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Remarks by Andrew S. Natsios, Administrator
U.S. Agency for International Development

USAID: The Next Four Years

Council on Foreign Relations
Washington, DC
April 19, 2005

MR. REESE: Good afternoon. Hope you had a good lunch.

My name is Bill Reese. I'm the president of the International Youth Foundation. And it's a real honor to be here with the AID administrator and give him the floor for some important discussions.

Just a reminder about house rules. Would you turn off your cell phones. We're going to have a little bit of a variation on the non- attribution rules. The first part of this session, where Andrew Natsios will be making a short presentation and I will ask him a couple of questions, that will be on the record. And then the second half of the conversation, where you get your crack at him, that will be off the record and back to our normal rules.

And we'd like then for people to just raise your hand; we'll get a microphone to you. State your name and affiliation. And remember, you're asking the questions and he's giving the speeches. So. (Laughter.)

MR. : I've never seen an implementation of that rule that you just said at a Council on Foreign Relations meeting, but anyway.

MR. REESE: Well, we'll see.

Andrew Natsios. You've got his bio. I'd like to describe him in a little bit different way than you have officially. And that is that rarely does a person get the U.S. government job that he really wants and is so supremely prepared for as Andrew is, and then he gets to keep it in a second term.

I'd call him a man for all sectors, really. He was an elected public official, being a state legislator, where he rebuilt his party and brought it back from tougher times. He knows all about grass- roots politics. He's been in public administration at the local and state level, running the Massachusetts Turnpike Authority in the "Big Dig" that anyone who's been to Boston in the last 15 years knows what we're talking about.

And these things are important because he's going to lead off talking about good governance and nation building and what it takes to get development going and being sustainable. And that's all about -- much of it is about good governance.

He's worked in the private sector. He's worked here in Washington as director of the Office of Foreign Disaster Assistance in Bush I, and served -- then took time off during that period to go to the Gulf War as a lieutenant colonel in the Reserves.

He liked Washington and development issues so much that he stayed in Washington and worked for the largest U.S. NGO, World Vision, worked at the Institute for Peace and served on the InterAction Board, which really showed his -- all that together -- his commitment and understanding and involvement in international development issues as he was waiting for a chance to come back and be promoted.

He's written about famine and disasters in foreign policy, and it's no surprise, being that type of idea man, that when he took over AID in early 2001, he commissioned the Foreign Aid in the National Interest report, which he presented here at the council about three years ago, a phenomenal document really, rich in thinking, and he's used that and other ideas you're going to hear about now to reenergize and refocus AID.

And now he's going to tell us what that means for the next four years. So Andrew will start with a few comments, and then we'll go to questions and answers.

MR. NATSIOS: I wrote a few comments out in the last hour, as a matter of fact. And I'll do this and then we'll talk about -- have questions.

There is certainly a renewed interest in foreign assistance. I would say this is a seminal time for development assistance generally in the West, but certainly in the United States. ODA levels have been rising, particularly in the aftermath of 9/11. There are now 19 presidential foreign assistance initiatives.

I would argue the president's second inaugural is the 20th foreign assistance initiative, although he specifically didn't use the word "foreign assistance." It is a call for a focus on democracy, freedom, good governance and on human rights -- which are close to my heart personally.

ODA levels were $10 billion. You all know ODA is Official Development Assistance, which is a carefully defined term by the OECD so we talk about apples-to-apples comparisons between governments. It was $10 billion in calendar 2000. Last calendar year it was $19 billion. So it's increased 90 percent in four years.

It will be, we expect, well above this level. OMB has cautioned me about mentioning it until we've actually spent the money. This, by the way, is not appropriations or not budgeted levels; this is actual disbursements. ODA is only based on disbursements, and it's done by calendar year.

What is interesting is the ODA levels just came out for the Western democracies last week. I was in Oslo when it happened. It's quite intriguing, because the ODA level in Europe increased, aggregated from all countries in Europe, by 2.4 percent. It increased in the United States by 14 percent. So we were five times higher than the Europeans in terms of our ODA levels, actually more than that, in the last calendar year.

Now it's interesting, this does not include any money from the MCC and very little money from the president's HIV/AIDS initiative because while the contracts are in the place for HIV/AIDS, the actual spending increase would be reflected in this fiscal year, which is why the ODA levels will increase so substantially by the end of this year. And then we expect them to increase even more next year because of the spending in the MCC. And our budget in AID has increased from just over $7 billion in fiscal year 2000, I think it was, to under $14 billion. It's almost doubled in four years, five years.

And so money does count. It's nice to have a lot of initiatives, but if there's no money behind them then you're shifting the deck chairs on the Titanic. And this is not the Titanic, it's the Queen Elizabeth III, if I could use a term, a mixed metaphor here.

Now, what are the trends? Because the title of this talk is, What Are the Trends in Foreign Assistance? The first trend is that there will be a greater focus the next four years, not just in the United States but by all donors in democracy and governance programming and spending.

The general consensus at Monterrey and since has been the principal problem we're facing in the poorest countries of the world -- the 50 least developed countries in particular, but even the middle-income countries -- are governance issues; there's the matter of weak and fragile or nonexistent public institutions, it is the absence of ministries that can carry out public functions and provide public services, it is the absence of the rule of law; more than any other part of the development paradigm.

I expect that to be reflected in the United States, as well. And I would expect us, as we talk in AID about how to implement the president's second inaugural, to not just focus on D&G funding, democracy and governance funding, but to focus all of our sectors on governance issues. For example, if we have an environment earmark, which we do of some size, I expect more of that money may be spent in strengthening the ministries that deal with the environment in developing countries.

We have a civil society model for implementing our programs, which we will continue. That is not going to change. But we need new tools in the toolbox that are more focused on governance, because -- and that's the second trend that I want to talk about -- and that is there will be a greater focus on fragile states.

Fragile states are failing states, failed states that have collapsed -- Somalia, for example, hasn't had a national government, really national government, in 15 years now; I would argue that Afghanistan was a failed state before 9/11, was nonexistent as a functioning national state -- and recovering states, states like Afghanistan that have now bottomed out and are on the upswing. We just issued a new strategy paper on fragile states, which is on our website. I recommend that to you.

There is a democracy initiative -- I'm sorry, democracy strategy for AID that has been completed in its first draft. It's not available yet for anyone to look at. It's got to go through the interagency process. I've got to read it, too. And before it does that, Jerry, please do not circulate it until I -- I'm just joking. I know you won't circulate it till I've read it. (Laughter.)

MR. : The New York Times already has a copy. (Laughter.)

MR. NATSIOS: Okay. We're in big trouble if that's the case.

Dr. Rice has made very clear in her speeches and her private remarks that the democracy and governance set of issues will be central to the second term for President Bush. Anybody reading -- I re-read the second inaugural just to make sure I wasn't sort of inventing things in my own mind over the last four months, and it's pretty clear what that document is suggesting.

Now what does democracy programming means? Some people think it means elections, and it does. We used to sort of denigrate elections as sort of irrelevant or peripheral. Well, they're not irrelevant or peripheral. They're critical.

But they're not enough. And so a lot of what we do is to do those things that lead up to elections and then require -- or build the institutions that will have other elections take place. Because if you have one election and that's it, it's not democracy. You have to have successive elections on a regularized basis.

We tried during the Iraq War to operationalize human rights on the ground with staff. Not in terms of the issuing of papers, but actually taking actions on the ground that would lead to protection of human rights during unstable times in a country's history.

And we learned a lot of lessons, that is, how in the OTI, of Office of Transition Initiatives, in the DCHA bureau, democracy conflicts and humanitarian assistance bureau of AID which we reorganized four years ago.

But the point here is, human rights as a few years ago became an operational issue for AID to deal with. We now made a change in the statute that now allows AID to do criminal justice work in the policing area, in community policing. We're not arming cops, we're not training them how to use weapons, but we are working on the governance model for how police departments are run.

We've had actually some remarkable successes, particularly in El Salvador which was kind of the model. An 8 percent support level among the El Salvador population when we started the program. It took about eight or ten years, and by the end, the approval rating for the police was 92 percent.

That success was not an accident. It was through a deliberative attempt to take the model policing used in the United States and transfer that to a Central American country that was a willing recipient, that asked us to do this.

In fact we have more requests to do the community policing model than in almost any other area of the democracy and governance question or sector.

So we now statutorily have the authority -- we had to get exceptions before to do it -- but the statute was changed last year to allow us to do that.

Having a functional private news media can have more profound effect on democratization of a country than anything else you can do. And we're witnessing that in Afghanistan right now. We've invested a lot of money both in radio and television, and I think it's had an amazing effect.

And finally I believe, and this is from my experience in local government in New England, that the best schoolhouse for democracy, especially a newly functioning democracy, is local government. According to de Tocqueville in "Democracy in America", local government, particularly in New England, was the schoolhouse of democracy.

I would argue that it is the schoolhouse of democracy in developing countries. And that's why we invested so much money in Iraq in developing local government in that country very early after the military intervention. There were 13,000 elected local officials at the end of last year.

I've asked for the study. We haven't finished it yet, to see how many members of the new congress or parliament are former local government officials. I would project more than a majority are, even more than that. We're trying to check that now. It's a little difficult to interview each one of them.

But in December I was in a city near Kirkuk where we're building a gas-powered electrical plant from scratch. And I met the mayor of the city, 20,000 people, he was a Turkman. And I said, but what are you going to do now that you -- he was in the town council, and he was elected mayor. And I said, what's next for you? And he said, oh my name is in, I'm running for parliament.

I said, really? So the schoolhouse of democracy was functioning in Iraq in a profound way. In the transition government, a large number of the cabinet ministers and deputy ministers were former town councilors and city councilors in Iraq.

So the model does work. Robert Dahl wrote a very important book in the late -- early '70s, I think it was, called "Polyarchy", in which he argues that in a country with no democratic traditions the best way to build an understanding of democracy is to do it first at the local level.

Now that's not always what you have to do, but it's a way that works.

And of course an independent judiciary is critically important.

And finally the rule of law.

There's a third trend, and that third trend is in the internal mechanics which some of you would particularly be interested in since some of you maintain relationships with AID as partner organization.

One is the reform of our budgeting system. We have a new account -- it's not a new account, it's an old account we're using for new purposes. It's a TIA account, a Transition Initiative Account. It's the account that's funded OTI the last 10 years.

We are now using it to fund whole development programs in three regions of the world in the '06 budget. We've taken money out of the DA (ph) account and put it into that account.

Why have we done that?

Because that account is not subject to earmarking so far. It does not have to go through the same correctional notification processes to do things. And it has notwithstanding authorities attached to it, so we can do things much more rapidly and more flexibly.

And the reason for that is, countries that are fragile do not have six months to a year to wait to go through a long contracting process and Congressional notifications and all the earmarkings that limit what we can do or not do.

You're dealing with a fragile state. You need to be able to move very rapidly. And I'm going to attempt to convince Congress tomorrow, in my congressional hearing before the foreign ops committee in the House, that we need to change the paradigm for how AID does its budgeting.

Secondly, in terms of our internal mechanism, we put a -- one of the biggest changes we've had in the PL-480 account, the food aid account, the president has proposed moving at our recommendation 25 percent of the AID funding, the funding entitled to PL-480, our food aid program, into a local purchase account that will allow us, our NGO partners in the world food program to purchase food locally in the countries where we're working instead of shipping it from the United States.

Why is that? One, it takes 3-4 months to ship food, and people die in the interim. And when people are under severe nutritional stress there are sometimes political consequences to it.

One thing you need to do sometimes when you're trying to stop a country from sliding into chaos is to inject money in the local economy. What I'd have to do is to be able to go into rural areas with funding from P.L. 480 for food aid programs we would have run in that country anyway and purchased the food locally.

We can purchase more food locally than we can just from the United States, because we don't have the transportation costs which are 30-40 percent of the costs of P.L. 480.

We can buy more food, support local markets, and do it more rapidly, particularly focused on fragile failed and recovering states, but other states we may do that as well in .

So that is a very important reform that will make $300 million available to us to do this in developing countries.

The third is, we need to rebuild the technical expertise of the career staff in AID. The career service in AID lost a third of its staff in the 1990s -- net. Net. We have 3,000 civil servants and career foreign service offices in 1990, and we have about 2,000 now, 2,100. Our budget has doubled during the same time, just the last four years.

We are hiring too many contractors, PSBs, RASAs (ph), PASAs (ph), tax, you cannot imagine -- we have 13 personnel systems in AID to get around the limitations on the OE account, the operating expense account, has put on our budget.

It's not very popular, but I can tell you, the most important thing we have is not our programs in the field. It's the AID mission staff. It used to be that we would put career foreign service officers in the ministries. Their offices were not at the AID mission. They were in the ministries of the governments we were working in to build capacity and to help with reform.

We're not doing that now. Why? Because we laid off a third of our staff. And the technical expertise went with them. This was a very painful period in the 1990s to have that happen. We're rebuilding that technical staff. Many of the contract staff are very capable, but I do not want contract staff designing programs and running country strategies and being in ministries, I want foreign service officers doing that.

That may seem a small thing to you, it's not a small thing in the developing world.

So rebuilding our operational capacity. We already have a new authority we asked Congress to give us to allow for five-year limited career appointments to the Foreign Service. We now have 150 people moving from these contractual 13 personnel systems through the system to become foreign service officers in these limited career appointments.

We are going to spend more money on indigenous organizations, more spending on capacity building and government ministries and institutions, and more spending, I hope if I can get the money, on college and university scholarships which if you took a secret poll of the career officers of AID, civil service and foreign service, there would be overwhelming opinion that this has been the most successful of all of our interventions in the last four years.

And yet we stopped doing it. We had 20,000 scholarships in AID that we have out in 1990. We give out 900 now. Tuition has gone up a little bit in 25 years. We have may have to shift which universities we do. We have to have partnerships to do it.

But bringing people here for a year or two has a profound effect on their worldview and what they bring back with them. And if you go to the developing world, almost every country I go to, I ask, how many people in the cabinet have degrees from American universities with scholarships from AID or from the State Department? And the regular percentage is 30-40 percent, 30-40 percent. That's a profound statement.

If you look at who is the head of NGOs, developing country NGOs, or business -- the business community, you will see a huge percentage of them in developing countries across the south got degrees from American universities.

When I was in the Gulf War, the first Gulf War, my job as civilian affairs officer was to try to rebuild the country, working with the Kuwaiti government. But we also did something else, we tried to protect the Palestinians, because there were problems between the Kuwaitis and the Palestinians. There were half a million Palestinians in the country.

And when I went through the Palestinian neighborhoods with my reserve unit to try to calm everyone down and stop any potential trouble, I would ask Palestinians, I would get surrounded by 300-400 Palestinian Kuwaitis who live in the country, and I'd say, who do you want in your neighborhood patrolling to keep the peace? And they'd say, Americans.

And I'd say, well, we're not going to send American troops. You don't want us here. He said, absolutely. We want only Americans. We don't want anybody from any other country in our communities.

And I said, well, why is that? I said, you don't agree with us on a number of foreign policy issues. And they'd all laugh, and they'd say, all of our families have at least one person who went to an American university or school. They all came back and said, even though we don't agree with the United States on foreign policy issues, we love America because we were welcomed in your university community. We love the values of America, and we've brought them with us back to our families.

That's what America is about on those university campuses. Then we want you in our neighborhood. I had two dozen Palestinians say that to me in neighborhoods all over Kuwait. And I've been asking that question around the world, and the same answer is said over and over again. And yet we've reduced those scholarships in my view to a disastrous degree.

The final change in my view is extending the global development alliance, which is one of our great new initiatives. We started four years ago. We've now invested $1 billion in AID funding in 300 of these alliances, and we've leveraged $3 billion in private money.

This is no longer a small experiment. There are 2,000 applicants each year for innovation awards from the Kennedy School of Government and the Ford Foundation. There are now 18 finalists of the 2,000, and we are one of the 18 finalists to get an innovations award from the Kennedy School, which is a very coveted award.

A book is written of case studies based on the 10 cases that get the award. And I'm very proud of that, even if we don't make it to the final. I hope we do, but even if we don't. Eighteen means people recognizing there's something unusual going on here.

These alliances are with nontraditional donors.

They're with -- many of them have NGOs in them, but they have a lot of American corporations in them, and foundations, and universities, and groups that don't typically work with us.

And that is having an effect on the private sector, on private foreign aid in the United States, which is where the bulk of our money goes to the developing world. It's not through ODA any more. It used to be that 80 percent of all money -- or 70 percent of all money that went to the United States itself went to ODA. That was in 1970.

Last year it was 85 percent was private foreign aid, and only 15 percent was ODA. And (that's/not ?) because ODA went down, but because there's been a massive shift towards private foreign aid, and we have not captured that in our programming until we developed this global development alliance.

And we created a new procurement mechanism to make it easier for missions and for offices in Washington to do these global development alliances, so that it takes less time and less transaction costs.

And so we intend to expend that to a much greater degree in our programming in the future, because it ties our social order with the social orders of the south in I think some very interesting, innovative, and creative ways.

And finally there will a great focus on public diplomacy in the second term by AID. We now have officers being trained in all of the 80 AID missions. By the way we ha to close no missions in the last four years. Every time I try to close a mission there is screaming, so I said fine, I'm not going to close any missions.

And we've opened ten new missions. And most of them were done by orders from the White House. Yemen, Djibouti, Iraq, Afghanistan, Pakistan, Southeast Asia, East Timor, now one in Cypress. I'm forgetting the rest of them. But we're opening them, not closing them. That's a profound shift from the 1990s, where we simply closed a lot of missions which I thought was unfortunate.

But all of the AID missions will now have strategies for communicating what we do for the people in the countries we work in. Because most of what we do is not well known, and as a result of that, our good work is quiet and below the screen. And I think we need to raise that visibility.

Anyway, that's probably more than ten minutes. If anybody has any questions I'd be glad to answer them. (Applause.)

MR. REESE: You can tell by the detail and the metrics that he gets into that he knows what's going on in his agency,and has his hands on the levers of making personnel and budget and procurement things work as well as the big political issues.

I want to take you before we go to the audience, Andrew, to your so-called white paper. And it's a white paper that has been shared outside the agency, and around town.

And what it seems to talk about is that not all countries or problems or development strategies are alike. And there is a need to differentiate types of countries so that you can differentiate and delineate types of strategies, sets the clear goals, aid effectiveness in general, and in particular USAID effectiveness where you could link the needs of a set of countries with real goals that you would be measured on and then tie your resources to them.

And in doing so you and your staff created five sort of categories of countries. Would you reveal with the group what those are? You mentioned one of the categories of course was your fragile states.

MR. NATSIOS: The second one is humanitarian assistance, which is well known, and we have a well developed mechanisms for doing that, and we've been I think very very successful at it. Forty to 50 percent of all humanitarian assistance given in any years in the world by all donor governments was given by the U.S. government. So we are leaders in this area.

We're not so much in the development area, but in this area we are. What we need to maintain that edge and link that more into our development programs on the longer term.

The second is in what we call transformational development. Something that used to be called sustainable development, a term I don't like. I think transformational is more appropriate. That is our DA account, our development assistance account, the MCC account, are for countries that are transforming themselves and want our help to do that. It's based more on performance, and it's attached to reform efforts.

The third is geostrategically important countries. That is the ESF account which is well developed. The problem is now, ESF is being used for lots of things that have nothing to do with our direct strategic interest. I mean in fact, in the 1990s that tended, any distinction between DA and ESF seemed to have been eliminated. And that's not -- well, why have a separate account, even though it may be in the State Department, and they may have us manage most of the money, the fact of the matter is that we need to make a set of strategic decisions about how we allocate the money. And why is that? Our DA and transformational account is designed for longer term development assistance based on performance, not primarily on foreign policy issues or foreign policy criteria.

The ESF account will, when the State Department wants to support an ally in the war against terror, we will use development principles to the extent that we can, but we should not be held accountable for the fact that the ESF money is not spent using the same criteria and the same results as the transformational development, the MCC account, or the DA account.

I think it's unfair for us to be judged in the development program in Egypt, which is a foreign policy program even though it has many good foreign policy aspects to it, is a foreign policy account. It's different than the DA account that we've spent almost all of our money in in Mali, let's say, or in Ghana, or in El Salvador.

The fourth is what we would call transnational issues, human trafficking, counter-narcotics, our environment program, the (carpe ?) program in Central Africa that covers seven countries to preserve the rainforest. Or the HIV-AIDS pandemic.

Issues which cut across national boundaries, they need to be regional in nature, and which are worldwide problems that are the darker side of globalization.

We need a special set of authorities to do that. We have accounts to deal with it now, but I'm not satisfied that we've structured those accounts in the right way. So you humanitarian assistance, fragile states, strategic partnerships with geostrategically important countries, we have humanitarian assistance, and we have transnational threats.

And we believe that the accounting system, the budgeting system for AID should be more reflective of this than sectors, or earmarks or directives, which is a noose around the neck of AID right now. There are too many earmarks and directives that allow us almost no discretionary money in a way that I think is really doing a lot of damage to our programs in the field.

MR. REESE: Good. Let me ask one more question, and that's the coherence and coordination question. President Bush has almost doubled foreign aid, the first big increase since President Kennedy's Alliance for Progress, and that was the first big one since the Marshall Plan. And you've talked about that as being the third time in which executive leadership has come in to really change foreign aid programs. And a lot of new resources have come into AID, and the MCC has been created, and an HIV-AIDS coordinator in the State Department and a fragile states group led by Ambassador Pasquale who spoke to the Council here a few weeks ago.

Talk with us about how that can be coordinated. The world looks at America as always being efficient in getting things done in a very planned way. And is there a framework that can pull this together and make these different nodes and centers of leadership and funding more effective?

MR. NATSIOS: If the world only knew the reality.

We are now drafting a national development strategy within AID that will be circulated through the inter-agency process, and I'm sure there will be additions made by other departments, not just the State Department, but the U.S. Trade Representative, the Treasury Department. Many many domestic agencies now have foreign aid programs.

We do not have a national strategy for development -- international development -- that links all our individual strategies. We have a theory that if you just put out a new educational strategy, and we've put out fragile states. We're about to do a new democracy strategy that Sherry has developed.

And we have a dozen of these strategies, but nothing ties them altogether in the sense of a clear inter-agency document that when you go to an international conference and say, this is how we order our programming, these are the strategies, and everybody needs to conform to this.

So we're in the process of doing that now. I have explained this to the White House, this idea, and they actually were thinking in the same terms. Dr. Rice likes the idea, and her staff. I don 't know if it's all going to be approved, but we're working on it right now.

MR. REESE: Perfect. All right, to the audience. Would you state your name, your affiliation, and then make your question.

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