April 21, 1999

Mr. Chairman: It is a pleasure to have the opportunity to support the proposals before you for financing the work of the various multilateral institutions. The United States has played a critical role in shaping the policies and practices of these multilateral institutions for the better, and I hope through renewed financial support it can continue to wield its constructive and benign influence. In this testimony I will focus on the IDA replenishment, but the points I make apply generally to development assistance administered by the multilateral institutions.

Development assistance is in the interests not only of the millions of people in the developing world, but of all Americans. As I am sure the members of this committee know, polls show that Americans favor higher levels of such assistance than the United States now spends, reflecting not only their generosity but their intuition that development assistance, because it is a critical input to a future world that is less divided in material terms and thus a more stable and safe global neighborhood for our children and grandchildren, is in our enlightened self interest.

Development is one of the success stories of the late 20th century. Though there are still millions of people in the developing world living in poverty, the fact is that throughout the world, such indicators of how people live their lives as infant mortality, school enrollment, and knowledge of and access to health care, clean water, and new agricultural and other technologies, all have dramatically improved.

Moreover, the stage is set for more rapid and dramatic gains in growth and poverty reduction in the next decade than we have seen over the last several decades. There are two reasons.

First, most countries in the developing world, including some of the poorest and least developed in Africa and South Asia, have in the last decade embraced the kinds of economic, social, and political reforms that set the stage for growth that is not only greater in income terms, but that is more sustainable and more likely to be broadly shared. Behind those reforms is the global turn to the market and the healthy pressures to be open and competitive that markets demand. Throughout the developing world, countries are reducing the role of the state, strengthening property rights and the rule of law, modernizing tax administration and other public institutions, opening their markets, implementing efforts to increase the transparency of public institutions and to reduce corruption, and strengthening local government, civil society and other ingredients of working democracies.

Second, the approach to development assistance is changing. Over the last 40 years, development assistance has played a critical role in improving the lives of people in developing countries. But development assistance dollars were not always well spent. Much was quite literally wasted. A strong case for new development assistance can only be made on the basis of clear resolve in the World Bank and throughout the development community to improve aid effectiveness. Fortunately the evidence is that that resolve exists.

Careful studies of the effectiveness of aid have produced straightforward but valuable lessons about what works. The central lesson is that large infusions of development assistance only work, i.e. only help generate healthy growth and poverty reduction, when economic policies are sensible and public institutions function reasonably well in the recipient countries. This is equivalent to saying that financial assistance only works when reasonably good government is in place. Only under conditions of good government will foreign assistance complement and crowd in the private investment that is ultimately the key engine of growth, jobs and poverty reduction.

Three other well-documented lessons are: (1) that aid conditionality can complement but not substitute for the recipient government’s "ownership" or local commitment to policy and institutional reform; (2) that development projects in specific sectors like education and health can be important vehicles for strengthening local institutional capacity and generating new understanding of good practice – but their value lies as much or more in these indirect functions as in the additional finance they provide; and (3) that in countries with poor policies and weak economic management, aid can help, but should go in very small doses administered by donors prepared to be patient and opportunistic. These are points made with clarity and refreshing frankness in a recent World Bank publication entitled Assessing Aid: What Works, What Doesn’t and Why. On the basis of my nearly 20 years of research and operational work in development finance, I can attest to the quality of the analysis and its resonance for anyone who has worked with governments and private organizations to improve peoples’ lives in the developing world.

The bottom line is that both the way development assistance is allocated across countries and the customs and mechanisms for delivery of aid need to change. Dollar for dollar, development assistance buys more poverty reduction if targeted to countries that are both among the poorest and are committed to sound management, and if the multilateral and other donor institutions that deliver the financial assistance focus heavily on reinforcing sound management of good governments.

Fortunately the approach to development assistance is changing in the World Bank and in the regional development banks. Indeed, the IDA 12 agreement and the African Development Bank agreements reflect the changes underway, and their approval and financing can go a long way to ensuring these changes are consolidated and consistently applied not only in those institutions but also across the donor community.

Several features of the IDA 12 agreement are particularly noteworthy.

The first and most fundamental is the adoption of country performance criteria for the allocation of IDA funds; this means more differentiation in both amounts and types of assistance as a function of countries’ policy performance. Additional work is needed to improve the country performance rating system and to make the process transparent and public. This should be a priority as the new replenishment period proceeds. Indeed, the IDA 12 agreement can be the vehicle for the fine-tuning of what should become internationally agreed performance criteria adopted by all of the multilateral development banks.

The second is the explicit attention the IDA agreement endorses for inclusion in the performance criteria of governments’ pro-poor policies, reflected in their public expenditures, and of governance. In both cases, anti-poverty and governance, the emphasis is on current good policy, not on plans or promises of future good policy in potential recipient countries.

Governance is the catchall term to convey the notion of well-managed, transparent governments committed to the rule of law. A few remarks on governance show the link between the findings referred to above about what makes aid effective and the emphasis on governance. For development assistance programs to work requires not only sound economic policy but credible institutions to sustain sound policy – so that public service programs are effective and free from the predations of small and large corruption, and so that the private investment needed to generate jobs and growth is attracted. Credible institutions are the outcome not only of top-down honest and transparent direction in public bureaucracies, but of institutional and incentive arrangements that make public institutions accountable, through active participation of citizens both in the traditional practices of democracy such as voting and public hearings, and through civil society groups. Thus at the heart of the concept of governance are standards and ideas that are well understood by Americans and have made democracy work in this country: transparency, accountability, and citizen participation.

With strong leadership from the United States, all members of the donor community have signed on enthusiastically to these two principles: performance-based allocation of aid funds; and explicit attention to pro-poor policy and to good governance in the performance criteria. In that respect, the IDA 12 agreement provides a model framework for more effective and more cost-effective development assistance in the other MDBs and in bilateral assistance programs.

Other aspects of the IDA 12 agreement support and reinforce a more realistic and cost-effective approach to development assistance, including the commitment to make publicly available the country assistance plans of the World Bank, the renewed commitment to environmental programs, the emphasis on investing in people and on broad-based, labor-intensive growth as key ingredients to reducing poverty, and the appropriate planning for provision of post-conflict assistance.

It is also encouraging to note the World Bank and the regional development banks are increasing their attention to the global and regional issues which increasingly shape our world and which certainly affect the poorest developing countries that receive IDA and African Development Fund resources – including global environmental problems, control of illegal drug trafficking and money laundering, the spread of disease, and so on. The regional development banks, especially the Inter-American Development Bank, have been leaders in support for regional programs. It is reasonable for donors, including the United States, to press the multilateral institutions to make the internal organizational and incentive changes that would encourage increased attention to multicountry issues and that would ensure that the poorest countries can participate effectively in the design and implementation of regional and global programs.

Finally, let me conclude noting that the recent global financial crisis is a healthy reminder that we live in an increasingly interdependent world. The international institutions are central to the promotion of growth and stability across the globe, and to the reduction of poverty. In recent years, they have been strengthened by tremendous internal changes – including greater emphasis on poverty, the environment, and support for anti-corruption measures; reduction of their own administrative overhead; and greater openness and accountability. The United States has played the key role in promoting and monitoring these changes, and thus its own financial support has influenced for the better the use of the much greater amounts contributed by other countries. Now that the developing countries are more committed than ever to reform, and the other donor countries fully committed to the aid effectiveness approach the United States has supported, the moment is ripe for the kind of financial support you are considering.