JUL 17, 2001

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

Bank.

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

more effective.

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

world's poor.

Paul H. O'Neill is secretary of the Treasury.