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Global poverty is decreasing, but billions of people still do not have the resources they need to survive and thrive. Economic growth can reduce poverty, but it can also drive inequality that generates social and economic problems. And efforts at domestic resource mobilization through taxation, though critical to funding the SDGs, can negatively impact the poor. In this work, CGD experts offer suggestions to improve how the world tracks and tackles poverty and the inequities the international global system creates.
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This new book by CGD non-resident fellow Theodore H. Moran shows that Foreign Direct Investment (FDI) can provide a powerful boost to development, but can also distort host economies, including through grand corruption, with serious adverse consequences. Ahead of the planned launch of the book on March 8, Moran explains the key findings:
Q: What's the central finding in your new book?
A: The Washington Consensus may have argued that foreign direct investment (FDI) was "good," and the more the better. But the evidence in this volume shows that FDI comes in both "good" and "bad" forms. The book divides FDI into three sectors -- extractive industries, infrastructure and manufacturing and assembly. In each, FDI comes in a "good" or beneficial form that contributes to host country development, and a "bad" or harmful form that hinders or subtracts from host country development.
Q: What policies can developing countries adopt to ensure that FDI is as productive as possible?
A: In extractive industries like petroleum and mining, host authorities need to ensure that foreign investors report publicly all taxes and other payments made within the country, to ensure that revenues are not siphoned off for private gain.
In infrastructure, host governments should insist that foreign investors assume the commercial risks of, for example, a reduction in demand for power or other services when economic growth slows. This is preferable to sticking the public with take-or-pay contracts that must be met no matter what happens in the world economy.
In manufacturing and assembly, host countries benefit most from multinational plants that form an integral part of the parent's global competitive strategy. Here well-trained workers and effective vocational skill-building programs act as a magnet in attracting foreign investors; poor labor standards do not. FDI can be used for broad development as local firms become suppliers and contract manufacturers for the multinational plants.
Q: Are there things that rich countries can do--or should refrain from doing--to encourage their firms to make constructive investments in developing countries?
A: Both developed and developing countries have a common interest in supporting the Extractive Industry Transparency Initiative (EITI) that requires all extractive investors -- including those from China and Russia as well as OECD countries -- to "publish what they pay" and encourages host authorities to publish how they spend all revenues they receive. Multilateral lending institutions like the World Bank and NGOs like Global Witness can help by building up local capacity to monitor the expenditures of foreign companies and host governments.
As for FDI in manufacturing and assembly, political risk insurers in rich countries should screen out subscale projects oriented toward protected local markets that retard the development of the host economies where they are located. The growth of efficient international supply chains across borders, in contrast, produce win-win outcomes for workers as well as consumers in both rich and poor countries.
Q: You report that there are loopholes in the U.S. Foreign Corrupt Practices Act and the OECD Convention to Combat Bribery that make it possible for multinationals to offer bribes without risking prosecution. Can you describe how that works?
A: Yes: anti-corruption laws in the developed countries -- as now written -- criminalize the payment of bribes to host country officials. But the research in this book shows how U.S., European and Japanese multinationals have formed fake "partnerships" with family members and associates of government leaders in which the multinationals have lent the capital to the family members and cronies to set up the partnerships, and paid a dividend high enough to cover interest on the loan and extra money to go into the pocket of the "partners."
Q: How could this loophole be closed, and would doing so make a difference?
A: CGD has set up a Working Group to find ways to close these loopholes. While our recommendations are not yet final, we believe that rich country anti-corruption laws can be reformed and -- importantly -- that multinational investors whose concessions have been obtained through corruption should not have recourse to enforce their contracts in international arbitration. This would mean that all investors -- including investors from countries where home country controls on corruption are not strong, such as Russia and China -- would think twice about using illicit payments to secure a concession, since they could lose their holdings.
Remarkable increases in primary schooling over the past decade have brought gender equity to the education systems of many poor countries. But as CGD non-resident fellow Maureen Lewis and visiting fellow Marlaine Lockheed show in Inexcusable Absence, nearly three-quarters of the 60 million girls still not in school belong to ethnic, religious, linguistic, racial or other minorities. Marlaine Lockheed discusses the findings around these "doubly disadvantaged girls" and how the new analysis can inform practical policy solutions to achieve universal primary education for girls and boys.
Q: What's new about your research on girls' education?
A: Maureen and I discovered that nearly three out of four girls who are not in school belong to socially excluded groups, such as the Roma in Eastern Europe, hill tribes in Laos, indigenous peoples in Latin America, and lowest caste groups in India and Nepal. We also found programs that have worked to help socially-excluded girls get an education. Our book offers new insights into the problems of the girls who are still not in school, and highlights examples of proven, practical solutions.
Q: Why does educating these girls matter for developing countries?
A: Education is a basic human right for all, including for these girls from marginalized communities. More broadly, lack of educational opportunities for these girls has severe consequences for their communities, including increased poverty and poorer health, for both males and females. We all know that women who attend school have fewer and healthier children than women with no education. By educating girls in excluded communities, donor agencies and developing countries can help to improve lives for the entire community.
Q: How have countries been successful in getting socially-excluded girls into schools?
A: Countries have taken a two-pronged approach that focuses on both the supply of and demand for girls’ schooling. On the supply side, countries have attacked discrimination through laws and affirmative action, expanded school options through community and alternative schools and improved the quality of school facilities and teaching. On the demand side, countries have created incentives for households to send girls to school, such as scholarship programs in Bangladesh and school feeding programs in Kenya. Both approaches have helped to boost the enrollments of excluded girls.
Q: What can the U.S. and other major donors do to help get girls from excluded groups into school?
A: Enrolling socially excluded girls and keeping them in school entails both different approaches and higher costs than programs designed for members of the majority culture. Cultural variations, linguistic differences and the special needs of girls drive up costs. Often lower-income countries simply cannot afford the extra efforts required to reach excluded groups. The U.S. and other donors, who have done much to help boost the enrollments of girls overall, should ensure that the girls’ education initiatives they help to fund include resources to take into account the special needs of socially excluded girls. For example, financing remedial or compensatory school work for children who are behind or unable to keep up because they have neither the resources nor the necessary support at home. First-time school children often need some additional investment and it is an easily identifiable and achievable task and we have good experiences from across the world on this.
Q: What about the role of international organizations?
A: The UNESCO Institute for Statistics should report school participation and achievement data disaggregated by gender and by ethnic/linguistic group, to make it possible to identify the role of social exclusion. Disaggregating enrollment by gender--reporting separately on the school enrollment and achievement of girls and boys--was essential in monitoring progress towards gender equity. Having data on social exclusion would be a big help in designing programs to meet the needs of the vast majority of the 60 million girls who are still not in school.
Note: Inexcusable Absence: Why 60 Million Girls still Aren't In School and What to do About It will be discussed on Tuesday, Feb. 13, at a CGD event featuring the authors, U.S. Rep. Earl Pomeroy (D-ND), and Canadian M.P. Belinda Stronach. The event will be moderated by Gene Sperling, senior fellow for economic policy and director of the Center for Universal Education, Council on Foreign Relations. Complementary copies of the book will be available. See the event listing for more information and to register.
IMF critics allege that its programs unduly constrain health spending in poor countries, even when external financing is potentially available. The IMF argues that countries set their own spending priorities while the Fund monitors overall spending and fiscal sustainability. The issue has become more pressing, as countries seek to utilize scaled-up aid, including billions of dollars for prevention and treatment of HIV/AIDS. CGD recently launched a new working group to establish what actually happens under IMF programs and to make practical recommendations for improvements.
Working group chair David Goldsbrough, a CGD visiting fellow who was previously deputy director of the IMF’s Independent Evaluation Office, chaired the group’s first meeting last week. The day-long study session brought together a diverse group of experts with experience in analyzing and implementing macroeconomic and health sector policies and setting budgetary priorities. Goldsbrough discussed the group’s task and how it will proceed.
Q: What is the single most important concern about the impact of IMF programs on health spending that the group will study?
A: The key issue is whether the IMF’s approach in low-income countries has unduly constrained the policy options available to governments as they formulate and implement their macroeconomic plans. This could be because the IMF takes too conservative view on what is needed for macroeconomic stability and for longer-term fiscal sustainability or because some of the policy instruments it uses in its programs have unintended consequences for the health sector. Of course, even with debt relief and the prospects of higher aid, countries still face resource constraints that require governments to make difficult choices that will not please all stakeholders. So if health spending in a country is not growing as fast as some critics would like (e.g. to keep on track to meet the MDGs), this does not necessarily mean that the IMF has acted inappropriately. This is why it is useful to couch the key issue in terms of whether IMF actions have unduly narrowed the policy space.
Q: Critics say that the increased use of public sector wage ceilings required by IMF programs are an important part of the problem. How do you plan to evaluate whether this is indeed the case?
A: Wage bill ceilings in IMF programs have become more frequent in recent years, especially in Africa: slightly over half of all IMF arrangements negotiated in 2003-2005 had some form of ceiling on the wage bill. We plan to use a small number of case studies to investigate in depth how and why such ceilings were derived, what provision they made for increased health sector recruitment, and what the consequences were in practice.
Q: The group’s terms of reference say that you will also consider ways to improve the predictability of aid flows. Isn’t this mostly up to the World Bank and bilateral donors rather than the IMF?
A: Yes, it is mainly up to the donors to improve aid predictability, and some the recommendations of the working group may be directed at bilateral donors or the World Bank. But the group will also explore ways in which the treatment of aid flow projections in IMF programs might be improved.
Q: You plan to consider ways to improve the negotiation of IMF programs. What exactly will you be looking at in this regard?
A: We will try to look at two aspects of the IMF “way of doing business”. First, in many low-income countries, macroeconomic stability has been largely restored and the key macro policy challenge is to help manage effectively a scaling-up of aid –financed spending. This requires integrating more fully analysis on sector-level expenditure choices with macroeconomic assessments, in a longer-term timeframe. Second, we will look at ways of introducing greater transparency about the analysis and assumptions underlying IMF programs and policy advice.
Q: These issues are both complex and quite controversial, with strongly held views on both sides. How will you ensure that the group’s work is evidence-based?
A: First, I should emphasize that the purpose of the group is not to revisit such issues as the appropriateness of particular development models or aspects of the so-called “Washington Consensus” set of policies. Nor will the group try to address questions such as the appropriateness or impact of IMF conditionality in general. Second, we will base our conclusions on two types of evidence: (i) cross-country evidence on what actually happened to health spending and fiscal targets in countries with IMF programs; and (ii) in-depth case studies of how recent IMF programs in a small number of countries have interacted with health sector budgeting, drawing upon a detailed review of IMF and country documents and interviews with key stakeholders.
Learn more about CGD’s Working Group on IMF-Supported Programs and Health Spending including working group terms of reference and bios of working group members.
Last week Bangladesh's Grameen Bank and its founder, Muhammad Yunus, won the 2006 Nobel Peace Prize for waging a war against poverty with a revolutionary micro-lending system. CGD research fellow David Roodman has just released a working paper, Microfinance as a Business. After the Nobel Peace Prize was announced, Roodman discussed his findings in a Q&A.
Q: In awarding the Peace Prize to Muhammad Yunus and the Grameen Bank, the Nobel Committee praised Yunus as "a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries." How does this view compare with what you learned?
A: In studying microfinance from a business perspective, my coauthor Uzma Qureshi and I are asking questions that most overlook. How do Grameen and other large microfinance institutions cover their costs, scale up, attract private capital? I’ve come to think that Muhammad Yunus's real genius is not the discovery that the poor are "bankable"--after all, poor people have been borrowing from moneylenders for millennia. Rather he and his colleagues at Grameen developed financial products and management techniques that solved a tough business problem: how do you deliver millions of tiny loans to poor people lacking conventional collateral without losing your shirt?
Q: So what's the answer?
A: There are lots of them. The classic Grameen model, which Yunus and his colleagues developed from the late 1970s to late 1980s, involves: credit (as opposed to savings or other financial services); group operation, in which clients borrow in sets of five and are formally responsible for each other's loans; weekly meetings of "centers" (eight groups of five) to collect payments and conduct other business; and a focus on women. All these choices helped Grameen work efficiently, making it financially viable to give smaller loans, thus to reach more and poorer people. Unlike savings, credit requires regular, constant payments, which works well for transactions at the weekly meetings. Group lending shifts some classic banking tasks onto borrowers, such as judging who is credit worthy--I won't join a group if I think deadbeat neighbors will leave me holding the bag. And in rural Bangladesh, it seems that women are more susceptible to the peer pressure associated repayment.
Q: Is that how Grameen operates today?
A: One of the remarkable things about Grameen is that since 2001 it has actually broken from the model it made famous, with a package of reforms called "Grameen II." Borrowers are no longer jointly liable--if you default, I am not responsible. And Grameen now offers attractive savings products. The result has been that new burst of growth in an already large organization. Surprisingly, for the icon of microcredit, Grameen's savings portfolio surpassed its loan portfolio in late 2004--though much of that may be from not-so-poor people drawn to Grameen's high interest rates.
Q: How big is Grameen?
A: Grameen Bank is the largest microlender in the world, measured in number of borrowers, having recently burst out of a tie with its Bangladeshi rival BRAC. In 2005, Grameen's borrower count jumped from 4 to 5 million. Achieving such scale took vision, unorthodox creativity, experimentation, rapid growth (with all the management challenges that involves), and willingness to reinvent a seemingly mature organization. And I'm just talking about the banking unit. Grameen is now what business people would call a diversified conglomerate, with operations in solar energy, mobile phones, health insurance, and more.
Q: The Committee praised Yunus and Grameen for "their efforts to create economic and social development from below." Do you share the Committee's confidence?
A: If by "development from below" we mean fundamental transformations in the lives of the borrowers, then for me at least the jury is still out. I say that as a newcomer to the field who is asking tough questions and has much more to learn. There are many stories of microcredit success, but also stories of failure, and it is hard to sort these impressions out without systematic study. So perhaps the fundamental problem is the scarcity of rigorous analysis. In Bangladesh, there has been just one good study so far of effects on income, by the World Bank. Based on surveys of a couple thousand households at the beginning and end of the 1990s, researchers found that 100 taka lent to a woman raised her income by 5 taka net. So this is one finding of modest, positive impact.
Q: Is there hope for better data?
A: Yes! In August, Dean Karlan and Jonathan Zinman circulated a draft study of a "pay day" lender in South Africa. This is not what is usually thought of as microfinance, but the study design is rigorous and shows real benefit for those just barely qualifying for the short-term loans. I think we will see more excellent work in this vein from Karlan and his group Innovations for Poverty Action. The Abdul Latif Jameel Poverty Action Lab at MIT also has promsing studies underway in India.
Q: Why did you decide to look at microfinance organization as businesses?
A: It was fortuitous. The Dutch bank ABN AMRO asked CGD for a report on this topic and partly funded it. I believe it is the only international bank with retail microcredit operations, in Brazil, and it is doing wholesale lending to some two dozen MFIs in India. I am grateful for its support.
Q: Much of the recent migration debate in the U.S. has focused on the impact of illegal immigrants--or shall we say undocumented workers--on the U.S. economy. What about the impact of migration on the sending countries? Is there a consensus among development economists about whether emigration is good or bad for development?
A: Ever since mass emigration from Ireland in the 19th century caused wages there to rise, it has been clear to most economists that the departure of low-skill workers largely benefits the sending country (see, for example, Migration as Disaster Relief: Lessons from the Great Irish Famine). A UN balance sheet of the economic effects of migration found that movement of low-skill workers offers sending countries many benefits and at essentially no cost (see the World Economic and Social Survey 2004: International Migration (PDF) ).
But there's a raging controversy about the effects of emigrating high-skill workers. People worried about so-called brain-drain argue that skilled migrants take with them not only their abilities but also public investments in their education. But some skilled émigrés return home, many send money, and many assist in technology transfer and the creation of trade and investment networks. Their departure may even change the education decisions of those remaining behind--for example, by causing people to study harder and invest more in education. Some economists claim to show that the net effect of skilled worker emigration is actually positive (see Brain Drain and LDC’s Growth: Winners and Losers).
Q: Compared to the current arrangements, would a U.S. guest worker program have any effect on the development impact of migration?
A: There is likely to be little development impact of such a law on the migrant-sending countries, because the primary effect will be to regularize a small fraction of those already moving rather than to change who moves. There are 11 million undocumented immigrants in the U.S. now, with another 700,000 arrivals every year, but various proposals foresee caps of just 100,000 to 400,000 on the total number of visas--most of which will be used by people who would have migrated anyway (see the recent brief (pdf) from the Migration Policy Institute). If there is to be a development effect from any new law, it might come by making immigration somewhat more politically palatable to U.S. citizens (e.g. by shifting workers' medical expenses from tax payers to employers) thereby preventing a backlash against new immigration down the road.
Q: Within the development community, there is a lot of interest in remittances. By one estimate, remittances from the U.S. in 2004 were $47 billion, more than twice the nearly $20 billion that the U.S. provided in official assistance. What is known about the impact of remittances on development?
A: In El Salvador and Honduras, remittances exceed 15% of national income, and the positive effect of remittances on health and education in recipient households has been documented in several countries (see, for example, Remittances, Household Expenditure and Investment in Guatemala). But while remittances exceed foreign aid globally, this is not the case in most low-income, migrant-sending countries. Sub-Saharan Africa gets about $8 billion in remittances per year but gets more than $25 billion in aid. Many of the countries sending the fewest migrants--and thus getting the lowest levels of remittances--are also the poorest.
Q: Your own research has been focusing on the causes and effects of skilled migration. What is your hypothesis, and how are you going about testing this?
A: I study the consequences of skilled-worker migration on developing countries of origin. To make the question manageable I focus on one profession and one region: African doctors and nurses. I have measured the movement of health professionals out of 53 African countries, allowing me to observe the relationship between emigration and health outcomes across countries and over time. My hypothesis is that many African countries have both very poor health and increasing emigration of health professionals because of underlying problems with their health systems--not because of migration itself. I recently returned from Kenya and Rwanda, and all the top health policy officials I spoke with in these countries agreed with this basic premise.
Q: Give Us Your Best and Brightest: The Global Hunt for Talent and Its Impact on the Developing World by Devesh Kapur and John McHale suggested four policy options for rich and developing countries so that the benefits of migration are more equally shared with the developing world. One proposal is compensation: that rich countries compensate developing countries for the loss of skilled workers, for example, by headhunters paying a fee to the sending country, or that developing countries impose an exit tax, to recoup the costs of educating skilled workers who leave. In your view, does such an approach make sense?
A: The answer will surely vary depending on the case, but it is not at all obvious that this is appropriate. Consider migrant health professionals. The only academic study to focus on the remittances of these workers measured how much money is sent home by Tongan and Samoan nurses in Australia. The study found that the typical nurse sends home well over U.S. $2,000 every year, regardless of whether he or she has been in Australia for 5 years or 25 years. So Tonga and Samoa get back far, far more than they spent to educate those nurses. These developing island nations experienced a large financial gain--not loss--due to their public investments in departed nurses. Why should those sending countries be compensated for having made an investment with a huge financial return? Certainly there are complexities of the domestic distribution of those resources, but it is not clear that those are best handled through the blunt instrument of international government-to-government compensation checks.
John Nellis, co-editor of Reality Check: The Distributional Impact of Privatization, answers questions about the book and his work's implications for policymakers:
Q: Are there any generalizations that can be made about recent privatizations in developing countries? Do any interesting groupings emerge?
A: The most contentious privatizations are those in the utility sectors such as telecommunications, transport, energy and, especially, water. These are the areas in developing countries where it is more difficult to involve private providers, where the chances of something going wrong are higher, and where errors produce large, negative social consequences. The much more numerous privatizations of commercial, industrial and service firms in developing countries have not generated as much political debate; and they have been generally judged as beneficial, even in low-income, institutionally-weak countries.
In "Reality Check" we tried hard to reach conclusions based on data and reasoning, rather than on pre-conceived ideas. The big, well-documented conclusion that comes out of this approach is that the privatization of infrastructure - particularly evident in the best-studied Latin American cases - has NOT contributed to the continuing poverty and maldistribution of income. This is an important if modest defense of privatization. A stronger defense would be that privatization was closely associated with improved growth and reduced poverty and inequality. We did not find that, however.
Regarding regional differences and groupings, our findings are much more solid regarding Latin America than in the Asian or post-Communist transition cases examined. Partly, this is due to more and better quality information on the Latin cases. Still, we see more than enough in the transition country cases to make us think that privatization did contribute to the massive increases in inequality and poverty seen in that region since the demise of Communism.
Q: Is there enough evidence to judge the respective merits of moving quickly to privatize vs. a slower approach?
A: Yes, economically speaking, slower is better. The arguments for rapid privatization have been mainly political (e.g., if we Russian reformers do not sell off everything quickly the communists will return and defeat the transition); financial (if we do not find a private investor we will have to fund the railroad ourselves and there is no money in the budget for this); or some combination of the two (e.g., if we do not complete the privatization of X, then we will fail to comply with Bank or Fund conditions and a desperately needed injection of funds will be delayed at best, eliminated at worst). These arguments have often turned out to be spurious (though we must admit they rarely seem so at the time they are put forward!) Russia, for example, with a more cautious pace of sales and transfers, and earlier and greater attention to the creation of legal institutions, might have avoided some of the more egregious injustices in its early privatization program.
Our conclusion is that more time is generally available than is thought, and that the costs of speed outweigh the benefits.
Q: Can you highlight a few examples of developing countries that have managed privatization well? What did they seem to do right?
A: Chile has done a good job of privatization, particularly in infrastructure. In line with the conclusion above, the Chileans took their time. Years were spent on building regulatory bodies and subjecting the natural monopoly firms to regulatory supervision, well in advance of ownership change. Ultimately, they decided that private ownership was still required to tap private capital markets for network expansion. But by the time the new private operators came on board, the Chilean regulators were experienced and ready to deal with them.
Q: What do you think is new or important about this book?
A: We've already mentioned the important finding that privatization is, in Latin America at least, and probably in other non-transition regions, not the big social villain usually portrayed. The reason is that, in many countries, privatization has resulted in more poor people obtaining electricity and phone services, and to a lesser extent, water. The downside to getting connected to the network is that customers have to pay, and these costs can be high. A major finding of the book is that, in terms of distribution, the effects of increased access are more important than the effects of increased costs. That's a huge plus.
Q: What, if any, policy recommendations would you have for rich countries trying to help developing countries through the privatization process?
A: "Reality Check" focused much more on what is happening in the case countries as a result of privatization, rather than on how the countries' privatization policies were or were not influenced by donor countries. Nonetheless, the findings offer some guidance for rich countries wishing to assist the process and minimize the potential negative effects on distribution.
First, and most obviously, don't rush to sell the infrastructure firms. A corollary is take the time to enact and perfect regulation prior to sale. The stronger and more competent the regulatory system in place, the higher the likelihood that the social impact of an infrastructure privatization will be positive.
Second, some sectors are easier to privatize than others. For example, private operation of telecommunications' companies is much less problematic than in water, due mainly to the enormous differences in the technology of delivery systems in the two sectors. Private telecom companies are now the world norm; in water, in contrast, there have been a number of cancelled or disputed contracts with private providers. Electricity falls somewhere in the middle.