News 43 of 49

Special Presentation: New Approaches to International Donor Assistance

2001-09-12

I want to talk this evening about the challenges of economic development, and particularly in the context in which we live – that is in the context of globalization.

I would like us to understand globalization in a bit more unblinkered manner than I think we do. When I say "we," I have to acknowledge right at the beginning that I'm often thinking of "we" in the United States, and too often thinking about "we" in the US government that has so much influence on the way the world reacts to globalization, so much power, and unfortunately so little understanding of what's really happening. I think that for us to understand better what the tasks of international development assistance are, what the great challenges facing the Canadian International Development Agency (CIDA) or IDRC, or, in the United States, USAID, or other aid agencies, really is, the starting point, for me, is, again, the medical analogy: it's a good diagnosis, it's to understand what ails the system. And I think we have not gotten, ladies and gentlemen, a truly proper understanding of globalization, of what it means, of how it's affecting different parts of the world differentially, and therefore of how most effectively to intervene to pursue the goal we're all here to pursue: promote broad-based economic development and the alleviation of suffering in very poor countries.

I, myself, in my professional career (which I have to admit, after just celebrating my 25th college reunion last weekend, is now well into its third decade of practice as a macroeconomist) have learned a lot by experience and by watching what it is that the tools that I was trained to use could and could not accomplish. I came into this, if you'll forgive a little bit of personal digression, as a finance specialist and as a macroeconomist, and I learned fairly early on how to turn the dials of exchange rates, monetary policy, budgetary policy, financial market policy, and so forth, for the purposes of macroeconomic stabilization. And for many, many years I was engaged in helping countries in hyperinflation to attain some kind of stability. And often, I'm happy to say, with reasonable results in achieving such stability. But I also learned some very important lessons from that, and that is: what are the real powers of those tools and what are the real limits?

This was a country of impoverished people, of course. It still is a country of very poor people. It was a country that, in the preceding five years before the 1985 stabilization, had a reported decline of per capita income of more than 30 percent. That's a catastrophe in the scheme of things if you're already amongst the poorest. And, by the time I arrived there, the inflation over the preceding 12 months had reached 24,000 percent cumulatively. So this was a pretty mean disease – that's why I say it wasn't so pretty to watch. It was a very tough kind of circumstance of probably – by the count that I made at the time – the seventh highest hyperinflation in the history of the world. Sadly, it was subsequently surpassed, like many others that came at the end of the 1980s and the early 1990s.

But I learned something very important working with Bolivia over many years, and that is that they didnot achieve significant economic growth afterwards. They did succeed in breaking a free-fall that was horrendous and tragic. They did succeed in restoring economic growth, but it was growth in the order of around 2 percent per year per capita, which, for a very poor country, is surely a very long haul out of underdevelopment. Remember the rule of 70: if you divide 70 by the annual growth rate, it's the number of years that it takes to double the per capita income. Or double the variable, so at 2 percent per capita, it's 35 years to double the per capita income. And that means if you were what Bolivia was – roughly about $600 per capita at the time of this stabilization – it might take 35 years to reach $1,200, and then another 35 years to reach $2,400, and so forth. Obviously, to say "Well, next century you may reach the level of development that the United States reached 50 years ago," isn't exactly the target of global development.

Bolivia is very much a country of its geography. This is such an obvious point that perhaps it took me 15 years – and I'm still learning – to understand what that really means. But I came to understand very directly when I worked a few years later with Viet Nam for a short period of time. Viet Nam was growing at 6 percent a year. It had a miserable government; corrupt, terrible regulations. It was so much worse in governance than Bolivia ever was, much less democratic – of course there was much less participation of civil society. There was a pretty authoritarian old guard, a lot of corruption and mismanagement around the state enterprise. And yet it was growing at several percentage points per year faster. And it was absolutely obvious why: they had a beautiful long coast that was excellent for bringing in Taiwanese firms and Korean firms and many other firms that wanted to make television sets and sandals and footwear and T-shirts and other things which created jobs and created income.

Now, the more I've seen and the more I've thought about it, the more I've come to understand how incredibly important it is to centre the specific characteristics of the society, the country, in thinking about how globalization is affecting that society and the challenges [it faces]. Everywhere we look, for example, ladies and gentlemen, there are incredibly powerful geographical factors at play which are barely noticed, or barely noted at least, in our professional discourse. For example, the most obvious one is that almost all of the tropical world till today is poor. Almost all of the temperate world is either rich or formerly communist. It's hard to be in the temperate zone and not have been under the Soviet thumb and still be poor – that takes a lot of work. There are a few places that do that, but very, very few. If you look at the roughly 1 billion people that are in the World Bank's category of high-income countries, 992 million of them are in countries in the temperate zone. There are two economies in that list in the tropics – two – one country and one special district. They're Singapore, with its 3 million people, and Hong Kong. There is no other economy in the top 30 in the tropics.

It's a very peculiar thing. If you look at the landlocked countries in the world, like Bolivia, you will find no success stories, except if you happen to be landlocked surrounded by rich countries. So there are a couple of rich landlocked countries, Switzerland and Luxembourg. And then there is a world of poor landlocked countries: in South America, Bolivia and Paraguay; 14 utterly impoverished landlocked countries in tropical Sub-Saharan Africa – Chad, Mali, Niger, Central African Republic, Rwanda, Burundi, Zambia, Malawi, and so forth – not big success stories economically; the landlocked countries in Central Asia – the "stans" (Turkmenistan, Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan) where there's nothing going on economically except pumping oil, because that's the one commodity that you can fruitfully transport over 1,000 miles across borders. And you have to pity Uzbekistan in this regard: it's the world's only double landlocked country, meaning it's the only country all of whose neighbours are landlocked, so you have to cross two international borders to get to a coast. It's the only place like that in the world. And Laos and other landlocked countries – there's not a success story among them in the world. It's tough being landlocked: overland transport costs are extraordinarily high still. You don't ship most goods by air, except at a very late stage of economic development. And if you want to get started in economic development, if you don't have access to a sea port, it's very, very tough.

So this is also not an accident. When I used some GIS data recently to look at the temperate zone coastal regions that are within 100 kilometres of a navigable waterway or the ocean, it turns out that those thin strips of land on the east coast and the west coast of North America, of Chile, Argentina, southern Brazil, of Australia, New Zealand, in the temperate region of northeast Asia, of coastal China, Japan, Korea, and of Western Europe, are about 8 percent of the inhabited landmass of the world. But at least 52 per cent of the world's GNP is produced in those thin strips.

So if you look at what's happening in the world of globalization, you'll find that, not just in these static levels – that is snapshot differences of income – but in processes right now, it is absolutely fascinating the differentiation that is taking place in the world. The fact is that a lot of the world is being left behind for some identifiable reasons once you make the diagnosis, and probably some significant parts of the world are being absolutely hurt by globalization, while other parts are wonderfully benefiting. I think there's no doubt that the rich countries are benefiting from globalization, not because they're exploiting poor countries – I don't think that almost anything in economics has that zero-sum aspect to it – but because rich countries are innovating, dynamic economies that have, as Adam Smith taught us 225 years ago in The Wealth of Nations, benefited from an expanded scope of the market. If we're producing technology for a unified market, the bigger that market is, the higher are the returns to innovation. Innovation has this core property that you produce the blueprint once and then you produce at marginal cost -- at much lower cost than the one-time invention or discovery that's behind the innovation. The larger the market is that you can sell you products over, obviously, the higher return to that innovative activity. So if you're like the United States or Canada or Western Europe, you'll basically be a beneficiary of globalization because of expanded markets, just like Adam Smith said.

China, in 1978, was an extremely poor part of the world. They had had a very bad streak of luck and bad politics from 1433 until 1978, by my count. So they went through five centuries of one damn thing after another – if it wasn't the Mongols, it was the Opium War. It was really a very bad stretch and they went from one of the world's leaders to among the poorest. Since 1978, however, China has been the fastest growing country in the world because it was actually one of the only coastal temperate parts of the world that was impoverished. And so it had some major advantages. I haven't told you why the tropics are poor or why I think it may be true that they are – I'm coming to that in a moment.

And, again, one damn thing after another, finally culminating in Mao. That was another damn thing until 1976, when he died, and Dong Chow Ping began the reforms in 1978. And the place has boomed since then with 9 percent per year per capita growth. Utterly the product, ladies and gentlemen, of globalization. China could never have done this without globalization. So if you want to know if globalization can lead to development, China is the paradigmatic success story.

That kind of gradient is everywhere in the world that we look right now. So I went a little bit more in detail to stress the point that globalization can work, but it works differentially. If you look at Eastern Europe (I had the personal experience to advise many of the countries in transition, and some of them worked), Russia had a miserable decade; Kyrgyzstan, you'd barely notice; Mongolia you'd barely notice, it's been miserable. It doesn't really matter too much when you're 1,500 kilometres from a port. You can open up, you could close, no one's going to go in there. You're just not going to get industry going.

But if you go further to the east, go to Muldova, to Ukraine, to Moscow – well, Moscow is a little different, but to Russia in general – to the "stans" that I mentioned, you won't see economic development taking place. A few companies go to invest there, maybe to produce for the local market. Maybe Proctor and Gamble goes to make detergent for the Russian market globally, or maybe Coca- Cola bottles Cokes just about anywhere in the world, but you wouldn't go there as a production-based or globalized production systems as you would in Poland or as you would in coastal China. And so you don't have globalization creating this big uplift of economic activity.

Take a look at Africa. There's a very sharp north-to-south gradient. North Africa, aside from Libyan and the Algerian civil war, has some modest success, at least, in Tunisia, a little bit less in Morocco, and surprisingly okay in Egypt. That's because the Mediterranean is a short shipping distance to Western European ports, and once those North African countries opened up, it was easy to bring in the apparel factories, some of the automotive component factories, and so forth, to take advantage of the lower wages. You get a lot of German tourists coming to the beaches of Tunisia and that creates some economic growth. Globalization is working.

And if you look at the Americas, we have the same geographic gradient right now. What's working best in the developing countries in the Americas? Northern Mexico. NAFTA really is a beautiful thing, actually, for economic development. It will lead to economic growth and democratization in Mexico. And it will help Canada and the United States. I have no doubt about it. So I think this is a good example of mutually beneficial trade. But it reaches approximately to Mexico City. It does not reach to southern Mexico. That's not the fault of NAFTA, that's the limits of geography. Mexico is being stretched apart right now, where the northern states are growing at 3 or 4 percentage points faster than the southern states. And interestingly, the migrants – the undocumented illegal migrants -- that are coming to the United States, and probably Canada, they're not coming from northern Mexico, they're coming from southern Mexico. They go all the way up and right through the northern states. So there are a lot of people from Chiapas who have come into the United States in recent years.

But the Andean region, 130 million people, is absolutely in disastrous shape. Venezuela, Colombia, Ecuador, Peru, Bolivia – there is no success story right now. Bolivia is the best of all of it, and I know how fragile that is. You have regions that are burdened by the Altiplano, by the incredibly high transport costs, and by the fact that the one competitive advantage they have is producing cocaine for the US market. And rather than give Entrepreneur of the Year Awards there, we go in and shoot the entrepreneurs. So it's a real problem.

Even the Southern Cone, which is the temperate richer part of Latin America, is in pretty mediocre – poor – shape. Argentina is chronically in crisis right now, and the finance minister, Domingo Cavallo -- who was a classmate of mine 28 years ago in first year macroeconomics – just made, I think, a very questionable devaluation yesterday that he promised never to do. It's just a sign of how bad the situation is in what used to be, of course, the rich country in the region. Chile is a success story in terms of good governance and democratization right now, but don't overrate what's going on because, while they've had good economic growth, it's a country still dependent on copper and off-season fruit for the US market. That's a very thin reed for long-term economic development. And Brazil? Too complicated to talk about. It's a country of the future, and always will be. There's a lot to say, but it would, a little bit, take me off track.

What's going on in the world? What's going on, clearly, is that globalization is having some profound effects in reshaping the world, but not in a glib way that everyone is now benefiting in wonderful ways, but in much more complicated ways. Regions of disadvantage are finding that they're actually losing what little physical and human capital they have. It becomes easier to move and some places you move out of. So Africa is actually sending doctors to Canada in large numbers and Canada is actually recruiting doctors in large numbers. This can't be right from a global resource allocation point of view. There are almost no doctors in Africa.

Now, it seems on the evidence, if we just focus for another moment on the tropics, that endemic diseases like malaria, which can only be transmitted year-round in tropical environments (and not to be mistaken with the light touch that the temperate parts of the world used to have – malaria in a few months out of the year, in very low transmission rates). Year-round, holo-endemic malaria, which is only inherently climatically or ecologically a tropical phenomenon, by itself has devastating consequences on economic development. By estimates that we've made in our institute, probably 1 percent per year, over extended periods of time, of reduced growth in holo-endemic, malarious environments, compared to non-malarious environments – a very systematic gradient. And Africa is, of course, the falciparum malaria – that's the killer version of malaria – site par excellence in the world, with still probably1.5 to 2.5 million deaths per year due to malaria.

Economic development requires, in my opinion, a serious approach to three issues. First, to social development, but in context. And by "social development" I mean the capacity of a society to raise children who are healthy and receive an education. And large parts of the world cannot do this right now. Large parts of the world face disease burdens that are so vast and resources that are so scarce that they're utterly trapped in a poverty/disease spiral. So the first part of development is social development. Without healthy infants and toddlers, you don't have school-going children. Without healthy children, you don't have school graduates. Without healthy adults who aren't dying of AIDS by the millions, you don't have a healthy workforce. And many parts of the world don't come close to meeting these basic conditions right now.

This would be extraordinary. No poor country comes close to 8 percent of GNP. None for health. No poor country. But suppose you did that. You had no army, you had no war, you had no debt because we stopped faking it about the debt relief and actually gave it – what will you have? You'd have $24 per person per year. Try to control an AIDS pandemic, holo-endemic malaria, rampant tuberculosis, rampant diarrhea and acute respiratory infection and [provide] immunization programs, safe delivery for maternal health, mother and child health, micronutrient supplementation, on $24 per capita. I dare you. It's impossible. It is just impossible. So this is the message the United States absolutely does not want to hear.

We just gave $200 million for the Global Fund for Health, a wonderful initiative. US$200 million from the United States is $0.72 per American to fight the global AIDS pandemic. We're in the equivalent of the Black Death right now. We will have tens of millions dead from this pandemic, probably the most lethal pandemic in world history, and the United States has just seen fit to give $0.72 per American.

We will not turn the corner on development in poor tropical countries with this approach. I don't care how many more IMF missions go to Chad, they won't stop a single mosquito from biting. They're on the wrong track. They don't get it. It's not their job. They don't even belong in Chad. It's a huge misunderstanding of the world system to have the IMF running poverty programs. It's farcical. Why don't we have the WHO running poverty programs in Chad, like we should? You know why? Because the IMF is three blocks down from the White House. That's why. And the WHO is 3,000 miles away. That's the only reason. If the world had been more clever and put the health organization on 19th Street, and put the IMF in Switzerland, we would have controlled public health a long time ago because US presidents would have understood it's good for their foreign policy. But they don't get it right now. They send the IMF and then the IMF has these ridiculous seminars on malaria, which has got to be the worse resource misuse imaginable.

And we're seeing the results. Pandemics run wild. It is probably the case, ladies and gentlemen --I'll make one outlandish statement, but it's probably true, unprovable – that the AIDS pandemic has not been deflected from its natural course by any human intervention so far because we haven't even tried. Even the success story, "the" success story that's playing to Uganda, may be the natural result of ending the war and the rapes that were transmitting HIV in the late 80s, in the mid- to late-80s, and just the natural end of one wave of the pandemic and the economy reaching, or the society reaching a lower intermediate point.

It's hard to find evidence that we've made any difference at all so far. And when you look at how hard we've tried? You know, we let the epidemic run for 20 years. You know how much the World Bank put into AIDS control between 1996 and 2000 for Sub-Saharan Africa? Five cumulative years, 49 Sub-Saharan African countries, 10,000 speeches: how much did they actually give ...or lend? They gave nothing. How much did they lend? $31 million, total, $31 million over five years – $6 million a year.

The third area I would mention is what is sometimes called industrial policy, what's sometimes called sectoral development, what I would call business development. It's the confusion that the IMF and the World Bank and the US have had – whether deliberate confusion or not – of saying that opening your economy and freeing up markets and other things is the same as a sector development strategy, that that's the way to get your agriculture working or it's the way to get industry working, and so forth. No country in the world that is successful lacks an active industrial policy. It's true of Canada, it's true of the United States. There is no such thing as a free market industrial policy that works. Markets are very important. I believe the private sector is definitely the engine of growth everywhere. But in Canada and the United States, we know that you need an active government to promote higher education, to promote science, to promote particular industrial sectors. The United States has an absolutely active industrial policy to promote Internet-based technology. We spend $90 billion a year on basic science right now – $90 billion. We're actively promoting the US private biotechnology industry. We're actively promoting nano technology. We're actively promoting information communications technology. We have a very sophisticated industrial policy.

And so I was making this discussion and a very fine, nice IMF economist stood up, somebody that I really like, and he said, "Jeff, you know, it just doesn't make sense what you're saying." He said, "You know, if everybody gives tax holidays, all you're doing is just giving away tax revenue, you're not helping because it's a zero-sum game or negative-sum game then. If everybody gives the same incentives, no one's benefited." And I said to him, "You know, that's a really interesting observation, except there's one flaw with it. And the flaw is that the IMF only runs half the world. The other half gives tax holidays. What the IMF makes sure is that not one country under its control gets foreign investment. That's what happens." If we really had a world regime, that would be a different thing. But what we have is this crazy business, that Washington tries to run the business environment of countries, and it has failed miserably for 20 years.

So you can see I have a lot of complaints. Basically, I'll close where I started. We need a serious strategy. We need a strategy that understands that globalization is no panacea. It's no curse. It is a reality. It's a reality that's going to do a world of good for large parts of the world. It will bring hundreds and hundreds of millions of people, maybe a couple of billion people, into economic development. International trade is a good instrument for that. Foreign-direct investment is a very powerful instrument for that, if you can get it. But it will not solve the crises of Sub-Saharan Africa, it will not solve the crises of the Andean region, it will not solve the crisis of a large part of the Eurasian landmass. For that we're going to have to think a lot harder. We're going to have to invest heavily in health, which is going to cost tens-of-billions of dollars from the rich countries because the poor countries are too poor to do it. We're going to have to invest massively in science to address problems of low agricultural productivity in the tropics, recognizing that our entire consultative group for international agricultural research – the CGIAR network of tropical agricultural research centres – has an annual budget combined for the 18 specialized centres that's less than half of Monsanto's R and D budget alone. So we're going to have to get serious about investing in science and technology to address the particular problems the tropical regions face in their development.

I really believe in this stuff. I believe that technological advance has been the underpinning of the incredible quality of material well being we have in the rich world. And I believe that similar investments in science and technology could make similar contributions for the poor if their problems were addressed.

Thanks very much.

Top of Page

News 43 of 49