Saturday, October 2, 2010

How to Help Poor Countries

                                How to Help Poor Countries
                                        Nancy Birdsall, Dani Rodrik,
                                               and Arvind Subramanian

                                 GETTING DEVELOPMENT RIGHT 
The year 2005 has become the year of development. In September,
at the un Millennium Summit meeting of heads of state, in New York,
leaders of wealthy nations will emphasize their commitment to deeper
debt relief and increased aid programs for developing countries. The
Millennium Development Goals, the centerpiece of the conference’s
program, call for halving the levels of world poverty and hunger by 2015.
The summit will focus on increasing international aid to 0.7 percent
of donors’ gross national product to finance a doubling of aid transfers
to especially needy areas, particularly in Africa.With respect to global
trade, eªorts will center on the Doha Round of multilateral trade
negotiations and opening markets to important exports (such as cotton)
from developing countries. The discussions will thus proceed based
on two implicit but critical underlying assumptions: that wealthy
nations can materially shape development in the poor world and that
their eªorts to do so should consist largely of providing resources to
and trading opportunities for poor countries.
These assumptions ignore key lessons of the last four decades—
and of economic history more generally. Development is something

Nancy Birdsall is President of the Center for Global Development
in Washington, D.C. Dani Rodrik is Professor of International
Political Economy at Harvard’s John F. Kennedy School of Government.
Arvind Subramanian is Division Chief in the Research Department
of the International Monetary Fund.The views expressed here are their
own and not those of their respective institutions.

largely determined by poor countries themselves, and outsiders can
play only a limited role. Developing countries themselves emphasize
this point, but in the rich world it is often forgotten. So too is the fact
that financial aid and the further opening of wealthy countries’ markets
are tools with only a limited ability to trigger growth, especially in the
poorest countries. The tremendous amount of energy and political
capital expended on these eªorts in o⁄cial circles threatens to crowd
out attention to other ways in which rich countries could do less harm
and more good. A singular focus on aid and market access at the
September 2005 Millennium Summit should not leave other potentially
rewarding measures on the back burner.

Consider Nicaragua and Vietnam. Both are poor countries with
primarily agricultural economies. Both have suªered from long periods
of conflict.And both have benefited from substantial foreign aid. But
only Vietnam has reduced poverty dramatically and enjoyed steady
economic growth (five percent per capita since 1988). Nicaragua has
floundered economically, with per capita growth too modest to make
a real dent in the number of poor people.
Vietnam faced a U.S. embargo until 1994, and it is still not a member
of the World Trade Organization (wto). Despite these obstacles, it has
found markets for its growing exports of coªee and other agricultural
products and has successfully begun diversifying into manufacturing as
well, especially of textiles. Nicaragua, on the other hand, benefits from
preferential access to the lucrative U.S. market and had several billion
dollars of its o⁄cial debt written oª in the 1990s.Yet its coªee and clothing
export industries have not been able to compete with Vietnam’s.
Why has Vietnam outpaced Nicaragua? The answers are internal:
history and economic and political institutions have trumped other
factors in determining economic success.Access to the and
the largesse of Western donors have not been powerful enough to
overcome Nicaragua’s history of social and economic inequality: land
and power there have long been concentrated in the hands of a few
elites, and the government has failed to invest enough in infrastructure
and public welfare.

The experiences of many other developing countries confirm the
importance of specific internal factors. Like Vietnam, neither China
nor India—the two emerging superstars of the last quarter century—
has benefited from trade preferences.And neither has received much
foreign aid compared to countries in Africa and Central America.
But by enacting creative domestic reforms, China and India have
prospered, and in both countries poverty has plunged.
      On the flip side, many African countries have been unable to match
Vietnam’s success, despite being no poorer or more agrarian. True,
education and health indicators have improved markedly in Africa,
and some of its countries have achieved macroeconomic stability. But
even in the best-performing countries, growth and productivity remain
modest, and investment depends completely on foreign aid infusions.
It may be tempting to ascribe the rare African successes—Botswana and
Mauritius, for example—to high foreign demand for their exports
(diamonds and garments, respectively), but that explanation goes only
so far.Obviously, both countries would be considerably poorer without
access to markets abroad. But what distinguishes them is not the external
advantages they enjoy, but their ability to exploit these advantages.
Natural resource endowments have often hurt many developing countries:
the word “diamond” hardly conjures images of peace and prosperity
in the context of Sierra Leone, and oil has been more curse than blessing
for Angola, Equatorial Guinea,Nigeria, and many others.
       Witness the case of Mexico. It has the advantage of sharing a
2,000-mile border with the world’s greatest economic power. Since
the North American Free Trade Agreement went into eªect in 1994, the
United States has given Mexican goods duty-free access to its
markets, has made huge investments in the Mexican economy, and
has continued to absorb millions of Mexican laborers. During the
1994–95 peso crisis, the U.S. Treasury even underwrote Mexico’s
financial stability. Outside economic help does not get much better.
But since 1992, Mexico’s economy has grown at an annual average rate
of barely more than one percent per capita. This figure is far less than
the rates of the Asian growth superstars. It is also a fraction of Mexico’s
own growth of 3.6 percent per year in the two decades that preceded
its 1982 debt crisis. Access to external markets and resources has not
been able to make up for Mexico’s internal problems.

A notable exception to the limitations of outside assistance is European
Union membership. By oªering its poorer eastern and southern
neighbors not just aid transfers and market access but the prospect of
joining the union, the eu has stimulated deep policy and institutional
changes and impressive growth in about 20 countries. But the exception
proves the rule: the eu is not just an economic arrangement; it is
also a political system in which member states transfer extensive
legal powers to the central authority. In return, the center shoulders
significant responsibilities for the economic well-being of each member.
Unfortunately, accession to the eu or to any other major power is not
an option for most of the poorest parts of the world—and increasing
the financial resources and trading opportunities for the poorest
countries is not a su⁄cient substitute.

                                 EASY ACCESS
To start, there is the question of market access. Currently, the
international trade system is full of inequities. Rich countries place
their highest tariªs on imports important to developing countries—
garments and agriculture, for example. The tariªs escalate as the level
of processing increases, discouraging industrialization in the poor
countries. In addition,multilateral trade negotiations lack transparency
and often exclude developing countries from the real action. Using
wto procedures to settle trade disputes requires money and technical
expertise, both of which poor countries lack.
But to say that these flaws seriously hamper development in struggling
economies would be to overlook the remarkable success in the
last two decades of Vietnam and China in exporting manufactured
goods, of Chile in exporting wine and salmon, and most recently of
India in exporting services. These countries have achieved success
in exporting, despite the impediments.And barriers on manufactured
exports from developing countries were even higher when the Asian
“tigers” first arrived on the scene in the 1960s and 1970s.
Many argue that agricultural tariªs in particular represent an
impediment to poor countries’ economic growth. The World Bank
and organizations such as Oxfam argue that doing away with agricultural
subsidies and protectionism in industrialized nations would significantly

reduce poverty in the developing world. European cows, the famous
example goes, are richer—receiving $2.50 a day each in subsidies—
than one-third of the world’s people.
Yet the reality is that liberalizing agricultural trade would
largely benefit the consumers and taxpayers of the wealthy nations.
Why? Because agricultural subsidies serve
first and foremost to transfer resources
from consumers and taxpayers to farmers
within the same country. Thus, citizens of
developed countries would derive the
most benefit from having those subsidies
cut. Other countries are aªected only insofar
as world prices rise. But the big, clear
gainers from such price increases would be
countries that are large net exporters of agricultural products—
rich countries, such as the United States, and middle-income
countries, such as Argentina, Brazil, and Thailand.

            What about the poorer countries? For one thing,many poor countries
are actually net importers of agricultural products, and so they benefit
from low world prices. An increase in prices may help the rural poor,
who sell the agricultural goods, but it would make the urban poor—
the consumers—worse oª. Net poverty could still be reduced, but to
what extent depends in complicated fashion on the working condition
of roads and the markets for fertilizer and other inputs, on how much of
the gains are captured by poor farmers versus intermediaries, and
on the poverty profile of each country.
         Regardless of whether agricultural liberalization increases or decreases
poverty, the impact would not be significant. Most studies predict that
the eªect of such liberalization on world prices would be small. The
International Monetary Fund (imf) estimates that world prices would
only rise by 2–8 percent for rice, sugar, and wheat; 4 percent for cotton;
and 7 percent for beef.The typical annual variation in the world prices
of these commodities is at least one order of magnitude larger.
         Take cotton specifically. The largest credible estimate of the impact
of the complete removal of U.S. cotton subsidies on world
prices is less than 15 percent.How much of an eªect could this have on
farm incomes in West Africa? There is actually a useful benchmark for
Liberalizing trade in
agricultural products
would mostly benefit
the consumers in
wealthy nations.
comparison. In 1994, the member states of the Communauté Financière
Africaine currency zone (in which 14 African countries have had
their currencies pegged to the French franc since 1948) devalued their
currency from 50 to 100 cfa francs per French franc, eªectively
doubling the domestic price of cotton exports. If at least some of
the resulting price gain had gone to cotton farmers (and not to intermediaries
or inflation), the farmers’ incomes would have increased
in countries such as Burkina Faso and Benin. Indeed, the price
gain should have increased income and decreased poverty even
more than would the complete removal of U.S. cotton subsidies.
There is little evidence that a significant reduction in rural poverty
took place, however. A World Bank study found that poverty in
Burkina Faso remained stubbornly high and even increased in parts
of the country.
       Furthermore, a general reduction of trade barriers in rich countries
could leave some of the world’s poorest countries worse oª. A substantial
part of least-developed countries’ exports enjoy favorable
conditions of access to the markets of rich countries under various
preferential trade arrangements.With the end in January 2005 of
the long-standing system of quotas on apparel, for example, poor
countries such as Bangladesh, Cambodia, and Lesotho, which
benefited from preferential arrangements, justifiably have been
fearing competition from China and Vietnam. The loss of preferential
access for the poorest countries is not a justification for stopping
trade liberalization in its tracks. But it is an additional reason to be
cautious when estimating the magnitude of poor nations’ gains from
a trade-centered agenda.
       Of course, if global trade and growth were to implode, as in the
period between the world wars, international development would
receive a serious blow. A healthy multilateral trading system is important
to keep the possibility remote, and it can protect the poorest
countries from unreasonable bilateral pressures. A successful Doha
Round could stimulate trade among developing countries and
would signal a political willingness on the part of the international
community to keep the system purring and prevent an implosion—
even if the actual gains for the poorest countries from trade-barrier
reductions would be modest.

                               more money?
If not better market access, what about more aid? Boosting assistance
to the poorest countries of the world is a central recommendation
of the recent reports of the un Millennium Project and British
Prime Minister Tony Blair’s commission on Africa, and, along
with reduced corruption and better management in poor countries,
it is a cornerstone of the strategy envisaged to achieve the Millennium
Development Goals.
        Aid has accomplished some great things. On the health front,
smallpox has been eradicated, infant mortality rates have been lowered,
and illnesses such as diarrhea and river blindness have been widely
treated. Aid programs have improved women’s access to modern
contraception in Bangladesh and Egypt and helped increase school
enrollment in Uganda and Burkina Faso. Aid also pays for much of
the (still-limited) access to aids medicines in poor countries. In the
last decade, aid has helped restore peace and order after conflicts in
places including Bosnia, East Timor, and Sierra Leone. In addition,
aid can be a vehicle for policy advice and dialogue between recipients
and outsiders. There have even been macroeconomic successes, such
as the $1 billion grant that allowed Poland to establish an exchangerate
stabilization fund in 1990. By stabilizing the Polish currency, this
relatively small amount of financing provided valuable breathing
space for the implementation of broader policy reforms.
         What these successes share is that they were narrowly targeted
at specific objectives. Assistance does work well, but only when the
recipient countries do the right things to help themselves and have
the capacity and the leadership to spend the money wisely. Some
statistical evidence indicates a link between financial assistance and
growth. But aid has not been associated with the sustained increases
in productivity and wages that ultimately matter. During the 1990s,
for example, countries in sub-Saharan Africa received funding
amounting on average to about 12 percent of their gdp, while their
average growth rate per capita declined by 0.6 percent per year.
Meanwhile, some of today’s development successes—such as Chile
and Malaysia—relied little on aid. And aid to China and India has
been very small.
          There are many reasons for the mixed performance of foreign
assistance.Donors themselves cause many of the problems. Recipient
countries can be overwhelmed by the multiplicity of donors pursuing
many, even inconsistent, objectives, disbursing
aid to innumerable projects and imposing                  Aid is only as good
                                                                             as the ability of a
                                                                                developing country
                                                                              to use it effectively.
a plethora of conditions on its use. These
factors contribute to rather than oªset a poor
country’s lack of institutional capacity. On
top of that, there is the natural volatility and
uncertainty of foreign aid, which make it
di⁄cult for recipient governments to plan
their budgets. For more than a decade, the bureaucracies of donor
states and organizations have been unable, despite good intentions
and constant resolve, to change the political incentives and constraints
that impede the reform of their aid-delivery apparatuses.
         Probably more important, however, are institutional deficiencies
on the recipients’ side. Aid is only as good as the ability of a recipient’s
economy and government to use it prudently and productively. Thus,
the fundamental dilemma: countries most in need of aid are often
those least able to use it well. That sets limits on the extent to which
large infusions of foreign funds can make a diªerence.
The greatest example of the success of aid—the Marshall Plan—
illustrates the importance of homegrown institutional competence. Because
the institutions and capabilities of the United Kingdom, France,
and Germany survived the war to a large extent, even their war-ravaged
economies were able to exploit fully the potential of financial assistance.
         This simple point addresses the view that aid is a sine qua non for
African development on account of the continent’s bad geography and
favorable environment for diseases. A country’s growth may in fact be
hampered by its unsuitability for agriculture; its isolated geography; and
its susceptibility to malaria and other tropical diseases. In such cases, it
might seem appropriate that donors give more. But adverse geography
does not fundamentally alter the fact that the eªectiveness of assistance
depends on the institutions of the recipient country. At its best, aid has
helped nations rebuild after conflicts and assisted in achieving specific
objectives. But its role in creating and sustaining key institutions and
long-term economic health has been much less clear.

                                  sins of commission
To help developing countries help themselves, wealthy nations
must begin to lift the burdens they impose on the poor. Currently,
the developed world uses international trade agreements to impose
costly and onerous obligations on poor countries.The most egregious
example has been the wto’s intellectual property agreement, the
Trade-Related Aspects of Intellectual Property Rights (trips). Despite
recent eªorts to cushion its impact on the poorest countries, trips will
make the prices of essential medicines significantly greater, and this
at a time when poor countries are being ravaged by one of the worst
health epidemics ever known—hiv/aids. The price increase means
that money from the citizens of poor countries will be transferred
directly to wealthy pharmaceutical companies.The resulting revenue,
although a significant amount of money for the poor countries, will
be a relatively small part of the companies’ net total profits—hardly
enough to induce extra research and development.
An international community that presides over trips and similar
agreements forfeits any claim to being development-friendly.
This must change: the rich countries cannot just amend trips;
they must abolish it altogether. A simple comparison makes the
point clear: major industrial countries such as Italy, Japan, and
Switzerland adopted pharmaceuticals patent protection when
their per capita income was about $20,000; developing countries
will adopt it at income levels of $500 per capita, in the case of the
poorest, and $2,000–4,000 for the middle-income countries. By
these standards, forcing developing countries to abide by trips is
about 50–100 years premature.
But costly obligations are not restricted to trips. Trade agreements
between the United States and countries such as Jordan,
Morocco, and Vietnam have required the latter to adhere to intellectual
property regulations that go beyond trips, further increasing the
patent holder’s monopoly and restricting access to medicines. Other
trade agreements have called for developing countries to open their
capital accounts immediately, despite recent experience showing
that doing so exposes the countries to the volatility of international
capital flows.
         Just as crucial for empowering poor countries is providing them
with enough space to craft their own economic policy.During the last
decade, economists have come to understand that economic development
is at once easier and harder than previously thought. Many
countries have reduced poverty and generated significant economic
growth without the deep, comprehensive structural reform that has
been the centerpiece for development institutions over the last quarter
century. That is the good news. The bad news is that there are few
general economic-policy standards that seem to apply to every country—
except for such basic principles as macroeconomic stability, outward
orientation, accountable government, and market-based incentives.
The hard part is moving beyond these broad objectives and figuring
out the appropriate specific policies for each developing country’s
particular needs. The many poor countries that have made progress
on the general standards can better craft their own economic course
if they have adequate room for policy autonomy and experimentation.
The idea may sound radical, but would China have been better oª
implementing a garden-variety World Bank structural adjustment
program in 1978 instead of its own brand of heterodox gradualism?
Almost all successful cases of development in the last 50 years have
been based on creative—and often heterodox—policy innovations.
South Korea and Taiwan, for example, combined their outward trade
orientations with unorthodox policies: export subsidies, directed credit,
patent and copyright infringements, domestic-content requirements
on local production, high levels of tariª and nontariª barriers, public
ownership of large segments of banking and industry, and restrictions
on capital flows, including direct foreign investment. Since the late
1970s, China has also followed a highly unorthodox two-track strategy,
violating practically every rule in the book—including, most notably,
securing private property rights. India, which raised its economic
growth rate in the early 1980s, remained a highly protected economy
well into the 1990s.Even Chile—Latin America’s apparently “orthodox”
standout that managed to achieve both growth and democracy—
violated conventional wisdom by subsidizing its nascent export industries
and taxing capital inflows.
          Conversely, countries that have adhered more strictly to the orthodox
structural reform agenda—most notably in Latin America—have fared
less well. Since the mid-1980s, virtually all Latin American countries
have opened and deregulated their economies, privatized their public
enterprises, and allowed unrestricted access to foreign capital. Yet
they have grown at a fraction of the pace of the heterodox reformers
and have been strongly buªeted by macroeconomic instability.
The contrasting experiences of eastern Asia, China, and India
suggest that the secret of poverty-reducing growth lies in creating
business opportunities for domestic investors, including the poor,
through institutional innovations that are tailored to local political
and institutional realities. Ignoring these realities carries the risk that
pro-poor policies, even when they are part of apparently sound and
well-intentioned imf and World Bank programs, will be captured
by local elites.
           Wealthy nations and international development organizations thus
should not operate as if the right policies and institutional arrangements
are the same across time and space. Yet current wto rules on
subsidies, foreign investment, and patents preclude some of the policy
choices made, for example, by South Korea and Taiwan in the past,
when rules under the wto’s predecessor, the General Agreement on
Tariªs and Trade, were more permissive. What is more, new wto
members typically confront demands to conform their trade and
industrial policies to standards that go well beyond existing wto
agreements. The new Basle II international banking standards, better
fitted to banks in industrialized nations, risk making it more di⁄cult
for banks in developing countries to compete.
To be sure, not all internationally imposed economic discipline is
harmful. The principle of transparency, enshrined in international
trade agreements and many global financial codes, is fully consistent with
policy independence, as long as governments are provided leeway
with respect to actual policy content. A well-functioning international
economic system does need rules. But international rules should regulate
the interface between diªerent policies and institutional regimes,
not erase them.
There are signs of change in the rich world’s attitude. Some donors,
notably the United Kingdom and the United States, the latter with
its Millennium Challenge Account, are moving away from attaching
explicit, heavy conditions to their grants and loans and are instead
screening applicants early to ensure that assistance will be reasonably
well spent. The World Bank and other organizations are designing
programs with countries in which resources are disbursed not in
exchange for policy reform but on the basis of pre-agreed benchmarks
of progress—be it reduced inflation, more children finishing primary
school, or more completed external audits of government accounts.
These changes deserve to be reinforced.
Rich countries also harm their developing counterparts in other
ways, most notably with their emissions of greenhouse gases.According
to the growing scientific consensus, the costs of climate change will
disproportionately burden developing countries. Estimates of these
costs, including reduced water availability and agricultural productivity,
vary from 4 to 22 percent of poor countries’ incomes. Rich nations
must quickly lead the way in enacting measures beyond the Kyoto
Protocol. A market-based system of tradable emissions rights oªers
a great opportunity to combine e⁄ciency with equitable treatment
for developing countries. Poor nations would be allotted enough
emissions to ensure future growth—the same right that the industrial
countries have enjoyed for centuries. Market-based trading would
guarantee that pollution would be cut where costs are lowest, ensuring
maximum e⁄ciency: if costs are lower in India than in the United
States, for example, the United States could pay India to pollute less,
and India would be financially better oª in doing so.

                               positive steps
Wealthy nations can also take positive steps to directly benefit
developing countries—specifically, by taking action against corrupt
leaders, assisting research and development, and enhancing global
labor mobility.
The deepest challenge for countries in the poorest parts of the
world, especially Africa, is governance. The African continent has
been ravaged both by civil war and conflict and by rapacious leaders
who have plundered the natural wealth of their nations. Corrupt rulers
and their weak regimes have arguably been the single most important
drag on African development. But with increasing democratization,
the situation may be starting to improve.And rich countries can play
a large role in the reform process, for the simple reason that corruption
has two sides—demand and supply. For every leader who demands a
bribe, there is usually a multinational company or a Western o⁄cial
oªering to pay it. For every pile of illicit wealth, there is usually a
European or American financial institution providing a safe haven for
the spoils. The governments of wealthy countries need to take steps to
block these activities.
There have been notable strides in the right direction: the British
Department for International Development helped found the Extractive
Industries Transparency Initiative a few years ago, and the
un and the Organization for Economic Cooperation and Development
(oecd) have been working together to address the bribery of
o⁄cials in developing countries by foreigners. But these eªorts do
not go far enough.
Many institutions—the oecdand the U.S.government,for example—
have laws against bribing foreign o⁄cials. But the regulations are
often both narrow in scope and weak on enforcement. For example,
a loophole in the U.S. laws (“deferred gifts”) invites abuse. Some oecd
rules damage transparency by protecting banks that hide ill-gotten
wealth deposited by leaders of developing countries. Multinational
companies and banks need to be more transparent in their dealings
with poor-country governments. Preempting corruption must also
be made more of a priority. One idea, first proposed by Harvard
University’s Michael Kremer, is for the international community to
categorize certain regimes as corrupt or “odious.”Companies that deal
with such regimes would risk losing their claims to repayment if later
on a lawful government decided to default on the debt passed down
by its unlawful predecessor.
Wealthy countries can also spur technological advances that serve
the specific interests of developing countries. Because poor countries
lack wealthy markets, private companies in the developed world currently
have little incentive to devise technologies for them. Hence a
Catch-22 results: developing countries remain poor because of limited
technological opportunities, while these opportunities remain di⁄cult
to create because the countries are poor.
The health sector provides a good example of the current problem.
Pharmaceutical firms in industrialized nations conduct 90 percent of
their research on diseases prevalent in the rich world—and that aªect
less than ten percent of the global population. There is little research
on diseases endemic in the poorer parts of the world, because there
are no market returns for such investments. Yet developing countries
badly need medicine for preventing and curing diseases such as aids,
malaria, and sleeping sickness.Beyond health care, developing countries
also need enhanced crops that can better withstand heat, drought, and
the salinization of irrigated land, as well as new energy sources that
can reduce the rate of tropical deforestation.
There is already a precedent for foreign research acting to undo
this technological imbalance—the “green revolution.” Agricultural
production in the developing world was revolutionized by new varieties
of wheat developed at Norman Borlaug’s
International Maize and Wheat Improvement
Center, in Mexico, and new strains
of rice cultivated at the International Rice
Research Institute, in the Philippines. Although
the green revolution’s impact was
uneven, benefiting Asia and Latin America
more than sub-Saharan Africa, the aggregate
eªect was nevertheless sizable. In the 1960s, southern Asia witnessed
dramatic increases in productivity growth as a result of the new seed
varieties.Yale University’s Robert Evenson has estimated that the global
return on the research on the new strains was more than 40 percent.
The international community needs to learn from this example,
so that the resources of wealthy firms can be harnessed to develop
important technologies for the world’s poorest countries. One simple
yet powerful improvement would be for rich-country governments
to commit contractually to rewarding the creation of such new
technologies—for example, with guaranteed purchase agreements. In
eªect, the international community would ensure a minimum financial
return on private research undertaken for the benefit of developing
countries. The Center for Global Development has devised a plan for
this kind of advance-market-commitment mechanism to spark research
on a malaria vaccine, at an estimated cost of $3 billion. Imagine the
benefits of a $50 billion global technology-creation fund, with actual
disbursement of the funds taking place over ten years or more. That
Wealthy countries
should spur
technological advances
that help the poor.
$50 billion would represent only about five percent of all the financial
aid that donors have promised to spend on the poor in the next decade.
Finally, to have a big impact on developing countries, trade negotiators
should spend more time improving the cross-border mobility
of labor—particularly of low-skill laborers, who typically are at the
bottom of the pile. Current wto negotiations on labor mobility (“mode
four” in the trade jargon) focus only on high-skill labor, and even
there they have made very little progress. Greater opportunities for
poor and less-skilled workers to move across borders would, more
than anything else, increase both the e⁄ciency of resource allocation
in the world economy and the incomes of the citizens of poor countries.
This fact is based on a simple principle of economics. The loss in
e⁄ciency due to segmented (as opposed to integrated) national
markets increases with the gap in prices in these diªerent markets,
and the loss is further compounded as the gap increases. Now compare
price gaps across diªerent types of markets. In markets for goods
and capital, quality- and risk-adjusted price gaps from country to
country are relatively small—perhaps no more than 50–100 percent.
But in labor markets, which suªer from huge border restrictions,
wage gaps for similarly skilled workers are enormous—on the order
of 500–1,000 percent. That is why even small relaxations of work-visa
restrictions generate large income gains for workers from poor countries
(as well as for the world economy).What is especially appealing
is that the gains in income go directly to the workers, rather than
through imperfect distribution channels (as with trade in goods)
or through governments (as with aid).
Take, for example, a scheme for temporary work visas amounting to
no more than three percent of the rich countries’ total labor force. Under
the plan, skilled and unskilled workers from poor nations would be
allowed employment in rich countries for three to five years, and they
would be replaced by a wave of new workers after their time ended and
they returned to their home countries. Such a system would easily yield
$200 billion annually for the citizens of developing nations.The returnees
would also bring home far more benefits than their wages alone: experience,
entrepreneurship, funds to invest, and an increased work ethic.
To make sure these benefits are realized, such a regime must generate
incentives for the workers to return home. Although remittances
can be an important source of income for poor families, they rarely spark
or sustain long-term economic development. Designing contract
labor schemes that are truly temporary is tricky, but it can be done.
Unlike in previous plans, there must be clear incentives to ensure the
cooperation of each party—workers, employees, and home and host
governments. One possibility: withhold a portion of workers’ earnings
until they return home. This forced savings scheme would also guarantee
that returning workers would have a sizable pool of resources
to invest. In addition, there could be penalties—the reduction of worker
quotas, say—for home countries with nationals who fail to return.Home
governments would thus be motivated to create a hospitable domestic
economic and political climate to encourage their people to come back.
Of course, even with the best-designed scheme, it is inevitable that the
return rate will fall short of 100 percent. Even with this consideration,
however, facilitating labor mobility would bring significant gains.
Despite the obvious advantages, is a scheme like this politically
feasible in developed countries? If there has been substantial trade
liberalization in rich countries, it is not because it has been popular
with voters, but largely because the potential beneficiaries have organized
successfully and forced their agendas. Multinational firms and
financial enterprises have been quick to recognize the link between
enhanced market access abroad and increased profits, and they have
put the issues on the negotiating agenda. Temporary labor flows, by
contrast, have lacked a well-defined constituency in the developed
countries. This is not because the benefits would be smaller, but
because the potential beneficiaries are not as clearly identifiable. The
tide has begun to turn lately as a result of labor shortages in sectors
such as high-tech and seasonal agriculture, and because labor inflows
would increase the tax base for financing pension benefits for retirees,
thereby providing a partial solution to pension shortfalls in pay-as-yougo
systems. Moreover, political realities can change—with the right
leadership. In the United States,President George W. Bush has already
proposed a temporary-worker program, which if designed properly
could mark a useful beginning.
There are of course other ways the rich world could contribute to
development. Outsiders should play an important role in preventing
and resolving conflicts and humanitarian crises in developing countries.
Minimizing and eliminating conflict has obvious benefits for human
life—and potentially for long-term development. Just as important is
stopping arms sales to dangerous governments and halting the drug
and illicit diamond trades that often fund rogue groups. Another
important issue is the governance of international economic institutions.
The democratic deficit of these institutions has increasingly caused
a corresponding legitimacy deficit. Insofar as this gap reduces the
eªectiveness of such organizations, rich countries would be wise to
agree to reforms.

                                new priorities
The international communitymust ask itself what really matters
for development, so that good intentions can be translated into real
benefits for the poorest countries.To a large extent, sustainable progress
is in the hands of the poor countries themselves. Internalizing this
reality is important for the developing world—and also for the wealthy
one, not least because doing so would check the perennial temptation
to promise results that cannot be delivered.
That said, this must be clear: developed countries should not
abandon the poor to their plight. If, however, rich countries truly
aim to help developing countries achieve lasting growth, they must
think creatively about the development agenda. If aid is increased
and delivered more e⁄ciently and trade inequities are addressed,
then the two traditional pillars of development will yield rewards.
But these rewards should not be overestimated. Indeed, other
courses of action—such as giving poor nations more control over
economic policy, financing new development-friendly technologies,
and opening up labor markets—could have more significant
benefits. It is time to direct the attention of the world’s wealthiest
countries to other ways of helping the poorest—ways that have
been for too long neglected.¶

Nancy Birdsall, Dani Rodrik, and Arvind Subramanian