This speech by Larry Summers may interest penners. (Long.)
--Alan G. Isaac
----------------------------Original message----------------------------
Mr. Larry Summers talk to the Overseas Development Council
373 Lines Updated On:Wednesday, October 26, 1994
United States and the World Bank
Remarks by
Lawrence H. Summers
Under Secretary of the Treasury
For International Affairs
before the Overseas Development Council
October 11, 1994
Introduction
I am delighted but daunted to be with so many old friends to
discuss the United States and the World Bank. Delighted, because I
welcome the chance to reaffirm the United States' strong support for
the Bank as it celebrates its 50th birthday. Daunted, because of the
cumulative knowledge represented by this audience.
The goals of American International Economic Policy
With the end of the Cold War, American foreign policy can no
longer be defined by what we are against. It must be defined by what we
are for. Creating shared prosperity among all nations must be a major,
if not the central objective of American international economic policy.
Shared prosperity fosters all our other goals:
--shared prosperity promotes peace. From Ghana to Gaza, from
Rwanda to Russia, and from Haiti to Hanoi successful economic
development is absolutely necessary if our core strategic objective of
a stable peace is to be achieved.
--prosperity promotes human freedom. Almost every rich country is
democratic, but very few poor ones are. Avoiding debilitating disease,
learning to read, and working with dignity are as much a part of
freedom as is voting. With new generation satellites dishes that are
the size of pizza pans, the correlation between prosperity and freedom
will increase.
--nations that prosper are better trading partners. As the
100,000 jobs NAFTA has already created, and Mexico's emergence as our
second largest trading partner are demonstrating, the United States
economy has much to gain and little to fear from economic development.
-- nations that prosper help meet our most profound challenges.
In this age of abundance, it is a moral abomination that 15 million
children die unnecessarily each year, and 1 billion people live on less
than $1 a day. Unsustainable fertility and environmental degradation
spawned by poverty are global concerns. Shared prosperity is the only
way out.
The Importance of the World Bank
If shared prosperity is an American core objective, then the
development banks are as important to the new world order as the
security organizations were to the old one.
Development banks are one of the few fora where diverse nations
don't just talk together but act together. Because they are
multilateral and able to borrow, they provide great financial leverage
for our scarce budgetary resources.
That leverage is rarely appreciated. For example:
--the 24 billion dollars that the United States contributed to the
IBRD and IDA over the last 50 years has supported some 334 billion
dollars in lending to the less developed world.
--The development banks last year lent about seven times as much
for environmental programs as the US allocates bilaterally, and over
seven times as much for social investments.
--The World Bank invested about 11 times as much as we were able
to invest bilaterally in Latin America, 3 and 1/2 times as much in
Asia, and over 3 times as much in Africa.
But financial leverage is only part of the story. The development
banks' success in promoting effective development strategies has also
served American interests. Take as an example the area of trade
liberalization. Under successive World Bank supported adjustment
programs, Mexico unilaterally brought its average tariff levels down
from 28 percent to 12 percent between 1985 and 1991. That means that
the Bank did much of the tariff reduction work before NAFTA finished
the job.
With the growing importance of the economic element in foreign
policy, the increasing role of developing countries in the world
economic system, and the challenge of post-Cold War reconstruction upon
us, America's stake in the World Bank and the regional development
banks has never been greater.
That is why the Clinton administration has been steadfast in its
support for the banks. President and Secretary Bentsen worked hard
last year to ensure that we met our commitments and made a start on
paying down our arrears, which still stand at an unacceptable $825
million. The administration also provided leadership in major capital
increases for the Inter-American and Asian Development Banks, and we
look forward to strongly supporting IDA 11 in the upcoming
negotiations.
The World Bank and its Critics
To say that we support the developments banks is not to say that
they are perfect. Indeed, it is precisely because of the tremendous
American stake in what the development banks do that the debate about
their future has been so vociferous.
I will speak in a few moments about some of the changes that I see
as necessary in the years ahead. But let me be very clear at the
outset. Those who think that 50 years is enough are dead wrong.
The World Bank has been at the center of the post-war world's
development effort. In reconstruction, in early emphasis on
investments in people, in massive assistance to integrate China into
the world economy, in fighting rural poverty, in early sponsorship of a
Global Environment Facility --accross all region and sectors, the World
Bank has led economic development.
Of course progress has been uneven and difficult. But make no
mistake. The world's development effort has been a resounding success.
The human condition has changed more in the last generation than in any
previous century in human history. A child born in the developing
world today is half as likely to die befor the age of 5, twice as
likely to learn to read, and can expect more than twice the material
standard of living of a child born a generation ago. And the pace of
progress appears to be accelerating. The developing world is now
growing twice as fast as the industrialized world.
I cite these statistics to refute the suggestion that somehow the
development effort in general or the World Bank in particular has been
a failure. But the development challenge is as pressing today as it
has ever been:
--In much of sub-Saharan Africa where nearly 500 million people
live and almost 1 billion will live a generation from now, a child born
today is more likely to die before the age of five than to enter
secondary school. Warfare like Rwanda's can obliterate a decade of
progress in weeks.
--The return of wholesale human slaughter to the European
continent in former Yugoslavia reminds us of the stakes involved in a
successful economic and political transition in Russia and central
Europe.
--The fragile flower of democracy in Latin America can only
blossom if governments by the people prove to be governments for the
people, by spreading prosperity and meeting basic needs.
--The economies of Asia are growing at a staggering pace. But
this growth will end in disaster if infrastructure bottlenecks are not
eliminated and if the environmental consequences of doubling,
redoubling and redoubling again the use of energy aren't planned for.
Meeting the Challenges That Lie Ahead
How can the Bank meet these challenges? The Bank must continue to
evolve, as it already has, to reflect a new development paradigm. This
paradigm emphasizes the role of markets. It holds that giving people
equal access to economic progress is the paramount goal. And it
recognizes that environmental considerations must be woven into the
fabric of economic policy.
Private Sector
One of the greatest lesson of the last few years has been the
effectiveness of markets in promoting prosperity. Far and away, the
single most important reason why developing countries are now projected
to grow so rapidly is the role they now assign to market forces.
The Bank can take much credit for this transformation. Its work
in support of the development of financial systems, transparency, and
free-trade have all been important catalysts for market-based growth.
Assistance for economic reform is important, but not enough. The
Bank's newly announced guarantee program is a first step towards a
profound change in the way in which the Bank does business. It's a
step toward supporting rather than supplanting private sector finance.
Neither the World Bank nor its affiliates should do what
commercial banks or investment banks will do. Nor should they do
what commercial banks or investment banks won't do, because the payoff
isn't there. What the Bank and its affiliates must do is rely on their
advantage as an official source of finance. That is what the new
guarantee program does, by insuring a portion of the risks associated
with infrastructure projects. Not the risks that the plant won't work,
not the risk that consumers won't need electricity, but the
non-commercial risk associated with future government action, like
punitive regulation. This eases the path for private investors, while
ensuring that governments won't take investor-harming actions in the
first place.
The IFC has grown very rapidly in recent years. Its challenge is
to use the techniques of finance in order to leverage capital more
effectively, so as to maximize its development effectiveness.
Privatization must be the linchpin of efforts to harness
market-forces for growth. It is not the role of public institutions to
choose the firms to be privatized, or the investments to be made in
them. The European Bank for Reconstruction and Development is setting
an example in Russia of how the multilateral banks can aid a
market-based privatization effort. The Bank, in cooperation with G-7
donors, has created regional venture funds which take a programmatic
approach. These funds provide money and technical assistance to help
restructure newly privatized entities. But they do so only after firms
have been privatized, and have won investment from private actors,
based on market considerations. We should see much more of these kinds
of programmatic efforts, not merely in Europe, but in most regions
making the switch from nationalized to private sector industries.
Adjustment programs designed to liberate the energies of the
private sector have been highly controversial. Certainly no one in
Africa can be satisfied with the results. But as study after study has
shown, the results of adjustment through adjustment programs are better
than the results of the forced adjustments that come when finance is
suddenly cut off by an impatient private market.
Second generation adjustment programs, in addition to worrying
more about the impact of public spending cuts on the poor, may have to
move a bit away from the field of dreams approach of fostering the
private sector. Removing barriers, and getting prices, may not be
quite enough.
Poverty Reduction: Putting People First
The second critical policy step is increased emphasis on
investments in the social sector. Particularly where concessional
money is being used, this has to become the highest priority for bank
lending.
It is a real accomplishment that the Bank will lend $15 billion
for human resource development over the next three years, twice what is
lent over the previous three years. But this is only a beginning. If
the Bank is to succeed in supporting economic reform, it must do what
it can to assure that reform minded governments endure. That means
enhancing their capacity to provide services as efficiently and
equitably as possible. That means more primary health care and fewer
tertiary hospitals, more primary schools, and less universities.
Only through direct support for social investments is there the
prospect of building a durable and inclusive prosperity.
But such support for basic human needs is not enough. The impact
on the poor of structural adjustment and other Bank lending policies
must remain at the heart of Bank concerns. Affected communities must
be recognized as constructive partners in the development process.
That can only happen if new ways are found to mainstream public
participation in project selection, design and implementation. There
should also be a renewed Bank-borrower partnership to incorporate the
benefits of "grassroots" experiences into the mainstream of lending
operations. This isn't just a moral policy -- it is sound development
policy. Incorporation of grassroots experiences will vastly improve
project quality and performance.
The Bank should also use its considerable staff expertise to work
actively with other donors in promoting microenterprises and other
small-scale poverty and environmental initiatives. Such a turn towards
microenterprise marks an important new chapter in Bank programming, a
recognition that equitable, market-led growth rises from the bottom-up,
not the top-down. The use of local intermediaries will help facilitate
this process, allowing Bank creditent of the population.
Environment
Perhaps as significant as the need to unleash market forces is the
need to respect environmental limits in promoting growth. Critics
notwithstanding, the Bank has done a great deal to put the environment
at the heart of its decision-making process. New policies for bank
lending regarding forestry, energy, agricultural, and water resources
now govern bank activity. Sound resettlement guidelines protect the
rights of local populations. The first, highest environmental priority
is ensuring full compliance with all environmental policies. That will
mean no more Narmadas.
But there is much more that needs to be done. Just as the
depreciation of capital is recognized as a cost in economic planning,
so must depletion of natural resources be assessed in formulating
policies that transform the environmental balance.
There are, to be sure, difficult tradeoffs between environmental
protection and growth. And to be sure those tradeoffs have too often
been made against the environment. But in recognizing the need for
those tradeoffs, let us not lose sight of the enormous array of win-win
policies that the World Bank can support. Cuts in subsidies for
commodities that encourage overuse of resources, aid for female
education, support for family planning, sanitation and clean water
efforts -- all of these foster growth even as they remove incentives
for environmental degradation.
Programs that halt overuse of energy are the best example of these
sort of win-win strategies. Subsidized energy prices are not only a
source of waste. They also result in substantial needless pollution,
and a substantial contribution to global warming. Adjustment programs
that raise energy prices to market levels are good economic policy and
good environmental policy -- especially when they are supplemented with
support for programs that conserve energy.
By some estimates, the bank now loans 20 times as much for the
production of energy, as it does for energy conservation. That balance
has to change within 5 years.
The Bank's Culture
Even as Bank programming changes to fit this new development
paradigm, the Bank's internal culture must evolve to match its work.
Thinking about organizations in recent years has changed dramatically.
The centrality of an organization's culture to its success has been
increasingly recognized.
Lew Preston has made a very important start on transforming the
Bank's culture. The pathbreaking Wapenhans report, and the emphasis on
supervision that followed, are changing the way in which the Bank does
business. Now, a toast will be drunk when development has been
accomplished, not when projects have been brought to the board.
Greater transparency will expose problems earlier. In international
organizations as well as our own government, sunshine is an important
disinfectant.
The recent steps to streamline operations and cut costs have been
impressive. But I would suggest that there is much more that needs to
be done.
--The Bank must act more like a bank, providing loans that are
packaged in a way that serve borrowers' interest, not its own
treasury's convenience. If there ever was any doubt about this point,
the response to the Bank's single currency loan program should end it.
--More attractive loan terms will make loans more valuable to
borrowers, and will increase the Bank's capacity to encourage policy
reforms.
--The Bank's clients are not the governments to which it lends,
but the poor it is seeking to help. More participation, more
involvement of those directly effected by Bank operations will, as
experience after experience has demonstrated, improve the quality of
projects.
--Effective knowledge-based organizations in the 21st century will
not concentrate all their people in one site. I would suggest to you
that one well-placed Bank expert in a nation's capital, ready to answer
key questions on an hour's notice, is worth hundreds of carefully
reviewed reports at headquarters.
Conclusion
The Bank's future will continue to be debated for as long as there
is a Bank. It can be no other way for an institution that embodies
some of mankind's highest hopes, but which must daily confront its most
profound problems. These discussions will take on increased urgency
over the next year -- in the context of the G-7 leaders' call for a
rethinking of the international economic architecture, in the
Development Committee's task force on the future of the development
banks, and in the context of the Bank's own discussions, internally,
and with its board, about its future.
There will be disagreements on means. But there can be no doubt
on the common end. Development remains the greatest challenge facing
the human race.
The World Bank has an unmatched capacity to harness financial
resources. It has the world's greatest financial franchise -- the
capacity to borrow at costs that are often below those of industrial
country governments, and to lend at spreads lower than those of any
commercial bank. It's got more knowledge and experience in the
development process than any other institution in the world. It must,
and it will, with strong support from the United States, remain at the
very center of the world's development effort.
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