Global Policy Forum

Treasury Secretary Lawrence H. Summers
Remarks to the Council on Foreign Relations
New York, NY

Thank you. It is good to be at the Council on Foreign Relations and to be a part of your continuing dialogue on the international financial architecture. It was only 18 months ago that President Clinton stood in this room and addressed what seemed at the time to be the worst international financial crisis in 50 years. We can all take satisfaction from the progress that has been made since then. But at the same time, we have to recognize that the strengthening of the world's economic and financial institutions and the management of global integration are central policy challenges of our time.

Last December I gave a speech in London making suggestions for the role of the International Monetary Fund in this new global economy, in promoting global financial stability and responding effectively to crises. Today my focus is on the role of development policy and the international development institutions, particularly the World Bank. I want to reflect on the lessons of the development experience over the past 50 years; the roles of the international development institutions in the poorest countries and what have come to be called the emerging market economies; and the frontier issue of global public goods.

Let me start, though, with the recognition that the work of the World Bank and the regional development banks is probably more important now than it has ever been. As the President has often observed, today the US has as much to fear from states that are too weak as states that are too strong. In such a world, the promotion of successful development serves America's core interests.

A more global prosperity will promote peace: from Bosnia to East Timor, from Rwanda to Palestine, successful economic development is absolutely necessary if our core objective of a stable peace is to be achieved. A more global prosperity will promote human freedom. Nations that succeed economically are much more likely to become democratic, and avoiding debilitating disease, learning to read and working with dignity are also crucial components of human freedom. A more global prosperity will produce better trading partners for the US: time and again, as poor countries grow richer, they become the fastest growing markets for US goods and services. Already, developing countries account for some 42 percent of US exports. And as we saw in 1998, adverse economic and financial developments in the developing world today can put our own prosperity at risk. A more global prosperity will help us to meet the profound challenge of protecting the global environment. Environmental degradation spawned by dire poverty is a global concern. A more shared prosperity creates the will and the way for these problems to be overcome.

Successful efforts to promote economic development around the world may well be the most cost-effective investment that we can make in forward defense of US core interests. To be sure, the world has changed in profound ways: most importantly, with the spread of market ideologies and a more truly global private capital market. And so the development institutions must change and adapt as well. But their special benefit, their special efficiency; their special ability to lever funds - because they are both financed multilaterally and able to borrow from the private markets - all make them especially important tools today. Each dollar that we contribute to the MDBs leverages $45 in lending programs in the economic success stories of tomorrow.

Ten years ago, when the Berlin Wall came tumbling down, the United States defense budget was more than $100 billion higher, in real terms, than it is today. Reasonable people can debate how much of this dividend ought to have been invested in the ongoing protection of our interests that support for the International Financial Institutions (IFIs) and other foreign operations provides. But it would be difficult to make the case that the right answer is to spend a good deal less on these things than we did before. In fact, we are spending 20 percent less in real terms today on foreign assistance overall - and 40 percent less on the MDBs.

Strong support for the MDBs has been central to a vision of closer integration between nations and shared global prosperity upon which United States foreign and economic policy has been based for the bulk of our postwar history. We believe that this vision has served our country extraordinarily well, and that it will serve us even better in the new century to come. But we equally believe that the investments we make in these institutions need to be deployed as effectively as they possibly can. How best to achieve this will be the focus of my remarks today.

I. The Global Development Experience

What are the main lessons of the global development experience? This is an area that has been pored over by economists and others for decades and will continue to be debated in the future. There are no simple blueprints or magic bullets. But there are certain truths that I think now command broad consensus. These truths can usefully frame our approach to development finance over the years ahead, and thus can frame an approach to the role of the world's primary development institutions.

Countries shape their own destiny. When the will to reform and grow is present, outside support can make a powerful difference, as the experience of international assistance to Korea and Taiwan in the 1960s - and successful recent reformers such as Poland and Uganda - will attest. But it cannot substitute for that domestic commitment where it is lacking. The international community cannot want reform and stability more than a country's own government and its people do.

Growth is both necessary and a long way toward being sufficient for reducing in poverty. In every region of the world and at every time in history, experience has confirmed what common sense would suggest: that the best way for a country to reduce poverty is to make itself richer. The world's single greatest success in reducing poverty has been in the fastest growing Asian economies. Even with the recent crises, the number of Asia's people living on less than a dollar a day has fallen by nearly 40 percent, or 175 million, since 1990. In Sub-Saharan Africa, average income per head is today somewhat lower than it was in 1970. And the number of people living in such extreme poverty has risen by 20 percent, or nearly 50 million in the past decade alone. One study estimates that simply raising the average incomes of the developing countries by one percent today would result in 53,000 fewer child deaths.

While it is surely right to emphasize that policies or pre-existing conditions can make growth more or less effective in reducing poverty, discussions of poverty reduction that do not lay primary emphasis on economic growth are like Hamlet without the prince. They are a symptom of what is morally urgent to avoid in development debates: the substitution of attractive sentiment for clear-eyed analysis. Quite simply, rapid, market-led growth is the most potent weapon against poverty that mankind has ever known.

Market-oriented open policies work best

It cannot be an accident that Soviet-style communism, planning ministries in the developing world and large US corporations run by command and control all ran into a brick wall in the same decade and had to be restructured. In this new global economy, the power of open markets and market-based incentives are larger and clearer than ever before. And the failings of more centralized means of coordinating economic activity have become that much more apparent. Globally the message has been repeated again and again: that successful national economic development depends above all on the promotion of open markets and the institutions and policies that are needed for markets to function well.

Public investment in people and a sustainable environment is crucial to growth

Experience in Asia and elsewhere has taught us that investments in people, especially basic health and education for women, and in long-term environmental sustainability, especially the efficient use of energy, are crucial to lasting economic growth and poverty reduction. In that sense, respect for people and for the environment are central to successful economic policies. And a framework that reflects the rights of people is one in which every child's right to go to school rather than labor in the fields or workshops is protected - and every worker's right to core labor standards is promoted.

Assistance must be conditioned to be effective

Economic history has provided a clear natural experiment regarding the efficacy of finance without conditions. Again and again, natural resources windfalls have financed presidential planes and palaces and entrenched official corruption, while producing very little in the way of lasting economic benefits. Countries with the windfall external finance provided by abundant natural resources, such as Nigeria, Venezuela, Burma, and Zambia have failed to progress economically - indeed, in several cases have fallen back. Similarly, the record of official assistance that is provided for political reasons, rather than the assessment of appropriate conditions for development, is hardly encouraging.

Recent research has raised another important difficulty in the provision of assistance: the problem of fungibility. International resources provided for a certain purpose, like health or education, often substitutes for domestic spending on these priorities, meaning that the incremental impact of project lending is something very different than the project that appears on the MDBs' books. Developmental lending cannot have a developmental impact if it simply supplants public resources. The basic lesson we need increasingly to bring to bear is that MDB lending needs to be conditioned on government commitments to reform, sound analyses of budgets and public institutions and a clear assessment of how development lending will affect the share of national resources invested in core development priorities.

These observations point up a number of priorities for MDB lending: that support should reward and strengthen domestic efforts to reform rather than try to force those efforts into existence; that it must support, not supplant the development of open markets and the growth that open markets can bring; that it should be conditioned on an effective framework for promoting market-led growth; and that conditions should focus on the essentials, including critical public investments.

Let me spend the rest of my time outlining in greater detail the implications of these principles for the primary development institutions going forward.

II. More Effective Policies in the Poorest Countries

What the MDBs do to promote development in the poorest countries is without doubt their most morally urgent and important work. These are countries that cannot expect to mobilize private flows on a consistent basis and can expect to be reliant on official flows for some time to come. This is the right moment for a fundamental reassessment of how these flows are provided.

The Highly Indebted Poor Countries initiative is a one-off attempt to clear away the residue of the Cold War and the mistakes of the past, and offer these countries a fresh start. It is essential that we make it work. Debt write-offs need to be planned as a one-time event, not conceived as part of a cycle. That makes effective programs essential.

Again, this is not an area for simple solutions. While hard and fast rules are tempting, inevitably conditions will differ and policy will need to balance conflicting considerations and demands. However, we believe that an effective approach will require a shift in the emphasis of the MDBs in these countries in four areas.

First, a more human-centered approach and new division of labor between the IMF and the World Bank Development lending exercises always rely on estimates of gaps, financing needs and measured indicators of performance. In light of recent experiences in the HIPC countries, we believe that these need increasingly to move from a predominant focus on macro-economic issues to more clearly emphasizing the nature of human needs.

As a condition for receiving debt relief and new loans, HIPC countries are now required not only to have established a solid track record of reform, but also to produce forward-looking Poverty Reduction Strategies. We cannot lose sight of the fact that effective growth strategies go a long way toward reducing poverty, and ineffective growth policies will go a long way toward making poverty more entrenched. At the same time, we must work to ensure that growth has the greatest possible impact on poverty. These strategies will clearly define national poverty reduction goals, such as reducing infant mortality and malnutrition, and identify the medium term costs associated with achieving these goals. They will and must form an important part of the basis for a satisfactory financing framework for countries going forward. Over time we expect this to become the primary responsibility of the World Bank given its expertise and mandate in global poverty reduction. For its part the IMF needs to have a continuing role in macro-economic evaluation, because no plan is viable if there is not a financing framework that is sustainable.

Second, increased selectivity We recognize that there will inevitably be a tension between helping the countries most in need and helping those who will use MDB resources well. But as the World Bank has recognized in implementing IDA 12, increasingly we need to shift the balance in favor of providing support to countries where donors can have confidence that assistance will be well used - and more often denying it where they are likely to be misused, particularly in cases of corruption. Too often, need-based aid rewards failure and penalizes success. Where countries are using concessional resources effectively, they should be expected and encouraged to attract more of such flows. By some estimates, this would more than triple the effectiveness of development assistance in reducing global poverty.

Third, better procedures for the interaction between countries and the IFIs The greatest shortage in the poorest countries is of institutional capacity. And frankly, too much of that scarce capacity is absorbed in dealing with the international development institutions. Too often, the need for conciliation between the institutions and countries results in a dialogue where the response to failure is promises more ambitious than the ones that failed before, setting the stage for future failure - and yet greater escalation of goals.

This suggests a need for a smaller number of clear and measurable performance targets, set more realistically, and then more vigorously adhered to. An important part of this shift will be developing more effective mechanisms within the MDBs for evaluating when targets and intermediate benchmarks have been met, including a stronger commitment to disbursing in stages and more frequent formal reviews. There also needs to be a stronger presumption of publication of all relevant loan documents and transparency in the relevant operations at the national level, so that the domestic population, outside investors and donors can readily track disbursements and results.

Fourth, additional concessional resources Financing debt relief in a way that reduces the existing stock of concessionary resources will not expand the budget capacity of countries to invest in core development priorities. We should not delude ourselves that HIPC or the reforms that it has inspired will translate into better basic schooling or health care in these countries without a genuine increase in the pool of concessional resources. This makes it especially urgent and important for Congress to help the US play our proper part in this effort, by enacting the President's supplementary appropriations request and the funding contained in his FY2001 budget. The earlier version of HIPC saved Uganda $45 million in debt service in 1999 alone. This relief has helped it to double enrollment in primary education in just two years. Under the enhanced HIPC, Uganda would receive an estimated $650 million more, in net present value terms, to invest in these basic priorities. But these benefits for Uganda and other countries will remain in question if the United States does not do its part.

III. Development Assistance in the Emerging Market Economies

Emerging market economies, where there are private financial flows, involve different issues than those posed in the poorest countries. It needs to be recognized that these countries have a certain capacity to repay debt, and therefore a certain borrowing capacity. If that capacity is absorbed by international financial institutions without their programs actually raising borrowing capacity, the result is to crowd out private sector finance. Therefore, the role of MDB lending in these countries should be confined to the areas where they can increase total financing capacity.

There are a number of such areas and it is crucial to the interests of the United States and the international community as a whole that they be a basis for lending by the MDBs: crucial because of these economies' increasing systemic significance; and crucial because these are still the countries in which the majority of the world's poorest people live. For all the progress that we have seen, one third of the people in Latin America live on less than $2 a day - and more people live on that income in China and India than the entire population of Sub-Saharan Africa. Private financial markets alone will not finance needed investments in basic health and education and rural infrastructure. And appropriately targeted MDB finance can itself catalyze additional private investment.

We therefore categorically reject the idea that these countries should not be in a position to obtain the additional finance, expertise and insurance against instability that access to MDB programs can provide. But we equally recognize that the work of the MDBs and their private sector lending arms in such economies needs to be more tightly focused on adding value that the private markets cannot.

This suggests an emphasis on three types of circumstances:

Where the ability that the public sector development institutions uniquely have to impose conditions that promote key public investments - including basic health and education and other social spending - that the existing stock of private and public resources cannot fully provide. These public goods also include financial sector and capital market development, and the legal and institutional infrastructure indispensable for functioning societies, such as the rule of law, clearly stated and fairly applied. In this context we share the hope and expectation of the World Bank that it will meet its own targets for social sector lending in the future and will more effectively seize the opportunities that exist to promote durable institutional reforms.

Where the involvement of the MDBs can attract genuinely additional private flows: for example, where MDB co-financing arrangements and guarantees can enhance the credibility of developing country borrowers in the eyes of investors. In this context we believe that the MDBs should continue to explore more innovative ways of catalyzing private capital flows to such countries, where these can be pursued within strict and clear guidelines that safeguard the financial position of the institutions.

Where the MDBs can help to counteract temporary disruptions or limitations in a country's access to private capital due to contagion or other external shocks. To this end, they should be taking advantage of the substantial recent improvement in global financial conditions to develop a large, more flexible, contingent financial capacity to respond to deterioration in investor confidence in emerging markets down the road.

This last is an important point. Financial emergencies are times when there is more social and human distress, and as we have seen, they are times when more structural changes can take place in 18 months than would otherwise been achieved in a matter of years. They are not times for the usual rhythms of development lending. It is thus noteworthy that despite the professed urgency of the situation, the World Bank was only able to deliver $260 million for social sector lending to the Asian crisis economies in FY1998, the most acute year of the crisis. While this in part reflects legitimate concerns about domestic absorptive capacity and the potential diversion of funds in some countries, it will be important for the World Bank to find ways to upgrade substantially its capacity to respond rapidly and effectively to such emergencies in the future.

At the same time, recent experience suggests that it will be increasingly important for the World Bank and others to ensure that their lending is genuinely productive, and that it enhances rather than reduces a country's capacity to grow out of a need for official funds. The IFC, especially, will need to guard against the risk of supplanting, rather than supporting, private sector finance.

Accordingly:

We believe there should now be a strong presumption that the MDBs have no business lending in countries for sectors in which private financing is available on appropriate terms, and where there is a risk that such lending will simply supplant private financing. These include credit programs serving mainly large-scale industry, support for large-scale infrastructure in cases where these would have no significant environmental benefit, and lending in oil, telecomm and other sectors where the private sector is already active. In a world in which the MDBs are promoting policies that succeed in increasing the capacity for emerging market economies to borrow in private markets, it is natural that the share of MDB lending that is devoted to these economies should decline in volume over time and become more closely linked to the end-goal of graduation. The MDBs cannot expect to live in a world where they can count on successive capital increases for their non-concessional loan windows. They should incorporate this reality in their identification and management of lending in middle income countries going forward.

For all MDB lending in emerging market economies, I believe that a review of pricing policies is appropriate. Pricing needs to avoid excessive encouragement of public rather than private sector reliance. It also needs to assure that given the enormous needs for concessional finance, the MDBs are in as strong a position as possible to contribute resources to concessional programs and to the creation of global public goods. A review based on these principles will, I suspect, lead to higher prices in many cases.

IV. An Enhanced Focus on the Provision of Global Public Goods

Increasingly, as integration proceeds, the world is confronting a broad class of problems that cross borders and defy solution by individual governments and markets. Whether it is money laundering and financial crime, global warming, new killer diseases, or reductions in global bio-diversity - the solutions to these problems will be global public goods, requiring concerted global cooperation. We believe that the World Bank and other development institutions potentially have an enormous contribution to make in helping to push the frontier of international efforts to promote these kinds of goods, many of which will especially benefit developing countries. And examples such as the Consultative Group on International Agricultural Research (CGIAR), the Green Revolution and the campaign to defeat river blindness in Africa have all shown that determined and innovative forms of collaboration among the World Bank and other official bodies can deliver results.

Let me highlight two areas where we believe that the MDBs should be looking especially hard for new kinds of responses:

Collective efforts to promote the creation and dissemination of medical knowledge

Infectious diseases such as HIV/AIDS, tuberculosis, malaria and respiratory and diarrheal disease, are responsible for almost half of all deaths of people under 45 worldwide. Life expectancy is now actually declining in a host of African countries struck by HIV/AIDS, with adult mortality rates in the worst affected countries now twice what they were even a few years ago. Providing vaccines to prevent these deaths is one of the most cost-effective ways there is of raising the well being and productivity of people in the poorest countries. Yet the WHO estimates that only perhaps 10 percent of the $50-60 billion spent worldwide each year on health research is directed toward diseases that afflict 90 percent of the world's population.

President Wolfensohn has led a major effort to put this high on the Bank's agenda in recent years. And President Clinton has proposed a number of important bilateral efforts that he hopes will catalyze further efforts by other bilateral and private donors. But we agree with President Wolfensohn that the MDBs - the World Bank, especially - has an important contribution to make. One crucial part of the problem is that there is not a visible market for new treatments and vaccines in many of the countries worst affected. And the World Bank can do much to create a market, through its lending programs and the policies they support. That is why the President is proposing that the MDBs dedicate a further $400 million to $900 million each year of their concessional lending for basic health care to immunize, prevent and treat infectious diseases in the poorest countries. We expect to be intensifying global efforts in this area at the upcoming G8 Summit in Japan.

Collective efforts to promote global environmental security

The Global Environmental Facility is a promising development. But going forward we believe the MDBs need to exercise far greater leadership in finding ways for the international community to better protect the global resource base we all share.

For example:

In helping countries to combat deforestation. The World Bank potentially has a key role in helping those who live in or near the forests to move beyond slash and burn agriculture, to manage the harvest of the forest, and above all to develop new ways to earn a better living and ensure their own well being. A major World Resources Institute forest policy reform study, to be released on Wednesday, shows that under the right conditions, World Bank structural adjustment lending has been effective in supporting domestic constituencies for reform against entrenched vested interests in unsustainable logging. These experiences need to inform the MDBS as they work to develop even more effective ways of engaging in these issues in the future. In supporting global efforts to find ways to combat global warming that are responsive to the economic needs of the poorest. We cannot develop the global economy unless we protect the global resource base. Nor can we expect the developing countries to meet the short-term costs of this kind of protection on their own. To this end we believe that the MDBs need to expand their efforts to lead in the development of markets for cleaner and more energy efficient technologies; small-to-medium scale renewable energy sources; and testing methods to internalize the true costs of energy in assessments of project viability.

V. A Better Division of Labor Across the System

Husbanding well the world's scarce flow of concessional resources for development must mean improved coordination and division of labor more broadly - across the panoply of international institutions, bilateral donors and NGOs that have come to be called the "development community". Devising the right framework will be a strenuous, ongoing effort - and certainly, will not be the prerogative of a single country or institution. But ensuring clarity of mission and purpose must be a core reform priority at a time when there are, for example, 18 international donors and 65 individual programs operating in Bolivia in the health sector alone.

I have already mentioned the new division of labor that we envisage between the IMF and the World Bank in the poorest countries going forward, with the World Bank more clearly taking the lead. Clearly, this is not an area where precise distinctions and road maps can be drawn. But three further imperatives seem to us to be important:

First, as President Wolfensohn has recognized in the Comprehensive Development Framework, the World Bank - through the new approach embodied in the PRSPs - has potentially a unique role to play in helping to bring the threads of global development activities and expertise together. This can also help to ensure that every institution or donor or NGO is playing to its strengths. Among other things, it must also mean bringing donor coordination to the center of official assistance activities.

Second, this improved framework must be based on a recognition that no MDB or other part of the system can or should aspire to be and do everything for all countries. It makes no sense for the regional development banks or, indeed, the World Bank to build and maintain a capacity to undertake every kind of activity relevant to development in every country in which they could play a role. In that context we believe that it should increasingly be recognized that the World Bank should take prime responsibility for core program-lending - with responsibility for certain kinds of project lending possibly more often devolved to the regional development banks where they have proven expertise.

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