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European Affairs
International Development
To Help Poor Countries, U.S. Favors Private Aid and Good Governance
By Andrew S. Natsios
We are at a watershed moment in history. The tensions and bipolarity that characterized the Cold War are gone, and one after another the states of Central Europe are joining NATO and the European Union. On the other hand, there are many nations outside these institutions that are failing in ways that are very dangerous to them and to all of us.
Despite headlines suggesting continued discord between Europe and the United States, there are many things that unite us. One of them is that the percentage of Europeans and Americans that believe that terrorism is a serious threat to our societies is exactly the same – the figure is 77 percent on both sides of the Atlantic.
The terrorist attacks of September 11, 2001, highlighted this danger in a dramatic fashion, focusing this country as never before on the threat of terrorism and the dangers posed by failed and failing states. The media has made much of the growing polarization of political attitudes in Europe and the United States, and, if true, this might present a challenge to the Transatlantic partnership that has been central to the security and prosperity of our countries for 60 years.
Nobody can dispute that there are disagreements among us, but I seriously doubt that they really threaten the basic foundations on which our alliance is built. We are working together in many areas. In Afghanistan, NATO now is in command of ISAF, the international force that is patrolling Kabul, and in the U.S. Agency for International Development (AID) we hope that NATO will expand its presence further, because security is needed to reconstruct the rest of the country.
Among our many common interests, we agree on cooperating in the fight against terrorism. Our cooperation in this fight has been exemplary, which is probably why we never read about it. We also all agree on the importance of development assistance. Most people, even in the United States, do not realize that President George W. Bush has increased the aid budget for Africa by 35 percent over two years, after 20 years of stagnation.
Some of our European critics say that the United States is still not fulfilling the UN aid target of 0.7 percent of GNP, which Europe is much closer to meeting. But we are never going to do that, politically or practically. If we did, the World Bank might go out of business because the amount of money in our AID budget would be $60 to $70 billion and the third world could not absorb that much money. The fact is that we have instituted the largest increase in foreign aid in more than 50 years.
The National Security Strategy that President Bush issued in September 2002 stresses the dangers of the extreme ideologies that are developing in some areas of the world, as well as poverty, corruption and political injustice. In the words of the strategy paper: “The events of 9-11 taught us that weak states like Afghanistan can pose as great a danger to our national interest as strong states. Poverty does not make poor people terrorists and murderers, yet poverty, weak institutions and corruption can make weak states vulnerable to terrorist networks and drug cartels within their borders.”
The strategy puts heavy emphasis on development, which has never before been accorded the same weight as national defense strategy and diplomacy. Today our work in countries like Afghanistan and a dozen other failed states is putting us to a stern test. But we have solid plans and we are determined to succeed. Fortunately, these new assignments are being matched with new ideas and new resources.
The Millennium Challenge Account (MCA) that President Bush introduced at the Monterrey conference on financing for development is not just a new source of development funds. It is a new approach to development assistance that puts a premium on performance and accountability. It will reward governments that rule justly, invest in people's health and education, and promote economic growth. It will encourage nations that may not qualify initially to make the necessary adjustments.
Many people in the developing world say that the MCA is already having a revolutionary effect, even before it has gone into effect. They say that it is influencing the debate in the banks, the NGO community and elsewhere, and that even when people do not agree with it, they are arguing about it. Governments are making changes to conform to the standards set by President Bush for fear that they may be left out. I could cite several examples: an African country that has announced democratic reforms and a Balkan country that is cracking down on corruption in order to qualify for MCA funds.
Our intention, however, is not just to spend money. It is to empower the reformers in every society who want to change the power structures in their countries. The power structures make a difference as to whether or not a country puts the institutions in place that allow it to grow economically, to democratize and to build stronger institutions.
There is a big debate on this issue in Europe. Some of my European colleagues are more on our side on the economic development question. But other Europeans say that poverty reduction should be the central goal of development. Clearly that is a significant part of our work. But unless developing countries improve their systems of economic governance to stimulate investment and economic growth, the people of those countries will be poor forever and they will not progress.
Since 1980, Botswana is the only nation to have left the list of the least developed countries, reducing their number from 49 to 48. It did so because the elites found a way to prevent revenues from the diamond mines from being looted and to use the money for public services instead. That is why Botswana is the Costa Rica of Africa, one of the best–governed and managed countries of the continent. Botswana's main problem is that it has a 40 percent adult AIDS infection rate, which is an enormous tragedy.
The point here is that governance counts, investment counts and they will make the difference between whether a country progresses or not. We need to put tools in the hands of the agents of change in these countries, which is what the MCA does. Even modest growth rates can yield impressive results, if sustained over time. In the United States, for example, our average annual growth rate over the last 200 years has been 1.7 percent. Over the course of 227 years, that adds up.
Our greatest development president was Abraham Lincoln. Leaving aside the Civil War, he built the continental railroad and he created the Homestead Act, the greatest piece of land reform in the 19th century, to distribute land to the middle class. He created the land grant college system, which caused a massive increase in the number of agricultural economists and scientists and led to a massive surplus in our agricultural system, which led to huge exports. This built the base for the industrial growth of the United States. We need more Lincolns in developing countries.
We know that these things count. It annoys me when people say that Africa is chronically poor and cannot succeed, and lump all the African countries together. Mozambique, for example, which was a basket case and lost 2.5 million people in a civil war, now has an economic growth rate of over 12 percent. Something is working in Mozambique.
It is often said that capital is the engine of development, but the reality is that people will not invest money without stability and good governance. Secretary of State Colin Powell says that capital is a coward, and I think he is right.
Banks prefer to focus on macro–economic rather than micro–economic reforms. AID is focusing on micro–economic reform. And we have been much inspired by the work of Professor Michael Porter, of Harvard Business School, who was one of President Bush's professors at the school. We regularly give his books on competitiveness in the developing world to people from developing countries, and some people read them and take them seriously.
We are not experimenting, because Mr. Porter helped to rebuild the economy of Massachusetts and make it the second richest state in terms of per capita income in the 1990s. We are now using his theories in our proposals for micro–economic reforms in a number of countries.
We believe that trade plays an essential part in promoting economic development and creating market economies. We have a $540 million a year trade capacity building program, which trains business people and civil servants in the developing world to adopt the micro–economic reforms necessary to stimulate trade with the United States and Europe.
A recent World Bank analysis suggested that there would be an $832 billion increase in “dynamic income gains” if we had a completely free trading system. Few people, however, noticed that 65 percent of that increase (or $539 billion) would accrue to developing countries. Moreover, the same analysis indicates that a unilateral liberalization by developing countries alone would provide $424 billion in benefits to those countries. So, a free trading system just in Africa, for example, would yield enormous results. Of course free trade should not be limited to regional zones in the developing world. We should make similar efforts to free trade between developed and developing countries as well. But we are working with groups of countries in Africa and other areas to break down trade barriers and stimulate trade between developing countries.
UN Secretary General Kofi Annan has said that the main losers in today’s very unequal world are not those who are exposed to globalization, but those who are left out. The least developed countries account for less than 0.5 percent of world trade, which is not acceptable. We are working with Robert Zoellick, the U.S. Trade Representative to help the poorer countries understand how the modern, rules-based global economy operates and how they can orient their economies to benefit from it.
One area where they can benefit most is agriculture, because most of the poorest countries have agricultural economies. The Western aid agencies, in the United States, Europe and Canada, all stopped aiding agriculture in the mid–1980s. The banks also pulled out of the farm sector. As a result, there has been a steady decline in agricultural productivity because no one is investing any money.
Even Western countries, such as Spain, Portugal, Greece and Turkey, began their industrialization with reforms to stimulate agricultural production. The same thing happened in Asia. The only Asian countries that did not begin industrialization with agricultural modernization were Singapore and Hong Kong, because they are city–states without any land. In the so–called “green revolution,” Bangladesh has doubled its rice production, helped by AID and European governments. India has done the same thing. Agricultural productivity is essential to industrial development, even over the longer term.
There is evidence from World Bank studies that a focus on rural development and agriculture is closely related to income distribution. Nancy Birdsall, President of the Center for Global Development, has argued that while macro-economic policy is important, it is even more important to distribute development funds in a balanced manner between urban and rural areas. In the 1960s and 1970s, the Asian Tiger countries all invested as much in rural areas as in the cities, probably because of the pressure of mainland China and the fear of communist revolution. Latin American countries focused almost entirely on the cities.
In Thailand ten years ago, for example, 60 percent of people living in cities had electric power, compared with 40 percent of those in rural areas. In Brazil, during the same period, 90 percent of people in the cities had electric power, but only 10 percent of the people in rural areas. In every area of service in Latin America – roads, hospitals, sewers, water systems and schools – everything was in the cities and not in the rural areas. It was like two different societies.
The Asian countries balanced their development. I would argue that this is the reason that Asia’s income distribution is the best in the world – Taiwan, in fact, has among the most equitable income distribution in the world. We have created a problem by forgetting that lesson – we are neglecting the rural areas in Africa and in Latin America.
A generation ago, 70 percent of the funds that flowed from the United States to the developing world came from official development assistance (ODA) Today, 80 percent of capital flows to the developing world emanate from private sources. I am talking about charitable aid, not Wall Street investment. We call this private foreign aid.
There is some reluctance to accept the importance of this, both in developed and developing countries. It is the nature of the American political system and our social order to be more private–sector–oriented. In Europe, for example, there are no private foundations comparable to the Gates, Rockefeller or Ford Foundations, and while European companies do give money, they do not give nearly as much as American companies.
Our recent studies show that, quite apart from business investments, $45 billion goes from private sources in the United States to developing countries every year. Workers’ remittances account for over $20 billion; church groups not related to AID provide $5 billion to $6 billion; foundations spend $3 billion to $4 billion, and private universities in the United States supply $1.2 billion in scholarships.
Some people have challenged these transfers because they are not officially controlled. But it is very good that we do not control them. The notion that you must control these capital flows in order to make them effective is ridiculous. Is anyone suggesting that people who get degrees at the Kennedy School of Government and then go back to their countries are not increasing the capacity of their government to govern? It is a big mistake to dismiss private scholarships as irrelevant.
We are now trying to connect USAID programming with all these private institutions through an organization called the Global Development Alliance. We have created a huge network including the business community, foundations, universities, NGOs that do not normally do business with AID and the ethnic diasporas in the United States.
The Gates Foundation, the largest foundation in the world with a $20 billion endowment, spends $800 million a year in the developing world, which is more than many official aid programs. A representative of the Gates Foundation sits in our Global Health Bureau, because Bill Gates likes all of our health programs. When we invest money in something, he invests money in something. When we said that we would put $50 million into GAVI, the Global Alliance for Vaccines and Immunization, Mr. Gates put in $750 million, far more than any donor government in the world. It would be crazy to say that we are going to ignore all these private flows.
In Angola, for example, Chevron–Texaco told us that they wanted to give money for a development project anywhere in the country, not just near the oil wells. They first gave us $4 million and are now about to give us another $10 million, because they liked the way we programmed their money. They actually told us, to our surprise, that our management systems were faster than theirs in terms of decision–making, and they were happy to have us manage the money for them. A second oil company in another country just announced an agreement with us for $20 million in Nigeria.
Some people are now criticizing us for getting into bed with the oil companies. But we look carefully at the background of each company, using a social index of corporate behavior, before we become involved. It would be irresponsible simply to say that we are not going to take any risks and that we do not want to deal with these companies. These companies have a major place in the development of developing world economies and we need to be connected to them in a responsible way. We have begun to do that.
We have also made a number of other interesting discoveries. We created a network of several hundred credit unions in Central America because, for example, in El Salvador 12 percent of GNP is accounted for by remittances from the United States. We set up the credit unions to reduce the transaction cost of moving this money – in some cases the immigrants were paying fees of 20 percent to move the money to their families.
Now people are using our credit unions, where the fees are only two to three percent, but something odd is happening. The families at the receiving end are not taking the money out of the credit unions. They are leaving the money in these saving accounts, earning interest, and it is being lent out for business investment. As a result, we have discovered a massive increase in money available for investment in rural areas. That is not why we created the credit unions. It is an unintended consequence, which for once is desirable instead of undesirable.
We also found out that 50 percent of the micro–lending for business in Mexico comes from the Mexican–American remittances from California. The amounts involved dwarf anything that any donor government is doing in terms of micro–finance lending. The more we examine these capital flows, the more we realize that things are happening that none of us have studied because they are not in the public sector. A lot of our offices are stunned by the data that we are getting. Our officers in the field are inventing new ways of tying ourselves to these capital flows.
One reason countries are poor is that they have weak institutions. If you try to channel all aid money through public sector institutions, they are not going to have the capacity to absorb it all. About 80 percent of U.S. foreign aid is channeled through private organizations – not just NGOs, which cannot do everything – but through other groups such as trade and bar associations. If countries want to train more doctors, we work through medical associations, or we create new associations. We have done this very successfully throughout the countries of the former Soviet Union.
We also work through private agricultural cooperatives that have nothing to do with the state, or local universities. We have built chains of local universities around the world, and we move money through them. We understand that some money must go to the public sector, because there has to be competent governance, but we have oriented our programs far more toward the private sector, and we have had a lot of success with that approach.
In India, for example, 70 percent of health care is provided through the private sector, and has nothing to do with the Ministry of Health. So, if you deal only with the Ministry of Health in India you are ignoring 70 percent of the healthcare provided in the country. That simply does not make sense if you are running a health care program. We have also commissioned a number of scholars to develop a strategy to deal with conflict in the world. Some people think this is an irrelevant, peripheral issue, but it is not. We did a survey in 2001 that showed that two–thirds of the countries in which we have missions had had either a civil war or a regional conflict within the previous five years. If you do not deal with conflict and conflict prevention, you cannot deal with development.
In the Balkans, for instance, Yugoslavia was the richest Eastern bloc country, but it is not any more because of the wars that have taken place there. The notion that we can separate our work from conflict management and conflict prevention is unwise. Many of the European aid agencies are ahead of us on this. To catch up, we have created a new office of conflict management to deal with this issue. We are hoping that we can in future deal with these conflicts before they take place, not after there is a catastrophe.
These new trends in AID are going to have a profound effect on the agency's future direction. Such changes should not be made at the whim of a political appointee with no management experience. The important thing is to ensure that the career staff in an agency support the changes decided at the top. If you get the career staff behind you, you will create a very powerful lobby that will keep institutional changes in place for a long time, through different administrations, provided the changes work.
In AID we are very practical people. If a proposal does not work, we abandon it as fast as we possibly can because it is a waste of money. We are now working through the career staff to institutionalize these changes at AID in a way that I hope will outlast my time as Administrator.
Andrew S. Natsios has been Administrator of the U.S. Agency for International Development (USAID) since 2001. He was previously Chairman and Chief Executive Officer of the Massachusetts Turnpike Authority from April 2000 to March 2001, and had responsibility for managing the Big Dig, the largest public works project in U.S. history. He has also served as Secretary for Administration and Finance for the Commonwealth of Massachusetts and Vice President of World Vision U.S. He was a senior official at USAID from 1989 to 1993