Center for Global Development
June 2003
Political leaders in the world's richest nations regularly proclaim their fervent desire to end poverty worldwide. At high-profile meetings and summits, politicians push developing countries to tackle corruption, reduce inflation, and slash budget deficits. These leaders also boast of their spending on foreign aid—currently about $58 billion a year—even while they regularly call on each other to spend more.
These objectives and efforts are praiseworthy, no doubt. But cash transfers to poor nations are far from the only or even the most important way rich countries affect poor countries. Indeed, the finger-wagging over foreign aid has actually obscured the critical influence other rich countries' policies have on the development of poor nations. Until now, that is. The first annual CGD/FP Commitment to Development Index (CDI), created by the Center for Global Development and Foreign Policy magazine, ranks some of the world's richest nations according to how much their policies help or hinder the economic and social development of poor countries. The CDI looks beyond mere foreign aid flows to encompass trade, environmental, investment, migration, and peacekeeping policies. In this inaugural edition of the index, the CDI ranks 21 nations: Australia, Canada, Japan, New Zealand, the United States, and most of Western Europe.
In ranking these countries' commitment to development, the CDI rewards generous aid giving, hospitable immigration policies, sizable contributions to peacekeeping operations, and hefty foreign direct investment in developing countries. The index penalizes financial assistance to corrupt regimes, obstruction of imports from developing countries, and policies that harm shared environmental resources. Although the governments and leaders of poor nations are themselves ultimately responsible for responding to the many challenges of development, rich countries can and should change their policies to spur economic growth and social development in poorer nations. The CDI highlights and ranks the rich countries' policies themselves, not their final impact. This approach emphasizes what each rich country—regardless of size and reach—can do to improve opportunities for development throughout the world.
The results of the first annual CDI cast traditional assumptions about the most development-friendly countries in a new, unexpected light. For example, the two countries providing the highest absolute amounts of foreign aid to the developing world—Japan and the United States—bring up the rear in the index. Japan ranks last overall, with low marks in migration and aid. The United States ranks high in trade policy but finishes second to last overall due to particularly poor performances in environmental policy and contributions to peacekeeping. By contrast, the Netherlands emerges as the top-ranked nation in the index, thanks to its strong performance in aid, trade, investment, and environmental policies. Two other small countries, Denmark and Portugal, follow in second and third place, respectively. Norway, which is usually regarded as a model global citizen and a force for peace worldwide, comes in a disappointing 10th, mainly due to its poor trade performance. And though New Zealand is not noted for its particularly generous aid giving, that country finishes fourth overall thanks to a strong showing in migration and peacekeeping policies.
The CDI results are critical for two reasons. First, helping impoverished people worldwide build better lives is the right thing to do, and this index can educate policymakers, provoke public discussion, stimulate research, and guide activists seeking that goal. The hard truth is that even the best-performing nations in the CDI have a long way to go to make their policies as helpful as possible for poor families in developing countries. The Netherlands, even though it ranks highest, averages merely 5.6 points on the 10-point scale. Second, what rich countries do to and for the rest of the world comes back to affect them—poverty and instability do not respect borders. Surely the United States would benefit if Mexico were as stable and prosperous as Canada. Surely West European nations would benefit from an economic resurgence in Poland, Hungary, and the Czech Republic. Call it trickle-up economics: When the poor become better off, so do the rich.
STATES OF DEVELOPMENT
Development is a state as well as a process. A society has achieved a state of development to the extent that its citizens live free from want and tyranny and can obtain education and employment. But for the four fifths of the world's population still living in developing countries, the practical question is not what development is, but how to achieve it—and how to speed the process. The CDI measures how well rich countries contribute to the process in six policy areas: aid, trade, environment, investment, migration, and peacekeeping. The countries, scored on a 10-point scale for each policy area, are then ranked by their overall averages. Different scores are calculated in different ways, reflecting the particular issues involved and the availability of data. [Click here for more details on how the index is calculated.]
Aid | Today, rich countries send more than $50 billion a year in grants and low-interest loans to poor nations. Normally, these aid programs are compared via crude sums of dollars disbursed or by total aid as a percentage of gross domestic product (GDP). The CDI improves upon these traditional measures by considering the quality—not just the quantity—of aid. For instance, the index penalizes "tied aid," that is, financial assistance that recipient countries are required to spend on services from the donor nation. (For example, the Canadian or Italian governments may grant loans to a poor nation for highway construction but then require the recipient nation to hire a Canadian or Italian contractor to build the roads, thus preventing the aid recipient from getting the best deal.) In 2001 alone, roughly two fifths of total international aid flows were tied; in the late 1990s, the U.S. Agency for International Development reassured the U.S. Congress that almost 80 percent of the agency's resources went to purchase U.S. goods and services. The CDI aid ranking also subtracts interest payments that donor nations receive on prior loans (equivalent to about $4.7 billion in 2001). Finally, the ranking rewards donors for channeling funds to countries that are relatively poor yet relatively free of corruption compared to other nations at similar income levels.
Denmark tops the CDI aid score, followed by Sweden, the Netherlands, and Norway. These countries are not only among the world's most generous, but only a small proportion of their aid is tied. Japan and the United States rank 20th and 21st, respectively, in the aid category. (The aid scores are based on 2001 data and do not reflect two recent U.S. initiatives: the Millennium Challenge Account and the Emergency Plan for AIDS Relief.) The Japanese aid score suffers because Japan exacts heavy interest payments on old loans. Of course, the United States provides significant private financial contributions to developing countries via churches, foundations, corporations, and private voluntary organizations. Since domestic contributions to such private groups are often tax-exempt, these flows, which would roughly double total U.S. aid, arguably could be credited to U.S. policies. If such private aid flows were included in the index, the United States' aid ranking would jump to about 14th, assuming no similar contributions from other countries; the United States' overall CDI ranking, however, would remain unaffected.
The CDI trade ranking sides neither with the passionate trade critics who fear a "race to the bottom" in environmental and labor standards nor with the equally passionate advocates who consider international commerce the prime mover of development. The truth about trade is more complicated. On the one hand, Nigeria might be better off without the oil export revenues that have corrupted the state, exacerbated ethnic tensions, and harmed the environment. On the other hand, South Korea, Taiwan, and even China could not have lifted so many from poverty so fast without exporting clothing, shoes, toys, and boom boxes to rich countries.
The CDI measures rich countries' barriers to developing-country exports, as well as the income that poor countries forgo due to internal production subsidies in rich nations. The World Bank estimates that trade barriers in developed economies cost poor nations more than $100 billion per year, roughly twice what rich countries give in aid. [See the chart on how trade trumps aid.] Among the most protected industries in high-income nations are agriculture, textiles, and apparel—not coincidentally the precise areas where poor countries are most competitive, and where they could create the most jobs absent such protectionism. Producers in rich nations benefit from a combination of government subsidies and tariffs and quotas on imported goods. Japan, for instance, imposes a 490 percent tariff on foreign rice, while the average cow in Switzerland earns the annual equivalent of more than $1,500 in subsidies. [See the chart comparing each country's CDI score with its GDP.] In the CDI trade ranking, the United States finishes first, followed by Australia and New Zealand. By contrast, Norway ranks a distant last; it has particularly high tariffs against agricultural imports from poor countries, and its various barriers are equivalent in impact to a flat 61 percent tariff on all goods from developing countries—equivalent, that is, in terms of lost profits for producers in poor nations. Norway's ranking may seem surprising given the country's record as a beneficent provider of aid. However, in Norway, as in much of Western Europe and the United States, agribusiness and other rural interests, though they are no longer competitive abroad, remain politically powerful, and the government has been unable to reconcile domestic politics with its otherwise enlightened approach to the developing world. The problem is less acute in Australia, New Zealand, and the United States, which have more efficient agricultural sectors.
A healthy environment is often dismissed as a luxury for the rich, distinct from and secondary to economic development. Yet poor nations will struggle most with any effects of climate change, such as drought, flooding, and the spread of infectious diseases. The CDI environment ranking reflects the belief that rich nations have special responsibilities for global environmental stewardship. Are such countries reducing their disproportionate exploitation of the global commons? Which nations have signed the Kyoto Protocol on climate change? How much money have they contributed to the Montreal Protocol Fund, which helps developing countries phase out ozone-depleting chemicals? And are developed nations advancing state-of-the-art, environment- friendly energy technologies?
According to these measures, Switzerland ranks highest in its environmental policy, thanks to hefty government investment in clean-energy research and development, relatively low emissions of atmosphere-disrupting pollutants, and no fishing subsidies. Sweden finishes second, and Spain third. The Spanish case is particularly interesting since Spain, although it earns only average scores on most environmental indicators, scores high overall due to its heavy government support for wind power technology. Australia, Canada, and the United States rate among the worst environmental performers, due largely to their high per capita greenhouse gas emissions.
International capital flows come in three main varieties. Portfolio investment occurs when foreigners buy securities, such as stocks and bonds, which are traded on open exchanges outside their home country; foreign direct investment (FDI) entails companies from one country buying major stakes in existing companies or building new factories in another nation; and banks lend large sums directly to governments and corporations. For many analysts, the Asian financial crisis of the late 1990s—during which portfolio investors stampeded in and out of various Asian economies—proved the potential dangers of so-called hot-money flows. However, some countries, including the United States in the 19th century and Malaysia during the last 30 years, have benefited greatly from FDI, which is generally more stable than portfolio capital and often brings good management and technology. For example, Singapore could not have raised its per capita income from $2,200 in 1960 to $29,000 in 2000 without ample investment from abroad, which boosted employment and injected new ideas and technologies.
Clearly, foreign investment can bring jobs and foster economic growth in developing countries. The CDI investment score gives dominant weight to the amount of FDI (as a percent of GDP) flowing from each rich country to all developing countries. However, the CDI "corrects" investment flows by considering the propensity of corporations from rich nations to rely on bribes overseas to conduct their business. Among the countries in the CDI, Italy reportedly has the most corrupt companies, while Australia boasts the least corrupt, according to Transparency International's 2002 Bribe Payers Index. So Australia's FDI, dollar for dollar, counts more than Italy's. Four countries stand out as sources of this "healthy" FDI: the Netherlands, Portugal, Spain, and Switzerland. Although banks and corporations from Japan and the United States often appear to dominate foreign investment in developing countries, U.S. and Japanese investment scores are relatively low. Indeed, their investment flows are a good deal less impressive when considering the overall size of their economies.
At first glance, it may seem odd to include immigration policy in the CDI. How is the process of development advanced if thousands of Turks exit their native country for Germany or if millions of Mexicans cross the border into the United States? Clearly, migration flows hurt in some ways and help in others. On balance, however, the freer movement of people—like the freer movement of goods—generally enhances development. The easier it is for a Vietnamese laborer to work in Japan, the more Nike will have to pay her to sew clothes in the company's Vietnamese factories. Migrants also send home sums large enough to constitute a major economic force in many developing countries. For example, remittances account for 13 percent of El Salvador's GDP—more than aid, investment, or tourism.
The migration scores in the CDI are surprising. For instance, both Switzerland and Japan have reputations for xenophobia, yet Switzerland finishes near the top and Japan near the bottom of the migration ranking. Why? In Switzerland, non-citizens face great difficulty gaining citizenship; by contrast, everyone from doctors and nurses to nannies and janitors can easily obtain legal entry into Switzerland to work—the indicator the CDI actually measures. Meanwhile, the United States, a nation of immigrants, scores only slightly above Japan. If the United States legalized more of its illegal immigration inflow, as Mexican President Vicente Fox has repeatedly requested, the U.S. score would increase substantially.
The CDI peacekeeping score rewards financial and personnel contributions to multilateral peacekeeping operations. Greece ranks number one for contributing 2,000 personnel to peacekeeping in nearby Bosnia and Herzegovina and Kosovo—a large number for such a small country. At the other extreme, Switzerland ranks last because it has historically hewed to neutrality and avoided membership in international organizations. (The country only joined the United Nations in September 2002.) Japan scores low as well; it contributed $675 million to U.N. peacekeeping in 2000 and 2001 but provided minimal troops for peacekeeping operations, reflecting the country's constitutional ambivalence regarding the use of military force.
The inclusion of peacekeeping in the CDI reflects the belief that domestic stability and freedom from external attack are prerequisites for economic development. In many cases, rich nations engage daily in military activities that enhance the security of developing countries. These forces keep the peace in places once torn by conflict; their navies protect sea-lanes vital to international trade; occasionally they intervene directly against oppression, as in Kosovo in 1999. In Mozambique, for instance, U.N. peacekeeping paved the way for new elections in 1994 and subsequent economic growth. But one nation's security enhancement may be another's destabilizing intervention—the debate over war in Iraq is a clear example. And the extent to which rich countries encourage arms sales to poor nations or provide aid to repressive regimes may actually undermine security in the developing world. Considering such complexities, the first edition of the CDI focuses solely on peacekeeping contributions rather than on broader aspects of rich nations' security policies.
BETTER POLICIES, FEWER PROMISES
The terrorist attacks on September 11, 2001, challenged those who enjoy the freedom and affluence of life in the world's richest countries to ponder their place and purpose in the larger world. Seven nations—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—account for two thirds of the world's economic output. Together, these nations form the Group of Seven (G-7), often characterized in the press as the "seven leading industrial nations." Yet judging by the results of the first annual CGD/FP Commitment to Development Index, the G-7 are not leaders. By virtue of their sheer size, the G-7 engage in more trade, more aid giving, more peacekeeping, and more pollution than any other group of nations. They have the greatest power to help developing countries, but, with the exception of Germany, which ties Spain for sixth place in the index, they generally use their enormous potential the least.
Who currently leads the world in tackling the challenge of development? According to the CDI, the Netherlands, Denmark, and Portugal do. Though they could still perform better, these three nations set an example for other rich nations. But with a combined population smaller than that of Tanzania, these countries can hardly lead alone. The G-7 nations must assume the responsibilities commensurate with their size, power, and economic might. That means reforming all their policies with an eye toward aiding development—as a matter of both morality and enlightened self-interest. These nations' steady progress on the measures included in the CDI could inspire other rich nations to follow suit. If the richest of the rich do not lead, then no one will. But if these countries do step forward, then they will help improve the lives of millions of people who deserve better than they now have—while building a more stable world in the process.
More Information on Financing for Development
More General Analysis on Poverty and Development
More Information on Social and Economic Policy
FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
