Helping Poor Nations Jude Wanniski July 19, 2001

Memo To: Paul O’Neill, Treasury Secretary
From: Jude Wanniski
Re: Nice op-ed in the NYTimes

Your op-ed in Tuesday’s NYTimes, “The Best Investment in Helping Poor Nations,” certainly points in the right direction. It is about time a U.S. Treasury Secretary lectured the international financial institutions, which have been throwing money around for half a century while global poverty has either shown no advance or has gotten deeper. The line that sticks out is this one: “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.” The International Monetary Fund, the World Bank and the other banks typically hand out loans at subsidized rates for the poor countries willing to sign up for boondoggles that chiefly benefit U.S. multinational corporations or the big banks. You discretely avoid saying so, but if you continue along this line of argument, it is bound to come up. In some important ways, much of the misery in the world has been caused by these institutions, using taxpayer funds to feed themselves at the back door.

You know, Mr. Secretary, that I am not one of those who recommend U.S. withdrawal from these institutions. If the policy framework were altered, so that the goal would be increased productivity of ordinary workers in the poor countries, we would see palpable improvements in their lives in their own lifetimes, even in the lifetime of the Bush administration. Poor countries do not need the rich countries to finance steel mills or airlines or textile plants for them. At the most basic level, workers at the bottom of the economic ladder are willing and able to produce goods for exchange with each other – and do so now only in what amounts to a barter system. To advance, they have to be able to transact in a money economy, which means they will be able to produce and exchange over longer distances and greater time periods. If they must face confiscatory taxes and regulations in the money economy, production and exchange is discouraged. If they must make contracts in a national currency that has no credibility, because its value changes from one day to the next, they are again driven back to barter and what amounts to pre-civilized economic devices. The big guys at the multinationals do not even think about this, which is why it is important you bring it up at your high-level meetings. The World Bank thinks we could solve the problem by buying more of the production of poor countries, but that is a cop-out. Between the lines, it means we should buy their steel and textiles so they can get the dollars to pay back their loans to our international banks.

The one thing that President George W. Bush could do with the stroke of a pen that would bring instant relief to all the poor countries of the world would be put the dollar back on a gold standard, after correcting for the deflationary errors made by our central bank these last few years. If we provided that fixed unit of account, all the world could fix their currencies to the dollar or to gold and that element discouraging production and exchange among the poorest people would be removed. At first glance, the big guys would not like this, because it removes an element of volatility from which they can profit if they have the right contacts. But with that single act, the amount of new wealth that would be generated around the planet would more than compensate them. It is something you may have to think about for a while, before the simplicity of the idea hits you. Fed Chairman Greenspan yesterday told the House Banking Committee he is doing the best he can under a fiat dollar, hinting that he might be open to a gold standard. That might be the topic of your next op-ed, perhaps for The Wall Street Journal.

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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.