The Best Investment in Helping Poor Nations
New York Times- JUL 17, 2001
By PAUL H. O'NEILL
WASHINGTON — With more than 1.2 billion of the world's people still living on less than
$1 a day, there is no more important challenge than improving living standards and
eliminating poverty. The World Bank and other multilateral development banks have a crucial role
to play in meeting this challenge. To do so, they need to change their ways of doing business.
Today President Bush will speak about how we might spread development and prosperity to other
parts of the world. In addition to describing the benefits of trade expansion, the president will point
out that the key to improving living standards in poor countries is to design development strategies
that focus on economic growth.
Earlier this month in Rome, at a meeting of finance ministers, I had the opportunity to share ideas for
improving the development banks with both officials of G-7 nations and heads of several of the
banks themselves: the World Bank, the African Development Bank, the Asian Development Bank,
the European Bank for Reconstruction and Development, and the Inter-American Development
All of these development banks, whether they operate worldwide or regionally, try to use capital
provided by richer nations to modernize the economies of the world's poor countries. But too often
the millions or billions of dollars they have lent to finance development projects have not led to the
hoped-for economic growth. To improve the lives of the poor significantly, these banks need to be
First and foremost, the development banks must focus their efforts on raising productivity growth in
the developing world. Virtually all differences between rich and poor nations can be explained by
differences in productivity — the amount of goods or services each worker produces per hour of
work. Higher productivity translates directly into higher incomes. To start, the banks should devote
more resources to the development of human capital. Education is inextricably linked to improving
living standards, and it is critical that the banks place greater emphasis on it. Over the past five
years, education projects accounted for only 7 percent of total World Bank lending. My colleagues
in Rome agreed that this must change.
The banks should also promote the right kinds of investments in physical capital. Not all capital
investments are equal. Economic history has taught us, for example, that investing in agriculture
while laying the foundation for diversifying into competitive, privately owned manufacturing is a key
to development. Investments should support the production of real products for real customers in
competitive markets: it is important that the banks do not induce countries to invest in business
sectors that are already globally oversupplied.
Because a market economy relies on institutional bedrocks like the rule of law, enforceable
contracts and a stable government free of corruption, the development banks should actively
promote sound governance and public-sector management in borrowing countries. They should
lend only to those with governments committed to meeting these standards.
The banks must also adopt a bolder, more aggressive stance on the use of outright grants of money,
as well as loans. During the past two decades, many of the poorest nations became so highly
indebted that now they are unable to make payments on their current loans, let alone borrow and
pay back more. Grants are the right way to help an already heavily indebted country provide
education, health, nutrition, water and sanitary needs for its poorest people and to help fight AIDS
and other infectious diseases. Loans should be made only when there is an expectation that
principal and interest will be paid back in full and on time.
Countries that do not have access to capital lent by private financial institutions are in the greatest
need of the development banks' resources. As the financial conditions of individual countries
improve, we should create a system of loan rates that moves toward the private-market interest
rate. This will keep the development banks from competing with the private sector and help
concentrate their lending on countries that lack access to the private financial markets.
Finally, it is essential that the multilateral development banks become more rigorous about
measuring their own results. In education, to take an illustrative example, measuring inputs —
classrooms, teachers — is secondary to measuring the product — ability to read and write and
compute at an appropriate level. Similarly, in assessing the performance of the development banks,
we need to develop specific ways to assess progress toward development objectives; we must be
hard-minded and demanding about the necessity that the money lent really produce results.
I strongly believe that the multilateral development banks can be more effective in promoting world
economic development by focusing their knowledge and resources on improving the lives of the
Paul H. O'Neill is secretary of the Treasury.
Copyright 2001 The New York Times Company