Winning the peace

Brian Griffiths Deputy Chairman Goldman Sachs International Member British House of Lords Project Syndicate

The war against terror and rogue dictatorships such as Saddam Hussein's can be won only in part on the battlefield. Poverty and misery must also be reduced if despair is not to incite new sources of fanatical violence. Britain's Chancellor of the Exchequer Gordon Brown has devised an ambitious proposal to help in this fight.

Chancellor Brown's proposal, presented to the IMF Board this past weekend, seeks to cut by half the number of people -- currently some 1.25 billion -- living on US$1 a day, provide universal primary school education, and improve public health. To achieve this, foreign aid must be doubled from $50 billion to $100 billion a year until 2015 -- a date agreed by 140 world leaders at the UN's millennium summit in 2000.

The centerpiece of Brown's proposal is the "International Finance Facility" (IFF). On the basis of donor countries making long-term -- say, over 15 years -- rather than annual commitments, the aim is to raise from international capital markets an extra $50 billion per year between now and 2015. These funds will then be dispersed as official aid. To achieve these goals, donor countries need only extend their existing commitments into the future; new funds are not needed.

Of course, government-to-government aid is perceived nowadays as subsidizing incompetence, corruption, and bad policies. Even the World Bank admits that aid to countries such as the Democratic Republic of Congo and Zambia has been a disaster. All too often, success has been judged by dollars spent, not poverty reduction. But the fact that some aid has been squandered or stolen is not an argument against all aid.

Brown's proposals are different because the effectiveness of aid will be judged by measurable outputs, not monetary inputs. Success can be measured by miles of roads built, numbers of vaccinations, performance of children at schools, clean water -- all validated by independent auditors. A cultural shift will necessarily be demanded of global and regional aid agencies.

Chancellor Brown is also explicit in saying that the engine of growth everywhere is the private sector. Without a thriving private sector, poverty will never be defeated. But for a private sector to develop, governments must provide well-defined and legally protected property rights, and they must reduce red tape. If the private sector is to thrive, it needs lower trade barriers and improved incentives for risk-taking. Without clean water, universal primary schooling, more roads, and better public health, saving and growth will be constricted.

A third, critical element is conditionality. Increased aid to the world's poorest nations is a moral imperative. But its effective disbursement is also a moral imperative.

Funds will be dispersed only to countries committed to stable prices and public spending, and support of the market economy. This will require greater transparency in monetary and fiscal policy, timely publication of data, readiness to be assessed by the IMF, more open public administration, and rooting out corruption. The logic of these proposals is that funding for countries that do not implement sound policies will stop.

Conditions set by donor countries will vary. America looks at not only economic stability and investment in human health and education, but regard for civil liberties, government effectiveness, the rule of law, and anti-corruption norms. European countries may stipulate other terms.

Although Brown's IFF proposal is about jointly raising more funds from international capital markets, a key feature is that each country retains the right to disperse the extra funds to those countries committed to meeting its conditions. The IFF will not simply transfer funds to the World Bank and let it decide how they are dispersed. Because countries, not development banks, are in the driver's seat, taxpayers will control how funds are spent.

Unlike present aid, the bulk of this funding will be through grants, not loans. Too often in the past, development banks developed a lending culture in which success was judged by loan growth, not poverty reduction.

Moreover, not all aid need go to governments. Private sector providers, including NGOs and charities, could be awarded contracts on a competitive basis. Failure to deliver on earlier projects would be a handicap in future bids.

External auditors will scrutinize the use of funds and measure increased outputs. Donor countries might withhold final payment until auditors sign off. In sub-Saharan Africa, peer review by the countries of Nepad, the New Partnership for Africa's Development, is a step toward Africa owning its own development. But for peer reviews to work, they must embody international practice and full transparency.

Of course, if a developing country's private sector is taking off, foreign aid might be considered unnecessary. However, even if dynamic private-sector-led economies emerge in the world's poorest countries, they will not produce clean water, build new roads, train more teachers, or improve public health by themselves. Markets may generate sufficient wealth to take care of these problems in the long run, but their magnitude demands action now, because sustained private-sector growth is dependent on an effective public infrastructure.

Chancellor Brown's proposals mark a watershed in tackling world poverty. Doubling aid, changing the terms on which it is given, strengthening the private sector, and speeding up reform in poor countries is the only effective way to win the peace in so much of the world.

The writer was head of policy development under prime minister Margaret Thatcher.