the development challenge

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The Development Challenge

5effrey D. Sachs

PROMISES, PROMISES

As AMATTER f statedpolicy, there sno doubt thatWashington iscommitted to supportingeconomic development in impoverishedcountries.InSeptember2000, it joinedthe UN in issuing theMillenniumDeclaration, inwhich theworld pledged to cut extremepovertyin half and reducechildmortality by two-thirdswithin thenext 15 ears(aims ater ormalized spartof theMillenniumDevelopmentGoals). InMarch 2002, theUnited States andthe internationalcommunity dopted heMonterreyConsensus,which laidout amultifacetedstrategy o achievetheseobjectivesby promotingtheprivatesector ndeveloping ountries, peningtrade ith them,andincreasingofficialdevelopmentassistance(ODA).hat year,theU.S. NationalSecurity Strategy promised to "secure ublichealth,""emphasizeeducation," nd"continue o aidagricultural evelopment" n lowincome ountries. TheUnited Statesandotherdeveloped ountries,"thedocumentasserted, should etanambitious ndspecific arget:odouble the size of theworld's poorest economies within a decade."

Most Americans,andperhaps ost senior .S. government fficials,believe that theUnited States has been following through on suchcommitments. he U.S. response, ublicandprivate,toDecember'sIndian Ocean tsunami has seemed to confirm the nation's generousengagementwith those inneed. Ironically, hough,thisoutpouringof concernmay obscure rather than clarify adeeper truth.Other than

JEFFREYD. SACHS isDirector of the Earth Institute at ColumbiaUniversity and Director of theUN Millennium Project,which inJanuaryissued the report Investing inDevelopment:A Practical Plan toAchieve the

Millennium Goals.He isalso the author of thenew book TheEnd ofPoverty.

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TheDevelopmenthallengein response to disasters-famines, floods, and earthquakes-U.S.assistance for the world's poorest countries is utterly inadequate. Itfalls far short of meeting the needs of recipient countries, fails totap into the vast U.S. capacity for providing aid, does not fulfillWashington's many promises to fund development adequately, and isa small fraction of what Americans believe theU.S. actually provides.Without a new approach,Washington risks undermining themost important international development goals that theworld hasaccepted-and plunging the internationalcommunity into amaelstromof recrimination.Without dramatic reform, theUnited States willincreasingly be tarredas a country ready to invest inwar, and perhapsin emergency relief,but not inpeaceful development. The number offailedstateswill increase, preading isorderand threatening lobalandnationalsecurity.

Only a new U.S. international development strategy can avoidthis outcome by achieving the objectives set forth in theMillenniumDeclaration, theMonterreyConsensus, and theNational SecurityStrategy. Embarking on a new, practical course of assistancewill haveshort-term osts,but the long-termbenefitswill faroutweighthem.Continued failure,on theother hand,will be far too expensive tobear.

THE DEVELOPMENT MIRAGETHE DEVELOPMENT ASSISTANCE COMMITTEE (DAC) of theOrganizationforEconomicCooperationandDevelopment definesofficialdevelopment assistance as the sumof grants and sub-market-rateloansmade todevelopingountriesopromote conomicdevelopmentandwelfare. Military aid is not counted, nor is aid to high-incomecountries such as Israel.Even with theseparameters, the DACdefinitionis too expansive tomeasure realassistance for economic development,but itnonetheless gives a systematicmeasure ofU.S. foreign assistance.By the DAC'S efinition, in 2003 (themost recent year forwhichcomprehensive internationaldata areavailable), theUnited States gave$16.3billion innetODA. f thatamount,$1.7billionwent tomultilateralorganizations such as theWorld Bank, which in turngrant orlend themoney todevelopingcountries.Washington distributed heremaining 14.6billionbilaterally,irectly argetingecipient ations.

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JeffreyD. SachsTogether, hemultilateral ndbilateral idrepresented.15 ercent f the$11 rilliongrossnational income (GNI)f theUnited States in 2003.In the 2004U.S. budget-which totaled$2.3 trillion-developmentassistance epresentedust0.7 percentof budgetary xpenditures.These sumsarevastlysmaller hantheAmericanpeople thinktheyare.In a 2001survey, heProgramon International olicyAttitudes(PIPA)t theUniversity fMaryland found hatAmericans,on average,believe thatforeignaid accounts or20 percentof the federal udget,around 0 timestheactual igure.PIPA urveys n themid-9ggoscameupwith essentially he same result.Many Americansand seniorgovernmentofficialsalsomistakenlybelieve thatprivategivingrepresents substantial mountofU.S. aidto developingcountries.TheWall StreetJournalnd others, citing anearlierstudyby theU.S. Agency for Inter

U.S. assistance for nationalDevelopment (USAID),ave eventheworld'spoorestreported that private giving significantlytheworld's poorest exceeds official giving, but their estimates

countries isutterly erroneouslyinclude $18 billion in privateremittances,hich arenot developmentaidinadequate. but income transfers between family members in theUnited States and abroad. TheDACestimates thatU.S. assistance from private voluntary agencies in2003 amounted to about $6.3 billion. Even if one added to this figure ahigh-endestimateof $4 billion inothergivingfromprivate oundations, orporate hilanthropy,ndotherorganizations,he sumofU.S.publicandprivate inancialontributionso internationalevelopment

would amount to around $26.6 billion, or just 0.25 percent of GNI.Not only are the figures for official development assistance themselves not nearly as large as most Americans believe, but the DAC'Sestimate of $16 billion also overstates U.S. official aid for economicdevelopment by including a considerable amount of assistance thatcontributes ittleornothing to long-termdevelopment.In a recentwhite paper,USAID akes thepoint by distinguishingbetween fiveoperational goals for foreign aid: promoting transformational development, supporting strategic states, strengthening fragilestates,providinghumanitarian elief,andaddressing lobalchallengessuchas the HIV/AIDSepidemic and climate change.

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TheDevelopment ChallengeAll five operational goalsmake sense from a foreign policy stand

point, but only the first directly targets economic development. Aidintended for transformational development aims to support longterm economic change by helping a country achieve structural transformations that should allow it ultimately to escape dependence onoutside aid. Assistance to strategic countries focuses on nations thathave geopolitical importance, such asColombia, Egypt, Iraq, andAfghanistan, and helps fight terrorism,strengthen alliances,orreduce narcotics trafficking.Aid to fragile states is designed to headoff conflict or help countries recover from it. Lastly, humanitarianassistance isearmarked for relief following natural disasters and oftentakes the form of U.S. grain deliveries.A surprisingly smallproportionofU.S. bilateral ssistancesdirected t transformationalevelopment,and only a small part of that actually transforms the economies ofdevelopingcountries.

Washington's own aid accounting (as opposed to the DAC's)makesakey distinctionbetweendevelopmental ssistance nd geopoliticalaid,which isdistributed o strategic ountriesmostly as EconomicSupportFunds (ESF).n2004, theESF rogram rovided$3.3billionto 42 countries. Economic development is a side effect, not a basicobjective,of such aid.Strategicstates-defined here as developingcountries receivingmore than half of their U.S. assistance from theESFor similar funding (such as the IraqiRelief and ReconstructionFund, theAndean Counterdrug Initiative, and the EmergencyResponseFund forAfghanistan)-include severalcountries in the

Middle East, Asia, Europe, and Latin America.1 These 16countries,plus theWest Bank andGaza Strip, received about 45 percent of totalU.S. bilateral assistance to developing countries in 2003, even thoughthey accounted oronly iLpercentof thepopulationof developingcountries receivingU.S. aid.Many of the strategic states are in factmiddle-incomecountries hatarenothigh development riorities. nmany cases,ESFupportsorruption r allowsagovernment o reduceitsown development spending to free up funds for itsmilitary.

The states or territories classified as "strategic" by this definition are, by region, Egypt,Iraq, Jordan, Lebanon, West Bank/Gaza, and Yemen; Afghanistan, East Timor, Mongolia, Myanmar, Pakistan, and Sri Lanka; Turkey; Bolivia, Colombia, Ecuador, and Peru.

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Jefey D. SachsMeanwhile, according to theDACdatabase, very little of the $6.1billion theUnited States spenton bilateralassistance o "nonstrategic"developing ountriesn2003actually eached hegroundaslong-terminvestmentntransformationalevelopment. orone thing,$2billionwas distributedasemergencyassistanceor as non-emergency foodaid.Emergencyassistance,although salutary, erely addresses mmediate crises.Food aid fornon-emergency urposes,moreover,hasenormously igh transaction osts anddistorts the localeconomybydepressing heprices ocal armers eceive or their oods.Amazingly,

nearly half of themoney spent onU.S. food aid in 2004went to covertransport costs rather than the food itselfIn 2003, only $4.1 billion inU.S. bilateral aidwas not spent onstrategic countries, food aid, or other emergency aid. Of that total,moreover,$1.3 illion tookthe formof "debtorgiveness rants"-thecancellation of old debts, not the granting of new money. Further

more, recipient countries saved even less than that amount in actualdebt payments in 2003, because the cash-flow savings that yearwereonly a small fraction of the debt that was erased from the books.In some countries, debt payments have actually risen thanks to debtcancellation.After eaching greementsith creditorations, ountriesthat had previously been servicing none of their debt burden have hadto resume payments on a smaller base.)

Of the remaining $2.8 billion in 2003 U.S. bilateral aid, very littleactuallyunded nvestmentsntransformationalevelopment.ccording to the DAC, the entire sum went toward technical cooperation:payments made primarily toU.S. entities-consultants from govern

ment agencies or nongovernmental organizations (NGOs)-forassignments in recipient nations. These missions may be useful, butthe expenditures are not long-term investments in local clinics,schools, power plants, sanitation, or other infrastructure.

Washington gave very littlemoney directly to nonstrategic developing countries to support specific investments in transformationaldevelopment. Poor countries have proposed sound plans to buildschools and clinics and pay the salaries of teachers and doctors, buttheUnited States virtually never fiundssuch programs directly, sendingits own consultants instead. In doing so,Washington contributes toanunworkable proliferation of donor-country pet projects, rather than

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TheDevelopmenthallengeto an integrated strategy adopted by the recipient country and supported by the donors. A balanced and judicious aid program wouldprovide both technical cooperation and budgetary support to countriesthat could use themoney effectively.The case of sub-SaharanAfrica-the poorest regionof theworldshows how dangerously skewedU.S. aid priorities are.The prevailingimage in theUnited States is thatWashington givesAfrica vast sumsof money, which corrupt officials there thenfritter way rstash noffshore ccounts. ut Washington's aid tothis image, fueled by inaccurate stereotypes,badlymisconstrues he truth. eve oping countnes iSIn fact, in2003, theUnited Statesgave vastly smaller than$4.7billion to sub-SaharanAfrica in net .bilateralODA. f thatsum,$0.2billionwent Americans thinkto a handful of middle-income countries,especially South Africa. Of the remaining $4.5 billion, $1.5billionwas apportioned foremergency aid and $0.3 billion fornon-emergencyfood aid.Another $1.3 billion was designated for debt forgivenessgrants, and $1.4billion went to technical assistance.This distributionleft only $1i8million forU.S. in-country operations and direct support for programs run byAfrican governments and communitiesjust 18cents for each of the nearly 65omillion people in low-incomesub-Saharan Africa. This figure represents the totalU.S. bilateralsupport, beyond aid in the form of technical cooperation, for investments in health, education, roads, power, water and sanitation,and democratic institutions in the region that year.The next timeU.S. officials visit Africa andwonder aloudwhere the "trillions andtrillions" of dollars went, they should be reminded of how smallthose trillions actually are.Two recentU.S. initiatives will modestly improve the picture, butso far their impact remainsvery limited.Announced in2002, the newMillennium Challenge Account (MCA) s designed to give grants tolow-incomecountries thatdemonstrategood governance.For thecurrent fiscalyear, $1.5billion has been appropriated for theMCA, and in2002 theBush administration promised to request $5billion per yearin2006 andbeyond.The MCA sahighlymeritoriousnew approach.No funds,however,haveyet been disbursed.The President'sEmergency

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JeffreyD. SachsPlan forAIDS Relief (PEPFAR)s also budgeted to give an average of$3 billion per year to certain African and Caribbean countries. In2004, roughly$2.4billionwas disbursed.This important nitiativeshould be increased in scale significantly, with more of the fundingdisbursed ith otherdonors through heGlobal Fund toFightAIDS,Tuberculosis, ndMalaria. Such an approach ould better leverage

U.S. funding and allow recipient countries to pursue amore integratedapproach o fightingAIDS.

FLUNKINGTo EVALUATEND IMPROVEhe currentU.S. foreignaid system,a three-prong test should be used: How much foreign assistance isneeded and can be used effectively o achieve transformationalevelopment?What is theU.S. capacity togive?And-most importantfor theUnited States' international image-how does U.S. aid stackup againstWashington'spromisestopoor countries?

The answer to the firstquestion can be derived from careful studiesconducted to determine the amount of worldwide ODAneeded toachieve the goals of theMillennium Declaration. Most recently, theUNMillennium Projectundertookthemost extensiveanalysis f thisquestioneverperformedand determinedthat thedevelopingworld

will require an additional $70 billion in aid over current levels by2006, rising to $130 billion over current levels by 2015 (in constantU.S. dollars at 2003 prices).With these added funds, total projectedaid in 2006 would represent 0.44 percent of total projected donor GNIthat year, increasing to 0.54 percent in 2015.Assuming that all 22DACdonor countries contribute an equal percentage of their nationalincome and that theU.S. economy grows at an average of three percent ayear, the $i6 billion contributed byWashington in 2003wouldhave to increase to $51billion in 2006 and to $74billion in 2015.Thus,even the full funding currently promised for the MCA and PEPFAR($5 billion and $3 billion per year, respectively) would leave theUnited States far short of doing its part to help poor countries meettheMillenniumDevelopmentGoals.These calculations arebased on a transparentand rigorouseconomicanalysis (albeit one subject touncertainty). The basic idea is straight

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TheDevelopment Challengeforward.To achieve theMillennium Development Goals, eachimpoverished ountrymustmake specific, dentifiable nvestmentsinhealth, education, and basic infrastructure such as roads, electricity,water, and sanitation.Of course, since thesecountries are impoverished,their own financialmeans are limited;most of their current incomemust be used simply to stay alive rather than to invest in the future.

Thus, the poorest nations are caught in a poverty trap.They arepoor because they lack the basic necessities of health, education,and infrastructure, and because they arepoor, they cannot invest inthesebasic necessities on the scalenecessary to achieve theMillennium

DevelopmentGoals.Development assistance can close this financing gap. In the typicalAfrican country, total investment needs areabout $11oper person peryear.Assuming a substantial increase in domestic resourcemobilization, around $10 per person can be financed by local households, andanother $35by governments in the low-income countries.The balanceof $65 per person is the financing gap that should be covered bydonors.Global estimatesof necessaryODA rereached y projectingthis level of aid for all low-income countries in need, with somefurtheradjustments.

Such an approach is built on the principles of private-sectorled,market-basedeconomicgrowth.After all, private-sector-ledgrowth dependson adequate infrastructureroads,power, ports,water, and sanitation) and human capital (a healthy populationwith adequate levels of literacy, education, and job skills). Domestic and foreign investors will shun a developing country withoutthoseprerequisites.The second standard-U.S. capacity toprovide foreign assistanceis far from being fully realized.The small sums thatWashington givesinODA redrivenby political onsiderations,ot by economicneed.Toensure that theMillennium Development Goals aremet, the UNMillennium Project calls for ODAfrom each donor country to rise to atleast o.44 percent of GNI in 2006, and then to continue to increase to0.54percent of GNIby 2015.To meet needs beyond thesegoals-geopolitical ndhumanitarian eeds, forexample-the projectrecommendsthateach donor country actually reach0.7 percentof GNIindevelopmentassistance by zo15.

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JeffieyD. SachsThese sums are small not only relative to GNI, but also relative torecentchanges in theU.S. budget.Since 2001,defensespendinghas

expanded by about 1.7percent of GNI, and tax revenues have declinedby 3.3 percent of GNI, due mainly to tax cuts. In the same period, U.S.official development aid rose by only 0.04 percent of GNI.The UnitedStates has, in short, chosen to spend its money on priorities otherthan development assistance, yet such assistance isjust as fundamentalto national security as themilitary.When ODA iSmeasured as a share

of GNI, each of the other 21donor countriesDevelopment aid isjust

contributes more than the United States,and most by a wide margin. The Unitedas fulndamental as States ranks econdfrom last(slightlyaheadmilitary spending to of Italy)when NGO evelopmentassistanceiSadded to ODA.U.S. national security. isaddtDAU.S. political eaders ouldmoblize publicsupport or increased DA. residentGeorge

W. Bush's emergency AIDSprogram isenormously popular, and he isrightly proud of having launched the effort.Moreover, the public repeatedly supports the purposes of development assistance, especially

when convinced that themoney can be effectively used. Indeed, asmentioned earlier,Americans also believe thatU.S. assistance ismorethan one order of magnitude greater than is really the case.As for the final test of measuring U.S. development assistanceagainstU.S. commitments, the enormous gap between promise andperformance has been weighing heavily onWashington's foreignpolicy formany years.The U.S. political leadership repeatedly emphasizes that it isparty to theMonterrey Consensus, and Bush traveledpersonally toMonterrey tomake that case.Yet the administration hasfailed o followthrough.Inparagraph 42of theMonterrey Consensus, the signatoriescommitthemselves tomaking "concreteefforts towards the targetof 0.7 percentof gross national product" inofficial development aid, a commitmentthat dates back to avote of the UNGeneral Assembly in1970.Althoughsome U.S. government officials have long expressed resistance to thatinternational target, the U.S. government has in fact repeatedlysigned onto it, not only inMonterrey but on other occasions aswell.Meanwhile, fivecountries-Denmark, Luxembourg, theNetherlands,



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Norway, and Sweden- Uncle SamorUncle Scrooge?have already met the goal Net officialdevelopmentassistance odevelop(and in fact did somany ingcountriesromdonor ountries*sayears ago). Sixmore coun- percentagefgross ational ncomen2003tries have recently set atimetableo reachtbefore Denrark 1.82015:Belgium, Finland, luxembourg .8iFrance, Ireland,Spain, and Netherlands .8othe United Kingdom. Sweden .79This year, other countries Belgium .X..J. 6oare ikely ojointhepledge Ireland39with specific schedules Switzerland .1139oftheir own. The gap be- Finland E35tweenWashingtonandthe UnitedKingdom 34otherdonorsisgrowing. GermanyWashington'spalpable Australia 2 ;Canada 4shortfall has become a Spain .23 ipervasivesourceof fric- Newealand .23tion in U.S. relations Portugal22 4with low-income coun- Greece - 2 Ltries. ~~~~~~Japan j.20tries. The United States aua .20regularlyasks thesena- Italy .17 (tions for help in thewar Unitedtates 15_on terrorism, only to Total AC ..25plead its own "poverty The22 ountriesfthe evelopmentAssistance Committee (DAC) of thewhen asked for more OrganizationorEconomic ooperationndDevelopment.development aid-even SO0U CE: OECD-DAC. "FinalODA Data for 2003,"December 8-9, 2004.for areas such as health,education, and agriculture,which are focal points ofWashington's national security doctrine. In one striking example, the United States contributed ameager $4million toEthiopia in 2002 to raise its agricultural output-and then gave $soo million in emergency food aid whenfamine predictably hit the country ayear later.Low-income nationsare painfully aware of the truth: theUnited States can be countedon to respond to emergencies, but not to help them break freeof poverty.

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JejfreyD. SachsMAKE OR BREAK

THE MILLENNIUM DEVELOPMENT GOALS were announced in2000. Five years later,and with just a decade until the target date of2015,dozens of theworld's poorest andmost desperate countries remaintragically ff course-often well governedbut too impoverished omake the investments n infrastructurend human capitalnecessarytomeet the goals. And despite repeated commitments to help suchnations free themselves from this poverty trap, the amounts of U.S.aid contributed continue to fallwoefully short of what is needed. Privately,many U.S. officials around theworld arewringing their hands.Most of theworld has recognized that 2005 is a make-or-breakyear.The United Kingdom has alreadycharted apath to success, albeitone that theUnited States has stillnot embraced.The United Kingdomwill chair oth theEU nd theG-8groupofhighlyindustrializedationsplusRussia thisyear,and in itscapacity ashost of the G-8'sJuly summithas promised to put development assistance at the center of theagenda.U.K. Chancellor of theExchequer Gordon Brown has put onthe table an important proposal for an International Finance Facility(IFF),backed by donor countries, todouble development aidduring thenext decade. There iswidespread European and developing-countrysupport for the IFF.Yet, unwisely, theUnited States has not only giventhe proposal a cold shoulder but also failed to explain how the donornations should otherwise meet the needs of the poorest countries.In September, international leaderswill convene on themillenniumsummit's fifth anniversary to take stock of theworld's progressor lack thereof-in meeting theMillennium Development Goals.Theywill also considerreforming heUN to supportgreaterglobalsecurity.The summit's participants must realize that the two agendas-development assistance and global security-are inexorablylinked, not only in substance but in process. Countries such as

Germany and Japan that aspire to permanent seats on an expandedSecurity Council will find that low-income states have aspirationsof their own. The poorest nations will hold theirwealthy counterparts accountable forwhat they have and have not done to enablethe indigent to overcome early death, mass hunger, disease, andextremepoverty.



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TheDevelopment ChallengeThe United States itself faces awidely unappreciated risk: the riskof business as usual,with theworld wanting to discuss development

while Washington focuses on thewar on terrorism.The emotional,geopolitical, and operational divide between theUnited States and therestof the international community could verywell widen markedly,anddangerously.If their life-and-death needs arenotmet, impoverishedcountries may be much more reluctant to supportWashington anditsmany security concerns. The United States should not be complacent about the growing perception of this country as one that caressolely about itself, even to the neglect of itsown pronouncements.It is not too late to rectify this situation, but it is growing morecritical by the day. By taking four fundamental steps,Washingtoncan turn this crisis in international development into an opportunityfor theUnited States to reassert itsmoral and political authority asaworld leader.

First, President Bush and congressional leaders should explain totheAmerican people thatU.S. development assistance is far less thanwhat theybelieve it tobe-and far less thanwhat isneeded, affordable,and already promised byWashington. Thegovernmentmust explain hataiddelivered The giant gap betweentowell-governedcountriesorwell-targeted tpurposes-healthcare, chools, oads, ower, the United States andsanitation-wouldnotonly savemillionsof other donors threatenslives each year but also help countries break .freeof thepoverty trapthatbinds them. to keep growing.And Washington must explain thatexpandedaid is a bipartisan, indeed nonpartisan, cause that is crucial toU.S.nationalsecuritybecause impoverishedountriesarevulnerable obecoming failed states and even havens for terrorists.Next, thepresidentandCongressshouldcommit to frilfillinghefinancing needs that have been identified and internationally agreedon: U.S. development assistance should be increased to an averageof 0.5 percent of the nation's GNIduring the coming decade, reaching0.7percentof GNI y 2015. y 2006,U.S. support or theMillenniumDevelopment Goals should riseby another $40 billion per year abovethe current $16 billion already designated for development aid. Anincrease on this scale isaffordable; in fact, it equals approximately half

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JeffreyD. SachsofWashington's annual spendingon Iraq andAfghanistan, yet itwould helpmore thanabillionpeople in low-incomecountries, inaddition to savingmillions of liveseachyear.Third,Washington shouldspendthenew totalof $56billion in aidthrough number f reliablehannels. lausibly,hegovernment oulddistribute$3billion to theGlobal Fund toFightAIDS,Tuberculosis,andMalaria (partlyforAIDS ncountriesnot coveredby PEPFAR);$5billionto PEPFARrograms; 10billion totheMillenniumChallengeAccount; $8billion to the International evelopmentAgency of the

World Bank, aswell as to regional development banks; $20 billion toUSAIDn non-MCA ountries or transformationalevelopment; nd$lo billion to strategic tates(upfromthe current$5billion).Washington's genciesandprograms houldcontinue to engagewith andsupport thework of U.S. NGOS,while also funneling a large part oftheirnew fundingdirectlyto thebudgetsof therecipient ountries.Finally, thepresidentandCongress shouldoverhaul he structureof U.S. developmentassistanceprograms o enabledevelopmenttoplay thestrategic olerequiredornationalsecurity. SAID houldberaised to the rankof a cabinet department, with MCA and other agencies housed under the same roof, similar to the United Kingdom'sDepartment for International evelopment.The new departmentmust be investedwith the analytical capacity and political clout toensure that the United States becomes a true leader of the globaleffort to fightpovertyandachievetransformationalevelopment.By reassessing tsprioritiesand implementingthese sweepingreforms, theUnited States can seize the initiative in internationaldevelopment. Last year at the UN, President Bush declared, "Ourwider goal is topromote hope and progress as the alternatives tohatredand violence. Our great purpose is tobuild abetterworld beyond the

war on terror."The safety of the nation requires nothing less.0

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