How to Help Poor Countries

Nancy Birdsall, Dani Rodrik, and Arvind Subramanian

From Foreign Affairs, July/August 2005

Summary:  Increasing aid and market access for poor countries makes sense but will not do that much good. Wealthy nations should also push other measures that could be far more rewarding, such as giving the poor more control over economic policy, financing new development-friendly technologies, and opening labor markets.

Nancy Birdsall is President of the Center for Global Development in Washington, D.C. Dani Rodrik is Professor of International Political Economy at Harvard's John F. Kennedy School of Government. Arvind Subramanian is Division Chief in the Research Department of the International Monetary Fund. The views expressed here are their own and not those of their respective institutions.

The deepest challenge for countries in the poorest parts of the world, especially Africa, is governance. The African continent has been ravaged both by civil war and conflict and by rapacious leaders who have plundered the natural wealth of their nations. Corrupt rulers and their weak regimes have arguably been the single most important drag on African development. But with increasing democratization, the situation may be starting to improve. And rich countries can play a large role in the reform process, for the simple reason that corruption has two sides -- demand and supply. For every leader who demands a bribe, there is usually a multinational company or a Western official offering to pay it. For every pile of illicit wealth, there is usually a European or American financial institution providing a safe haven for the spoils. The governments of wealthy countries need to take steps to block these activities.

There have been notable strides in the right direction: the British Department for International Development helped found the Extractive Industries Transparency Initiative a few years ago, and the UN and the Organization for Economic Cooperation and Development (OECD) have been working together to address the bribery of officials in developing countries by foreigners. But these efforts do not go far enough.

Many institutions -- the OECD and the U.S. government, for example -- have laws against bribing foreign officials. But the regulations are often both narrow in scope and weak on enforcement. For example, a loophole in the U.S. laws ("deferred gifts") invites abuse. Some OECD rules damage transparency by protecting banks that hide ill-gotten wealth deposited by leaders of developing countries. Multinational companies and banks need to be more transparent in their dealings with poor-country governments. Preempting corruption must also be made more of a priority. One idea, first proposed by Harvard University's Michael Kremer, is for the international community to categorize certain regimes as corrupt or "odious." Companies that deal with such regimes would risk losing their claims to repayment if later on a lawful government decided to default on the debt passed down by its unlawful predecessor.

Wealthy countries can also spur technological advances that serve the specific interests of developing countries. Because poor countries lack wealthy markets, private companies in the developed world currently have little incentive to devise technologies for them. Hence a Catch-22 results: developing countries remain poor because of limited technological opportunities, while these opportunities remain difficult to create because the countries are poor.

The health sector provides a good example of the current problem. Pharmaceutical firms in industrialized nations conduct 90 percent of their research on diseases prevalent in the rich world -- and that affect less than ten percent of the global population. There is little research on diseases endemic in the poorer parts of the world, because there are no market returns for such investments. Yet developing countries badly need medicine for preventing and curing diseases such as AIDS, malaria, and sleeping sickness. Beyond health care, developing countries also need enhanced crops that can better withstand heat, drought, and the salinization of irrigated land, as well as new energy sources that can reduce the rate of tropical deforestation.

There is already a precedent for foreign research acting to undo this technological imbalance -- the "green revolution." Agricultural production in the developing world was revolutionized by new varieties of wheat developed at Norman Borlaug's International Maize and Wheat Improvement Center, in Mexico, and new strains of rice cultivated at the International Rice Research Institute, in the Philippines. Although the green revolution's impact was uneven, benefiting Asia and Latin America more than sub-Saharan Africa, the aggregate effect was nevertheless sizable. In the 1960s, southern Asia witnessed dramatic increases in productivity growth as a result of the new seed varieties. Yale University's Robert Evenson has estimated that the global return on the research on the new strains was more than 40 percent.

The international community needs to learn from this example, so that the resources of wealthy firms can be harnessed to develop important technologies for the world's poorest countries. One simple yet powerful improvement would be for rich-country governments to commit contractually to rewarding the creation of such new technologies -- for example, with guaranteed purchase agreements. In effect, the international community would ensure a minimum financial return on private research undertaken for the benefit of developing countries. The Center for Global Development has devised a plan for this kind of advance-market-commitment mechanism to spark research on a malaria vaccine, at an estimated cost of $3 billion. Imagine the benefits of a $50 billion global technology-creation fund, with actual disbursement of the funds taking place over ten years or more. That $50 billion would represent only about five percent of all the financial aid that donors have promised to spend on the poor in the next decade.

Finally, to have a big impact on developing countries, trade negotiators should spend more time improving the cross-border mobility of labor -- particularly of low-skill laborers, who typically are at the bottom of the pile. Current WTO negotiations on labor mobility ("mode four" in the trade jargon) focus only on high-skill labor, and even there they have made very little progress. Greater opportunities for poor and less-skilled workers to move across borders would, more than anything else, increase both the efficiency of resource allocation in the world economy and the incomes of the citizens of poor countries.

This fact is based on a simple principle of economics. The loss in efficiency due to segmented (as opposed to integrated) national markets increases with the gap in prices in these different markets, and the loss is further compounded as the gap increases. Now compare price gaps across different types of markets. In markets for goods and capital, quality- and risk-adjusted price gaps from country to country are relatively small -- perhaps no more than 50-100 percent. But in labor markets, which suffer from huge border restrictions, wage gaps for similarly skilled workers are enormous -- on the order of 500-1,000 percent. That is why even small relaxations of work-visa restrictions generate large income gains for workers from poor countries (as well as for the world economy). What is especially appealing is that the gains in income go directly to the workers, rather than through imperfect distribution channels (as with trade in goods) or through governments (as with aid).

Take, for example, a scheme for temporary work visas amounting to no more than three percent of the rich countries' total labor force. Under the plan, skilled and unskilled workers from poor nations would be allowed employment in rich countries for three to five years, and they would be replaced by a wave of new workers after their time ended and they returned to their home countries. Such a system would easily yield $200 billion annually for the citizens of developing nations. The returnees would also bring home far more benefits than their wages alone: experience, entrepreneurship, funds to invest, and an increased work ethic.