FROM THE OFFICE OF PUBLIC AFFAIRS

Manila, Philippines

September 20, 2002

It is a pleasure to be here today to talk with you about the very important work you all are doing here at the Asian Development Bank.  It is also a pleasure to visit the Bank with our new U.S. Executive Director and Alternate are in place.  Ambassador Paul Speltz and Lori Forman bring a wealth of expertise and experience to the Bank, and I know you all will enjoy working with them.  ADB is an important institution in the multilateral financial system and plays an integral role in promoting economic growth and reducing poverty in the Asia and Pacific Region.  Asia has tremendous economic potential, but at the same time faces serious economic challenges - challenges that have not always been addressed in the most effective or productive way.  

I'd like to use this opportunity to talk about the Bush Administration's economic development agenda, specifically as it relates to the role of the MDBs.  It is a big agenda designed to help people around the world exit from extreme poverty through an emphasis on increasing productivity. 

First, the agenda calls for a much greater emphasis than in the past on policies that reduce the impediments to higher productivity growth.  The three categories of polices which we believe are most important are those which I mentioned before and I’ll mention again: rule of law, investing in people, and economic freedom.  Countries that follow sound economic policies are to receive more development assistance, and the actual results of the assistance are to be quantitatively measured. We will pursue these goals both bilaterally and in the development institutions like the ADB. 

Second, element is measurable results, including by the institutions we are supporting.  The U.S. introduced a new concept in the IDA replenishment, that links increases in the U.S. contribution to specific, on-the-ground development results in the areas of education, health, and private sector development.  President Bush also called for the creation of the Millennium Challenge Account (MCA), a new, separate U.S. bilateral account for development assistance that is tied to performance and measurable results.

Third, we are emphasizing new development approaches and tools.  Key among these is the use of grants. Agreement has been reached that some IDA assistance to the poorest countries to be provided in the form of grants rather than loans.  This needs to be replicated at the Asian Development Fund. 

Fourth, private sector development must be the engine of growth in developing countries.

Before describing some of the specific policies, I first want to define the problem we are trying to solve. I then want to discuss in simple, straight-forward terms the economic principles that logically and empirically lead to the specific policies. In doing so I will draw on economic development research completed in the last dozen years. 

1.  The Goal of Productivity Growth

The first pillar of the U.S. MDB reform agenda is directly related to our poverty reduction objective.  One must ask: what is the reason for the remaining large numbers of poor in Asia?  Productivity is the amount of goods and services that a worker produces per unit of time with the skills and tools available. If you want to reduce the number of countries with low per capita incomes, then you have no choice but to increase productivity in poor countries. And the higher the rate of productivity growth, the faster poverty will decline. Simply put, the ticket out of poverty is higher productivity jobs.

If low productivity is the proximate cause of poverty, then we need to answer another question: why is productivity so low in so many areas of the world? According to basic economic growth theory, productivity depends on two things: capital per worker and the level of technology. If there are no impediments to the flow and accumulation of capital and technology, then countries or areas that are behind in productivity should have a higher productivity growth rate.  More and more evidence has been accumulating that the laws of economics have not been repealed, but rather that there are significant impediments-in the broadest sense-to investment and the adoption of technology that are holding countries and people back.

One can group these impediments into three areas. First, poor governance-the lack of rule of law or enforceable contracts and the prevalence of corruption creates disincentives to invest, to start up new firms, and to expand existing firms with high-productivity jobs. This has a negative impact on capital formation and entrepreneurial activity. Second, weak education systems, which impedes the development of human capital. Workers without adequate education do not have the skills to take on high-productivity jobs or to adopt new technologies to increase the productivity of the jobs they do have. Third, too many restrictions on economic transactions, which prevent people from trading goods and services or adopting new technologies. Lack of openness to trade, state monopolies, and excessive regulation are all examples of restrictions that reduce incentives for innovation and investment needed to boost productivity.

2.  Measuring Results

Measuring results is a very important priority for Secretary O’Neill at all the multilateral development banks. In fact, it goes beyond the development banks. Measuring results is a very high priority for the entire Bush Administration. President Bush is insisting that we measure results in all government programs, domestic as well as international. For Secretary O’Neill, measurement of results encompasses all aspects of Treasury’s mission, from closing our books, to worker safety, to combating terrorist financing. So I want you to know how vital your work is to us.

By measuring results, we can focus our efforts on what really matters: helping poor people around the world escape from poverty and lead better lives. The approach helps us cut through bureaucratic layers, ignore non-essentials, and concentrate on development problems that must be solved. It is a way to maximize the benefits of our funds.

How should you go about measuring results of development assistance in practice? I would like to use an example of what I have in mind. As I am sure any of you working in Bangladesh is well aware, there is a local NGO in Bangladesh called the Bangladesh Rural Advancement Committee, or BRAC. BRAC wanted to teach mothers in remote rural areas how to administer oral rehydration salts to children suffering from diarrhea. Absent such therapy, children frequently die from diarrhea.  BRAC worked with instructors who taught mothers how to administer the oral rehydration salts. Like us, the people at BRAC were interested in measuring results. They could have simply based the measurements on the number of mothers that the instructors taught. But they went further than this. They went directly to see of the mothers learned the technique. Instead of paying the instructors for every household they visited, BRAC actually went to the households to see whether the mothers that the instructors taught were administering the oral rehydration treatments properly. The instructors were paid according to whether or not the mothers they taught were actually able to perform the action. The result was more mothers being able to give the medicine and fewer children dying from diarrhea.

I think this example illustrates how a focus on results has to permeate every level of ADB and others do in development. If we focus on these very simple measures, we can really get to the heart of the matter.  Here at the ADB, we need to be able to measure at the project level, country level, and Bank-wide level to be able to say whether we are meeting our goals.  I would also argue that we need to reward staff performance based on reaching these kind of targets, not lending targets.  Staff should be congratulated when they reach a target of reducing illiteracy in a project, rather than saying they processed a loan of x amount of dollars.  I challenge you to think this way.  I like to compare it to monetary policy, where you have a single target of inflation and you craft policy on the basis of achieving that result. Sometimes you may have two objectives (growth/low inflation) that may conflict; then there has to be a weighting to come up with a single performance measure. But if we can hone in our focus on simple areas – the areas that really matter to the living standards of poor people around the world – we can do a lot for development.  Many of the Millennium Development Goals (MDGs) are targets that, as a starting point, we all can apply to the countries where we work.

Measuring results is a key part of the Millennium Challenge Account (MCA), as well our contribution to the most recently-concluded replenishment negotiation, IDA-13. This will be an approach that extends to other institutions, including the Asian Development Fund.   The U.S. would like to see results measurement in every loan or grant these institutions provide and incorporates into policy objectives at the country and corporate level.

3. Grants

As many of you know, President Bush also proposed, and donors agreed, to convert part of IDA loans to results-based grants. We strongly urge that similar steps be taken at ADF.  ADF loans have highly favorable terms, yet there remains a burden of repayment.  The objective of the U.S. grants proposal is to prevent such problems, with all its disruptive consequences for economic growth, from ever occurring again. We want to "stop the debt."  Afghanistan is a very strong case in point.  As you well know, Afghanistan faces urgent reconstruction needs, yet is simply not in a position to assume large amounts of debt that will require servicing in the future.  Afghan authorities recognize this.   My sense is that the ADB also appreciates this, given the strong efforts to mobilize grant assistance to complement ADF.  But ADF itself should have the capacity to provide grants, and we hope this can be addressed quickly.  As was agreed in the IDA context, we are not arguing to convert the whole fund to grants, but only a reasonable portion of it.  This would be earmarked for the poorest countries, and would be for projects with the lowest or slowest financial return.  We will continue to talk with ADB Management and fellow shareholders about this issue, but urge you as staff to consider this proposal and how it would help in your work. 

4.  New instruments

Finally, I want to highlight President Bush's initiative to promote results-based development through the Millennium Challenge Account. This account will be funded by increases in the budget beginning in fiscal year 2004. The account is designed to increase to $5 billion a year starting in 2006 - which is a 50 percent increase over and above the approximately $10 billion in existing U.S. development assistance. The idea behind the Millennium Challenge Account is to channel aid to those poor countries that have good economic policies that increase economic growth and reduce poverty. To access the account, developing countries must demonstrate strong commitments in three policy areas: (1) "ruling justly"-upholding the rule of law, rooting out corruption, protecting human rights and political freedoms; (2) "investing in people"-education and health care; and (3) "encouraging economic freedom"-open markets, sound fiscal and monetary policies, appropriate regulatory environments, and support for private enterprise. Note that these are exactly the three policy areas I mentioned above when listing the impediments to economic growth. I also point out that the terms we are using are not entirely different from those the ADB is using.  The three pillars of ADB’s poverty reduction strategy are:  “good governance”, “social development”, and “pro-poor economic growth.”  I hope this says a lot about cooperation in the future. 

5.  Conclusion

The premium placed on good governance, transparency and due-diligence in the developing countries applies equally to the way donors, such as the Bank, conduct their business.  Broad public consultation, including with the private sector, makes for better and likely more successful, policy and programs.   Putting in place sound policies is important, but complying with those policies is demonstrated commitment.  Professionalism, "tough love", quantifiable results, should feature in Bank work

Open meetings like this one provide a forum for sharing what we know and-just as important-what we do not know about economic development.  The Bush Administration and Secretary O’Neill and I have made a point of reaching out to the MDBs.  This is my first visit to ADB, and I understand it has been many years since an Under Secretary of Treasury visited the Bank.  Today I have tried to describe how good ideas have informed the Bush Administration's policies on foreign assistance, both bilaterally and at the development banks.

If we are going to achieve the productivity growth goals and better measure the results of our efforts as I have suggested in this talk, we are going to need more ideas. I look forward to benefiting from the research and insights of the ADB and its staff.  I look forward to hearing from you and learning from ideas and your questions.

Thank you.