Global Policy Forum

by George Soros

Military strikes against Afghanistan by the United States and its allies are continuing. President Bush has warned that this struggle against terrorism would be sustained. A war on terrorism is needed. But bombing terrorist camps and airlifting food to refugees is not enough. A constructive agenda to address the inequities in today's global system – inequities that contribute to someone like Osama bin Laden gaining adherents – must be established, too. Well before September 11th, I had begun work on a series of proposals with this longterm goal in mind. These proposals have now become even more urgent.

We live in a world characterized by global markets, but political arrangements remain firmly rooted in the sovereignty of states. Some international institutions do sustain global markets, but they are far from perfect. International institutions dedicated to the provision of public goods, such as preserving peace, protecting the environment, alleviating poverty, and improving health, labor conditions, and human rights, are even less effective and less well-endowed.

The disparity between our international financial and trade institutions and our international institutions serving social goals has made the development of global society lopsided. Trade and financial markets are good at generating wealth, but cannot address other social needs.

Prior to the globalization of financial markets, provision of most public goods could be left to individual governments. Now that capital is free to move around, it is difficult for individual countries to impose taxes and regulations because capital can go elsewhere. Moreover, many countries lack good governments. Oppressive or corrupt regimes and weak states are by far the most important causes of poverty and misery today. It is thus not enough to devise better arrangements for the provision of public goods on a global scale; we must find ways to promote better government in individual countries.

Public goods, like health or the environment, cannot be promoted by imposing sanctions on countries if they don't comply with international standards, because many countries lack the resources to meet them. Instead, there must be international assistance to encourage voluntary compliance and to enable poor countries to raise their practices to international standards.

International assistance requires resource transfers from rich countries to poor. Unfortunately international assistance has a bad reputation. Foreign aid, as currently administered, is rarely effective and often counterproductive. Broadly speaking, I can see five basic reasons for this:

• Foreign aid is designed to serve the interests of donors, not recipients. Donor countries often provide aid based on their national security interests and geopolitical considerations, and often without regard to the level of poverty or the character of the recipient government;

• Donor countries like to channel aid through their own nationals, and international institutions prefer to send foreign experts rather than build domestic capacity. Recipients often lack the capacity to absorb aid. Because development projects are designed and implemented by outsiders, when the experts leave, little remains;

• Foreign aid is mainly intergovernmental, and recipient governments divert resources for their own purposes;

• Donors insist on retaining national control over the aid they provide, resulting in a lack of coordination;

• International assistance is a high-risk enterprise. Doing it well is harder than running an enterprise for profit, because no single measure of social benefit exists. Aid is administered by bureaucrats with much to lose, and little to gain, by taking risks.

Better ways must be found to finance and deliver international assistance in order to redress some of globalization's inequities.

As regards financing, I propose that the IMF should issue Special Drawing Rights and rich countries should donate their allotments. SDRs, created in 1969 and last issued in 1981, are international reserve assets that serve as a unit of account and means of payment among IMF members and prescribed other holders.

I consider using an issue of SDRs preferable to the Tobin tax (a proposed tax on international currency transactions) for a number of reasons, the most important of which is that a special SDR issue was already authorized in 1997 and ratified by 71% of IMF members. It could be used for international assistance immediately, if the US Congress also ratified it, and developed countries pledged their allocations for that purpose.

Because SDRs are an interest-bearing instrument, donating countries would incur interest costs. But the amounts would be negligible: giving away its $3.69 billion share of the proposed $27.5 billion SDR issue would cost the US roughly $124 million a year.

Even more important than finding a source of finance is to improve the delivery of international assistance. I propose creating a kind of market where programs compete for donors' funds. This is how it would work.

An international Board, operating under the aegis of the IMF but independent of it, would be set up. The Board's members would be eminent persons appointed on the basis of merit. The Board would not only decide on the eligibility of programs, but arrange for their monitoring and evaluation. The Board would have no authority, however, over the spending of funds. Instead, donor countries would be free to choose which eligible programs to support with their SDRs, creating a market-like interaction between donors and applicants.

Three types of programs would qualify:

Trust funds for the provision of public goods on a global scale, e.g.: combating HIV/AIDS. These trust funds would be under the authority of an international board of eminent persons and could operate through an international agency like the World Health Organization, or set up national agencies, or both. National agencies would work closely with governments but would be independent from them, with local boards approved by the international board. To avoid duplication there should be no more than one global trust fund for one area, such as HIV/AIDS, but several agencies could compete for the privilege of running it.

Government sponsored development programs aimed at poverty alleviation. Programs would be proposed by the governments of recipient countries and subscribed to by donor governments. If recipient governments fail to live up to their promises, donors would withdraw support.

International financial institutions would play a dual role: they could assist in the design of programs and contribute personnel to a program's execution; and they would also be a major source of funding. But programs need not be sponsored by international financial institutions. In contrast to World Bank loans, they would be owned by the governments of the recipient countries.

Non-governmental programs. These would be particularly useful in countries with repressive or corrupt regimes. Instead of reinforcing bad governments, international assistance would provide a countervailing source of support to civil society. Repressive regimes could of course forbid non-governmental activities, but they would be hard put to justify the prohibition of assistance-delivering agencies to their own population.

In addition, many activities are best conducted outside government channels. Microfinance is such a case. There is ample evidence to show that it works; the most impressive example is Bangladesh. But successful microlending operations, although largely self-sustaining, cannot grow out of retained earnings; nor can they raise capital in financial markets. To turn microlending into a big factor in economic and political progress, it must be scaled up significantly. This would require general support for the industry, as well as capital for individual ventures.

Support by the finance industry to microfinance initiatives would include: developing management software and making it available as a public good; training managers; establishing a rating agency; and establishing a loan guarantee scheme. The rating agency would help attract philanthropically-minded equity investors who would be willing to accept below market returns, or no returns at all; the loan guarantee scheme would enable qualified microlending institutions to issue commercial paper with AAA rating. (The World Bank's callable capital could be used for guarantees.) Combining educational stipends with healthcare and microlending could move large segments of the population out of poverty.

In non-governmental assistance, diversity and pluralism should be encouraged. There ought to be competition in grant-giving as well as grant-taking. For instance, a number of venture capital funds could be set up that would invest in microlending operations.

The use of non-governmental channels is one of the main advantages of this scheme. The World Bank is confined by its charter to go through governments in most of its activities, often bolstering repressive and corrupt regimes. Jim Wolfensohn, the Bank's president, has tried to work more closely with NGOs and has come under attack from all sides.

If this scheme is successful, the initial SDR issue could be followed by annual issues, and their size could be scaled up to a point where they can make a significant impact. For in a world of sovereign states providing positive incentives is the best way to improve the quality of governments.

In judging this scheme, it is important to realize that a foreign aid "market" will be less efficient than a normal market. In the pursuit of private wealth there is a simple criterion to go by: the bottom line. Public goods must be judged by the effect they have on various segments of society, and the impact on individual participants is difficult to aggregate. Still, I believe the scheme I am proposing would mitigate all the five drawbacks I identified.

Improving and increasing international assistance has become even more pressing since the terrorist attacks against the United States on September 11th. We must do everything possible to resist and eradicate terrorism, but we must not allow it to become an all-embracing, all-consuming endeavor. If we do, we play into the terrorists' hands: they would set the agenda, not us. We must offer a positive vision for improving the world if we want to win the hearts and minds of people who suffer from globalization's inequities.

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