Working Paper: What Undermines Aid's Impact on Growth?
Working Paper: Aid and Growth: What Does the Cross-Country Evidence Really Show?
The IMF and the Millennium Development Goals -- A Factsheet
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Transcript of a Press Briefing to Review Issues Related to Aid, Trade and Debt Relief to Poorest Countries|
By Mark Plant, Senior Advisor, Policy Development and Review Department, and Arvind Subramanian, Research Department
International Monetary Fund
Thursday, June 30, 2005
View this press briefing using Media Player
MR. HAWLEY: Good afternoon, I'm David Hawley of the External Relations Department of the IMF.
Welcome to this press briefing on issues related to aid, trade and debt relief to low income countries. The briefing is under embargo until 15 minutes after its conclusion, when I will set the exact time.
We are today releasing two new Working Papers on aid and growth. You can pick up hard copies of papers at the entrance of the briefing room; they will also be posted on the IMF's external website this afternoon.
Today's briefing will be led by Mark Plant, Senior Advisor in the IMF's Policy Development and Review Department, and Arvind Subramanian, Chief of the Macroeconomic Studies Division in the IMF's Research Department. Arvind is the co-author, together with the IMF's Economic Counsellor and Research Department Director Raghu Rajan, of the two papers. Raghu is unable to join today's briefing because he is traveling.
Before taking your questions—and, I hope, questions by email from those watching the embargoed webcast—I believe Arvind and Mark have brief opening remarks.
And finally, a housekeeping point. When you ask a question, please identify yourself.
Thanks a lot.
MR. SUBRAMINIAN : Thank you. Before clarifying and amplifying the contents of the two papers, I should say that these studies are research papers by Raghu Rajan and myself. They are not policy or position papers. And, of course, as stated in the papers themselves, they also do not necessarily reflect the views of the IMF, its Board, or management.
The first paper was a response to the literature on aid and growth, which has not had a consistent message. Our approach in this paper was to say that if one was starting de novo to examine the aid/growth relationship and attempting to do it in a comprehensive and transparent manner, what would one find?
Our central conclusion is that it's difficult to find a robust positive or negative relationship between aid and growth. This conclusion holds quite generally across time horizons, types of aid, who it's given to—for example, those with good policies and institutions and others—et cetera.
This result prompted us to explore why we were unable to find such a positive result for aid, and that is the focus of the second paper.
One of the concerns of the IMF has long been that aid could push up wages too fast, leading to overvaluation, which in turn could hurt the country's exports, the so-called Dutch disease. It's important to try and avoid this disease to the greatest extent possible because if a country's export and labor-intensive sectors fare badly, its growth prospects could be in danger.
Unfortunately, these are also the sectors where wage pressures induced by aid inflows could inhibit competitiveness. We find strong evidence consistent with aid undermining the competitiveness of the labor-intensive and exporting sectors.
So what are the possible implications of our papers? First, we would stress that our findings do not bear upon certain kinds of aid, for example, humanitarian aid, reconstruction aid, aid for improving health, combating epidemics, et cetera. These are clearly beneficial and important, period. Our findings relate more to aid in boosting economic growth. Here, too, our findings which relate to the past do not imply that aid cannot be beneficial in the future, but they do suggest that for aid to be more effective in the future, questions of aid delivery and absorptive capacity should be more seriously addressed.
Our second paper suggests that policymakers should also be careful about the competitiveness of an economy, especially when large aid inflows are planned. This means that the macroeconomic management of aid inflows to minimize the Dutch disease effects is terribly important.
Overall, we see our papers as urging care, prudence, and perhaps a little more creativity and experimentation when aid is delivered to low-income countries so that its benefits can be fully exploited. Thus, our findings support efforts under way at national and international levels to improve aid effectiveness.
MR. PLANT: I'd like to put my colleagues' paper in the wider context of the Fund's work with its low-income member countries. As the Managing Director has repeatedly stated, the Fund fully supports the Monterrey Consensus to meet the Millennium Development Goals, particularly halving poverty by the year 2015. Toward this end, the international community has established a two-pillar approach: first, low-income countries have to implement good policies; and, second, the developed countries have to step up to the plate with more resources, in particular, through aid, through trade, and debt relief.
This combination, good policies and more assistance, is key to reaching the MDGs. But that's much easier said than done.
At the time of the 2005 Spring Meetings, the IMF and the World Bank jointly issued the Global Monitoring Report, which looked at the challenges of making this international partnership work. It identified five areas of immediate action if we are to accelerate our progress in fighting poverty:
First, ensure that the low-income countries own the policies that they're implementing.
Second, improve the environment for the private sector to grow.
Third, deliver better and more human services, particularly health and education.
Fourth, dismantle barriers to trade between the developed and less developed world.
And, fifth, substantially increase the level and effectiveness of aid.
Let me dwell on that fifth point for one minute. More aid is needed. I think no one disputes that. But the debate that is ongoing—and it's a very interesting debate—is how much more aid and how that aid is to be delivered. It is a debate that is not yet resolved.
We know that some aid has been misused in the past, but much aid has been effective. And lots of research tells us that the environment in which aid is used—the institutions, the rules, the regulations, the coordination among donors and with the government—all make a difference.
The World Bank last year had a huge conference on how to increase the scale of effective aid practices. If you will, you might think of that as the microeconomics of aid.
For the Fund, the challenge is one of what is the macroeconomics of aid. The Fund is in a position to take a look at the overall macroeconomic picture and see how aid is being absorbed and used in the economy as a whole. Is aid helping to spur the growth that's critical to poverty reduction? And is it being used in a way to help countries sustain that growth over the longer term? Our unique vantage point gives the Fund a critical role in helping the donor community ensure that aid is used well.
The international community, not just the IMF, benefits much from research like that done by my colleagues and other researchers around the globe in figuring out how we can get more aid delivered more efficiently, more effectively, both in a microeconomic sense and in a macroeconomic sense. All this research serves as a valuable input into setting the IMF's policies and other institutions' policies toward helping these low-income countries achieve the MDGs. And our policy remains now that substantially more aid is needed if we are to fight poverty effectively.
MR. Hawley: Thank you very much, Mark and Arvind.
Over to you. Who would like to ask a question?
MR. Hawley: Going once, going twice—okay, please.
QUESTIONER: [inaudible] Turkish Business Standard. My question is regarding the upcoming G-8 meeting, and we hear a lot about aid and how the United States should increase its aid to the developing countries. The trade aspect of this discussion is lacking, so may I receive your comments on that issue? Would you address what needs to be done regarding increasing the trade quotas of low-income countries?
MR. Plant: I think both the Managing Director of the IMF and the President of the World Bank and others have been clear that to help low-income countries grow, developed countries have to open up their markets to low-income country imports. That means removing trade barriers. It means removing subsidies. It means allowing these countries to compete effectively in developed countries with developed country producers.
The WTO round, the Doha round is ongoing, and the institution is involved in helping that round come to a successful conclusion, which we think will indeed promote trade between the lesser developed world and the developed world.
MR. Hawley: Any other questions?
MR. Hawley: Okay. If that's the case, we'll lift the embargo at 3 o'clock. Thank you very much. Thank you, Mark, and thank you, Arvind.
[Whereupon, the press briefing was concluded.]
IMF EXTERNAL RELATIONS DEPARTMENT