April 23, 2006
JS-4202

U. S. Treasury Secretary John W. Snow
Development Committee Statement

We meet at a time of unprecedented economic prosperity. The IMF's World Economic Outlook (WEO) states that despite higher oil prices and natural disasters, global economic growth in the second half of 2005 was more robust than anticipated. Similarly, the forecast for global growth for 2006 is 4.8 percent overall, and 6.9 percent for emerging markets and developing countries. In sub-Saharan Africa, the poorest region in the world, the WEO projects GDP growth in 2006 to be 5.8 percent, the highest level in over three decades.

These economic results, along with our concerted efforts to reduce poverty, can only add to the positive outcomes we are witnessing in terms of increased living standards. According to this year's Global Monitoring Report, between 2000 and 2005 over 100 million people are estimated to have moved above the $1 a day poverty line. Not only has the number of countries that have achieved or are on track to achieve universal primary school completion increased significantly since 2000 but more importantly the pace of progress has increased. Likewise, the rate of progress in reducing child mortality is accelerating, particularly as childhood immunization programs are scaled up. And, the first signs of decline in HIV/AIDS infection rates are emerging in several high-prevalence countries.

Despite these positive results, we know we still have challenges in establishing a firm foundation for long-run sustainable growth.

These challenges begin with achieving good governance and ending corruption. The new President of the World Bank has set out his vision and we are encouraged by his leadership. First, good governance and fighting corruption - including sound public financial management and the rule of law - are fundamental to the process of achieving sustained economic growth. Our own strong belief in this principle is reflected in "ruling justly" being one of the three categories of criteria we established for countries' eligibility to access Millennium Challenge Account funds. Second, the focus on governance highlights the need to give greater attention to the quality and effectiveness of aid. And third, as the Global Monitoring Report points out, good governance also plays a significant role in accelerating efforts within countries to help us reach the global Millennium Development Goals.

We recognize that governance can be a complicated issue and that we have more to learn about how different facets of governance interact and their precise impact on development effectiveness. But this should not stand in the way of the Bank's efforts to support countries' plans to improve their own management systems. This effort should include the development of disaggregated, actionable indicators of performance in governance. In particular, we urge the World Bank to commit to a time-bound plan of systematizing and universalizing the coverage of its Public Expenditure and Financial Accountability (PEFA) indicators so that they may become as broadly useful as the Doing Business indicators have proven to be for improving countries' investment climates.

Corruption is a critical issue for donors, but more importantly, it is vital to the citizens of recipient countries. Fighting corruption begins with the multilateral development institutions ensuring that their own in-house operations meet high integrity standards and that their interventions in member countries promote good governance. We want to applaud the recent commitment of the Heads of the International Financial Institutions and the European Investment Bank to establish a task force to address both internal and external problems of corruption. We look forward to an agreement on a uniform Framework for Preventing and Combating Fraud and Corruption by the September annual meetings of the World Bank and IMF.

Second, we believe strong fiduciary integrity and sound public financial management systems are key to stemming corruption. This is why we look with concern at efforts to rush to use country systems that do not meet the highest international standards and to provide increasing amounts of budget support in countries with weak systems. This is particularly troublesome with respect to government procurement. We believe countries which receive assistance from the multilateral development institutions should use the World Bank's procurement standards - not only because they are the best in the business - but also because it promotes fair and efficient competition, which saves these governments money.

Third, we need to build on measures to increase transparency and accountability. In particular, we should pay greater attention to those countries that are heavily dependent on natural resources.

Efficiency in government expenditure is at the heart of the fiscal space discussion. The Bank's report emphasizes that it is the quality rather than the quantity of public spending that determines its ultimate impact on growth. We could not agree more. It is not only obvious as a matter of common sense, but well-documented by the enormously uneven cross-country evidence on the relationship between levels of public spending and growth.

More broadly, we feel that access to improved information about the composition of public spending in many developing countries is critical for supporting donor and developing country efforts to promote growth through mutual accountability. From the Bank's perspective, this information should also help to improve the criteria used to select among alternative aid modalities, including the choice to engage in Development Policy Lending.

Our agreement on debt relief is historic. With the crushing debt burden lifted, countries can focus their efforts on generating economic growth by investing in infrastructure to help move goods from producers to purchasers, and by investing in their people.

We must remember, however, that one of the core objectives has been to foster long-term debt sustainability by conclusively ending the destabilizing lend-and-forgive approach to engaging poor countries. The clearance of unsustainable debt is a critical component of the broader solution. However, it also means we must take care that we don't add to these burdens in the near term. The World Bank/IMF debt sustainability framework needs to contain new mechanisms to constrain the accumulation of concessional debt - including, and this is critical, the rate at which it occurs. Clear country experience has proved that the rapid accumulation of concessional debt quickly can lead to incidents of debt distress. In addition, donors need to address the issue of "free-riders", i.e. creditors providing non-concessional financing immediately following debt relief or in the context of MDB grants. We look forward to advancing these important issues later this year.

In promoting clean energy, we believe it is important for the multilateral development banks to maintain a development perspective and take action within the context of their current mandates and comparative advantages. Energy is a means to development, not an end in itself. Lack of access to affordable and reliable energy services impedes economic growth and investments that improve standards of living, and thus perpetuates poverty. Moreover, many people have no option but to use traditional fuels, which contributes to local environmental degradation and sickness. Our ultimate challenge is to end energy poverty by stimulating access to secure, affordable, and increasingly clean energy services that are needed for development.

With respect to investment in energy infrastructure, international concessional finance is likely to be needed both to help meet developing country needs and to shift such investment toward cleaner, more efficient technologies. The question is how the multilateral development institutions can help achieve that goal through more effective application of their existing instruments in the context of all the other sources of financing, including the private sector, export credit agencies and domestic finance. Going forward, any discussion by the multilateral institutions of new instruments should evaluate their potential to: (1) shift overall investment toward lower pollution and lower greenhouse gas-intensity in key countries; (2) provide for both efficiency and additionality; and (3) leverage international and domestic private financing, all in a manner that is consistent with the development and poverty reduction mandates of these institutions. The analysis of financing requirements should also consider the extent to which the need for external financing could be reduced by strengthening governance in energy and banking sector reforms, environmental regulation, contract enforcement, and intellectual property rights protection.

We share the sense of urgency about the need for developed and developing countries alike to offer significant, broad trade liberalization if the growth and development potential of the Doha Development Agenda is to be realized. We also fully support the Aid for Trade agenda launched at the Hong Kong Ministerial.

Aid for trade will be an important complement to a successful Doha round, even though it is no substitute for completing the Round in a timely and ambitious fashion, and it should not itself become part of the negotiations. Like so many other aspects of the development agenda, developing countries, developed countries and IFIs all have important responsibilities with respect to effective aid for trade. It is essential that developing countries prioritize trade in Poverty Reduction Strategy Papers (PRSPs) in keeping with the principle of country ownership as the key element to successful trade capacity building; it should also be given priority in Country Assistance Strategies (CASs) and other donor support programs.

The U.S. commitment to successful aid for trade is reflected in the announcement at Hong Kong that the U.S. will more than double its grant contributions to Aid for Trade from $1.3 billion in 2005 to $2.7 billion annually by 2010. These will be carried out through bilateral programs administered by U.S. agencies.

The World Bank is making some strides to operationalize trade into its country programs, in keeping with country demand, but we would like to see the whole Bank focus much more energy on trade capacity building and easing supply-side constraints so that developing countries will be better equipped to engage with the global trading community and take advantage of new trading opportunities. It is important to avoid the establishment of new funds or institutions.

The past few years have seen a new era of global economic growth and poverty reduction based on free markets, expanded trade, financial stability, and the integration of the global economy. We have promoted debt sustainability and are hopefully turning the tide against AIDS and other infectious diseases. We are providing more assistance on more appropriate financial terms to help the world's poor, and we're starting to provide it more effectively. We are pushing for better ways to unleash the power of the private sector, to broaden and deepen access to financial services, to fight corruption and to promote greater transparency. With billions of people still living in destitute conditions, however, we cannot rest - we must do more to make these ideas and programs even more productive, beneficial, and effective.