The end of the beginning of ending poverty

Joseph E. Stiglitz, Project Syndicate

With President Bush at the table, the "spin masters" who put a victorious gloss on all his actions had little need to lower expectations concerning the outcome of the G-8 meeting in Scotland. Any agreement would be seen as a major achievement. The write-off of multilateral debt for the world's poorest countries -- thanks to Britain's leadership -- is nonetheless especially welcome.

Agreement by the G-8 to debt relief is a major event, but we should not be fooled by the seeming magnanimity of the gesture: much of the debt would not have been repaid in any case. More debt relief -- encompassing more countries and more debt (including bilateral debt) -- is needed. But debt relief should be viewed as just a start. As Britain itself has pointed out, developing countries need more assistance and a fairer international trade regime.

Perhaps not surprisingly, the IMF has tried to pour cold water on international enthusiasm for its generosity. New studies, it warns, suggest that aid does not in general lead to faster growth.

This came as a relief for the Bush administration, which claims to have given as much as its "budgetary processes" allow. The world's richest country, which blithely gave its richest citizens a series of tax cuts worth hundreds of billions of dollars, now says that it simply can't afford to spend much more on aid.

Even after the increases in annual assistance promised by Bush at the UN's meeting in Monterey, Mexico, in 2002, the United States is still giving less than a quarter of its commitment of 0.7% of GDP. Now, the IMF offers the following reassurance: "You may be stingy, you may not be living up to your commitments, but the money probably wouldn't have made much difference anyway."

Of course, not all foreign-aid money is well spent. But the same is true of money spent on, say, national defense. Even if Americans have not been cheated by Defense Department suppliers like Halliburton, it is clear that the money spent in Iraq has not bought the promised peace and security in the Middle East. But no one argues that the US should cut off defense expenditures.

The objective should be to improve the efficiency of government, to make sure that we get the most value for what we spend. In this, surprisingly, there have been marked improvements in recent years. The World Bank, for example, has been allocating more of its money to countries with a proven track record in spending money well. It has been exploring new ways of "delivering" aid, sometimes using state and local governments where that appears more effective.

Similarly, so-called "Social Funds," whereby communities design projects and compete for money, have enhanced participation and "ownership" of development projects. In one village, a bridge was built to connect two neighborhoods separated during the rainy season.

A simple project like this can make an enormous difference to the life of a community. For instance, children who live on one side of the river can now attend school on the other side during the rainy season. Likewise, micro-credit schemes throughout the developing world have provided finance for the poor to expand their economic enterprise, with repayment rates that are truly impressive.

The IMF warns about "Dutch disease" problems, when an influx of foreign exchange drives up the local currency's exchange rate, making it difficult to create jobs in the export sector or to protect jobs against an onslaught of cheaper foreign imports. On this, the IMF is partly right. Countries need to rely on themselves and mobilize domestic resources (although the IMF frequent insistence on tight monetary and fiscal policies often makes this more difficult.) But there continues to be an enormous need for imported goods -- medicines to promote health, technology to reduce the knowledge gap between the developing countries and the rest of the world, and machines to enhance productivity.

In any case, not much weight, in my judgment, should be given to the IMFs statistical studies of the impact of foreign aid on growth, partly because the results do not appear to be very robust. Different studies, with slightly different data sets, different countries, different techniques, and different years yield markedly different results. An earlier set of studies, for instance, showed that aid does make a difference in countries with good governance and sound macro-economic policies.

Equally important, historically much foreign aid was provided not to promote development, but to purchase friendship, especially during the Cold War. When the West gave money to Mobutu, they knew that the funds were going to Swiss bank accounts rather than benefiting the people of Zaire (now Congo). The money worked as intended -- not to promote development, but to keep Zaire on the side of the West.

Of course, Mobutu's boundless corruption challenges us to be thoughtful about foreign aid, both about how the money is spent and who is responsible for "delivering" assistance. Some governments have demonstrated a better capacity than others for using funds well. In countries where governments are deficient, there are often alternative ways of providing assistance, including NGO's.

Global support for "making poverty history" shows how the issue of Third-World poverty has finally struck a responsive chord. Debt relief is a good beginning. But that is all it is.

The writer, a Nobel laureate in economics, is Professor of Economics at Columbia University.