Assessing Aid: What Works, What Doesn't, and Why

with

Joseph Stiglitz
David Dollar
Phil Hay

Washington, DC, November 10, 1998

Contents:
Introduction by Phil Hay
Presentation by Joseph Stiglitz
Presentation by David Dollar
Questions from the Media

Proceedings

MR. HAY: Okay, everyone; a very good morning to you all and welcome to our briefing this morning on Assessing Aid: What Works, What Doesn't and Why. Before we kick off, let me just remind you that it's embargoed until 3:00 this afternoon, and that's 2000 GMT, 8:00 in the evening in the U.K.

Let's have some quick introductions up here. I'm Phil Hay from Media Relations here at the Bank. On my left is Joseph Stiglitz, the World Bank's chief economist and its senior vice president, and on his left, let me introduce you to David Dollar, the lead author of Assessing Aid and a senior research economist here at the Bank as well.

So, without any further ado, let me ask Joe to start us off.

MR. STIGLITZ: Well, I hope you've all picked up copies of Assessing Aid. Unlike a lot of our reports, this is actually relatively small. You could actually read it--

[Laughter.]

MR. STIGLITZ: --before you have to write your stories. I'll try to make it a little easier for you by talking about some of the high points, and David will give you an overview.

The starting point for the report is the fact that foreign aid has fallen to its lowest level in more than 50 years, since aid was first institutionalized in the Marshall Plan after World War II. At the same time, there has been a growing disparity between the resources available and the needs that aid addresses. While there has been great international success in reducing poverty and in economic development, it remains a severe global problem. More than 2.5 billion people live in poverty, which is defined as less than US$2 a day; and more than 1 billion people still live in what we call extreme poverty, which is a dollar a day.

We know that development is possible. That's one of the lessons of the last 50 years. It means that real improvements in people's lives: healthier babies, more children in school, less hunger, are possible. A key role for the World Bank and the research group within it is to understand better the ingredients that go into successful development. What makes development happen?

We highlighted one important ingredient in the World Development Report that came out last month: knowledge. Today, we are launching this book, which focuses on another ingredient, resources for aid.

What do we know about the role of aid and about getting the most mileage out of aid? That is the key question that we address in this book. We find first that resources are important; aid has made a difference. In fact, aid has had a powerful effect on poverty reduction in those countries with sound institutions and policies. One reason for this powerful effect is that in a good policy environment, aid acts as a magnet and brings in private investment, nearly US$2 for each US$1 of aid. Aid helps a country provide the broad infrastructure for growth, roads and power plants, but it also provides for education and health, the kind of human resources that make a country more attractive for foreign investors.

One of our key findings, thus, is that effective aid is complementary to private investment. Moreover, because of a worldwide move toward economic and governance reform in the 1990s, there are a larger number of poor countries in which aid is now highly effective. In other words, there are a large number of countries today that have put into place the kind of policy environment that we argue provides the environment in which aid is highly effective; produces very high returns in terms of poverty alleviation and economic growth.

The second theme in the report links up with our World Development Report: knowledge. Aid is more than just money; it is about ideas or knowledge creation. One of the most valuable roles of aid is to help countries develop the policies that work for them. At a more local level, helping communities find what works for them and getting services to the people who need them most, be it primary education or rural water supply.

Developing countries, in large numbers, are moving toward sound policies. Donor agencies are changing to become more effective at supporting reform and institution building. In fact, there has never been a better time for giving aid. But unfortunately, despite these big strides by both recipients and donors, international support for aid continues to decline. This report is aimed at developing countries that are struggling to put good policies into place and donor agencies that are trying to become more effective and at the broad public, who need to know that aid is a powerful tool for poverty reduction.

If the world is serious about poverty reduction, then, we must post a call to action. The world must find a way to increase aid budgets, because as we show with this report today, aid can be highly effective in lifting millions of our poorest people out of poverty and into more hopeful lives.

Thank you.

David?

MR. DOLLAR: I'm going to give you a brief presentation of the main findings in our report Assessing Aid. We have three main findings. First, money is important. Providing money to poor countries has a large impact on growth; it spurs growth; it reduces poverty, but only under the right conditions; only in countries that have sound policies and institutions. Our second point is that aid is more than just money. Aid is also about ideas or knowledge creation, and when it comes to supporting country-wide policy reforms, often, the knowledge side of the business is really critical. The third point is that aid is also about helping provide specific public services. Aid supports primary education, rural roads, a whole host of important services. But again, in this area, it's often the knowledge creation side of aid that's really critical.

So, what I want to do is just briefly elaborate on each point, starting with the first one, that money works under the right conditions, in a good policy environment. What we found in our research is that if you focus on developing countries with sound policies and institutions, what you find is those that get larger amounts of aid grow more rapidly. They have more rapid per capita income growth. What we mean by sound policies and institutions are things that have actually been shown to lead to successful development. Examples would be private property rights; openness to foreign trade; low level of corruption; investment in education. These are some of the examples of a good institutional policy environment.

Now, if you focus on countries where there is a very weak institutional policy environment, it's not true that more aid leads to more rapid growth. So, this is one of our most important findings. Now, growth is important, because in countries with mass poverty, growth is a necessary ingredient for reducing poverty. So, our work suggests that the money part of aid will be really effective in countries that have a lot of poverty and that have good policies and institutions. So, a natural question to ask is are there really poor countries with a lot of poverty that have good policies and institutions?

The good news is that in the 1990s, there has been a wave of economic reform in the developing world, so that, in fact, there are lots of such countries. As of 1996, there were 32 countries with poverty rates above 50 percent and pretty good policies and institutions. This includes quite a few big countries, like India and Ethiopia and Vietnam, so, in fact, 75 percent of the world's poor live in the countries in the upper right hand quadrant there with high poverty and pretty good policies and institutions.

Some of the other important countries there would be Uganda and Ghana. But one of our messages is that there have been a number of important successful reforms in Africa during the 1990s, so we really have a very good environment for effective aid.

We also look at how aid is actually allocated, and this is looking at 1996. This is controlling for the level of poverty, so it answers the question how do donors treat different countries that have the same poverty but different levels of policy? And as you move from a really terrible policy regime, such as Nigeria, to a more mediocre policy regime, such as Zambia of Tanzania, we find that there is a big increase in aid.

But as you move into the truly good policy realms, we find that aid actually diminishes. Countries such as Ethiopia and Uganda get less aid per capita than many poor countries that have weak policies and institutions. Our work suggests that we get the maximum effect on poverty reduction if we would give more aid to the countries with pretty good, quite good policies and institutions, but, in fact, the donor community tends to give less aid to the truly good policy initiatives.

We can actually estimate the effect of allocating aid more efficiently in terms of poverty reduction. If the world donated another US$10 billion in aid, and we allocated it the way aid is currently allocated, we estimate that it would lift 7 million people out of poverty. But if we focus it on some of the poor countries that have made a lot of progress with improving their institutions and policies, we could lift 25 million people out of poverty, about three times more.

Now, there are a number of reasons why donors continue to give quite a bit of aid to countries with good policies, and one reason is the hope that aid will induce policy reform. But we found that giving a large amount of money does not necessarily lead to policy reform. Zambia is an example of this, a country that got an increasing amount of aid but where policies have gotten worse, at least until a new government came to power in the last few years.

During the period covered here, there were a number of adjustment loans from the World Bank and the IMF, so one of our points is that it is difficult to generate reform. Just providing a large amount of aid or having conditional loans is not necessarily going to generate reform; it really depends--it really starts with countries' own effort; countries' own initiative. So, our second main point is that when it comes to the key issue of supporting reform or helping countries generate reform, often, the knowledge creation side of aid is really critical.

Vietnam provides a nice counterpoint to the Zambia example. Vietnam is a country that had very poor policies in the mid-1980s and was receiving a small amount of Western aid, less than 1 percent of GDP in aid. Vietnam is a country that started its own reform program and, with fits and starts, made a lot of progress in improving its reform by the early 1990s. Now, while donors were not providing a lot of money, what they were doing is helping on the ideas side. So, you had donors like Sweden and the UNDP providing technical assistance; helping the government essentially learn about policy from neighboring countries; the World Bank was providing policy advice at that time, but it was not providing financing.

So, one of our points is that when countries start their own reform programs, then, foreign aid is often critically important to helping countries learn about good policy; work out the details of reform. And then, as you can see, once policies were pretty good, a large amount of aid has flowed into Vietnam, and our work suggests that that financial transfer now has a very strong impact, and, in fact, Vietnam has had very dramatic success with poverty reduction in the 1990s.

Our third main point is that most aid still goes to support particular public services. Aid is about getting kids into school or improving the rural water supply, but again, the knowledge side is often the critical component here. One reason for this is that aid, like money in general, tends to be fungible. What we mean by fungible is that if donors put a dollar of aid into the rural development sector, we estimate from a large sample that it leads to a net increase in rural development spending of 11 cents.

Now, this is not because of corruption; this is the reality of public finance that if a donor finances a particular activity, if a donor finances some rural roads, it frees up the government to do other things with its other resources, so if a donor finances some rural roads, the net effect on spending in that sector is a lot smaller than what the donor contributes. Essentially, aid is financing the whole public sector, which is why the overall quality of policies and institutions is important.

Now, this does not mean that aid cannot help in particular sectors; actually, one of our strong messages is that donors really can help in particular sectors, but you often find that it's the knowledge creation side of the business that's critical. So, let me give you one concrete example: Pakistan is a country that has traditionally had low female school enrollment of about 45 percent, and in recent years, donors and the government have worked with communities in Balochistan state to develop an innovative program.

To make a long story short, donors and the government provide communities money to start new private schools, and the communities commit to a certain level of girls' enrollment. This program has been very successful. There has been an immediate jump in girls' school enrollment, and it is an example of how donors have helped the community develop a new way of providing services. It's what we call knowledge creation: finding what really works to get girls into school in rural Pakistan, and there are lots of examples of donor support providing this critical aspect of helping communities find what they need to provide services like education or rural water supply.

Let me close by coming back to where Joe Stiglitz began. There has been a sharp drop in foreign aid in the 1990s. Official development assistance has declined by one-third in real terms. Our work says that there's the best environment ever for effective aid. Effective aid depends primarily on developing countries' own efforts. We have lots of countries reforming; we have lots of communities trying to improve their services; aid can help with the knowledge side of the business, but an important message from us is that money is important, and money has a large impact on poverty reduction in the right environment, and there are lots of those environments in the 1990s.

Thank you very much.

MR. HAY: Okay, David; thanks for that. Let's open things up to questions. We've got a mobile mike in the aisleway, so if you can just wait until it gets to you. If you would, just for the sake of the poor transcriber up there, let people know who you are and which company you represent.

We're going to restrict it to aid and this report this morning, just out of respect for the sleepless days and nights that David's had over there putting it together over the last 18 months to 2 years, and we'll see how we get on with that. So, I think, actually, we had a question here just to begin with.

MR. MENON: N.C. Menon, Hindustan Times.

Now, this report suggests that countries with good policies can benefit more from aid, and it is also suggesting that donor countries should direct aid towards countries with good policies. Now, does that mean that they shouldn't give more money or all the money to countries with good policies, and they will take the high most?

MR. STIGLITZ: No, let me--what this is says is--what David emphasized is that aid takes two forms; one is money, and the other is knowledge, knowledge that helps countries build better institutions, better policies.

What it says is that the money itself is most effective when allocated in an environment where there are good policies and good institutions in place, and so, it does say something about how money should be allocated. It says that we ought to work very hard to try to create the environment in the other countries that makes money more effective, and we are actually doing that; what we say is one of our main missions. So, what it really says is that you have to tailor your overall aid program to the circumstances of the country; the mix of, you might call, knowledge and money has to be adapted to the situation at hand.

It is also the case that we would argue that this is based on what has happened in the past, given the delivery mechanisms that have been employed in the past. The report raises the possibility that there may be alternative delivery mechanisms that need to be explored to see whether they can work more effectively. So, for instance, in a country with bad economic conditions and ineffective public institutions, government institutions, it still is important to improve the quality of education and to--after all, you know, investments in education today will really not be reaped for 10 years, 15, 20 years, and there will hopefully be a better government in place 15 or 20 years down the road.

So, we certainly don't want to write off those countries. The question is are there ways of delivering, for instance, through NGOs or through the private sector that are able to deliver public services like education, like health, in those countries where the government isn't effectively able to provide those services.

Do you want to add anything to that, David?

MR. DOLLAR: I guess I would just very briefly--I would just add that, you know, we want to get the message out that we are not saying that, you know, give no assistance to the countries with very poor policies. As Joe indicated, it's an issue of what kind of assistance, and then, we are saying that there are some countries with high poverty and very good policy where we can make large financial transfers.

MR. HAY: Okay; up the back there in the last row, Kristyn.

MR. CHAPMAN: Thank you; Irv Chapman from Bloomberg Television.

Dr. Stiglitz, a couple of things. Would you not sum up the definition of reform in these governments that those who have discovered the principles of the free market are doing okay, particularly since there's no Cold War pressure from the other side propping up ineffective efforts at central control? And also, it was thought for a time that the wealthy countries should assume an obligation of 1 percent of their gross output for aid. This seems to have gone by the boards except for a couple of smaller and wealthy countries.

Would you comment on whether there should be some such moral obligation, or maybe it's a material obligation; maybe it's an investment obligation.

MR. STIGLITZ: First, on the question, I think that the basic framework that you said is correct; that the market economy is really at the core of successful economic growth; the fact that I alluded to before that successful aid; US$1 of successful aid brings in US$2 of private investment is testimony to that.

We also have recognized by some of the failures in recent years that a good market economy requires, for its effective functioning, good public institutions; that it requires laws, effective financial institutions; it requires a judicial system; it requires capital markets to work; it requires what the United States would call a good Securities and Exchange Commission; good protection of minority shareholder rights, things that often, in market economies, we take for granted that are the institutional infrastructure that make market economies work and that some of the failures we've seen have come because governments have not played their critical role as a complement to the market economy. And so, when we say--in our report, we talk about good markets and institutions, we include in that institutions of the kind that I have just described.

On the second issue, I think the irony is that the commitment of the international community to support aid has declined, while the potential profitability, if you want to think about it, has actually gone up; that, as David pointed out, there are now more countries that have adopted the policy environments and the institutional environments in which aid is very effective, and while we have made major strides in addressing the problems of poverty, poverty remains very, very large, and as I assess the situation, there really is enormous potential of high returns from further expenditures on aid.

Now, I think that from the perspective of the world community, these can be motivated on both moral grounds and on investment grounds. You know, I think all of us, when we see, you know, the level of grinding poverty that exists in many parts of the world, people who are working very hard and eking out a bare minimum, you know, living; it's not lack of work; it's just that they are unfortunate enough to have been born into a situation where they don't have access to education; don't have access to clean water; don't have access to health facilities that they suffer so much and that there is, I think, a moral obligation for supporting--for providing this kind of support, which is not a handout, to use an expression that became more popular in the United States, but actually, what we are trying to do is make these countries self-sustaining; making them more productive so that they are actually able, in a sustained way, to maintain high levels of growth and so that in the future, they will not need as much aid.

I think that also, though, it is an important investment for the more advanced countries. We have seen that the downturn in one region in the world in the emerging markets can affect all of us and certainly impose a huge amount of uncertainty on our own economic progress and that during the early 1990s, a very large fraction of growth in the developed world was instigated through expansion in the emerging markets. The emerging markets were the engine of economic growth.

And so, I think that the aid--there is a considerable amount of self-interest as well in the advanced countries providing this kind of assistance.

MR. HAY: Third row there.

[Pause.]

MR. HARRISON: Thank you; I'm Nat Harrison with the French news agency AFP.

How would you explain what appears to be the selfishness on the part of the wealthy countries, since you've laid out a very compelling case that now is the time for them to increase aid, and they don't seem to get it. How would you explain their reluctance to increase aid?

MR. STIGLITZ: I think there are a couple of factors. One of them that has played a very large role in the United States and Western Europe in recent years have been the growing budget deficits, and in a period of growing budget deficits, it's easier to cut out money from other people than it is to cut out things within one's own country. It's just a natural inclination.

I hope, for instance, in the United States now that the United States had a US$70 billion surplus last year, that that can be turned around, and, you know, I think the increased aid that Britain is now giving and the very large support that Japan has announced for East Asia are all hopeful signs of a turning around in this respect.

A second aspect that I've seen data for the United States, and I haven't seen data for other countries but may describe those other countries as well, is the lack of understanding among the citizenry of how much we are giving and the effectiveness of aid. There was a poll that was done about a year ago--it may have been 2 years ago--in the United States that asked people how much the United States should be giving and how much the United States was giving, and what was remarkable was that the study showed very strong support for foreign aid; that the levels of foreign aid that they thought we should be giving are 100 times larger than we were giving.

But in fact, they thought we were giving much more than we, in fact, were giving. So, their view was that we should give an enormous amount, but they thought that we were already giving an enormous amount, and one of the points of a report like this is to confront people with the reality that, in fact, aid is now minuscule and has been declining; a fact that people just, you know, have not fully absorbed.

There is also the view that aid is ineffective among some people, and one of the points of this report is to show that aid can be highly effective in promoting economic growth.

MR. DOLLAR: Could I just add briefly on that that I saw some survey results from a Western European country where they asked people would they be willing to give more money to reduce poverty in Africa, and something like 90 percent of the people said yes. And then, they were asked are they in favor of increasing their country's foreign aid budget, and about 90 percent of the people said no.

[Laughter.]

MR. DOLLAR: So, that, I think, takes to Joe's last point, that people need the information that often it's very effective in reducing poverty.

MR. HAY: Just in front of Nat Harrison; one behind you. You're a gentleman.

QUESTION: Just to follow on Mr. Stiglitz's point about aid, can you address the point about multilateral aid from the World Bank and places like the World Bank? It was raised with the South Asian crisis that the World Bank can actually raise billions of dollars to programs in Southeast Asia. Can you talk a little bit about your focus for the aid from the Bank to reduce poverty?

MR. STIGLITZ: Well, the amount that the Bank has--the Bank gives two kinds of assistance. One is concessionary IDA money, in which we depend on basically an annual grant from the more developed countries that provide this kind of concessionary assistance, and this report, by the way, focuses on this kind of concessionary assistance, where we lend money, but the rates at which we lend are far below commercial rates, and this money goes to the low-income countries.

We are completely dependent on the grants from the more developed countries and limited by those grants on the amount that we can give, and consistent with that, you know, the argument of this report is that there is--we could well spend more money than we have available at the present time. In fact, our research also shows that the Bank has done a quite good job at allocating aid according to these basic principles; that the IDA money is allocated in ways that are roughly commensurate with the principles underlying what we recommend. It doesn't say there isn't room for more improvement, but they have been roughly commensurate with those principles.

The other kind of assistance that we give is where we borrow from the market and lend on to countries, and this is for the, like, medium-income countries. The loans to Korea fit within that category. The amount of those that we can lend depends on our basic risk position. We have a certain amount of--you might call it equity, originally funded by the more developed countries and partly reinvestment of the returns that we got, and we are roughly now in a position where the amount of lending that we can do is circumscribed by our risk exposure; that is to say that given our capital base, there are certain prudential limits associated with how much borrowing and lending we should be engaged in, and that limits the magnitude of the lending activity that we can engage in at the present time.

MR. HAY: Okay; let's go up the back here. We've been going right a bit. Our second row woman.

MS. VULLO: Angela Vullo from the Executive Intelligence Review.

Mr. Stiglitz, this shift from money to policies, I think, is extremely critical in terms of not getting into a continuing crisis management mode, handouts, which would obviously be a shift away from free market policies, and my question to you is that there has been a proposal for world reorganization based on a unilateral movement of sovereign nation-states to work together in terms of development, and what I would like to ask you is what do you think about this proposal that has been made by Mr. LaRouche based on a new Bretton Woods system, which would be fixed exchange rates; fixed currencies; fixed parities and a return to science and technological development for all nations throughout the world, based on a program like the Eurasian Land Bridge.

What I would like to ask you is what is the role of the World Bank in actually a return to the old Bretton Woods system? I mean, this was the original conception, and that's what I'd like to ask you.

Thank you.

MR. STIGLITZ: Well, I think that there is general consensus among economists that the gold standard system didn't work, and the adjustments, the flexibility in wages and prices that would be required to make the gold standard work simply aren't there, and as a result of that, the economic disturbances would be more profound, and the reason the world left the gold standard was because it was--did not address--didn't work effectively.

On the other part of your question, the Bank is very much concerned with promoting science and technology as part of a strategy for development, and one of the main themes of the World Development Report for this year focuses on the importance of science and technology and the improvement of that as a vital role in closing the knowledge gap that separates the less-developed from the more-developed countries.

MR. HAY: Let's just come down here, second row; then, we'll go in the middle; then, we're down here.

MR. PARASURAM: Parasuram, Press Trust of India.

You had mentioned that years of statistics on how aid, official development aid, benefits the receiver. I was wondering whether you had run any similar studies on to what extent it benefits the giver, so that you can persuade the countries to give more. Secondly, you had mentioned that both India and China have good policies. Does it mean that the nature of society, the nature of the political system, does not have any impact on whether it follows good policies or bad policies? I have in mind a statement that in democracies, you don't get famines; but in authoritarian societies, you do. Do you find a similar kind of a trend as to whether, in democratic countries, you get better policies than in countries which are not democratic?

MR. STIGLITZ: Do you want to get that?

MR. DOLLAR: Okay; on the first question, some of our research looks at how foreign aid is allocated; how different types of aid are allocated, and certainly, donors are trying to do a number of different things with aid, so donors are pursuing some strategic interests or supporting their former colonies. So, we do get into that issue in the report, and, you know, we can't second-guess the motives of different donors. What we can do is point out that pursuing those other goals takes aid away from its potential to really have a large impact on poverty reduction.

You know, sometimes, pursuing strategic objectives fits in with poverty reduction, but sometimes, there is a conflict between those goals. So, I think we--you know, we do recognize that donors are trying to do different things; poverty reduction is one of them, and our report is mainly sort of looking at when that is effective and quantifying what you might think of as the costs of using aid for other purposes. And then, as Joe Stiglitz pointed out, the evidence that aid is powerful in helping growth in emerging countries, that obviously implies that it has benefits for the kind of long-term growth and stability of the world economy, so that, you know, I think where there is both a moral issue from the point of view of the giving countries, and then, there's also the practical considerations.

MR. STIGLITZ: Let me add just a couple points. On the second question, we actually have a research program at the Bank now focusing on some of those issues. One example is reflected in this report. We think, for instance, that more openness in a society, more transparency, is likely to lead to less corruption. Corruption breeds in an environment where there is a lack of scrutiny by a free press.

One of the variables that is a key variable in our policy, when we call good policies, there are a number of ingredients that David has called attention to. One of the policies is lack of corruption, and to the extent that democracy, openness, scrutiny by the free press reduces corruption, it creates a better policy environment and a better policy environment than is a key variable, as we have said, in making growth more effective and aid more effective.

On the other issue on the benefits to the donors, I mentioned several examples of that, but let me mention one more. There is a widespread view that the aid that is being given by Japan and by other countries to the East Asian countries may have actually an enormous stimulative effect on the world economy; that, in fact, one study I saw argued that the potential multipliers associated with giving aid to East Asia in the current circumstances were sufficiently large that the donor countries would actually benefit more from that than if the money were spent in their own country.

Whether that is, you know, precisely correct or not, the important point is that there are enormous benefits that do accrue in economic terms, let alone in terms of social stability and the moral terms that I've talked about earlier.

MR. HAY: Okay; the gentleman in the fourth row.

Yes; just there.

QUESTION: I have a couple questions, but you already mentioned one point: transparency. I know the World Bank has been working with 30 countries about corruption, and you have mentioned that this a barrier to applying good economic policies. Why hasn't the World Bank given the names of these countries, if you are talking about transparency? It could be better if you give the names of these countries that are working on corruption, to force them, you know, to apply good policies.

And the second question is about Central America: how much do you think Hurricane Mitch will be increasing the level of poverty in that region and also other disasters as El Niño in the whole hemisphere.

MR. HAY: Let me handle the corruption one just to begin with. It's a matter of standard policy: we don't name the countries. We want to work with them, and if we actually start naming names, then, we don't give countries any incentive to come forward and work with us on many of these matters of governance and transparency. So, suffice to say that it's a pretty broad international effort, but, you know, until the prevailing winds change, I'm afraid, you know, we don't name them, because we want them, in their best interests and ours, to come together, and if we identify them, then, people run for cover; it's human nature, national nature.

So, your second question part, I will hand on to Joe.

QUESTION: In other words, no transparency from the World Bank.

MR. HAY: No, simply untrue in your conjecture.

Joe? And we know who they are. You can talk to Harry Dunphy there in the front, our Delphic source.

MR. STIGLITZ: One of the sad things about the fight on poverty is that climbing up the ladder out of poverty is a very slow, step-by-step process, and on the other hand, adverse disasters can push you down very quickly, and those disasters can be not only natural disasters but also man-made disasters. The hurricane and the El Niño are obviously going to have significant effects on poverty. I don't know if we have a quantification of that.

But of equal concern is the fact that the man-made disaster in Indonesia, the economic downturn, the downturn in their economy, is undoing 10 years, perhaps 20 years, of work of bringing people in that country out of poverty, and that just reinforces the importance of how important it is to maintain a stable economic system and to have an economic framework that insulates countries against these kinds of shocks.

MR. HAY: David, do you want to jump in?

MR. DOLLAR: Not on that one.

MR. HAY: Okay; Mr. Sitov?

MR. SITOV: Andre Sitov from TASS.

Russia does not really receive any concessionary loans, but still, there is a debate in my country on the issue of quote-unquote "foreign aid." And one of the aspects of that is that people argue whether the macroeconomic stabilization, per se, was enough. So, I would like Mr. Stiglitz to give us his view on the right balance between assistance in macroeconomic stabilization and assistance that's aimed toward development.

MR. STIGLITZ: I think there is now universal agreement that macro stability by itself is not enough. I was alluding to that in the answer to one of the previous questions, where a market economy requires a whole variety of what I call institutional infrastructure to make it work effectively, and an element of that is macro stability, but market economies in which you have monopolies that are unregulated do not deliver the fruits that a market economy is supposed to deliver.

The fundamental results about the efficacy of market economies for producing efficiency have to do with a force of competition, and so, it's not just private property; it's competitive market forces, and so, if you do not have competition, you will not get the benefits out of a market economy.

Making competition work is not easy, and in the United States and in Western Europe, you have competition agencies like antitrust agencies designed to make sure that firms act in a competitive way, and these play a very active role in making the market system work, and this goes back to what I said before: those people who, in a market economy, often take for granted the underlay of the institutions that make market economies work; successful development requires markets but requires the institutional infrastructure that makes markets work, and those include bankruptcy law, corporate law, contract law, competition law, financial systems that really provide funds for new enterprises, because if you don't have new enterprises, you're not going to have the force of competition that makes market economies work; infrastructure, and then, there's an important role that the government plays like providing for education that are the human resources that make a market economy work.

MR. SITOV: So, does that mean--sorry, a brief followup. Does that mean that Russia should not have been given that money strictly for macroeconomic purposes?

MR. STIGLITZ: I think the hope was always that the macroeconomic reforms would be accompanied by other reforms and the other conditions that make market economies work and that one cannot simply focus, as I said before, on macro stabilization.

MR. HAY: David, did you want--

MR. DOLLAR: I just want to say this is a good point to emphasize that the measure of policy we're using in our research and our report goes way beyond macro policy to include a lot of the things that were just mentioned: you know, rule of law, institutional quality, governments' investment in people, a whole range of things. So, our concept and measure of good policy and institutions goes well beyond macroeconomic stabilization.

MR. HAY: Okay; up the back there.

MS. ORTIZ: Hi, Ortiz from Tiempo del Mundo. Could you please tell us what impact the study could have on World Bank policy, and could you also elaborate further on what you consider to be good policies, apart from the infrastructure that Mr. Stiglitz laid out and apart from the transparency laws that were discussed? What else would constitute good policies?

And also, in your study, did you consider moral hazard to any degree and what impact that could have?

MR. STIGLITZ: Okay; let me talk about the first point and then ask David to talk about the second. The Bank has, over time, been evolving towards many of the lessons that are brought out in the report. As I said, the report emphasizes both the role of knowledge and money, and the Bank has been talking about itself for the last 3 years as a knowledge bank as well as a money bank.

We've been trying to tailor programs to the circumstances of the country, the mix of money and knowledge depending on the circumstances. This report helps give guidelines to further refine that process of tailoring.

So, overall, in a sense, the report represents a continuation in the evolution of our thinking about the key concern of the Bank is how to promote most effectively development and poverty alleviation. Let me give you one other example. On the delivery of services at the local level, our research has shown that, for instance, in water projects, local participation has a very major effect on improving and increasing the effectiveness of money spent on water improvements, and so, this is again an example of how a design feature can make money, a policy framework can make money spent be more effective.

MR. DOLLAR: Well, you know, on the good policy issue, we've mentioned some of them, but here's another way to think about it. We divide the good, important policies for development into four broad categories, one of which is macroeconomic stability. That is one element. But then, there is a whole set of policies you might call structural policies concerning the competitiveness of the market: openness to foreign trade; the regulatory environment; competition policy; rule of law; so, there is a whole set of issues around how well the market economy functions.

Then, you have public sector efficiency issues, including the quality of the civil service and level of corruption; the ability to provide public services, and then, you have a set of issues around poverty and social safety nets; you know, to what extent are some of the poor and vulnerable being taken care of? So, those would be sort of four broad areas within which there would be a number of specific policies.

I'm not sure exactly which moral hazard issue you're asking us about. One we certainly considered is we looked at the question of does giving a lot of aid to countries' lead to bad policy? You know, some conservative thinkers have argued that giving a lot of money will actually lead to bad policy. We looked at that rigorously; we found no evidence that giving aid to countries leads to bad policies. So, I think we have addressed that particular moral hazard issue.

MR. STIGLITZ: Yes; that's sometimes called the aid dependency issue, and the report clearly rejects that in the countries with good policy environments.

MR. DOLLAR: But let me just add that we do also find, if I can use a little jargon, diminishing returns to aid, meaning the fact that we show there is a high return to giving, you know, 4 or 5 percent of GDP in aid to Uganda, you can't then say giving 50 percent of GDP would lead to 10 times that result. That is obviously not true. So, we're not advocating, you know, huge amounts of assistance. The reality is that countries like Ethiopia and Uganda get a lot less, you know, far below what would take them into a realm where that would be a serious issue. So, there is real scope to increase aid to a number of the countries we've mentioned that have high poverty and good policies.

MS. ORTIZ: Did you look at World Bank aid, or did you look at aid in general?

MR. DOLLAR: The report is mainly about aid in general. You know, we do draw on some World Bank data sources which are particularly good; in a number of points, we make a distinction between multilateral aid and bilateral aid, but the report is primarily about foreign aid in general.

MR. HAY: Okay; time left for one, maybe two; let's go here on the side.

MR. POMPER: Hi; Miles Pomper from Congressional Quarterly.

You mentioned Uganda. One of the criticisms has been that, as you've suggested, you've suggested that people should first reform their economies, and then, the aid should essentially follow afterwards. The question is on timing. There has been a criticism that Uganda and countries like it have had to wait too long to be rewarded for pursuing the proper policies. Did you address the issue of timing and phasing in the study?

MR. DOLLAR: Yes; I mean, it's an art more than a science, so, you know, what our results suggest is ideally, you'd like to get the timing exactly right, so even starting from a terrible policy environment, we argue that there are useful things that donors can do, but often, they don't require a large amount of money, and as policies improve, the evidence is that the money has a big impact and will help sustain the whole reform program.

So, ideally, you want to get the timing quite exact. If you think about the Vietnam figure I showed you, actually, policies improved a good year or two before the large-scale money flowed in. So, that may be a case where the donors were a little bit slow to flow in. But actually, Vietnam got some private investment early because the private investors knew that they would eventually be getting foreign aid. So, I think that helped Vietnam.

So, ideally, you want to get the timing exactly right. You're going to make mistakes in reality. I think the important point is if you put a lot of money into a very poor policy environment, that's where we really find weak results. I think we have a better sense of how to measure policies, so we have more potential now to really bring the large-scale finance in as you see clear improvements in policy, and there are a number of recent examples; you know, Ghana in the late 1980s or Bolivia; if you look at those cases, the aid increased pretty much in lockstep with the policy improvements.

MR. STIGLITZ: I think the point you may be raising is that there are a number of countries where the policy reforms have occurred more quickly than the aid flows have responded, and Ethiopia and Uganda both reflect examples of countries that have had dramatic reforms now for 5 or 6 years, so it's not a case where you would say, oh, we can't trust it; you know, they really have governments who are very committed to pursuing good policies and a whole variety in terms of the list that David talked about. They are pursuing good policies on a whole variety of fronts, and yet, the aid flows have increased but not commensurately with the improvement in the their situation, in their policy regimes.

MR. HAY: Lucky last question anyone?

[No response.]

MR. HAY: Okay; thank you all for coming very much today. If you could do us a favor, and this is very sort of unofficial, but the URL address on the bottom of the press release, it becomes open for everybody to see on the Web once the embargo expires at 3:00. If the spirit so moves you, and you want to just mention the URL address in your coverage for the general public to pick up on, feel free, but, you know, I propose it merely in that way.

Thank you very much.

[Whereupon, at 11:01 a.m., the briefing was concluded.]