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Ottawa, April 17, 2000
2000-034

Statement Prepared for the Development Committee

The Honourable Paul Martin
Minister of Finance for Canada

Washington, D.C.
April 17, 2000

Delivered text is official version.

More rapidly than ever before, economic forces are affecting all aspects of global existence – while technology and trade have reduced the distance between nations, they have also inextricably interwoven economics into science, culture and politics. The new technologies of communication and the exploding sense of popular engagement are radically changing the style of decision making.

Looking back 50 years, it is clear that the Bretton Woods architects did not design their system for this new reality. At the same time, and partly as a result, the international spotlight is on the Bretton Woods institutions as never before. We must not miss this pivotal opportunity to take stock of our mission, review our achievements and to ensure that all our energies are focused on our fundamental goal. Indeed, as the World Bank mission statement clearly articulates: "Our dream is a world free of poverty." As never before, the services, expertise and commitment of the Bank are needed to address the staggering challenges posed by continuing poverty across the globe. The numbers are staggering – 1.2 billion men, women and children live on less than $1 per day; 2.8 billion people live on less than $2 per day.

In comparison to the enormity of the task we face, our resources are limited. It is vital that we exact the maximum possible return from our collective contributions and efforts. We must be innovative and selective – though not of those in need, but in the manner in which we address these needs.

Remaining Focused on the Poor

At our last meeting, we agreed on the substantial enhancement of the Heavily Indebted Poor Countries Debt Initiative and on the need for stronger linkages between debt relief and sustained poverty reduction. We also looked to enrich the World Bank's central mandate to achieve sustained poverty reduction with a new consultative and country-driven process.

For its part, Canada honoured its commitment by announcing in February 2000 an additional contribution of C$175 million to support the Heavily Indebted Poor Countries trust funds administered by the Bank and Fund (C$109 million to the Bank trust fund and C$66 million to the IMF trust fund). This brings total Canadian contributions to date to C$215 million. Canada will also provide 100-per-cent debt forgiveness to all countries qualifying for debt relief and making real efforts to reduce poverty and to improve governance. Ireland has committed 16 million Irish pounds to the Heavily Indebted Poor Countries trust funds and, although not an Official Development Assistance creditor, has also committed bilateral contributions of 10 million Irish pounds to Tanzania and Mozambique for debt relief.

It is encouraging that more countries are being considered for debt relief. However, we can understand that the Heavily Indebted Poor Countries themselves and many interested observers would like to see the pace intensified. Failure to move quickly on our commitment to faster, deeper and broader debt relief that we made here last fall has the potential to undermine all our efforts.

Building upon the partnership philosophy underpinning the Comprehensive Development Framework, we took the important step last autumn of linking multilateral and bilateral support for debt relief to the development and implementation of effective national poverty reduction strategies. The Bank and Fund must move quickly, responsively and flexibly with the implementation of poverty strategies. Strengthened linkages between debt relief and poverty reduction are crucial, but they must not delay our efforts, nor overburden already constrained capacity.

This is particularly true for those countries that have already gone through the debt relief process (the retroactive countries) and where countries have already developed effective participatory anti-poverty programs. Uganda is an instructive case in point. The Ugandan government had developed its own national long-term poverty reduction program (the Poverty Eradication Action Plan) well in advance of the introduction of the Poverty Reduction Strategy Paper. In fact, Uganda's program is one of the blueprints – Uganda's Poverty Eradication Action Plan, based on the government's strong commitment to reduce poverty through a widespread and participatory process, is a Poverty Reduction Strategy Paper. Indeed, the long-term success of the Poverty Reduction Strategy Papers depends on the extent to which they become homegrown and sustainable. Further, we had never intended to require retroactive countries to go through the whole process all over again, meeting a whole new set of conditionalities along the way.

While the enhancement of the Heavily Indebted Poor Countries Debt Initiative was an important step in our battle against poverty, debt relief by itself will not be sufficient to raise living standards for women, men and children in the world's poorest countries. We must continue to look to the Bank as a key instrument for the international community's broader attack on poverty.

The commitment to a renewed focus on poverty reduction extends far beyond debt relief. The Poverty Reduction Strategy Paper is transforming the content of International Monetary Fund lending under the new Poverty Reduction and Growth Facility; it will also come to guide the Country Assistance Strategies of International Development Association (IDA) countries. In fact, Poverty Reduction Strategy Papers will form the core of the Bank's approach, as they should for other multilateral and bilateral development agencies. Complementing and building on the Comprehensive Development Framework, the Poverty Reduction Strategy Papers should rebalance the equation, moving the country into the driver's seat. Our challenge, both at the multilateral and bilateral level, is to assist national governments in the development and implementation of their strategies for poverty reduction and sustainable growth.

The impact on these governments will be huge. At the same time, we cannot overemphasize the fundamental nature of this change to the way that development agencies will operate – it requires an entirely new mindset. We need to open room such that countries can take the lead. We must be ready to learn as much as we have tended in the past to teach. The international development community will have to accept new and potentially controversial approaches to development, approaches that will be as different as the countries they support.

However, a half-century of development experience (including many false starts) has shown us that while there is no single development path, there are common elements:

• economic growth is key to long-term, sustained poverty reduction, and the private sector is a critical element in providing strong growth;

• sustainable growth requires strong institutional foundations and a commitment to good governance;

• growth is higher and more sustainable when economic benefits are distributed more equitably – this builds the social and political stability that is fundamental to longer-term prosperity;

• participation in the world economy furthers growth opportunities;

• strong government commitment to the social sector and social programs, with particular attention on the capacities and needs of women and children, is a critical part of the institutional basis for growth. A strong economy cannot be built or sustained without social safety nets in place and a commitment to social programs every bit as strong as those on the fiscal side; and

• "good" development requires the strong engagement of civil society.

A Continued Role for the Bank in Middle-Income Countries

So far, we have focused on the development needs of low-income countries. Contrary to the views of some, however, we also see a continuing role for the Bank in middle-income countries. In fact, it would be damaging to hundreds of millions of poor were the activities of the Bank to be restricted to solely low-income countries. We do not need to be reminded that many of the poor are found outside the IDA countries, outside Sub-Saharan Africa and South Asia, but also in Latin America and the Caribbean and Eastern Europe. In short, the distribution of income, and not just the average level of income, matters and that means the Bank must retain the capacity to provide development assistance to middle-income emerging market economies. The fact is, there are hundreds of millions of poor in middle-income countries who need the same basic health, education and access to safe water as those in the poorest countries – services that will not be funded by monies raised in financial markets.

At the same time, the development needs of middle-income countries can often be very different from those of the world's low-income countries. While short-term private sector finance is frequently available and physical facilities in the social sector are often far more developed, many middle-income developing countries still face significant capacity and institutional constraints in both the public and private sectors. In the public sector in particular, state regulatory and supervisory bodies are often too weak to promote and enforce good governance, particularly in periods, like the present, of fundamental social, economic and technological change. The East Asian financial crisis has shown that economies cannot rest on weak institutional foundations or flawed safety nets. As the events of 1997-98 made clear, private financial flows to middle-income countries and to emerging markets in particular can be volatile, and those countries with weak institutions are under most threat of capital flight.

Bank lending in these countries needs to be focused in niches where the market has failed to deliver financing on reasonable terms, and should be designed to promote institutional change and development. In particular, in these countries the Bank Group must:

• be focused on the poor, both rural and urban;

• help mobilize, and not displace, financing from the private sector;

• work closely with government social sector agencies; the Bank must reinforce and not displace government social sector capacities and initiatives; and

• increase its focus on institutional capacity in the state regulatory and supervisory bodies as well as, through the International Finance Corporation, focus on strengthening the private sector.

Need for Increased Cooperation and Coordination

At the heart of the development transformation is a strong focus on partnerships. We need to move beyond multilateralism towards a broader unity in which we tap the synergy between all the development actors: the Bretton Woods institutions, the regional development banks, the United Nations system, bilaterals, the private sector and civil society actors. Ministers of finance are increasingly sitting around the same tables with foreign ministers and development ministers. We are seeking a paradigm shift in our behaviour towards meaningful harmonization and coordination, from the more insular styles of the past.

Resources at the disposal of developing country governments are usually scarce and capacity is limited. Too often donors have favoured parallel rather than complementary programming. We read too often about the hundreds of missions that many countries face in a given year. The multiplicity of distinct reporting requirements imposed by both multilateral and bilateral development agencies has led to significant administrative burdens on already overstretched government institutions.

Project monitoring is a critical element of ensuring that development objectives are being achieved and that resources are being used efficiently and effectively. However, burdensome reporting requirements risk negating some of the impact of development cooperation. In cases where bilateral development agencies are engaged in co-financing with one or more multilateral development banks, they might share common formats.

We – the Bank, the regional development banks, bilateral donors and others – need to do better. We cannot praise partnership without practising it much better than we have to date. We need major efforts to harmonize programming and project management arrangements to lessen the burden on developing countries. The development banks must rationalize efforts – they need to coordinate, not duplicate, efforts. Scarce resources should not lead to competition among development players, but increased cooperation and coordination.

A key element in this new spirit of partnership has to be our belated recognition of the critical importance of global public goods. This can extend from our new determination to put knowledge at the centre of the development effort to the new efforts to energize key multi-partner development initiatives. We need strong partnerships – not new monopolies – if we are to effectively harness the collective capabilities of the international community. There are some striking examples: the Global Alliance for Vaccines and Immunization, the Consultative Group on International Agricultural Research, and the Consultative Group to Assist the Poorest. In addition, the Bank, in partnership with United Nations agencies and bilateral donors, has shown strong leadership in the international effort to combat the spread of HIV/AIDS, which threatens the social and economic future of many of the world's poorest countries. This battle against HIV/AIDS is a high priority of Canada's own development cooperation activities and we are very pleased with the level of cooperation with the Bank and the United Nations agencies. Ireland shares this priority and is seeking to raise awareness in the international community generally of its implications for developing countries.

Need for Capacity Building In Trade

As highlighted earlier, participation in the world economy significantly increases growth prospects, and if managed properly, can offer real opportunities to lift individuals out of poverty. But these key linkages can only be achieved if the benefits of globalization are shared by all. This requires increased participation of developing countries and small states in multilateral negotiations, increased market access for developing nations and, with the support of the international development community, explicit recognition and action by developing nations to build trade into their long-term development plans. We look to the Bank and Fund to play a major role in all areas. As such, we welcome the inclusion of this topic in the Development Committee agenda and hope that the trade dimension will receive a strong endorsement from members.

Without a doubt, the lack of domestic capacity, including limited infrastructure facilities, weak institutions, immature legal and governance structures, and scarcity of human capital, limits the ability of developing countries to maximize gains from the global trading system. Many of these countries still lack the institutional capacity to implement commitments arising from the Uruguay Round. Many countries also face formidable challenges in terms of strengthening legal structures, increasing efficiency of and transparency of customs administration, and establishing standards systems that arose during the Uruguay Round.

Capacity building for trade is an area that the Bank and the Fund are well placed to address. However, success will rely very much on the enhanced cooperation between the Bank, the Fund, the World Trade Organization and other organizations involved in multilateral trade issues. In this context, the Integrated Framework for trade-related technical assistance to least developed countries has the potential to be an effective tool to better coordinate and promote increased trade-related technical assistance. We would encourage all participating institutions to devote more attention and resources to improving the Integrated Framework process. At the end of the day, greater Bank involvement is needed to energize the Integrated Framework.

Canada and Ireland share the view that all major trading economies, both developed and developing, must work together to enhance access to their markets. Developing countries must have realistic opportunities to trade. Since 1983, Canada has accorded stable and unconditional duty-free access for most products originating from the least developed countries. Moreover, Canada's preferential market access program includes simple and transparent rules that allow an unencumbered flow of developing country products into Canada. But more is required. Accordingly, Canada is working together with its trading partners on a number of initiatives, including those that promote improved market access, put forward by the World Trade Organization to assist least developed countries. Ireland is working through its membership in the European Union to ensure wider access to developed markets for developing countries and is contributing to current efforts to ensure that developing countries are in a position to benefit from trade rounds.

The broader development context will also have to place a higher priority on trade. Both the Bank and Fund as institutions are well placed to address trade-related issues in the broader development context through the Poverty Reduction Strategy Paper process. We encourage both institutions to continue to intensify efforts to mainstream trade issues in their policy, programming and lending operations. We welcome the recognition of the need for tailored, country-specific, reform programs that are appropriately timed and sequenced, especially in the case of small states, so that the benefits of trade liberalization can be widely spread. For a good number of developing countries, the transition to an open, competitive trading regime needs to be seen in terms of a revolutionary transformation. Given their limited institutional capacity in the public sector, this represents an enormous undertaking.

The most important contribution from the Fund is to help countries put in place and maintain sustainable macroeconomic policies which are growth-oriented, which promote full integration into the world economy, and which are consistent with the overriding objective of reducing poverty. The Bank has a clear comparative advantage in helping countries design approaches/programs which mitigate the negative impact on the poor.

Ensuring economic and social opportunities for all is the major challenge of globalization. But the reality is that many nations have very legitimate concerns about the pace and scale and change that are taking place globally. In some cases, countries are being asked in only a few short years to reform their economies when many of us have had decades to adapt to global trade. Therefore, we need to understand that the issues of timing, pacing, sequencing and transition are imperative.

At the end of the day, all trade and development players need to pay more attention to coordinating their actions. Coordination among various elements of development is as important as coordination among various institutions. It is crucial to integrate capacity-building needs, trade policy reforms such as market access, and poverty reduction strategies into one broad development framework.

Small States

While trade issues will have to be addressed by all nations, developed or otherwise, we would like to highlight the special challenges facing the world's smallest developing states. Adjustment to the evolving global trading system for the small states, many of which are in the Caribbean, is proving very difficult. These countries face enormous capacity-building challenges and without support they risk being left behind in the increasingly global economy. Their scarce resource endowments, including limited human capital and stretched institutional capacity, underlie the challenges these countries face in trying to restructure their economies and diversify their production and export structures to benefit from the global trading system. We also need to appreciate the special difficulties they face as they seek to make the transition from a concessions-based to a rules-based global trading regime.

In this regard, I would like to quote the striking and eloquent words of the Governor from Barbados, Prime Minister Owen Arthur:

It is however important that the two crucial, qualitative aspects of the process of Caribbean reconstruction be constantly held up so that both the urgency and the scale of what now has to be undertaken in the next decade can be fully appreciated.

The first is to properly appreciate the time dimension of the adjustment. The advanced, industrialised countries have over the course of the past fifty years, through an effort spread across 8 rounds of multilateral trade negotiations gradually but efficiently and effectively made the adjustments to their fiscal systems and their real economy to prepare themselves to participate fully in the present phase of globalisation which is driven in such large measures by the liberalisation of trade, financial and technological flows globally.…These economies face today's intensely competitive international environment having benefited from a gradual and carefully managed phased process of liberalisation extending over half a century.…

The Caribbean will be expected to successfully carry out over a period of ten years a process of liberalisation which has taken the advanced economies over fifty years to master. It will be expected to do so with a relatively weaker resource endowment, faced with fewer options, and hence confronting the spectre of doing severe damage to its fiscal system, its real economy and indigenous business by compressing necessary change into too short a period of time.…

The second qualitative aspect of the economic challenge which faces the region is the sheer magnitude and scope of what has now to be undertaken in a very short period with very limited resources to correct longstanding social and economic deficiencies to accommodate the competitive pressures arising from globalisation.

The multilateral trading environment has been with the industrialized states for some time. Developed nations have indeed had the luxury of time to both build the system from the ground up, on our terms, and to facilitate adjustment in our economies. It is both unrealistic and short-sighted to assume that the small states can adjust to this new reality overnight.

In small states, the transition to an open, competitive trading regime will require the development of a level of production flexibility, innovation and marketing capacity that will be new for many of them, and this is likely to prove to be an enormously challenging process. The adjustment is likely to take some time, and will require strong domestic political commitment and domestic effort in addition to significant external support from both multilateral and bilateral partners.

I would like to take this opportunity to thank both the Bank and the Commonwealth Secretariat for their efforts over the last 18 months in producing the special study that focused on the challenges and vulnerabilities of small states. This is an important report. The drafting process was enormously instructive and informative. We not only deepened our understanding of the small states, but also learned more about how institutions and developed countries behave towards them. It is now time to move forward with an appropriate work program to further development and poverty reduction efforts in the small states.

We are grateful to the Commonwealth Secretariat and World Bank Task Force for their role in catalyzing a very valuable policy discussion among the small states. Indeed, this has set a process in motion that will better equip small states for their external discussions and negotiations as well as offered a valuable opportunity to strengthen the inter-regional network and dialogue. It has resulted in a heightened recognition within small states of the critical importance of implementing the right mix of policies and of staying the course through adverse circumstances, and of the pressing need for own-account action and self-reliance.

Most importantly, however, this process has incorporated a range of international institutions and external actors. We now look to the Bank and other international institutions to systematically review and amend where necessary their own approaches to the small states and to ensure that all general policy work addresses as appropriate the special circumstance of the small states, both at the analytical and policy prescription stages.

It is my hope that the work of the Task Force marks the launch of a strong and sustained multilateral effort to recognize, understand and respond to the circumstances and challenges facing the small states. It is critical that the momentum built so far is maintained and compels us all to act on the recommendations of the report.

It is also appropriate that I use this opportunity to recognize and express my appreciation for the contributions of Prime Minister Arthur and President Wolfensohn to the small states process. In particular, Prime Minister Arthur led the Commonwealth delegation that met with President Wolfensohn to establish the Task Force; he has nurtured the process through two international conferences and several working drafts; and has shown great leadership across the Caribbean, our constituency more broadly defined and within small states worldwide.

Looking Forward

For most of their first 50 years of existence, the Bretton Woods institutions operated in relative obscurity. However, the last few years have brought a degree of scrutiny to the institutions as never before. This intense interest reflects the impact that the institutions have on the well-being of individuals and families worldwide in a highly integrated global economy.

What we have to demonstrate is that international financial institution reform is part of the solution, not the problem. We must demonstrate that we understand that countries are made up of people and not economic indicators.

Up until recently, the activities of finance ministers, development ministers and central bank governors at these meetings has been of interest primarily only to the participants and a few curious onlookers. I suspect that with this weekend, this will change. Whether it will change for the better or for the worse is up to us.

Our challenge is to demonstrate that not only are global markets essential to improved standards of living, but that national governments acting multilaterally through the great international institutions are the guarantors of that well-being. Quite simply, global integration should represent the clearest and most direct path out of poverty for hundreds of millions of people. Our task is to make this happen. Our task is to see to it that the combination of new technologies and open markets translates into higher incomes, better opportunities and increased security for people in all parts of the world.

I'm not sure that everyone would agree, but if we succeed, their children will.