading system.

The MDBs should also continue and expand their work on governance, especially attempts to assess and reward good governance. Good governance and sound economic policies allow aid to work most effectively, thereby leveraging trade and investment flows. In contrast, in countries with poor policies, assistance can actually have a negative effect, either crowding out trade and investment or at least reducing the incentive for countries to correct policies. That's why donor countries need to be more selective in our assistance, rewarding good practices and not rewarding countries that prevent or stifle growth.

Now in the negotiations over the replenishment of the soft window of the World Bank, the International Development Association, the United States has offered to increase our assistance by nearly 20 percent over three years if we can get agreement on performance benchmarks, and if those performance benchmarks are met.

This is a very important initiative and it's one that suggests a basic win-win proposition. If we can increase the effectiveness of development assistance, then development assistance itself can be increased. And if we could get other developed countries to take this approach as well, we are confident that the developing countries and development institutions would respond. Together, we can make a very big difference.

The United States also has made another very important proposal on IDA. We have suggested that half of IDA's resource flows to the poorest nations should take the form of grants rather than loans. Using grants rather than loans will let the World Bank fully support "pre-development" activities such as education, health, and sanitation. These are activities that don't necessarily generate quick or immediately identifiable financial returns. By doing this the bank will be able to support development without creating once again an unsustainable debt burden on the poorest countries.

Some critics of the U.S. grant proposal have suggested that the Bank may be starved of resources 10 to 40 years from now if the poorest countries in the world are not required to repay IDA.

These fears are misplaced for several reasons.

First the U.S. pledge to increase our IDA contribution over the next three years is a clear indication of a commitment on the part of IDA's largest shareholder to fully support IDA and its work. I have no fears about the future financial viability of IDA.

Second, it would be foolish to base IDA's future financial viability on reflows from the world's poorest countries. Unsustainable debt burdens -- including debt burdens to IDA -- are a primary reason why the developed country taxpayers now are being asked to contribute to debt reduction through a trust fund. Monies that will be used to pay back to the World Bank loans that the poor countries themselves are not able to pay.

For several decades now IDA and its developing country borrowers have been able to evade the reality of unsustainable debt burdens, because IDA enjoyed a preferred creditor status. Basically this meant that when debt problems arose, other official creditors in the private sectors were asked to step in and reschedule or forgive their debts while IDA was repaid in full. It would be more honest and straightforward to recognize that these resource flows to the poorest countries are already grants in essence and should now be considered as grants.

One reason why we feel that is that the provision of these soft loans undermines rather than supports the development of the credit culture. In developing countries the provision of soft loans that don't have to begin to be repaid for 10 years creates a certain cynicism. Finance ministers look at a proposed loan and say, "We know that we can't repay this but I am going to be gone long before the 12 years are up, so why not take it?"

These loans can also undercut the ethic of selectivity in the Bank itself, because they produces institutional pressures for the banks to provide new resources to countries not on the basis of their performance but on the basis of the fact that these countries need to repay loans to the World Bank itself.

This grant proposal is an urgent issue. It does not threaten the viability of the World Bank; instead it strengthens it. We are working hard with our donor partners to reach a proposal that will be acceptable to every one of the supporters we can get.

I would like to offer a few comments now about aid volumes. For the thirty years that I have been in public service there have been persistent calls for increases in aid levels. During that same period, assistance levels measured as a percentage of GNP have actually been declining, particularly in larger countries like the United States but also the larger European countries and Japan. This approach hasn't worked. Perhaps it's time for a new and different approach.

In talking about aid levels, it is important to aim for the goal line, not for the headlines. The goal line is results -- reduced poverty, universal basic education, reduced infant mortality, a cleaner environment and the elimination of hunger.

If we can show that we are mobilizing effectively all of the sources of financing for development and that we are achieving real results on these objectives then we are going to be in the position to make the case to our citizens and to legislators that it's appropriate to increase development assistance budgets.

In closing, I would like to thank you and to say a few words about events of the last year. Since September 11, the United States has changed in a very deep and lasting way.

We suffered a terrible attack on our own soil, in the heart of our best-known city. We know that additional attacks are being planned. The American people and the Bush Administration realize that we are a nation at war.

We are never going to forget the immediate and concrete support that we have received from Great Britain, our staunchest ally. Together with Great Britain and other coalition partners we are determined resolutely and patiently to confront and defeat those who would seek, through terrorist acts, to take innocent lives and to shake the foundations of the civilization that we all cherish.

At its root, terrorism is an ideology that feeds on despair and poverty of spirit. It attempts to demean human beings by sowing death, destruction and fear. To overcome that we need to offer an alternative. A sound development policy, which is focused on and gets results, is one of the best ways of offering young people around the world an alternative vision of hope, opportunity and freedom.

The United States is serious about supporting those who are looking to build a better life for themselves and their children. We are serious about working in partnership with other countries to advance goals we share.

I've just come from a very useful meeting with our colleagues in the government of the United Kingdom who share the many of our goals on development and we are trying to work together on some common approaches. Development progress over the last few decades has been impressive. In the last 30 years, hundreds of millions of people have been lifted out of poverty, but obviously far, far too many have been left behind. So we are eager to work together in the course of this very important year to ensure that we come up with the practical programs that will enable many, many others to gain hope and start building the basis of sustainable prosperity.

Thank you very much and I do look forward to our discussion.

QUESTION: A question about IDA. Your proposition, or the U.S. Government's proposition, that aid must be effective, is widely accepted. What's not as clear is the conditions you are attaching, or trying to attach, when you talk about improvements. I think you're saying that aid could be better channeled if there were benchmarks. So what exactly do you have in mind, given that you are talking over the next three years? Capital gains will basically be an issue over the next ten years and how do you respond to the idea [inaudible]?

LARSON: We have two very important initiatives on IDA. They are related, but they are distinct, one from the other. The proposal for moving to 50 percent grants is not subject to any particular conditions. It's something that we think should occur for resource transfers to the poorest countries in the world, and we are in dialogue with partners around the world about how to accomplish that.

Some of the discussions resolve around focusing on per capita income levels, in other words, just making a cut off at a certain income level and saying that at that level a certain percentage of the resource flows will be on a kind of grant basis. The other approach is looking at particular types of activities, like eradicating AIDS or investments in public health and sanitation, or activities in post-conflict countries that are just pulling themselves up after a prolonged period of civil disturbances. So we're prepared to look at it from either of those perspectives but we aren't putting any particular conditions on it.

The second proposal is the proposal to agree to phased-in increases in IDA contributions, that would be related to progress in achieving benchmarks and we have put into President Bush's 2003 budget a specific proposal for those types of increases that are programmed in the budget presentation. We would be the first to admit that there needs to be some work, serious work, among all of our partners on exactly how to measure those indicators of improved performance. And I think frankly that it's a different task in the very, very short run than it is in the intermediate term.

In the intermediate term I think it's clear that what one wants to measure is whether the programs that the Bank or IDA are carrying out are helping countries make progress on these international development goals of reducing poverty, getting kids in school, cutting infant mortality, eradicating hunger. I mean it's a fairly straightforward thing. We all know that those are things that move slowly, and I think that in the shorter run during the period of the three-year IDA replenishment that what we would be looking at would be intermediate variables, variables that would help us understand institutionally whether the Bank and countries are taking steps in the right direction. But, therefore, it would be valuable in helping us to assess whether we are making progress.

The key for me politically is that this is an opportunity to strike a basic bargain, to say, yes, we've heard calls for increased assistance, we've also heard calls for increased effectiveness of aid, let's not let these two ideas be in conflict, let's join them together and say if we can show through some agreed benchmarks, that aid is being used more effectively, then increased resources would be made available.

Q: My name is [inaudible] from the London Business School. I'm from sub-Saharan Africa. I have two closely related questions. First of all is why the U.S. and all the other aid agencies fund this business at all and, if it is for altruistic reasons, then is linking bad governments, bad local governments to giving aid, a rational way to go, because if you are signaling to governments that they are bad governments and they will never change, from my experience, and I think a lot of other people's experience, they get the message but they don't care a great deal. And if this is for altruistic reasons, aren't these the countries that actually need a method other than channeling this aid through governments? Isn't there an urgent need for a method to get this aid on the ground?

A: The answer I think is yes. Let me start out by saying that there is some portion of U.S. assistance that has been and will for quite a while be related to security and political considerations and that's not divorced from development because I think to the extent that one is trying to promote peace in the Middle East for example, one is trying to lay the foundations for development and prosperity in that part of the world.

But what one looks at what is purely conceived of as purely development aid to countries of sub-Sahara Africa for example, I think the starting point is that the studies of the World Bank have shown that in countries that are broadly following good development policies, assistance can be very effective in leveraging even greater private flows, trade and investment and unlocking domestic financial capability, so there can be a very strong pay off to the resources, whereas when you channel aid through governments that are not pursuing good policies the opposite happens, there is no multiplier and in fact they may be even discourage indirectly, effective policy.

So, purely from the standpoint of using taxpayer resources most effectively, there is an argument towards providing more resources to countries that are pursuing sound policies. Now, we do draw a distinction between development aid and humanitarian aid and we try to supply humanitarian aid on the basis of helping people, and we try to do that, by working through non-governmental organizations. For years and years in Afghanistan when it was ruled by the Taliban, a regime that we had no time for, we nevertheless were the largest supplier of humanitarian assistance to the Afghan people, working through the World Food Program. So we have always been prepared to provide direct support to the people, working through private organizations when it was a question of humanitarian relief, but we do believe that we need to be as selective as possible in providing development assistance, because we just get more pay off, we save more lives, we build more opportunity and we work with governments in pursuing certain policies.

Q: I work with Action Aid, which is an NGO working on poverty issues. I like the suggestion that we should focus on results, development results. [inaudible] So if you look at the results over the last few decades, I think we see a real mixed picture. It's true that we've had some gains in particular pockets but overall, I think that the picture still looks bleak particularly in sub-Saharan Africa where a large majority of poor people live and in South Asia, again you have a few countries that have done well, but overall the picture is not good.

The British government that we need to lobby [inaudible] The British government is particularly of the view that somehow in 2002, particularly with September 11 et cetera, this year offers us a real window to see some real progress and the fact that they've had phenomenal prosperity in the West and there's a real opportunity to do something. We also need the poor country governments and African governments in particular saying, there are a lot of things that I think we need to do, but we've also done it. They've liberalized their economies quite a good deal and we're working on governance issues et cetera. So what I want to ask you, is what the U.S. as the largest economy in the G-8, in 2002 what is it that we can really expect to happen from the U.S. because the big conference is coming up. If we take trade, aid and debt as the three big issues, will there be talking of the extra mile, is there likely to be a war against poverty?

A: What I have been trying to lay out are the ideas of my government about how more a vigorous and effective war against global poverty could be waged. On the trade side of the issue, we feel very strongly that it is important to really promote trade as an engine of poverty alleviation. The President is passionate about this. We've tried to use the Africa Growth and Opportunity Act as one important tool. We've seen that even very poor countries in Africa have been able to use the prospect of improved access to the U.S. market as way of stimulating investment, creating jobs. We want to work harder on this whole question of capacity building so that countries can figure out how to use this situation to take advantage of the opportunities to draw in investment and to help promote their local and the global economy.

So that trade dimension is very important. As I mentioned briefly in my remarks, we think that there's a particularly strong role to play in agriculture on the trade side. Right now, we've mentioned the subsidies, the other trade distortions.

There's frankly another problem for African agriculture that I didn't mention but will now, and that's the position that some of the European countries have taken on agricultural biotechnology. There was a conference last week in Washington where a number of developing country agronomists and experts came and talked about the wonderful experiments that are going on around the world in developing bio-tech cotton, bio-tech sweet potatoes, bio-tech casava. These are things that can not only be beneficial to the environment because they use fewer herbicides and pesticides, they can improve nutrition, they are farmer-friendly. It's something that we really ought to be promoting and we would like to see a stronger international effort through our assistance agencies to promote agricultural productivity using all the tools that we have.

But right now, a lot of these efforts in developing countries are in doubt because the developing countries and developing country farmers are concerned about their access to the European market given all the controversy about bio-tech food here in Europe. So that's the trade piece of this.

You mentioned debt. I think there are two things which we have to do in the debt area at least. One is to implement very vigorously the established HIPC program -- Highly Indebted Poor Countries initiative. The United States has been the strongest supporter of that and we are implementing that very vigorously. We also think that moving on this grants proposal is important because we want to stop building up the second debt burden. To a degree that hasn't been fully appreciated, the debt burden of the highly indebted poor countries is a result of the lending polices of the international financial institutions. Now we are never [inaudible] international financial institution. We've been a part of that policy, but we have looked at this and felt it's time to make a change and move towards at least 50 percent grants for the poorest counties so we don't build a new debt problem. So, that's the debt piece of what you suggested.

On the assistance piece, I think our ideas can be summarized in the following way. One, let's try to focus very, very hard on those areas that are central to development and that are central to helping people. We are increasing our aid budget for education, health -- where the President is committed now $500 million for the global infectious diseases fund, to fight AIDS, tuberculosis and malaria -- and also in agriculture.

So let's focus on some things that really directly improve people's lives. Let's increase our funding for these capacity building programs where countries can basically help themselves; we can help them to help themselves. Let's focus on selectivity so that we are using our aid resources more effectively and to have countries who are following good policies and let's measure the results of the programs that we are following so that we can expand things that are working and reallocate resources to programs that are working. And we believe that if we do those things we can make the case for increased budgets for aid, and that's why the United States has committed to this nearly 20 percent increase in our contribution to IDA for the poorest countries in the world, provided we can get a good solid beginning on measuring performance.

Q: The Times. You mentioned earlier on trade, I was just wondering whether we are going to get any signal from the U.S. government as to whether they are going to make a very conservative effort with these trade barriers. Many of these developing countries which you are talking about need to be [inaudible]. In order to do so they need to export, they need to get dollars and you are the biggest market. I mean what sort of commitment are we going to get from the Bush Administration that the Doha process [WTO negotiations] is going to generate some real reductions in trade barriers. You alluded earlier on to agricultural subsidies, is the U.S. going to eliminate its agricultural subsidies?

A: I think that this is the crucial part of the agenda. And it needs to be approached in two broad ways. One is that we want to make the most effective use of our preferential program, which is one-way free trade. The U.S. has several programs that are very important in this regard. One I mentioned is the Africa Growth and Opportunity Act. This is a new program but it's already having very good results and we've taken recently some steps to expand it slightly. We want to be working with it this year to help countries that haven't yet begun to benefit from it, by enhancing our capacity building program.

We also have similar program for the countries in the Caribbean, and together these two programs really are the counterparts to Europe's Everything but Arms program, a very important one-way trade benefit scheme. We are going to be pushing through the re-authorization of our General System of Preferences, this is something that's available to a much wider group of developing countries, the very poor ones and but also some not so poor developing countries. And we will be pushing through hopefully next month an extension and expansion of the program for the countries of the Andean region.

So, that's the one way free trade approach to promoting the trade opportunities of developing countries.

But the second thing that we need to do is to really move forward on the Doha Development Round. And there are two reasons for that frankly. One is that it's only in a global trade round that we are going to be able to attack the problem of agricultural subsidies and the problem of agriculture protectionism. Almost all of the efforts of the United States at the Doha Conference when this new round was launched, were built around the goal of trying to have language as strong as possible on agriculture. For us the centerpiece to build around is the elimination of agricultural export subsidies, and a dramatic reduction of domestic support and subsidies. That's our number one objective. We gave away a lot frankly in Doha to be able to get a good start towards that objective, and we are going to be very committed to it.

You may be alluding indirectly to the farm bill, which is working its way through the Congress, which I think incredibly showed [inaudible] in the direction of increasing some of the subsidies in U.S. agriculture. Certainly if we can bring down subsidies on a multilateral basis in the Doha round, we will be happy commercially but we also will have done a lot to help developing countries have a better opportunity to trade.

Now the other part of the multilateral agenda is this point that the developing countries themselves will be helped as their own trade barriers come down. They are not helped by the trade barriers, they are hurt by the trade barriers that they keep. In general trade barriers in developed countries are rather low compared to tariffs in developing countries. Africa on average is something like 20 percent. Some of the more prominent developing countries, such as India, Egypt and Brazil, their tariff levels are even higher.

This is a problem for a couple of reasons. First of all because many of the most important export opportunities for developing countries are to the markets of other developing countries and there can be a tremendous growth of trade among developing countries if we can on a multilateral basis bring these trade barriers down.

The other reason why these barriers are problems, because of their misallocation of domestic resources that they tend to cost and if you go to a country like India you find that a tremendous amount of domestic capital and a tremendous amount of the domestic labor force is basically trapped in industries that aren't competitive. They are not growing, they are not producing any growth in jobs or any growth in income, they exist because of trade barriers. Now this is the long run is not a good way to organize your economy because you want to get your domestic resources into the areas that are faster growing and which you have a bit of an advantage. So, with respect to trade liberalization, you could say the developing countries themselves are part of the answer to poverty eradication and international development.

Q: Sloane Business School. I was hoping on trade that you would say that the administration was definitely not going to impose new duties on steel. But I was very pleased, we are very pleased that you are here talking about these issues but I think that it's a sign of perhaps an [inaudible] between State and Treasury on these issues that may have prevailed in the previous administration. I was also pleased to hear you say that you were very much at one in your thinking with the UK government and wondered, this is the question, of whether you think that extends to agreements with the proposals by the Chancellor of the Exchequer for a major increase in development aid of $50 billion. You have spoken of a 20 percent increase, does form part of what the Chancellor [inaudible]? Is the United States willing to go that far? Is the Administration going to get Congress to go with it?

A: Three points. One, on steel, I don't know what the President's going to decide to do overall. We have to make that decision by Wednesday of next week, and I can only give you the platitude that we have been working enormously hard on this with every country that has stake in this, and with every company that has a stake in this. The issue has been analyzed up one side and down the other and I am sure it's going to be a very, very tough decision for the President.

On your broader point about decision making, I am in the same job now as I was during the last two years of the Clinton Administration so, which is rather unusual. I'm the first career person to be in this job and I am certainly the first person to continue to hold the job in its change of administration, so what I would like to really underscore here is that we have tried to have in each of the last two administrations a well coordinated international economic policy on issues like the multilateral development banks.

As you may know, I am the alternate U.S. Governor to the World Bank. Secretary O'Neill is the Governor; he is our principal representative. And I think that we are trying to make sure that there is a very strong foreign policy input to our development policy both because of the linkages that sound development policy has to global stability. But also because we think that we can only achieve these development outcomes by a working in partnership with developing countries and using some of the tools that we have including our embassies abroad on current issues.

Now on the level issue: As I mentioned in my remarks, I don't want to seem cynical, but I can't help but observing that we have had these calls for either doubling aid or reaching 0.7 percent of GNP for a long, long time. It simply hasn't worked, and one of the reasons I think it hasn't worked is that we have not had the buy-in from our own people and from our legislators who actually vote the money. I am very skeptical of approaches that are very, very ambitious but without having a path by which that ambition is achieved.

What we have been trying to emphasize is a sort of step-by-step approach. We have made a commitment over the course of three years to increase by nearly 20 percent our contributions to IDA. We've said that that we are prepared to see that happen and to make sure that that assistance is working and I think that's a signal of the approach that we are taking more generally and with respect to initiatives like the infectious diseases fund.

The President last year committed $200 million for the Fund, the first contribution to it. And he said more would be coming if we can get this set up in a way that shows that it's really going to be focused on saving lives, not spreading the cash around on some sort of political basis, but on who is coming forward with this specific proposal that will save lives from infectious diseases. We are satisfied with the way that the governing structure was developed through the end of last year and now we have committed an additional $300 million. So we are putting our money where our mouth is and we are doing it in very specific ways.

I think that there's a real temptation for short cuts in this. We have heard a lot of talk about SDR [special drawing rights] for example. There's been a lot of discussion about using these special drawing rates at the IMF as a way of financing government assistance. I remember when as a graduate student, probably an undergraduate student of economics, I was reading about all of these proposals and using SDRs to promote development. So this is one of the older ideas in the field of development economics.

I don't think it's going anywhere. It is certain that it tries to alter the tool that's designed to promote liquidity in the international financial system, a general approach that's a better way of enhancing development. At a conference in Washington a couple of weeks ago, proponents of the SDR idea would say almost simultaneously that this wasn't a way to avoid going to legislators for money and would then say actually yes it was a way of trying avoid going to legislators for money.

I think we need to be straightforward, we ought to have said we are not going to do any [inaudible] funds. We are going to go and make the case to the Congresses and the parliaments around the world that more assistance, more of these types of activities, are in the national interest, as well as our altruistic interest, but to do that effectively, we are going to need to show results. So let's get down to the difficult work of making development assistance effective and making it combined effectively with these larger resources.

I really do want to insist, that if you are talking about financing for development, $1.7 trillion in domestic savings and a couple of trillion dollars in export earnings and a couple of hundred billion dollars worth of foreign investment, each of which could grow enormously, that you simply can't avoid focusing on how those resources are used effectively. And you have to do that, I would argue, even with increased aid levels, which are always going to be a much, much smaller part of the resources available for development.

Q: Can I ask one quick follow up? You talked about [inaudible]. Is it ever discussed the possibility of a compromise in the position where the U.S. espouses larger [inaudible] development systems for in return for [inaudible]. I mean these are two huge issues, that Europeans tend to be more supportive of the idea of a large increase in development than the U.S. The agricultural subsidy policy clearly [inaudible]. Is there some [inaudible]?

A: I think you can all see why Dr. Tyson was head of the National Economic Council. It's a very attractive idea to say let's agree on some sort of political bargain, on some dollar per dollar basis we are going to reduce agricultural export subsidies and put that money into a development fund. I have not until just now heard it expressed quite that directly.

Q: I work for the Financial Times here in London. Mr. Larson, the U.S.'s own aid program has been criticized by lots of experts over the years, partly because so much of it is tied to buying U.S. exports and secondly because I think the glint of it has a very strong foreign policy element, not only in the Middle East but also in poorer countries in particular in Zaire. Given that, how much credibility do you think U.S. proposals in this area have within the international community?

A: I think our bilateral assistance program is one of the most effective bilateral assistance programs in the world. We've been a strong supporter of untying aid. I think we've gone further than most countries in untying aid, typically the one big exception, unfortunately the one they tend to point to, is food assistance where typically on food assistance programs, the Food for Peace programs are based on procurement of U.S. food, not exclusively, but the vast majority of it is U.S. food. These reasons are understandable and I don't necessarily want [inaudible].

I do not apologize for the assistance that we provide to countries like Egypt or Chad or countries where the rationale for the assistance is for a mix of security and what they call economic considerations. We know that insecurity and conflict are very destructive to development. I served earlier in my career in Sierra Leone and then Zaire,. The reason that Sierra Leone has the lowest level of human development in the world is because there's been a civil war going on there for 10 years. So, when one uses assistance to try and foster peace and stability and security, I consider that pro-development and I sort of put our assistance to places like Egypt in that category.

What are we doing? We are increasing our assistance for education, basic education, increasing our assistance for health. I gave the example of infectious diseases. We're increasing our assistance for agriculture and we are increasing our assistance to Africa. So, I think that if you look at the numbers you will see that we have an assistance program that's very focused on achieving the goals. It's one of the things that we do do rather well is to move more quickly and let others, in particularly, multilateral institutions. There's always room for improvement, but I think the current AID director is an extraordinarily committed person in this unique agency.

Q: The Guardian. It's a follow up really to this question as to whether or not the U.S. aid budget is putting money in the right places. I appreciate what you are saying about the importance of security in the Middle East, but it really is quite a different issue from raising people out of poverty in that, you know, in Egypt and Israel the U.S. spends a large chunk of its AID budget in middle-income countries. And I am wondering whether you are all going to provide the performance targets that you were talking about for development banks to your own aid program?

A: Well, we are certainly trying to, by the way, the assistance, the economic assistance we give to Israel doesn't count as aid. When you get the ODA scorecards of the assistance we give to higher income countries like Israel, it isn't something that you get credit for, even though we think that it's an important investment.

I think the answer is yes, we are trying to measure results in all of our programs. We are particularly interested in doing that in ones that we are trying to expand like education, health and agriculture. This is something the President feels very strongly about. It's a philosophy he developed when he was Governor in Texas and so we know that any time we suggest an initiative of any kind, one of the first questions is going to be how are you going to measure success.

If you bring in a case like Egypt, where some part of the rationale for our assistance is political and security, we've tried very hard to link that to improved economic performance. I was out in Egypt in December and had a chance to talk to the Prime Minister and the Trade Minister and others about their economic program, and one of the things that we were able to do, subsequently when we saw that they had made a major set of initiatives on the exchange rate, and on other aspects of their economic growth strategy including some trade policy commitments, was to accelerate the dispersal of assistance in the pipeline in recognition that they were making some very positive steps in the right direction.

So, I think the answer is yes, to the question of applying these benchmarks and standards to our own policies and there are very specific examples from it.

(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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