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.

To make sure these benefits are realized, such a regime must generate incentives for the workers to return home. Although remittances can be an important source of income for poor families, they rarely spark or sustain long-term economic development. Designing contract labor schemes that are truly temporary is tricky, but it can be done. Unlike in previous plans, there must be clear incentives to ensure the cooperation of each party -- workers, employees, and home and host governments. One possibility: withhold a portion of workers' earnings until they return home. This forced savings scheme would also guarantee that returning workers would have a sizable pool of resources to invest. In addition, there could be penalties -- the reduction of worker quotas, say -- for home countries with nationals who fail to return. Home governments would thus be motivated to create a hospitable domestic economic and political climate to encourage their people to come back. Of course, even with the best-designed scheme, it is inevitable that the return rate will fall short of 100 percent. Even with this consideration, however, facilitating labor mobility would bring significant gains.

Despite the obvious advantages, is a scheme like this politically feasible in developed countries? If there has been substantial trade liberalization in rich countries, it is not because it has been popular with voters, but largely because the potential beneficiaries have organized successfully and forced their agendas. Multinational firms and financial enterprises have been quick to recognize the link between enhanced market access abroad and increased profits, and they have put the issues on the negotiating agenda. Temporary labor flows, by contrast, have lacked a well-defined constituency in the developed countries. This is not because the benefits would be smaller, but because the potential beneficiaries are not as clearly identifiable. The tide has begun to turn lately as a result of labor shortages in sectors such as high-tech and seasonal agriculture, and because labor inflows would increase the tax base for financing pension benefits for retirees, thereby providing a partial solution to pension shortfalls in pay-as-you-go systems. Moreover, political realities can change -- with the right leadership. In the United States, President George W. Bush has already proposed a temporary-worker program, which if designed properly could mark a useful beginning.

There are of course other ways the rich world could contribute to development. Outsiders should play an important role in preventing and resolving conflicts and humanitarian crises in developing countries. Minimizing and eliminating conflict has obvious benefits for human life -- and potentially for long-term development. Just as important is stopping arms sales to dangerous governments and halting the drug and illicit diamond trades that often fund rogue groups. Another important issue is the governance of international economic institutions. The democratic deficit of these institutions has increasingly caused a corresponding legitimacy deficit. Insofar as this gap reduces the effectiveness of such organizations, rich countries would be wise to agree to reforms.

NEW PRIORITIES

The international community must ask itself what really matters for development, so that good intentions can be translated into real benefits for the poorest countries. To a large extent, sustainable progress is in the hands of the poor countries themselves. Internalizing this reality is important for the developing world -- and also for the wealthy one, not least because doing so would check the perennial temptation to promise results that cannot be delivered.

That said, this must be clear: developed countries should not abandon the poor to their plight. If, however, rich countries truly aim to help developing countries achieve lasting growth, they must think creatively about the development agenda. If aid is increased and delivered more efficiently and trade inequities are addressed, then the two traditional pillars of development will yield rewards. But these rewards should not be overestimated. Indeed, other courses of action -- such as giving poor nations more control over economic policy, financing new development-friendly technologies, and opening up labor markets -- could have more significant benefits. It is time to direct the attention of the world's wealthiest countries to other ways of helping the poorest -- ways that have been for too long neglected.