Introduction
I would like to thank the Australian Council for International Development for organising and hosting tonight’s function. I also wish to acknowledge the efforts of the non-government sector in helping the global effort to tackle world poverty and other sources of human hardship.
In reflecting on the challenge of poverty reduction tonight, I will touch on four themes:
- the goal of poverty reduction and recent progress towards it;
- the factors that are important to achieving that goal;
- how developed and developing countries can contribute most effectively to the development effort; and
- Australia’s special role in helping development efforts in the Pacific.
The goal of poverty reduction and recent progress
In September 2000 representatives of 191 countries adopted the Millennium Declaration setting out Millennium Development Goals (MDGs) and targets to achieve them. The goals were as follows:
- eradicate extreme poverty and hunger;
- achieve universal primary education;
- promote gender equality and empower women;
- reduce child mortality;
- improve maternal health;
- combat HIV/AIDS, malaria and other diseases;
- ensure environmental sustainability; and
- develop a global partnership for development.
Global progress in reducing poverty
The target for meeting the MDG to eradicate extreme poverty is to halve between 1990 and 2015, the proportion of people whose income is less than one dollar a day. Despite claims to the contrary by some, the evidence shows that we are well on the way to meeting that target (See Chart 1).
Progress towards this goal is uneven, however (See Chart 2). The most outstanding success is East Asia which has already met the 2015 goal. South Asia is projected to exceed the goal by 2015. The most disappointing region is Sub-Saharan Africa.
Progress has been made towards the goal of achieving universal primary education (See Chart 3), again with the exception of Sub-Saharan Africa.
Less progress has been made towards the goal of reducing the child mortality rate by two-thirds by 2015, with only 22percent of the developing world’s population currently on track to meet this target (See Chart 4).
Across all of these indicators Sub-Saharan Africa is lagging badly — while East Asia is doing particularly well.
Closer to home, a number of countries in the Pacific are unlikely to achieve the MDGs and some are even regressing.
Factors that are important to reducing poverty: economic growth
So what distinguishes the countries which have good all-round development performance from those with poor performance? A key distinction is sustained economic growth. The evidence is that when the average income of a society grows, the proportion of people living below the poverty line falls: economic growth is a poverty buster.
Not only income, but also social indicators such as life expectancy, maternal and infant mortality and education all tend to improve with economic growth.
Developing countries have been able to progress across some development dimensions by prioritising social services that reduce mortality and enhance the quality of life. Ultimately though, it is the growth in income per capita that is necessary to provide the real resources to allow continuing broad-based progress towards all of these objectives (See Chart 5).
Economic growth in East Asia, which is principally China, has been based on opening the economy, trade liberalisation and moving to a market economy. Economic growth in East Asia has largely driven the reduction in global poverty.
It is not aid, but trade and economic reform that has delivered these millions out of poverty.
Our own experience in Australia is that economic reform boosts economic growth. Since 1996 the Australian economy has exhibited strong and stable growth, with real GDP growth averaging 3.6percent ayear and inflation averaging 2.4percent ayear, contributing to a significant increase in the living standards of Australians. In per capita terms, Australia’s GDP has increased by more than 20percent or $6400 since the beginning of 1996.
In contrast, let us look briefly at Papua New Guinea. In PNG, gross national income per capitahas declined from US$840 in 1998 to US$530 in 2002 (in current US$terms).
PNG’s population grows at approximately 2.3per cent per annum, so to maintain its real per capita income PNG needs to achieve economic growth of at least this amount.
However, for the last three years the economy has contracted and the PNG Government’s own forward estimates are for around 2 per cent economic growth perannum. This implies no improvement in per capita living standards in the coming years.
If we assume ongoing population growth of 2.3 per cent per annum and project economic growth of only 2 per cent per annum out to 2020, the impact is quite clear—average per capita incomes fall away and there islittlepotential for poverty alleviation or improvements in living standards within PNG (See Chart 6).
I should add that the proposition that economic growth is central to development does not indicate that policies to build capacity through education, health and physical infrastructure are not important. Indeed, development potential will not be realised without a focus on these needs. But building hospitals, schools and roads is no substitute for economic policy.
Economic policy is essential to allow resources to be used more productively, incomes to be increased and social and physical infrastructure to be developed for the benefit of the whole community. Such policy leads to a virtuous circle of increasing private and community wealth.
How can developing and developed countries work most effectively to achieve the Millennium Development Goals?
The successes and failures in development over the past 30 years suggest that integrated and coherent polices to promote sustained economic growth are necessary. This leads to three clear policy prescriptions going forward:
1. Development is not possible without a sustained long-term commitment to sound domestic policies and institutions.
2. Developing countries prosper from participation in a strong stable global economy.
3. Aid can play an important complementary role in promoting development, but without suitable policy settings, aid alone will not deliver continuing reductions in poverty.
1. Sound domestic policies and institutions
The stark lesson from the past 30 years is that countries cannot develop without appropriate domestic policies.
The developing countries that have made the most progress have utilised their own domestic resources, made hard decisions, and taken advantage of global market opportunities — predominantly international trade and, to varying extents, foreign direct investment — to accelerate growth.
Development depends upon individuals having the incentives to participate in markets and increase their incomes.
This is not to suggest that there is no role for government. Indeed, effective governance is critical. Governments need to provide strong macroeconomic policies that encourage domestic savings and investment; independent and robust public institutions; domestic political stability; and the rule of law to protect property rights and allow contracts to be enforced predictably and economically.
An area of increasing focus has been how individuals can utilise their property to increase their incomes. Within the West, property rights, in particular individual ownership, underpin the economic growth and standard of living we have today.
In contrast, many of the world’s poor already possess the assets they need for success, but are unable to use these assets to their full potential: houses are built on land without formal title, unincorporated businesses have undefined liability and cannot borrow to finance growth, industries are hidden in the informal sector where investors and financial institutions cannot see them or safely lend to them.
In the Pacific we have also seen that imported national institutions can find it difficult to deal with traditional practices, especially in relation to authority structures, land ownership and land use.
Australia is playing an important role in the area of promoting sound domestic policies and institutions through both its contributions to multilateral institutions and its bilateral aid program, particularly in Solomon Islands and Papua New Guinea, a topic that I will return to later.
2. Participation in the global economy: — Trade
We have seen some outstanding examples of developing countries prosper from participation in a strong stable global economy. This participation provides direct benefits to developing countries through increases in trade and foreign investment, as well as from the flow of remittances from migrating workers. But just as importantly it encourages the adoption of modern business practices and helps build a range of public and private institutions critical to ongoing development.
This underscores the urgency of Australia’s efforts to secure a pro-development outcome from the current Doha round. At present developed country trade barriers are often highest on products of major export interest to developing countries — namely agricultural products (See Chart 7).
Australia, with the Cairns Group, has played a leading role in arguing that the successful conclusion of the Doha Round would be the largest single positive factor that could boost the development of low-income countries. I have also urged the international financial institutions and the world’s finance ministers to use their influence and leadership to push trade reform, both globally and in their own countries.
I am pleased that Australia has already provided duty-free access to Australia’s market to the world’s least developed countries.
As well as our efforts to convince other developed countries to lower their
trade barriers, we have entered into a dialogue with developing countries themselves
highlighting that some continue to have very high barriers to trade, often directed
against other developing countries. Going forward, reducing so called
“south-south” barriers is an area where developing countries collectively
could act to boost their own development prospects.
There is also much that can be done in reducing “behind the border” barriers to trade. Services such as customs clearance, product labelling and standards, transport and telecommunications infrastructure and access to financial markets have a crucial impact on a country’s trade performance. Australia has been a strong supporter of efforts to reduce these barriers in both developed and developing countries alike.
3. Effective aid
Foreign aid is the most visible vehicle for assistance from rich countries to poor countries. The Australian people have a long history of giving generously to those less fortunate than themselves.
While aid can assist in promoting long-term development, it is in itself not sufficient. Countries that have graduated from aid — such as South Korea, and Malaysia — have done so by achieving significant economic growth.
There has also been a lot of discussion around the need to increase aid in order to achieve the MDGs, with estimates that an additional US$50billion a year in development assistance is required.1
The problem with these estimates is that the historical evidence suggests at best a weak statistical correlation between the volume of aid and economic growth.2
While perhaps not a popular observation it is the case that aid can hinder as well as help — it sometimes allows governments with poor policies and weak institutions to stave off essential reforms and rely on donors to provide essential services to their people.
A striking example of the limitations of aid has been the economic performance of the Pacific in recent years. If we look at the Pacific growth record from 1992-2002, average GDP per capita growth was less than onepercent, in a period of time when annual aid flows per capita to the region averaged US$96 — the highest of any region in the world (See Chart8). 3 Excluding transfers to French territories, Australia is the single largest donor to the Pacific region.4
Australia has a special responsibility in the Pacific. Whilst European countries naturally focus their aid efforts in Africa, partly as a consequence of historical links, partly because of proximity, Australia’s historical links and proximity are in the Pacific. But the evidence of recent years has caused a rethink on how to enhance the effectiveness of that aid, which I will return to later.
I have suggested here that aid is no substitute for economic growth. But aid does have an important role to play in alleviating human suffering.
At last month’s Second Asia-Pacific Ministerial Meeting on HIV/AIDS in Bangkok, Australia announced a $350million funding boost over six years to combat the disease — more than doubling our commitment by 2010.
In the Asia-Pacific region, there were one million new infections last year and a staggering 7.4 million people are now living with the disease. HIV/AIDS impacts mostly on the young and working age population of developing countries, diverting scarce resources to combating the disease while reducing a country’s capacity to generate economic growth to deal with poverty.
Well-targeted aid also has an important role to play in assisting developing countries to improve governance and build institutions. The evidence is that countries with good policies and institutions are best able to make effective use of aid, whether it is through social or physical infrastructure.
The link between good governance and the effectiveness of aid gives rise to a dilemma where countries have relatively poor governance. In such cases, we need to move beyond discussions about increasing overall aid levels — which we know will be of limited value in such circumstances — to how we can use existing aid to improve governance, unlock capital and build institutions.
Here I am glad to say that internationally Australia continues to play a key role in encouraging a focus on the effectiveness of assistance. While the multilateral development banks, in particular, have traditionally focused on lending volumes, they are increasingly focusing on meeting countries’ specific needs, as agreed by the country and donors. A good example of this is the joint country strategy for PNG agreed to by Australia, the World Bank and the Asian Development Bank. The joint country strategy seeks to improve coordination in the provision of development assistance by these donors.
The Government and NGOs also share a common interest in promoting transparency, efficiency and accountability at the international financial institutions. Australia is often at the forefront of these efforts. For instance, Australia has played a key role in making the Asian Development Bank processes more transparent, including by chairing the Board Inspection Committee.
Australia strongly supported the opening up of the replenishment processes of the Asian Development Fund and the International Development Association, including making the papers available on the web, inviting representatives from borrowing countries and hearing from non-official representatives in developing countries.
Debt relief
There isno doubt that debt can become a major obstacle to alleviating poverty. For this reason the Government has been astrong supporter ofinitiatives such as theenhanced Heavily Indebted Poor Countries (HIPC) Initiativedesigned to assist countries with unsustainable debts. This initiative is yet to run its full course, but substantial relief has already been provided to qualifying countries, with more in prospect.
Since 1996 Australia has moved away from giving financial assistance to developing countries by way of loans. In reality many such loans are not aid at all — merely trade promotion activities. This is why Australia has very little in loans outstanding to the very poor countries. Many of those countries that have large loans outstanding were not actually trying to assist the developing country so much as to assist their domestic producers.
It is clearly not sensible for countries with high levels of debt to continue to receive assistance in the form of loans. Of course this is acomplex issue, andcare needs tobe taken againstrewarding countries with high levels ofdebt, while continuing to charge interest on loans to countries who have managed their debt prudently. Countries can borrow the same amount but end up with very different debt burdens depending on the extent they employ those loans to productive ends.
Policy Coherence: Relative benefits of aid, trade and economic reform
In addressing the challenge of development it is crucial to maintain perspective on the potential benefits from our actions. Ultimately we are in the business of providing the poor with opportunities to improve their lives. Policies should be measured against their outcomes, not their intentions.
It is now being suggested that an additional US$50billion per annum is required to meet the MDGs. Let me put this in perspective, the World Bank has estimated that trade liberalisation would deliver an additional US$350billion in income to developing countries per annum by 2015.5 In other words a doubling of global aid budgets — significant as that would be — would deliver about one fifth of the direct benefit to poor countries that trade liberalisation would deliver.6
Faced with this kind of information those interested in aid and helping the poor in developing countries should be the most vociferous supporters of global free trade.
It is also worth noting that aid comprises a decreasing proportion of financial flows to developing countries7 (See Chart 9):
- Foreign Direct Investment (FDI) in developing countries totalled US$135billion in 2003.
- Workers’ remittances to developing countries totalled an estimated
US$93billion in 2003, an increase of more than 20 percent from 2001, and
now rank second after FDI as a source of external finance to developing countries.
- The cost of sending remittances home can be as much as 20 percent of the remitted amount. If we reduce transaction fees to 5-10percent it would yield an additional US$9-14billion in annual remittance flows to developing countries.
The challenge of achieving a coherent policy approach by developed countries is to maximise the synergies between official development aid, trade liberalisation and private capital flows.
FDI is an important channel for directing capital to the developing world. While the ability to attract private investment flows depends primarily on developing countries’ domestic policy settings, developed countries can also play a role.
Recognising this role Australia is a signatory to the OECD Declaration on International Investment and Multinational Enterprises (MNEs), which includes a commitment to promote the OECD’s Guidelines for Multinational enterprises, a voluntary code of good corporate behaviour. As I noted as Chair of the OECD Ministerial Council Meeting in 2000, which endorsed the latest review of the Guidelines, they seek to build an atmosphere of confidence between MNEs and the societies within which they operate.
Recent events have brought home the importance of Australia acting as a good neighbour to our region
Australia’s rethinking of the role of aid in development is most clearly seen in our engagement with our immediate region. Australia has a clear national interest in our region of the world being safe, stable and economically prosperous.
We have a long history of engagement with the Pacific, including close economic and cultural ties. Reflecting these ties, Australia has traditionally devoted considerable resources to helping our neighbours along the path to becoming stable, prosperous democracies.
In recent times Australia has accepted (through the Regional Assistance Mission to Solomon Islands (RAMSI)) that we share responsibility with others in the region to restore law and order as a basic precursor to economic development in Solomon Islands.
We have also entered a new era of cooperation through the Enhanced Cooperation Program (ECP) to address PNG's economic, social and developmental challenges.
The immediate goal is to stabilise law and order. Longer term success will hinge on stabilising budget finances, settling on the appropriate role for government and energising private and public resources to create a pro-growth environment. As with any assistance, unless accompanied by economic development, any improvements in social indicators will not be sustainable.
The RAMSI and ECP missions represent an integrated whole of government approach to improving governance. This is about much more than law and order, it includes improving the justice system, economic management, public sector reform, customs and border management. For example, there are now around 15 senior Treasury staff working in PNG, Solomon Islands and Nauru alongside local staff in key areas such as budget control, debt management and economic reform.
Conclusion
There is a growing consensus that development cannot happen unless countries can establish progress in the areas of governance, law and order, and economic management.
Australia is doing its utmost to help in these areas.
In real terms we have increased our overseas development assistance by 10.4percent since 2002-03 and focused our effort in a number of key areas, including promoting improved governance, the delivery of basic services and strengthening regional security.
Through the Doha round we are working to secure a pro-development outcome on trade. More than any other single breakthrough trade liberalisation would open developing countries to a huge lift in income and economic growth without which the reduction in poverty, the improvements in health and education, are not sustainable.
Australia has a special commitment to our region. And we recognise the particular challenges involved. In cooperation with the governments of the region, we are re-focusing and re-doubling our efforts to help them deliver a secure and prosperous future for their people.
1 Devarajan, Shantayanan, Margaret J. Miller, and Eric V. Swanson, Goals for Development: History, Prospects and Cost, World Bank Working Paper 2819, Washington, D.C, 2002. and
United Nations, Report of the High-Level Panel on Financing for Development, United Nations, 2001.
2 Richard N. Cooper, A Half Century of Development, Annual World Bank Conference on Development, Washington, D.C, 2004. and
Michael A. Clemens, Charles J. Kenny, Todd J. Moss, The Trouble with the MDGs: Confronting Expectations of Aid and Development Success, Working Paper No. 20, Center for Global Development, Washington DC, May 2004.
3 If US contributions to Palau, Micronesia and the Marshall Islands are excluded, average aid flows per capita to the Pacific region for 1992-2002 are US$71. OECD International Development Statistics Online Database.
4 In 2002 Australia contributed US$270million of US$709million in total ODA to the Pacific region (excluding French contributions to New Caledonia and French Polynesia). OECD International Development Statistics Online Database.
5 World Bank, Global Economic Prospects 2004: Realizing the Development Promise of the Doha Agenda, Washington, DC, 2003.
6 Estimates are that Official Development Assistance from OECD Development Assistance Committee Countries in 2003 was US$68.5 billion, of which US$2 billion was reconstruction aid to Iraq. Source: Organisation for Economic Co-operation and Development Press Release 16 April 2004. Modest Increase in Development Aid in 2003.
7 World Bank, Global Monitoring Report 2004: Policies and Actions for Achieving the MDGs and Related Outcomes, Washington, DC, 2004.