Poverty Reduction, Jobs Key for Latin America, Official Says
U.S. advocates debt relief, trade, private-sector development
The United States is advancing debt relief, encouraging private-sector development, expanding trade, reducing the cost of remittances and fundamentally altering aid delivery to reward those nations that govern well, according to U.S. Treasury Assistant Secretary for International Affairs Clay Lowery.
Addressing the Getulio Vargas Foundation in São Paulo, Brazil, April 4, Lowery said that poverty reduction in the Western Hemisphere “is both possible and essential.” He outlined policies and specific U.S. efforts that have proven effective in reducing poverty in Latin America.
Lowery said nations successful in reducing poverty have sustained robust economic growth, maintained low inflation and sound finances and have pursued reforms that spread opportunity.
Even though there is no single recipe for success, he said, the best performers are countries that have opened markets, reduced barriers to starting businesses, invested in health and education, and linked their poor populations to markets.
“From empirical research and from what I hear people say, it is clear that the best way to help the poor is to make it easier for them to extract returns from markets -- labor markets, capital markets, and goods markets,” Lowery said. “The truth is that growth and opportunity do not reach many of the poor in the region because they are cut off from markets.”
In Latin America, Lowery cited Chile, Mexico, Costa Rica and Brazil as nations that have done better than others in reducing poverty. He said that these gains were related to these nations’ efforts to bolster public finances, cut inflation and debt, spend effectively on health and education for the poor and open markets.
The United States is committed to working with regional governments to reduce poverty and expand opportunities, he said.
“The people of this hemisphere are calling on their leaders and the United States to spread opportunity to those left out and left behind,” Lowery said. “The Bush administration is listening and responding. The U.S. must do all it can to help governments focused on giving the poor a chance for a better life.”
For example, the United States is advancing a number of initiatives, including a proposal to cancel the debts to the Inter-American Development Bank (IDB) of the region’s five poorest countries. This initiative and other relief, Lowery explained, would translate into nearly $19 billion for these nations, or approximately $620 per person in nations where annual spending on health is currently $50 per person.
The United States is working with the IDB to facilitate private investment and bank lending to the small and medium-sized businesses that studies show create 90 percent of new jobs in Latin America.
“To be effective, any poverty reduction or job creation strategy must focus on making it easier to create and grow small businesses,” Lowery said.
Other U.S. initiatives include working with the IDB to reduce by half the cost of transmitting workers' remittances as agreed to at the 2004 Special Summit of the Americas. The United States also plans to follow up with the IDB on the Infrastructure Facility of the Americas proposed at the 2005 Summit of the Americas. That entity is intended to foster private investment in infrastructure to spread opportunity.
Apart from its efforts with the IDB, the United States also will reward those nations that govern well and pursue sound policies with funds from the Millennium Challenge Account (MCA). (See Millennium Challenge Account.)
Lowery said Bolivia, El Salvador, Honduras and Nicaragua already have been selected for MCA funding; Paraguay and Guyana are eligible for threshold funds.
Trade is another important tool for spreading opportunity in the region when matched with proper policies, the Treasury official said.
“Trade also gives developing countries access to new markets,” he explained. “But its enormous potential for poverty reduction can only be realized when access to new markets is combined with access to the tools needed to seize these opportunities -- education, infrastructure, credit.”
Lowery said the World Bank has estimated that the successful conclusion of current World Trade Organization talks could lift 300 million people out of poverty globally. (See USA and the WTO.)
As the United States works with Latin American governments, the IDB and others to craft the proper policies and support needed to expand opportunity in the region, Lowery expressed optimism that poverty reduction is possible.
“My message today is fundamentally optimistic: the right policy choices and the right kinds of official support – more than geography, size, resource endowment, or history – are the most powerful determinants of success in fighting poverty, “ he said. “Markets and spreading opportunity work in very different cultures and in very different places.”
Following is the text of Lowery’s remarks, as prepared for delivery:
U.S. Department of the Treasury
April 4, 2006
STATEMENT OF U.S. TREASURY ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS CLAY LOWERY WORKING TOGETHER TO REDUCE POVERTY IN LATIN AMERICA SAO PAULO, BRAZIL
I am delighted to be here in Brazil, continuing our strong relations and cooperation and enjoying the warm hospitality of the Brazilian people. I am honored that you have come to hear me speak today.
When President Bush came here in November, he spoke to Brazilians about democracy, social justice, and fighting poverty. He said, "Our common ideal of social justice must include a better life for all our citizens. As elections and democracies have spread across our hemisphere, we see a revolution in expectations. Either democracies will meet these legitimate demands, or we will yield the future to the enemies of freedom."
The people of this Hemisphere are sending a message about what they want to see on the U.S. agenda in our relations with Latin America. They want poverty reduction and job creation to be top priorities. We hear the message, and we are responding.
Poverty exacts an intolerable human toll. It threatens stability and democratic institutions. It undermines our collective efforts to fight crime, corruption, terrorism, and drugs, and it prevents people from simply feeling safe in their homes. For these reasons, poverty reduction must not just be a domestic priority; it must be a shared foreign policy priority.
Much has been said and written about the lack of progress in reducing poverty in Latin America. But my message today is that poverty reduction in this hemisphere is both possible and essential. If we are to do better than we have so far, we have to look at global experience dispassionately and carefully. The issues are not simple and there is a lot we still don't understand. But we must heed and use the evidence of what works.
While I am talking now, I mainly want to listen. I am meeting today with citizens, small business people, and heads of families. They are perhaps the best judges of the barriers they face and what they need to lift themselves out of poverty permanently. We hear the call for more opportunity – education opportunities, job opportunities, business opportunities. The United States wants to help, and I'll outline some of the ways we are trying at the end of this speech. But first, I'd like to look at some of the lessons that we have learned about what works.
Poverty Reduction: What Works
If you look in this region and around the world, three characteristics appear universal for countries that have achieved substantial and lasting reductions in poverty. First, all have sustained robust growth. Growth reduces poverty over time because it raises investment levels, employment, and income. Second, all have maintained low inflation and sustainable public finances. In short, high inflation and financial crises are among the worst enemies the poor can face.
Third, all have gone beyond the macroeconomic reform agenda to pursue the microeconomic reforms that spread opportunity. While there is no single recipe for success, the best performers have all pursued some combination of policies that: open markets and create competition, reduce the barriers to creating a business, invest in health and education, link the poor to markets through infrastructure, strengthen land and property rights, and spread access to capital.
From empirical research and from what I hear people say, it is clear that the best way to help the poor is to make it easier for them to extract returns from markets – labor markets, capital markets, and goods markets. The truth is that growth and opportunity do not reach many of the poor in the region because they are cut off from markets.
-- They lack the human capital that would give them access to skilled labor markets.
-- They lack the opportunity at jobs because tax and regulatory barriers discourage employers from hiring them in the formal sector.
-- They lack access to financing from formal capital markets.
-- They lack a chance to start and grow a business.
-- They lack infrastructure links to markets.
-- And, with pervasive weakness in the rule of law, they cannot protect their property rights or extract returns from their property and assets.
We must not forget that it takes more days to start a business in Latin America than in any other region of the world except Sub-Saharan Africa, and more days to enforce a contract than any other region.
In other parts of the world, like South and East Asia, we see poverty reduction success stories that very much confirm the benefits of macroeconomic stability and sustained growth, but also of spreading opportunity. For instance, poverty reduction in those states in India that strengthened land and property rights and deregulated labor markets was significantly greater than in states that did not. Korea's poverty reduction success has been linked to its strong financial sector development, in part due to foreign investment in its banks, which helped the poor gain access to private credit. Thailand opened its markets but also expanded health care and financial services access to poor rural areas. The result has been a drop in the poverty rate to just 10 percent.
For Latin America overall, the reduction in poverty has been weak. But some countries, especially reforming countries, have done better than others. For the period 1991-93 to 1999-2003 – according to the World Bank's $2 per day definition of poverty – Chile cut the poverty rate from 22.5 to 9.6 percent, Mexico from 41.3 to 26.3 percent, Costa Rica from 14.6 to 9.5 percent, and Brazil from 33.1 to 22.4 percent. I would argue these cuts are integrally related to these countries' decisions to strengthen public finances, slash inflation and debt, spend more effectively on health and education for the poor, and open markets.
Chile not only put its fiscal house in order, it also made a major effort to expand investment in health and education. Mexico not only opened its markets, it expanded the Opportunidades social program which now provides grants to 20 percent of the population conditioned on keeping children in school, improving family nutrition, and regular health checkups. Brazil's similar Bolsa Familia program is targeted to reach 11 million families. This kind of spending does not break the budget but it can break the inter-generational cycle of poverty.
Brazil under the Lula Administration has articulated a reform agenda focused on spreading opportunity and on consolidating the economic reforms begun over a decade ago. This agenda is likely to produce dramatic gains if implemented. Already growth and buoyant export performance are generating major employment gains. Nearly 4 million jobs have been created during the Lula Administration, with 1.3 million jobs created in the last 12 months alone.
The people of this Hemisphere are calling on their leaders and the United States to spread opportunity to those left out and left behind. The Bush Administration is listening and responding. The U.S. must do all it can to help governments focused on giving the poor a chance for a better life. Let me tell you about some initiatives we are advancing.
Debt relief: One of the most potent ways the international community can help the poor is by writing off debt owed by the poorest, most indebted countries. The resources freed-up from these cancelled debts can fund education, health, and other programs for the poor if recipient governments use them wisely. The United States pioneered the G8 debt reduction initiative that will provide the poorest countries in the region with $4.6 billion in debt service relief, on top of the $9 billion in relief received under the earlier Heavily Indebted Poor Countries initiative.
But we want to do more for this region. So we developed a proposal to cancel the debts to the IDB of the five poorest countries and do it in a way that does not increase the burden on either the middle-income borrowing countries like Brazil or donor countries. This proposal will provide roughly another $5 billion in relief, bringing the total to roughly $19 billion for the region's poorest countries. This translates into $620 per person. Currently, the poorest countries in the region spend – on an annual basis – about $50 per person on health. Think for a minute about how this bold proposal could be translated into real benefits for people: more schools, more quality teachers, more immunizations and better health services.
Private sector development: One area where the IDB's activities are still limited is financing private sector investment. Currently, such financing accounts for only 3.4 percent of the IDB's operations. We know that to reduce poverty and create jobs, Latin American economies need to raise their investment rates from the current 21 percent of GDP to levels closer to the 35 percent seen in Asia. The IDB cannot possibly fill these investment gaps. But it can play a much larger role in catalyzing private investment. We believe that expanding financing to small and medium businesses that now lack any access to the formal financial sector would greatly improve the job creation and poverty reduction effectiveness of the institution. To do that, it must reorganize its fragmented and underperforming private sector operations. And it must set ambitious and measurable targets for expanding financing to the private sector.
Bank lending to SMEs: There is research that shows that small businesses create 90 percent of new jobs in Latin America. To be effective, any poverty reduction or job creation strategy must focus on making it easier to create and grow small businesses. At the Special 2004 Summit of the Americas in Monterrey, Mexico, President Bush proposed, and the Leaders agreed to, the goal of tripling bank lending to small businesses by 2007 with IDB help. A $5,000 or $10,000 loan from a bank can lift a small business from bare survival to rapid expansion. Experience shows that banks will lend to micro and small businesses on a large scale if given the right training and technology. A successful U.S.-supported program in Eastern Europe, for instance, has helped catalyze over one million bank loans totaling $6 billion to small businesses. What a difference the IDB could make in this region with such a program. Latin America's own dynamic microfinance sectors illustrates how much potential exists to expand bank lending to small businesses.
Remittances: Also at the 2004 Summit, the Leaders of the region committed to a U.S.-proposed goal of creating the conditions necessary to halve the costs of transferring remittances, so families with members working in the U.S. can get their savings home quickly and cheaply. Remittances in this Hemisphere reached nearly $54 billion in 2005. Facilitating these transfers through the formal financial system and supporting their use for investment in poor communities would provide a powerful impetus for poverty reduction. Our efforts with Mexico, working with banks in both countries, dropped remittance costs by up to half, with remittances between key cities now $5 to $10 a transfer. With the IDB continuing its leading role, let us spread that success throughout the Hemisphere.
Infrastructure: In last year's Summit of the Americas in Argentina, President Bush proposed an innovative initiative – the Infrastructure Facility of the Americas – for catalyzing much more private investment in infrastructure to spread opportunity. Public funds available to build infrastructure are scarce, so it is imperative to find ways to unlock large volumes of private finance. By using official finance in a targeted way to reduce investors' search costs for good infrastructure projects, we should be able to catalyze orders of magnitude more in private infrastructure finance. We are working with the IDB to create a fund for this purpose, to which the U.S. will contribute. We will not rest until the IDB follows through with bold action.
Millennium Challenge Account: The Millennium Challenge Account launched by the Bush Administration not only represents a major increase in aid but more importantly a fundamental shift in our approach to aid delivery. The MCA operates on the principle that aid is more likely to promote economic growth and raise living standards in countries that are ruling justly, investing in their people, and promoting economic freedom. It establishes a partnership in which the developing country, with full participation of its citizens, proposes its own plan for the use of MCA funds; and it focuses on measuring project results by making sure that every MCA contract includes quantitative objectives and clear expected outcomes.
The programs supported by MCA will differ by country. Indeed, that's precisely the point: it is up to governments in consultation with its citizenry to identify the most pressing development priorities and concrete programs for addressing them. Sometimes this will mean developing small businesses, particularly in rural areas. Other times it will mean strengthening the country's infrastructure so that more local businesses can reach potential customers. These efforts help the poor take advantage of the new trade opportunities created by opening markets and FTAs.
Bolivia, El Salvador, Honduras, and Nicaragua have been selected to be eligible to receive MCA funding. Paraguay and Guyana are eligible for threshold funds. Last year, Nicaragua and Honduras signed compacts worth $390 million to develop agriculture and rural business and to link rural populations to markets. In February, Paraguay and MCC reached agreement on a $35 million program to help the Paraguayan government fight corruption and reduce barriers to starting a business.
Trade: Trade is one of the most important tools for spreading opportunity to the poor. Tariff cuts reduce the cost of products consumed by the poor such as food and clothing – two areas currently subject to the highest tariffs. Trade also gives developing countries access to new markets. But its enormous potential for poverty reduction can only be realized when access to new markets is combined with access to the tools needed to seize these opportunities – education, infrastructure, credit. President Bush told Brazilians in November that every nation will gain from a successful Doha Round, but the developing world and the poor stand to gain the most. He cited the World Bank estimate that a successful Doha Round could lift 300 million people out of poverty. He stressed that we have to be ambitious in agriculture, as well as in manufactures and services.
My message today is fundamentally optimistic: the right policy choices and the right kinds of official support – more than geography, size, resource endowment, or history – are the most powerful determinants of success in fighting poverty. Markets and spreading opportunity work in very different cultures and in very different places.
In a sense we should not be at all surprised. All this merely affirms that the laws of economics work and people everywhere respond to the right incentives and opportunities. That has been our experience in the United States, a large and culturally diverse country, which shares many characteristics with Brazil.
While the message is optimistic, it is also urgent. At this moment, we are in danger of replaying old and unproductive ideological battles that sidetrack us from the pressing tasks confronting us. The poor in our hemisphere deserve better. They deserve leaders capable of learning from, and acting on, global evidence. The United States stands ready to help such leaders, to continue to expand our arsenal in the fight against poverty, and to keep it at the center of our agenda in this hemisphere.