June 28, 2005
js-2611

The Honorable John W. Snow
Prepared Remarks to
The Council on Foreign Relations
New York, NY

Good evening, and thank you so much for having me here tonight. It is an honor and a pleasure to speak to this group; I look forward to our discussion.

The timing for this visit couldn't be better. I recently returned from the G8 Finance Ministers meeting in London where we discussed some of the leading economic challenges facing the global economy, including the challenges facing the developing world – especially those in Africa.              

The most notable achievement of our meetings was for the G8 nations to agree to support President Bush's proposal for 100% debt stock cancellation. It was about a year ago that we put this idea on the table, and there were many people along the way who were skeptical of our motives, or not convinced that it could be achieved – but, clearly, a year of hard work on this has paid off. When Prime Minister Blair met with President Bush, the UK agreed to support the US principle of 100% debt stock cancellation, and the US affirmed its commitment to preserve the financial integrity of the development institutions. This important agreement between President Bush and Prime Minister Blair paved the way for the historic achievement among the entire G8 in London a week later. The G8 Leaders will build on this achievement in Gleneagles next week.

To many people who have followed the G8 over the years, a focus on debt cancellation and development in Africa may seem incongruous. The G8 has most often been associated with issues related to currencies, or financial crises, and not with development.

The role of the G8 is to monitor and address the key economic issues of the day. Among the many issues we discuss, today there are two prominent challenges confronting the world's economic leaders – what I call the two great "growth deficits."

The first "growth deficit" has to do with uneven rates of growth between the United States and its major trading partners. For some time now, the United States has been growing at a far more rapid pace than our major trading partners in Europe and Japan. Lagging growth in these two major economic areas contributes to imbalances which should be addressed.

The second "growth deficit" has to do with lagging growth in the poorest nations of the world – most starkly evidenced in Africa where living standards relative to the rest of the world have actually declined.

The G8 has an important leadership role to play in addressing both of these major challenges.

* * *

Let's look at the first challenge.

We know that the global economy is performing relatively well with the strongest overall growth in decades, low inflation, low interest rates, and no apparent financial crises. But the pace of growth is unbalanced, and this phenomenon can be problematic.

The United States continues to demonstrate strong economic growth. Real GDP rose 4.4 percent last year. The first quarter this year came in at a strong 3.5 percent annual rate. Since the employment trough of May 2003 the economy has generated 3.5 million new jobs. Well-timed monetary and fiscal policies have contributed to this improved outlook. More fundamentally, our higher growth and productivity stem from the resilience and flexibility of our factor markets, highly motivated workforce and investors, and open, competitive goods markets.

But this strong growth presents problems when our major trading partners are growing slowly. Europe and Japan have posted chronically low levels of growth for most of the past decade, so that Americans with more disposable income are purchasing more goods and services from our trading partners than they purchase from the U.S. When combined with lower savings rates in the United States (or a savings glut elsewhere) and a lack of currency flexibility in the Asia region, the result has been larger and growing current account imbalances.

The G8 – and in particular, the G7 finance ministers – have worked together to execute plans to deal with these imbalances. Addressing imbalances in the global economy is a shared responsibility among the major economic regions of the world. The international economy performs best when large economies embrace free trade, the free flow of capital, and flexible currencies. Obstacles in any of these areas prevent smooth adjustments. At best, such obstacles result in less than maximum growth; at worst, they create distortions and increase risks.

The United States is doing its part to address imbalances by aggressively tackling our fiscal deficit and our long-term liabilities. Because of strong growth and appropriate fiscal policy, the U.S. budget deficit in 2004 was well below projections, and with recent data, I expect further improvement in our fiscal deficit position this year. Some private forecasters predict that our fiscal deficit will be below 3% of GDP this year if we continue to hold the line on spending. We are also working to put in place innovative policies to increase the savings rate.

Our actions alone will not be sufficient to unwind global imbalances. Simply put, large imbalances will continue if growth in our major trading partners continues to lag. European and Japanese GDP together exceeds that in the United States.

These economies must continue to adopt and implement vigorous and necessary structural reforms to establish robust rates of growth – both for the good of their own citizens and to contribute to reduction in the imbalances in the global economy. Greater flexibility in China is also a necessary component of the global adjustment process – especially as concerns of competitiveness with China also constrain neighboring economies in Asia from adopting more flexible exchange policies.

During my recent visit to Brussels we discussed ways in which Europe could raise growth, including through the EU's efforts to integrate its capital markets.

The potential benefits for Europe's citizens of implementing structural reforms are clear and quantifiable. A recent OECD study determined that deregulating EU countries would raise EU GDP per capita by 2.8%.

The G8 nations have taken an active role in addressing the issue of imbalances. The G7 Agenda for Growth calls on each of the nations to make structural reforms to increase growth – especially in Europe and Japan. The U.S., as I mentioned, is working to reduce deficits and raise savings. And we have called on major economies to increase currency flexibility.

* * *

The second growth deficit confronting economic leaders in the G8 involves the conditions of improving living standards for the billions of poor people today who live on less than $2 a day.

U.K. Prime Minister Tony Blair has put development – with a particular emphasis on Africa – at the forefront of this year's G8. We applaud this effort as it has been President Bush's view that more can and should be done to assist less developed nations raise living standards. Africa's struggles are particularly poignant, as countries on the continent deal with disease, conflict, insufficient investment in health and education, lack of economic freedom, and unstable or unaccountable governments.

Many people are focusing this week on how wealthy nations can direct more development assistance to countries in Africa. This is an important discussion, and it's not a discussion in which the United States is shy to participate, because we are very proud of our record. I will have more to say in a minute about the dramatic increases in assistance to sub-Saharan Africa by the Bush Administration.

But the role of the G8 today, following the mixed results of 50 years of development assistance, is not just to do more, but to do better – to continue to improve how development assistance is both delivered and received in order to ensure the biggest bang for each buck of development assistance.

While headline writers and advocacy campaigns and rock concerts tend to focus on numerical targets for assistance, there is, unfortunately not sufficient attention paid to the conditions in which development assistance is delivered. And yet, this is not for lack of study and analysis – the World Bank has a library full of research papers citing the importance of good governance and sound economic policies. It is easy for people to focus on simple dollar targets, rather than the specific goals and results of assistance.

Increased development assistance is vitally important. During this Administration, development assistance overall has nearly doubled and assistance to sub-Saharan Africa has tripled. Today, nearly a quarter of every dollar of official assistance in the region comes from America.

In key sectors, America's commitment is unparalleled. The U.S. is the world's recognized leader in vaccine research and development and immunization funding. In 2004, the U.S. provided roughly 70% of total HIV vaccine research funding - $450 million out of $650 million total. U.S. funding will increase to $510 million in 2005 and $600 million in 2006. In addition, the U.S. accounts for approximately 45% of all government contributions to the Global Alliances for Vaccines and Immunizations. As of February 2005, the U.S. government had contributed roughly $220 million.

Notably, America's dramatic increase in development assistance in recent years has come before disbursements from the President's Millennium Challenge Corporation (MCC) program. The program, while a model for how development assistance should be delivered, is only this year beginning to make disbursements and has billions of dollars in the pipeline. More importantly, this program is setting a standard in delivering assistant to those countries that are helping themselves – by investing in the health and needs of its people, fighting corruption, and demonstrating a commitment to economic freedom.

Less than 18 months following the establishment of the MCC, four compacts have been approved valued at over $600 million and several more are expected in the coming months. Moreover, evidence indicates countries are already taking action to improve policies so they can become eligible for MCC funds.

This fiscal year the America has committed $2.8 billion to the President's Emergency Plan for HIV/AIDS Relief. As of March 31 of this year, the program has supported anti-retroviral drug treatment for approximately 235,000 men, women and children in 15 of the most afflicted countries in Africa, Asia and the Caribbean – exceeding the treatment target for the year months ahead of schedule.

But even with these dramatic increases in development funding, we have tried to change the focus both with our bilateral assistance and multilateral assistance away from simplistic numeric targets, and toward a greater focus on ensuring that assistance is well spent and goes into environments where it can have a great impact in lifting people out of poverty. Money alone is not the answer.

One way we have worked to reform the way that assistance was to encourage the greater use of grants instead of loans at the multilateral development banks. As President Bush recognized, it is counterproductive to continually add to the already unsustainable debt burdens of poor countries. Combined with our landmark agreement to cancel debt, the increased use of grants within a clear debt-sustainability framework will ensure that poor countries do not find themselves again in the lend-forgive-lend trap.

Sometimes the test for determining where to deliver assistance is aided by the use of non-traditional measures of government effectiveness. For example, one of the tests now utilized by both the World Bank and MCC measures how long it takes to start a business in a country. This simple measure tells a donor a great deal about a country's commitment to economic freedom and relative absence of corruption. If it takes 32 days to start a business in Benin, and 146 days to start a business in Angola, then you can clearly presume that Benin encourages entrepreneurial activity and has stripped away cumbersome levels of bureaucracy where corruption is often entrenched. (Of course we would like to see all countries improve to levels of developed nations – like Australia's 2 days, or Canada's 3 days.)

By working through the G8 we are also trying to focus more attention on other factors in growth-enhancing development – especially through a greater focus on private sector development. Here is an area that frequently sends many aid advocates scurrying for the exits, yet we know that the quickest way to lift someone out of poverty is to create a job. So we have focused greater attention on micro-lending programs for small and medium enterprises.  

Private sector resources also have a role to play and these resources dwarf traditional development assistance – specifically trade and remittances. President Bush considers it crucial that we complete the Doha Development Round to increase economic opportunity for all trading nations, especially developing nations. But even without global trade liberalization, America's Africa Growth and Opportunity Act trade preference system has generated a striking increase in trade flows between the United States and participating African nations. The U.S. purchased 24 percent of all sub-Saharan African exports in 2003, more than any other country; in 2004, African exports to the U.S. increased to almost $36 billion. President Bush extended the AGOA program to 2015 in order to further increase the U.S.-Africa trade relationship.

Through the G8 we are also working to reduce the costs associated when workers send remittance back to their families in their home countries. This instant source of assistance from the United States alone exceeds the combined aid contributions of all donor nations every year. Until the United States pointed to remittance flows, most nations failed to measure the flows, let alone encourage reforms to reduce the costs of transmitting them.

My predecessor in this job, Secretary Paul O'Neill often pointed out that the funding we provide for overseas aid came from the taxes of plumbers and carpenters in America. If we want to go back to those plumbers and carpenters for more money for development, we need to demonstrate that we're putting it to the best uses and producing real results for the people we intend to help.

I'm encouraged that as the leaders convene in Gleneagles next week for the G8 Summit that real progress is being made to address these important imbalances in the global economy. By working in concert we all stand to benefit.

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