Securing the Future; A Strategy for Economic Growth

8/9/2019 Securing the Future; A Strategy for Economic Growth

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USAID

SECURING THE FUTUREA STRATEGY FOR ECONOMIC GROWTH

Apri 2008

U.S. Agency or Internationa De e opment


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Capti ns cl ckwise r mt p le t:

In rmati n techn l ghelps cl thingmerchants in Dakar,Senegal, increasee fcienc and pr fts.Credit: riChard Nyberg, usaid

A Ukrainian w manrecei es title t herland. Titles increase the

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r e p rt. Arra aestablished a directmarket link with aMiami-based wh lesalerand meets strict e p rtstandards.Credit: JaN howard, usaid

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A ghanistan, makesg ds and ser ices m reaccessible t amilies andbusinesses, and all wsl cal pr ducers t sellt wider markets.Credit: usaid


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TAblE OF CONTENTS

Page 2E ecuti e Summar 3

Securing the Future 8

Ec n mic Gr wth Trans rms S cieties 8

The Ke t Ec n mic Gr wth Is Rising Pr ducti it 9

Gr wth in De el ping C untries Is in the U.S. Interest 9

Much Has Been Acc mplished 11

Much Has Been Learned 12

The Internati nal En ir nment r Gr wth in De el ping C untries Has Ne er Been Better 18

USAIDS Strengths Determine Its R le 19

USAID Will Pr m te Rapid, Sustained, and Br ad-Based Gr wth 23

Three Principles Will Guide Ec n mic Gr wth Pr grams 28

Ec n mic Gr wth in the Framew rk r U.S. F reign Assistance 29

Res urces and Res urce All cati n 32

In C nclusi n 34

Endn tes 35

Re erences 38


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SECURING THE FUTURE: A STRATEGY FOR ECONOMIC GROWTH 3

ExECUTIvE SUMMARY

t he United States Agency or International Development (USAID) promotes economic growthin accordance with the 2006 United StatesNational Security Strategy and the goal o trans or-mational diplomacy. Economic growth, in tandem with the promotion o democracy, is animportant key in achieving the Secretary o States goal o trans orming the developing world, whichincludes most o the worlds countries and most o its people. Free markets and ree societies are vitalto achieving the development goals o the United States. As stated by Secretary Rice:

the United States must assist the worlds most vulnerable populations through our transforma-

tional diplomacyusing our foreign assistance and working with our partners to build state capacity where little exists, help weak and poorly governed states to develop and reform, and empower those states that are embracing political and economic freedom. These are three main goals of our country assistance programs, with the ultimate purpose being graduation from foreign economic and governance assistance altogether. Vibrant private sectors in free, well-governed states are the surest form of sustainable development.1

ECoNoMIC GRoWTHTRANSFoRMS SoCIETIESEconomic growth is key to trans orming the

developing world, which includes most o the worlds countries and most o its people.Economic growth enables countries to reduce andeventually eliminate extreme poverty. It is thesurest way or countries to generate the resourcesthey need to address illiteracy, poor health, andother development challenges on their own, andthus to emerge rom dependence on oreign aid.

Economic growth in developing countries createsimportant bene ts or the United States as well.The developing world is emerging as the largestmarket or U.S. exports. Accelerating growthamong developing countries that have done well,and encouraging it in those that have not grownas quickly, will urther increase their contributionto global and U.S. wellbeing. Economic growth

creates the prospect that more developingcountries will become e ective partners with theUnited States in working toward a more stable,

healthy, and prosperous world.Poor countries that ail to grow can pose seriousproblems. They are vulnerable to crisis, sometimesincluding state ailure and violent confict; canharbor terrorist activity; are vulnerable to theimpact o natural disasters; and make large claimson U.S. and international resources. Countriesthat stagnate are less able and sometimes less willing to help address transnational issues, many o which originate within their borders, includingillegal migration; tra cking in narcotics, weapons,and persons; health threats such as HIV/AIDSand avian fu; and environmental concerns such asloss o biodiversity. All considered, economicgrowth in developing countries is essential tosecuring their uture and ours.

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4 USAID

The Framework or U.S. Foreign Assistance(herea ter, the Framework) gives economicgrowth a central position in the U.S. oreignassistance program. This makes it important tohave a clear understanding o the growth processin order to help countries grow more quickly.This strategy rst reviews the principal insightsinto economic growth gained over the past 50

years. It then identi es priorities and approachesor promoting economic growth in the USAID

assistance programs o the uture.

RECENT PRoGRESS ANDFUTURE PRoSPECTS ARE BoTHENCoURAGINGThe developing world has achieved much moreprogress than is o ten recognized. Global growthsince 1950 has been unparalleled in history. Average real incomes rose by at least hal inall regions o the world, and the share o the worldspopulation living in extreme poverty ell rom 55percent to 18 percent in 2004. Li e expectancy rose by 50 percent over the same period, whileequally dramatic progress was made in othermeasures o the quality o li e rom literacy andnutrition to access to water and electricity. Although A rica has historically had the slowestgrowth o any region, its per ormance hasimproved substantially over the past decade,

lending hope or the uture.Looking orward, the global environment orgrowth in developing countries has improvedmarkedly rom a generation ago, and in many respects has never been better. Understanding o what makes or good and bad economic policieshas expanded, with groundbreaking new work inmicroeconomic re orm. Rapidly increasing globaltrade and investment o er unprecedented oppor-tunities or countries that are willing and able tocompete. The increasingly ree fow o in orma-tion connects developing countries more closely tothe worlds ast-growing knowledge base.

But the challenge remains large. Despite wide-spread progress, there has been great variability in economic growth per ormance among

countries and over time. The act that 18 perceo the worlds population still lives in extremepoverty provides a sharp reminder o the urgenneed to achieve aster growth and to spread itsbene ts more widely.

ECoNoMIC GRoWTH BEGINS WITHCoMPETITIvE FIRMSEconomic growth is the sustained increase o asocietys output. The key is ongoing growth inproductivityturning the same resources intoever-greater amounts o goods and services ovtime. All productivity growth takes place at thelevel o the rma term that includes producein all sectors and o all sizes, rom the amily

arm and the vegetable seller with a handcart tothe largest global corporation. Productivity growth, and the investment that stimulates andsustains it, result rom the e orts o myriadindividual producers. Seeking pro t and spurreby competition, each works to increase sales,reduce costs, improve quality, and serve or creanew markets. For growth to be sustained,producers must be motivated to search or andadopt a never-ending stream o such improve-ments. Any single improvement in technology omanagement boosts growth only temporarily.

By SHAPING PRoDUCERS

INCENTIvES, ECoNoMICGovERNANCE DRIvES GRoWTHProducers decisions are strongly infuenced by thincentives and disincentives created by governmepolicies, regulations, and other aspects o economgovernance, including the capacity o governmeto en orce these rules o the game in market-

riendly ways. Key examples include the impactmacroeconomic policy on overall economicstability, along with the e ects o microeconompolicies including taxes, regulations, and theen orcement o property rights and contracts.Macroeconomic and microeconomic policiesrepresent thedrivers o economic growth,because they are the primary determinants o therate and sustainability o economic expansion.


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5SECURING THE FUTURE: A STRATEGY FOR ECONOMIC GROWTH

Sound macroeconomic policy is essential.Fortunately, most developing countries havelearned the principal macroeconomic lessons andmade the principal re orms. Hyperinfation hasalmost disappeared and multiple exchange rateshave become rare. Most governments recognizethat de cits must be controlled. Macroeconomicre orm will not, there ore, be the centerpiece o

most USAID programs. However, in certainsituations macroeconomic stabilization may emerge as USAIDs highest economic priority,especially in countries emerging rom confict.

Microeconomic governance has emerged as thenew rontier. New data show that businessregulation is much more extensive and onerousin poor countries than in rich ones. Someregulations are essential, but they should bedesigned so as to minimize costs, uncertainty,

and the potential or abuse. In many poorcountries, complex and costly regulationsdiscourage rms rom employing workers orinvesting in new technologies, and inhibit those

rms rom achieving high and growing produc-tivity. Many such regulations place considerablediscretion in the hands o government o cials,giving rise to pervasive corruption and rent-seek-ing. There is tremendous opportunity over thenext decade to address these constraints, and toimprove the microeconomic environment more

generally by strengthening systems o property rights, competition policies, and commercial law.

oTHER FACToRS ENABLEGRoWTHI macroeconomic and microeconomic policiesand institutions drive the growth process, other

actors enable growth to move orward. Theavailability o nance, o in rastructure, and o an educated and healthy work orce, or example,can infuence the rate and direction o growth.However, they cannot by themselves causegrowth to occur where the drivers are not inplace. Work in these areas is important, but itsimpact is much reduced in a country with a poormacro- or microeconomic policy environment.

PoLITICAL CoNTExT MATTERSThe greatest obstacles to growth stem not romnature, but rom politics. Because almost every economic change creates losers as well as winners,identi ying the correct economic prescription israrely enough to ensure that it is adopted.Understanding local interests is important indetermining with whom to work and what to do.

This o ten means that one size does not t all when it comes to designing and prioritizinginterventions. The basic principlesmacrostability, market-based competition, etc.can beapplied in di erent ways to suit di erent situa-tions. Governments committed to re orm havesometimes ound new and surprising ways to apply these principles success ully to accelerate growth.

DoNoR FLExIBILITy MATTERSAND PLAyS To USAIDS STRENGTHDonor fexibility matters as well. Among the topre orming countries, some 85 percent o micro-economic re orms occur within 15 months o achange o government.16 While countries pastper ormance must be taken into account whensetting aid levels and designing interventions, theability to re ocus support rapidly when genuineopportunities arise is essential to take advantageo political breakthroughs a ecting the local willto re orm.

USAID has several advantages in this regard inrelation to other donor agencies: a strong private-sector orientation, in-country sta s, the ability to

eld long-term technical assistance teams, grantunding, and the ability to respond quickly and

fexibly to emerging needs. These allow USAIDcountry sta to develop partnerships with re orm-oriented counterparts in the public and privatesectors and to be on the scene in situations wherearriving in time counts or more than the dollarvalue o assistance. Additional fexibility arises

rom USAIDs technical capacity to address theull range o issues that ultimately a ect a coun-

trys growthincluding issues o democraticgovernance, health, education, and other areascomplementary to economic re orm.


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6 USAID

WE WILL PURSUE RAPID,SUSTAINED, AND BRoAD - BASEDGRoWTHUSAIDs overarching goal in economic growth will be to help partner countries achieve rapid,sustained, and broad-based growth. Per capitagrowth o 2 percent per year should be regardedas minimally satis actory. Experience shows that

per capita growth rates o 3 percent, 4 percent,and higher are possible and are clearly pre erred.Sustained growth is growth that is maintainedover the long term. Prices, property rights, andother policies to encourage the responsible use o natural resources and an appropriate response toenvironmental concerns play an important rolein supporting sustained growth. Broad-basedgrowth is growth that includes all major incomegroups, ethnic groups and women, and thatsigni cantly reduces poverty.

In support o this goal, USAID will endeavor to:

Develop well- unctioning markets in develop-ing countries,working with the drivers andenablers underlying productivity growth tocreate the conditions or aster and moresustained economic expansion. This is thecentral challenge and the main area o oppor-tunity. E orts will mainly ocus on supportingpolicy and regulatory re orms, while buildinglocal capacities to implement them and tocontinue the re orm process. Principles o sound governanceopenness, transparency,and accountabilitywill be important acrossthe board. Capacity building can be moreexpensive than policy advice alone, but bothare inexpensive compared with many e orts inother sectors. Moreover, both have thepotential to achieve trans ormational resultsmany times the cost o the investment.

Activities should include a growing emphasis

on microeconomic re orm including supportor greater competition and stronger property

rights, improving the enabling environmentor agricultural development, in rastructure,

the nancial sector, and trade capacity build-ing. Macroeconomic re orm and capacity

building is likely to be pursued on a moreselective basis.

Enhance access to productive opportunities the poor, women, and other disadvantagedgroups, to help ensure that they bene t romgrowth. Faster growth is the basic source o new opportunities or the poor as well as the

non-poor. But complementary e orts areneeded to help the poor and other disadvan-taged groups gain access to those opportunitieExpanding access to improved basic educatio

or poor children and girls, expanding accessnancial services, promoting more fexible

labor markets, and securing property rights osmall armers and urban slum dwellers aresome examples o such e orts.

Strengthen the international ramework o policies, institutions, and public goodsthatsupport growth prospects and opportunities

or poor countries. Examples include researcon agricultural, health, and other problemsspeci c to developing countries, and promoting international standards rom accountinto customs operationsthat provide soundmodels or developing countries to emulate.

WE WILL SEEK SySTEMIC ANDCATALyTIC IMPACT IN LIGHT oF

PoLITICAL oPPoRTUNITIES ANDCoNSTRAINTSEconomic growth is a complex process.Moreover, di erences in country conditions anopportunities create a wide variety o potentialdonor interventions. Core principles or achieving the greatest results should guide the choice interventions. In particular:

Programs should seek large and systemicimpacts.The success o a ew rms, arms,communities is not enough. The goal isgrowth that a ects thousands o rms andmillions o people. This typically requiresimprovements in policies a ecting all busi-nesses within a sector or across the entireeconomy. It means that USAID will generall


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not nance development directly, but will seek instead the systemic re orms that can mobilizemuch larger savings and investment by others.

Where systemic re orm is not achieved,catalytic impact is essential.Demonstrationprojects can be valuable, but they shouldeither demonstrate approaches that cause a ar

larger number o people or rms to ollow suit without subsidies, or should have the clearpotential to catalyze policy or institutionalchanges with a much wider, systemic impact.

Close attention to the politics o economicchange is important or results.When changeis slow, support to re orm-oriented leaderspublic and privatecan help to generatepolitical will. External actorssuch asrequirements or joining the World TradeOrganization or the European Union, or alow ranking on a widely recognized indexo country policies and per ormancehavemotivated signi cant changes in the pastand should be used creatively to leverage

urther change.

THE FRAMEWoRK FoRU.S. FoREIGN ASSISTANCEPRovIDES A NEW BEGINNINGThe Foreign Assistance Framework adopted in

2006 places recipient countries into ve catego-ries based on their policy per ormance, level o development, experience with confict, and other

actors. The Framework also divides program-matic interventions among ve broad objectives;e orts in these ve program objectives areintended to be complementary and mutually rein orcing. This strategy suggests the kinds o economic growth interventions likely to be mostappropriate in each country category, whileemphasizing the need to recognize and respond

to the di erences among countries within eachcategory. It explains why achieving the goals o the Framework, and signi cantly increasinggrowth and incomes in the developing world,require both a clear and visible priority toeconomic growth unding or USAID, as well

as concerted attention to rebuilding USAIDscadre o economic growth pro essionals.

This strategy ocuses most strongly on thechallenges o achieving aster and more sustainedgrowth in Developing and Trans orming coun-triesthose with a reasonable degree o politicalstability. Rebuilding countries have an equally

compelling need to achieve sustained highergrowth rates. The distinctive issues related torestoring economic growth in Rebuildingcountriesparticularly those emerging romconfictare re erenced in this strategy, and arealso addressed in detail in a separate document.48

The Framework or U.S. Foreign Assistanceprovides the opportunity to recommit USAID topromoting economic growth in the developing worldthe only route or developing countriesto eliminate extreme poverty and generate thedomestic resources needed to address their owndevelopment challenges. This strategy establishesthe basis or setting priorities within theFramework so that USAIDs economic growthprograms will have the greatest impact. Throughincreased support or systemic and catalyticchange in the economies o partner countries,and with adequate unding and technical sta ,USAID can multiply the results o its work andhelp much larger numbers o people in partnercountries secure a better uture. In an interde-pendent world, a better uture or the people o developing countries means a more secure uture

or us all.


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8 USAID


Page 8

t he United States Agency or International Development (USAID) promotes economic groin accordance with the United States 2006National Security Strategy and the goal o trans omational diplomacy. Economic growth, in tandem with the promotion o democracy, is animportant key in achieving the Secretary o States goal o trans orming the developing world, wincludes most o the worlds countries and most o its people. Free markets and ree societies arto achieving the development goals o the United States. As stated by Secretary Rice:

the United States must assist the worlds most vulnerable populations through our tra

tional diplomacyusing our foreign assistance and working with our partners to build stawhere little exists, help weak and poorly governed states to develop and reform, and empostates that are embracing political and economic freedom. These are three main goals of ouassistance programs, with the ultimate purpose being graduation from foreign economic governance assistance altogether. Vibrant private sectors in free, well-governed states are t form of sustainable development.1

ECoNoMIC GRoWTHTRANSFoRMS SoCIETIESIn 1950, South Koreas per capita income wasroughly $770 in dollars o 1990 purchasing power;Ghanas was considerably higher, at $1,122. 2 Overthe next ve decades, per capita income in SouthKorea rose dramatically to $14,343, while Ghanascrept upward to just $1,280.

The consequences or ordinary people have beenenormous. In 1950 li e expectancy in SouthKorea exceeded that in Ghana by our years. Thegap has since grown to 20 years. Most citizens o both countries lived on less than $2 per day in

1950. By 1998, 78 percent o Ghanaians, butless than 2 percent o South Koreans still lived insuch poverty. Similar gaps emerged in education,health, and other measures o well-being. Duelargely to their contrasting records in economicgrowth, Korea has achieved trans ormational

development, whereas Ghana remains at a mucearlier stage o this process.

The consequences or U.S. interests have beendramatic as well. South Korea has become asigni cant and constructive actor on the worldstage as well as one o Americas top tradingpartners, with two-way trade exceeding $70 billiin 2005. U.S. trade with Ghana remains less than$0.5 billion. Korea supports development in othecountries through its own oreign aid program;Ghana remains dependent on assistance.

How can more countries be trans ormed througeconomic growth? Country experience providesimportant insights into the way that growthtakes place. These insights orm the basis orpractical advice or assisting partner countries achieve aster, more sustained, and more broadbased growth.


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The Ke t Ec n mic Gr wth Is RisingPr ducti itSustained economic growth meansongoing increases in per capita income and output. 3 In mostcases, the increases achieved seem small romone year to the next. But compounded over ageneration, they can produce dramatic improve-ments in the well-being o ordinary people.

The United States never achieved the sustainedhigh growth rates o a South Korea. It became richby growing at more modest rates or more thantwo centuries. Estimates o the average growth inper capita U.S. output since independence range

rom 1.7 percent to 2.2 percent per year. Thissuggests 2 percent per year as a benchmark o minimally acceptable per capita growth. I a poorcountry grows at this rate, it is doing as well as theUnited States has done over the long term. I it

does so consistently, it will eventually achievea fuence. I it grows asterand many haveitsliving standards will gradually gain on those o theUnited States and other rich countries.

Economic growth occurs as societies accumulateand equip workers with more and better physicalcapital (e.g., actories and in rastructure) andhuman capital (skills and knowledge), and usethese assets ever more productively to producegoods and services o increasing value. Amongthese sources o growth,increases in productivity account for most of the differences in economic growth among countries.4 Productivity grows asproducersentrepreneurs operating at allscales nd ways to squeeze more output rom agiven set o inputs. They do so by adopting moree cient production methods, applying technicalknowledge to create better products, changingtheir product mix, etc. Capital accumulation andproductivity growth both result rom the inde-pendent e orts o millions o individual produc-ers, constantly working to create new, better, andless costly goods and services through ingenuity and investment. Those e orts, in turn, areguided by the incentives that producers aceincentives strongly a ected by public policiesand regulations, macroeconomic stability, the

en orcement o contracts and property rights, theprevalence or absence o corruption, and otheraspects o economic governance.

M t rc cle repairsh p wners, Rubiahand Sardj n ,

btained a businesslicense at a new,

ne-st p registrati ncenter in Sid arj ,Ind nesia, cutting

ut m nths isitst di erent bureaus,and pa ing bribesand ees.

V i r g i N i a L . F o L e y , u s a i d

Gr wth in De el ping C untries Isin the U.S. InterestDevelopment is critical or nationalsecurity Development is a pillar o U.S. national security.

The 2002 National Security Strategy identi eddevelopmentalong with de ense and diplo-macyas undamental to U.S. oreign policy. Itcalled or the United States to actively work tobring the hope o democracy, development, reemarkets, and ree trade to every corner o theglobe. U.S. policy since then has rea rmed thismessage. The 2006National Security Strategy emphasizes that Development rein orcesdiplomacy and de ense, reducing long-termthreats to our national security by helping to

build stable, prosperous, and peace ul societies.Economic growth is essential

or developmentEconomic growth provides the material basis orprogress in all other dimensions o development.


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10 USAID

A b rder p stbetween Swazilandand S uth A rica.USAID w rked

with regi nalstakeh lders treduce maj r reightdela s at b rders.C mm n cust msd cumentati nam ng c untriesn w streamlinestrade betweenB tswana, Les th ,Namibia, S uthA rica, Swaziland,Malawi, Tanzania, andZambia.

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Rapid growthas in South Korea and Taiwansince the 1960s, and in China, India, andMauritius more recentlycan li t a country romgrinding poverty to relative a fuence in a ew generations. It is key to reducing and eventually eliminating extreme poverty, and an essential parto the solution to almost all other developmentchallenges rom poor health and education to

gender inequality and vulnerability to crisis.Growth also provides the only means or countriesto generate the public and private resources they need to address these and other developmentchallenges on their own, and thus to emerge rom

urther dependence on oreign aid.

The bene ts o economic growth are not only material. The Nobel Prize-winning economistDr. Amartya Sen points out that the ultimatevalue o growth lies inexpanding freedom: giving

people greater choice over what they can do withtheir lives, rom the material dimension at oneextreme to the spiritual at the other. Similarly,Benjamin Friedman emphasizes the intangible,moral bene ts o growth: The value o a risingstandard o living lies not just in the concreteimprovements it brings but in how it shapesthe social, political and ultimately the moralcharacter o a people.7 Prosperity tends to makepeople more tolerant, more willing to settledisputes peace ully, more inclined to avor

democracy. As political scientist MichaelMandelbaum observes, Many studies have

ound that the higher a countrys per capitaoutput, the more likely that country is to protecliberty and choose its government through reeand air elections.5 Economic stagnation anddecline are associated with intolerance, ethnicstri e, and dictatorshipcomplex relationships

that can run in both directions.6 Recent researchpoints to the positive impact o economic

reedom on peace, concluding that economicreedom signi cantly reduces violent confict.7

Economic growth promotes other U.S. interestsEconomic growth and development promoteU.S. interests on many ronts:

The broad political interest o the United

States in a prosperous, well- unctioningcommunity o nations that cooperate toaddress global issues and concerns;

Our humanitarian interest in reduced povertyand su ering, including those caused by man-made and natural disasters. Countriesthat grow experience a decline in the preva-lence o poverty, while gaining greater capacto care or those who remain in need, whethchronic or transitory.


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Our economic interest in an open and expand-ing world economy. Growing economies o erbetter markets or U.S. goods and services thanthose that are stagnant or declining.8 Projectingrecent trends, developing countries will becomea larger market or U.S. products than indus-trial countries by 2011.

The improved living standards we experiencerom imports o goods and services that canbe produced at lower cost abroad; and

Our economic security interests in havingreliable sources o supply or key resources,

or which growing economies with stable,accountable, and representative governmentsare much pre erable to corrupt or potentially unstable sources o supply.

Poor countries that ail to grow can pose serious

problems or the United States and the world.They are prone to political crises, including stateailure and recurrent civil warsespecially in

countries experiencing a bulge o young people who nd ew opportunities in a stagnant econ-omy, making it easy to recruit them into rebelarmies. Economically stagnant countries can alsoharbor terrorist activity, are more vulnerable tothe impact o natural disasters, and make largeclaims on U.S. and international resources.Countries that stagnate or decline are less able

and sometimes less willing to help address globaland transnational issuesissues that o tenoriginate within their borders, including illegalmigration; tra cking in narcotics, weapons, andpersons; health threats such as HIV/AIDS andavian fu; and environmental problems such asde orestation and loss o biodiversity.

For all these reasons, achieving more rapid, moresustained, and more broadly based economicgrowth is important to help developing andtransition countries secure more prosperous,peace ul, and healthy utures, and to help theUnited States secure its own uture in turn. Thisstrategy ocuses on how USAID can best con-tribute to these outcomes.

Much Has Been Acc mplished Worldwide growth since 1950 has been unparal-leled in human history. Global GDP per capitanearly tripled over that period; average realincomes rose by at least hal inall regions o the world; and all except A rica and the ormerSoviet Union more than doubled their per capitaGDP. As a direct result, the share o the worlds

population living in extreme poverty ell rom 55percent in 1950 to 18 percent in 2004.9

Progress in other dimensions o wellbeing has alsobeen dramatic. Li e expectancy has risen by morethan 50 percent since 1950, rom 41 years to 63years. Equally dramatic gains were made in literacy,nutrition, in ant mortality, gender equality, andaccess to water and electricity.10 Gains wereachieved in all regions, including those that grew more slowly. With ew exceptions, however,

countries that grew aster achieved greater gains inother dimensions o human wellbeing.

There has been considerable variation in the rateo progress, both among and within regions andover time. Speci cally:

Asia has made the most progress. First Japan,then South Korea, Taiwan, Hong Kong, andSingapore made the leap rom poverty toa fuence in little more than a generation.Rapid growth began in the 1970s in Thailand,

Malaysia, and Indonesia, and then during thelast two decades in China, India, andVietnam. Pakistan and Bangladesh have grownmore slowly over the past 20 years, thoughexceeding the 2 percent per capita growthbenchmark suggested earlier.

At the other extreme,Su -Saharan A ricahashad the slowest overall growth and most severedeclines in individual countries. Only oursmall countriesMauritius, Botswana,

Lesotho, and Cape Verdehave consistently achieved per capita growth o 2 percent peryear or more since 1960. Many initially promising countries were taken over by rent-seeking elites. In others, fawed eco-nomic policies led to dependence on mineral


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12 USAID

Thus, global progress since 1950 has beenenormous. At the same time, progress in somecountries has been uneven or slow, and a ew have retrogressed. The act that only 18percent o the worlds population still lives inextreme poverty means that 1.2 billion peopleremain on the margins o subsistence. USAIDstrategy or addressing those problems must be

shaped by what we have learned, by the changiglobal environment or economic growth, and a clear assessment o what we do best.

Much Has Been LearnedProductivity change and growth beginat the frmTo understand how to encourage aster and mosustained growth, it is essential to understandhow increases in productivity occur. Economist Arnold Harberger reminds us that all economigrowth takes place at the level o the productiventerprise12 a term encompassing producersin all sectors and o all sizes, rom microenterprises and amily arms to multinational corpotions. A countrys income increases as its produers nd ways to increase sales and reduce theircosts o productionby using new and bettermachinery, hiring more and better-skilled workers, or more generally nding lower-cost ways to organize production and distribution,

and improve the quality o their goods andservices in order to serve or create new marketsTo sustain a higher rate o growth, producersmust ace incentives that motivate them to adoa never-ending stream o such improvements. Any single improvement in technology ormanagement boosts growth only temporarily.

Incentives drive the growth processCompetition provides the most power ulincentive or producers to raise productivity. Where markets are open to entry by new rms,existing producers must continue to behave asentrepreneurs, working relentlessly to improvetheir products and reduce costs in order to stay in business and earn pro ts. Instead, govern-ments in many developing (and developed)

exports and economic collapse when com-modity prices ell sharply in the 1980s.Elsewhere, civil wars have created states o extreme economic insecurity.

However, Sub-Saharan A ricas per ormanceand prospects have improved signi cantly.Since the mid-1990s, 17 out o 40 A rican

countries have maintained per capita growtho 2 percent annually or better, rising to 24 o 40 countries since 2001. Improved economicpolicies in most countries were key to theturnaround, with additional support romdebt relie and stronger commodity prices.

latin America has proved a disappointment.The region grew rapidly rom 1950 to 1980,stagnated during the lost decade o the 1980s,and has since achieved at best modest growth.Even this has o ten involved short spurts o growth ollowed by economic crisis and decline.Only 8 out o 22 countries maintained percapita growth o 2 percent or more over thedecade ending in 2006. Explanations or thispoor per ormance range rom unstable macro-economic management and poor microeco-nomic policies, to extreme inequality in incomeand asset holdings, to weak educational systems.

In Eastern Europe and the ormer So ietRepu ics, the transition rom Communism

has generally involved sharp declines ollowedby recovery. The initial declines resulted romproducts and production methods that wereyears or decades behind those in countries thathad competed with the rest o the world. Asentrepreneurs scrapped obsolete technologiesand mind-sets, they ound new ways to com-pete, resulting in very rapid growth in almost allcountries since the mid- or late 1990s.

The Midd e East and North A rica o er agenerally positive picture. Among countriescurrently or previously receiving aid, Tunisia,Morocco, Algeria, Egypt, Jordan, Turkey, andCyprus all grew at rates above 2 percent percapita over the past decade; only Yemen andLebanon ell short o that benchmark.11


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countries shelter established producers romcompetitive pressure, undermining incentives orhigher productivity. It is in this arenaencour-aging host country governments to adopt policiesand practices o economic governance conduciveto competition and productivity, and helpingbuild the institutional capacity needed to developand apply growth-supporting policiesthat

USAID can play the strongest role in supportingeconomic growth.13

The role o the public sector in supportingeconomic growth extends beyond simply pro-moting competition. It must also establish andmaintain:

macroeconomic stability, especially avoidinghigh infation and unsustainable scal policies;

a predictable and transparent system to

en orce property rights and contracts; and a transparent, accountable, and e cient

system or resolving economic disputes amongrms and individuals.

Public policies, regulations, property rights, andother aspects o economic governance shape theincentives or productive e ort. As such, they represent thedrivers o economic growth, in thesense that they primarily determine the rate andsustainability o growth (see Figure 1 on page

14). I public policies create incentives that areseriously misaligned, economies will stagnate ordecline. Broadly speaking, the drivers o growthinclude macroeconomic policies ( scal, mon-etary, and exchange-rate policies) along withthose microeconomic aspects of governance most relevant to entrepreneurial activity (busi-ness regulation, property rights and the rule o law, trade policies, and the extent to whichmarket orces are allowed to operate in product,

nancial, and labor markets).

Other actors enable growth tomove orward Other actorssuch as the availability o credit orother nancial resources; the availability o roads,telecommunications, and electrical in rastructure;

Juli Jank a, aarmer in the

Chapare regi n B li ia, pr udl

sh ws his newland titles.

and the human resources embodied in theeducation, training, and health o those workingin any particular sector or in the labor orceoverallrepresentenablers o growth. Where theenablers are missing, the pace o growth can beundermined and its pattern distortedproblem-atic because improvements in these areas requiresubstantial resources and sustained, long-terme ort. But improvements in growth enablerscannot by themselves cause economic growth to

occur where the drivers are not in place.14

w a L t e r M u r , u s a i d

There are no insurmountable obstaclesMany explanations have been put orward orthe ailure o countries to growincludinggeographical disadvantage, climate, di cultterrain, lack o natural resources, over-abundanceo natural resources, overpopulation, endemicdisease, high illiteracy, and culture to name a

ew. Such conditions may indeed pose specialchallenges. But countries acing each o these

challenges have ound ways to overcome themand achieve rapid, broad-based, and sustainedeconomic growth. Bangladesh, Indonesia,Uganda, and Mauritius are only the mostconspicuous cases o growth under allegedly impossible conditions.


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14 USAID

Figure 1: Framew rk r Ec n mic Gr wth

The o a at top e t i s tit ed Dri ers, andcontains Micro po icies and Go ernance, such asproperty rights, en orcement o contracts andru e o aw, economy wide and sector speci cpo icies and regu ations, and trade po icies. Thesepro ide incenti es to Ena ers and Enterprises.

The o a at top right is tit ed Ena ers, andcontains Finance, In rastructure and HumanResources. These pro ide Inputs to Enterprises.

The center o a represents Enterprises, inc ud-ing arms, manu acturers and ser ice pro iderso a types and sizes: micro, sma mediumand arge.

The arrows then ead us to the ottom o a ,which represents Growth in Producti ity,Output and Incomes.

Political economy is key to re ormThe greatest obstacles to growth stem not romnature, but rom politics. Growth takes place within a complex setting o social and politicalconditions and orces. Most policy re ormsinvolve a political costoverriding the vestedinterests o those who bene t rom the currentsituation. As a result, identi ying the correcteconomic prescription is rarely enough to ensurethat it is adopted. Change can be slow andcircuitous as a result. Almost every rapidly growing developing country today, or example,

rst introduced economic re orms in limitedareas o the countrytypically industrial or

ree-trade zonesto demonstrate their value and

override political opposition be ore extendingthem to the rest o the economy.15 Patience,along with a clear understanding o the interesand politics o domestic groups, are critical to

ocus decisions about the pace and sequence ore orms, and to identi y potential allies in thegovernment and private sector.

These considerations also mean that donors neeto react quickly to changes in local politicalcircumstance. For example, recent researchshows that among the top microeconomicre orming countries, 85 percent o such re ormoccurred within the rst 15 months o a changeo government.16 This means that being able tomove ast when an opportunity arises to acilire orm is important to success.

Politics a ects growth on a deeper level as we Achieving rapid and sustained growth requiressecure property rights, so that producers caninvest without ear that the product o theire orts will be seized by the government or bypolitically avored private interests. Similarly,sustained growth bene ts rom honest ande cient administration o well-designed policand regulations, to ensure that producers devotetheir energies to creating value and raisingproductivity, rather than paying bribes andlobbying or avors rom government. These other dimensions o economic governancedepend on the domestic political context. As theconomist Robert Barro recently stated, A countrys economic per ormance depends onvarious aspects o government policy, but noaspect is more important than the quality o political, legal, and economic institutions.17

Well- unctioning democracies, complete withe ective checks on government power andmechanisms to ensure accountability, can achiethese goals. On average, democracies tend toachieve aster growth than autocracies. By comparison, autocracies include both the growtsuperstars o East Asiawhere leaders commited themselves to support growthas well asmany slow-growing or stagnant countries whosrulers have sacri ced growth out o greed,


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ideology, or incompetence. Progress towarde ective democracy and good political gover-nance can strengthen the institutions thatsupport and sustain growth over time.18

One size does not ft all Although policies and the incentives they createplay a central role in driving economic growth,

this does not mean that all countries can orshould adopt a one-size- ts-all set o policies. As Dani Rodrik has emphasized, undamentaleconomic principlesprotection o property rights, contract en orcement, market-basedcompetition, appropriate incentives, soundmoney, debt sustainabilitycan be applied indi erent ways, depending on local constraintsand opportunities.19 Where governments havemade growth a priority, they have sometimes

ound new and surprising ways to apply those

core principles. One lesson or donors is thatidenti ying and supporting governments com-mitted to growth is essential to ensure thee ective use o aid. A second lesson is that not allpolicy and institutional weaknesses need beresolved simultaneously. Rather, the challenge isto identi y and address those weaknesses thatpose the binding constraints to aster growth ora particular country at a particular time,and whose re orm is politically easible. 20 For thispurpose, understanding local circumstances can

be as important as identi ying best practicesbased on the experience o other success ulcountries. Those bestpractices may need to beapplied di erently, depend-ing on the local context.

Gem cutters inSri Lanka addgreater alue tsemi-preci usst nes thr ughUSAID training inCAD-CAM designand cuttingtechniques.

J . e . a

u s t i N a s s o C i a t e s

, i N C

.

Macroeconomicdrivers are the frstconsiderationMacroeconomic stability is

essential. Without it,domestic entrepreneursperceive the returns toinvestment as too uncertainto risk tying up their undsin actories and other xed

capital, and o ten look or sa er options abroad.Banks and other nancial institutions limit theirlending to only the sa est borrowers, whileinternational investors look elsewhere or betterbusiness climates. Historically, the main threat tomacro stability in poor countries has arisen romthe temptation to run budget de cits in order toincrease public spending beyond the limits

permitted by domestic revenues. In countriesundertaking nancial sector re orm, high levelso non-per orming loans in the port olios o commercial banksespecially those owned by the governmenthave emerged as a secondserious threat to macroeconomic stability. 21 A third major macro issue concerns the exchangerate, which a ects overall stability as well as thepro tability o producing or export versus ordomestic markets.

Most poor countries have learned the principalmacroeconomic lessons and made the basicre orms. As more and more governments havecome to recognize the harm imposed by highinfation, or example, hyperinfation has almostdisappeared. In act, most countries have reducedinfation below 10 percent. The previously widespread and damaging use o multipleexchange rates has also become rare. In addition,most governments have learned that stability requires that de cits be controlled, and that

openness to the international economy contrib-utes to growth.


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16 USAID

Nevertheless, macroeconomic stabilization may emerge as the highest economic priority inparticular countries, especially those emerging

rom confict. In such cases, technical support tostop hyperinfation, establish new currencies,stabilize macroeconomic conditions, and rebuildeconomic institutions can be vital or establish-ing political stability and restoring economic

growth. More generally, developing countriesremain vulnerable to economic shocks in anincreasingly open world, so that macroeconomicassistance is likely to remain relevant in certainadditional cases.

Microeconomic drivers are the new rontier

In contrast to their gains in macroeconomicpolicy, poor countries have made much lessprogress in re ormingmicroeconomic policies,

regulations, en orcement o contracts andproperty rights, and related orms o economicgovernance, which together shape the incentivesthat drive economic behavior in individualmarkets and sectors. In part, this lack o progresshas refected the di culty o quanti ying micro-economic policy problems, which vary amongsectors and across countries. A lack o good datahas, until recently, contributed to a relativeneglect o microeconomic issues.

Microeconomic issues have drawn growingattention, especially since 2004 when the WorldBank began issuing itsDoing Business reports.These reports o er annual country data on a wide range o measures o microeconomicgovernance, including: How hard is it to en orcea contract i the buyer re uses to pay? How hardis it to export or import goods? To start abusiness? To hire a new worker? To dismiss a worker? I a borrower de aults, what recoursedoes the lender have?

The central conclusion rom this new source o dataand complementary indicators rom othersourcesis that government regulation o business is dramatically more extensive andtime-consuming or rms in poor countries thanin rich ones. Some regulations serve essential

economic or social purposes, but these should bdesigned so as to minimize costs, uncertainty,and the potential or abuse. In practice, many regulatory obstacles exist because o inattentioor because a lack o broad representation andaccountability in decision-making has given risto regulations that serve special interestsincluding the interest o power ul incumbent

rms in blocking competition by newcomers. Inaddition, because they place substantial discre-tion in the hands o government o cials, manregulatory systems have become seedbeds o corruption 22 and rent-seeking behavior: eachadditional required signature creates anotheropportunity to o er or demand a bribe or othe

avor in exchange or pre erential treatment.

The burden o overregulation alls disproportiately hard on small and micro rms, which

employ a large share o the labor orce in mosdeveloping countries. For example, barriers tobusiness registration and operation orce these

rms to remain in the in ormal sector, wherethey lack legal status. 23 Operating in the legalshadows imposes a wide range o disadvantageon in ormal rmsrestricting their access to

nancial services, to the courts when disputesarise with other rms, and to legal services sucas property registration. 24 The net e ect is toslow growth and to skew the distribution o

income toward the (usually politically well-connected) owners o established rms.

E orts to improve the microeconomic dimen-sions o economic governancewhether ocuon the regulatory processes measured by Doing Business and other indices or on competitionpolicy, company law, land tenure and otherproperty rights, and reducing corruptionmustbe grounded in a good understanding o localpolitics and institutional strengths and weak-nesses i they are to succeed.

The impact o improved microeconomic gover-nance can be dramatic. Independent estimatessuggest that through modest improvements in theregulatory environments, poor countries couldboost their growth rates by 1.4 to 2.2 percentage


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points per yearenoughto raise incomes by 32percent to 54 percent within two decades. 25

USAID trainingr judicial fcials

in c mmercialarbitrati n reducesthe risk d ingbusiness rd mestic and reignfrms alike.

d e V e L o p M e N t a L t e r N a t i V e s

, i N C

.

Growth is good or the poor The evidence over- whelmingly con rmsthat growth is good orthe poor. Survey data

rom the 1970sthrough the 1990sconsistently show that,on average acrosscountries, consumptionamong poor house-holds grew at the samerate as consumptionamong non-poor households, with no generaltrend toward greater or lesser inequality. Onaverage, growth was as good or the poor as it was or the non-poor. 26, 27

However, the impact o growth on the poor variesconsiderably rom one country to another. Muchdepends on how strongly poor householdsconnect to the overall growth process, allowingthem to gain access to the opportunities createdby growth. In part, this is a matter o where

growth is taking place in the country, regionally and across sectors. Among a sample o countriesstudied by the World Bank, the most rapidgrowth tended to occur outside o agriculture, whereas most poor households were agricultural.In these circumstances, the impact o growth onthe poor partly depends on whether workers caneasily migrate out o agriculture and nd jobs inthe emerging non-agricultural sectors, whichdepends in turn on the fexibility o labor marketsand on whether those workers have the literacy

and other skills needed or those new jobs. 28 Meanwhile, poverty reduction also depends on whether agriculture itsel is living up to itseconomic potential. 29 Education and labor marketfexibility also strongly a ect the impact o tradere orm on the poor, a ecting how easily workers

can move rom sectors that have lost tradeprotection to sectors that have become morecompetitive dueto re orm. 30

The distribution o assets also a ects the distri-bution o income and opportunity. In general,government redistribution o existing assets ispolitically explosive and economically damagingexcept under highly unusual circumstances. Butpolicies that broaden opportunities or the poor

to accumulate assets can reduce large incomedisparities over time. In particular, governmentsplay a key role in providing education, whichplays a large and growing role in the distributiono income as countries develop. Public undingo basic education can help break the transmis-sion o poverty rom one generation to the next,by ensuring that the children o the poor gainthe skills they will need to take advantage o emerging economic opportunities. Otherexamples include nancial sector re orms and

easier titling o small arms, business property,and homes.

Growth depends on more than whathappens at homeThe policy choices that governments make, and


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18 USAID

their capacity to implement them, are the maindeterminants o a countrys growth. But orcesbeyond national borders also matter. Fastergrowth in the world economy, or example, boostsdemand or the exports o poor countries. Lowerbarriers to trade have the same e ect, while alsocreating opportunities or poor countries toexpand the range o goods and services they

export. Stable international nancial markets o er well-managed countries access to unds at arlower cost than attainable domestically, whileglobal nancial turmoil can drive up interest rateson existing debt and cut o the availability o private nance. Regional cooperation can provideaccess to more reliable and lower-cost power, while disruptions to global or regional sources o energy can bring growth to a sudden halt. Thepace and direction o technological advance a ectpoor countries in many ways, including the extentto which scienti c and technological e ort isdirected to the speci c problems that poorcountries ace, such as the need to achieve higheryields on the crops that eed their populations andto combat diseases that mainly a ect tropicalcountries. This list could be expanded, but helpsillustrate the point that e orts to improve eco-nomic prospects or poor countries as a group areneeded alongside those directed toward individualcountries and regions.

The Internati nal En ir nment rGr wth in De el ping C untries HasNe er Been BetterThe principles laid out in this strategy remainvalid regardless o fuctuations in the globaleconomy. Nevertheless, it is important torecognize that the international actors a ectingthe growth prospects o poor countries are quitedi erent rom a generation ago, and are as

avorable as at any time in history:

Po icymakers around the wor d ha e gaineda road understanding o the conditionsneeded to promote economic growth. While there is much art to improvingeconomic policy at the country levelmostly

relating to the politics o re ormthe broadoutlines o a growth-enhancing economicpolicy environment are more widely under-stood than ever be ore.

business c imates ha e impro ed, and manygo ernments are now acti e y working toimpro e their treatment o usiness enter-prises.

The business climate ratings publishedin the World BanksDoing Business seriescomplement similar ratings by Transparency International, the Fraser Institute, the HeritageFoundation, and the World Economic Forum.These ratings help policymakers in poorcountries compare their own regulatory environment with that o other countriesproviding the basis or a race to the top.

The e pansion o the wor d trading systemo ers unprecedented opportunities or poorcountries. Despite some protectionism by mocountries, especially in agriculture and servicethe current world trading system provides thegreatest opportunity or global integration anpoverty reduction the world has ever seen.

Pri ate internationa nancia fows ha egrown enormous y, and now dwar o ciade e opment aid in oth magnitude anddi ersity. In all but some very poor countries,private international nancial fows vastly

exceed donor assistance. In many countries,private nance mainly takes the orm o port olio investment or short-term loans. Bothare risky because o the potential or rapidreversals at the most inconvenient times. Dire

oreign investment is more stable because it idependent on long-term results in the recipiencountry. Private remittances to many countrieshave grown dramatically, sometimes reaching15 percent to 20 percent o GDP.

The internationa fow o in ormation andknow edge is aster, cheaper, and easier thane er. Along with large-scale migration rompoor countries to rich ones, in ormationtransmitted through the internet means thatpeople in poor countries are rapidly becomin


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better connected to the worlds ast-growingknowledge base. Broader access to in orma-tion on economic per ormance in othercountries provides an important tool to helpcitizens press their governments or greatertransparency and hold them accountable orbetter per ormance in economic a airs.

It is increasing y easy to identi y and adopt est practice standards rom e periencee sewhere. There has been an enormousgrowth o international public goodsprovided by organizations that establishstandards or a wide range o economic,political, social, health, gender, and environ-mental issues. Governments and civil society groups in poor countries rom pro essionalassociations o accountants or customsdirectors to stock-market regulators and

private rmscan easily nd in ormation onbest international practice, dramatically simpli ying the challenge o developingappropriate national regulations.

Today, one negative actor or late-developingcountries is that garment exports no longerprovide poor countries the easy rst step towardexporting manu actures that they did in the past, when the Multi ber Agreement (MFA) shelteredtextile and garment exports through quotas. Theend o the MFA is producing a consolidation o global production, leading to a loss o exportsand jobs in less competitive countries.

A second negative actor has recently beensuggested, which also applies to countries thathave not yet emerged rom economic stagnationand political ragility. According to this argu-ment, the economic success o so many otherdeveloping countries in Asia and elsewhere hasmade it harder or late-developing countries toget moving, by making them appear even more

unattractive to potential investors or tradingpartnersespecially those countries that arelandlocked or otherwise geographically disadvan-taged. 31 This is a serious argument. Nevertheless,almost all such countries can grow aster thanthey have in the past by reducing or eliminatingsel -imposed barriers to growth.

USAIDS Strengths DetermineIts R leIn what ways has USAID been most success ulin promoting economic growth? The choice o sector seems to have little to do with it. In many o the best-per orming A rican countries,USAID assistance has contributed signi cantly to broad-based economic re orm programs, both

at the level o overall policy and at the sectorlevel. In many o the same countries, USAID hasbeen e ective in helping create unctioningmarkets or agricultural inputs and products. InEastern Europe and the ormer Soviet Union,USAID helped create critical market-supportinginstitutions irrespective o sector, includingsystems o commercial law, trade regimes,banking, stock markets, and competent taxcollection. Current or recent successes suggestthat the approach matters more than the choiceo sector. For example: In Liberia, a USAID/Treasury team is helping

to implement a new collection system thatdoubled revenues or essential servicesbetween January 2005 and January 2006.President Johnson-Sirlea has called orextending this system to other sources o government revenue.

In Vietnam,a USAID- nanced project hashelped Vietnam put in place dozens o new lawsto help the country con orm to internationalpractice, increase transparency in the legal sectorand the en orcement o court decisions, andprotect intellectual property acilitatingVietnams accession to the World TradeOrganization. The Vietnam CompetitivenessInitiative is stimulating vigorous e orts by provincial governments to improve theirbusiness climates at the local level.

In Central America, where co ee and bananasaccounted or the great majority o exports in1980, USAID worked with governments andthe private sector to develop new export sectors,including computer chips, a wide variety o light manu actures, and high-value, labor-intensive agricultural products. By 2000, co ee


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20 USAID

and bananas had allen to only 25 percent o exports to the U.S., replaced by more dynamicsectors. This trans ormation was an importantcontributor to the regions desire or a ree-tradeagreement with the United States.

In Kazakhstan,USAID supported re orms tobuild a modern nancial sector. The politi-

cally sensitive pension system has largely shi ted rom an unsustainable pay-as-you-gosystem to a ully unded one; mortgagesdoubled in volume rom 2001 to 2006; andthe government has introduced consolidated

nancial supervision to maintain the stability o the nancial system.

The common thread among these examples is thatUSAID responded to a country- or region-speci cproblem based on an understanding o the key development issue and the motivation o localplayerspublic and privateto re orm andinnovate. They usually required only modest

nancial resources, and gained acceptance becauseo USAIDs capacity to deliver timely expertise onthe ground in response to the conditions andopportunities relevant to the country at that time.

Compared with many other donors, USAIDo ten has arger in-country sta s, includingThe examples also refect USAIDs relative

strengths in promoting economic growth:

Among donor programs that promote

private-sector-led economic growth, USAIDhas the strongest orientation toward thepri ate sector . Many donors avoid workingdirectly with the private sector, by statute or

earing (sometimes appropriately) that they will simply strengthen entrenched interests.Development banks sometimes try to supportthe private sector by underwriting govern-ments outreach to the private sector, o ten with disappointing results. USAID support tolocal business associations, think-tanks, and

other civil society groups that advocate orpolicy re orm has o ten yielded high pay-o s. 32 Direct support to pioneer rms andindustries has sometimes succeeded in cases where a clear success led numerous others tocopy the approach without subsidy.

high-quality local pro essionals. Unlike don with limited in-country presence, USAID isusually perceived in countries where it has worked or decades as being a good partner the country. This is di erent rom showingstrong support or the current government.USAID is more likely than many other donoto be seen as developing its view o thecountrys problems on the ground, and isbetter situated than many to identi y andencourage local initiatives or change.

Many donors can send an expert to address aspeci c issue. Multilateral banks are able to

eld long-term teams in response to a requesrom a government. But the delays, discusse

below, between conception and implementa-tion o these operations o ten mean thatsupport arrives when the host organization isno longer interested, or has identi ed other


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Rec nstructi n the n rth-s uthr ad thr ughAceh Pr incein Ind nesia. Thepr ject is injectingmuch-needed cashint the ec n m

while acilitating the

l ng-term gr wth l cal business andc mmerce.

u s a i d

e r , L

r e d

g e N i L o a r C

priorities, or when an open window o opportunity has already closed. USAIDsa i ity to e d ong-term teamsthat buildin-country capacities, and to do so relatively quickly, can be important to success.

Many recipient countries nd USAID to bethe donor agency that can act most quickly and provide the most fe i e response toemerging needs and opportunities. This isimportant in an environment where thepolitics o change can matter as much as theeconomics and where arriving in time cancount or more than the dollar level o assis-tance. A complementary dimension o USAIDs fexibility is its ability to support

regional development initiatives. The West A rican Power Pool, through which the regionscountries are developing a reliable and cost-saving source o electrical power to meet their joint needs, and the harmonization o collat-eral laws between the countries o Central

America as a ollow-up to the DominicanRepublic-Central American Free Trade Agreement, are just two o many examples.

Most unding rom multilateral agencies is in

the orm o loans. Even highly concessionalloans typically require rati cation by thelegislature, whereas grants can be imple-mented by the executive branch. The processo legislative approval can stretch the gapbetween initial project agreement and the starto implementation into months or years. Inthe meantime conditions may changeadedicated minister is replaced by one lesscommitted to re orm, or the conditionsnecessary or the passage o a key law or

regulation are no longer in place. USAIDsgrant unding helps avoid this problem.

Among U.S. Government agencies thatprovide assistance to developing countries,USAID is the only one with themandate and


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22 USAID

Maria Isabel C raland th usands

ther small businesswners in Ecuad r

e panded theirperati ns with

l ans r m fnancialinstituti ns assistedb USAID.

J o r g e V i N u e z a

capacity to address the u range o issuesrom macroeconomic policy and microeco-

nomic issues to democratic governance,health, and educationthat ultimately a ecta countrys growth.

In sum, where there is local commitment tochange, USAIDs strong private-sector orientation,in-country sta s, ability to eld long-term teams,fexibility, grant unding, and technical breadthallow USAID to e ectively address economicgrowth challenges in a wide variety o contexts.

USAIDs role will be distinct rom those o otherdevelopment agencies. Overall, the U.S. share o grant aid has risen over the past several years, andnow accounts or one-quarter o the total rom alldonor countries. For lending at near-marketinterest rates, the multilateral banks are the domi-nant players, and USAID has no role. USAIDscomparative advantage vis--vis the World Bank,the International Monetary Fund, and the regionaldevelopment banks refects several o the actorsmentioned above: smaller, more nimble, grant-

unded programs that can adjust relatively quickly to changing circumstances; a greater propensity to work directly with the private sector and to develop

private sector solutions to development problems;an ongoing on-the-ground presence that leads todeeper relationships and linkages with localinstitutions and individuals; and a strong traditiono building local institutional capacity.

The Millennium Challenge Account (MCA),administered by the Millennium Challenge

Corporation (MCC), supports economic growthin selected low-income countries that havebetter-than-average policies, at least as compar with other low-income countries. 33, 34 To remaineligible, countries must maintain their standingas good policy per ormers. A signi cant numbo countries have slipped in relative terms, andhave been cautioned that they risk losingeligibility as a result.

USAID has a critical role to play in helpingcountries cross the threshold o MCA eligibilityand keep improving beyond that threshold. Thistask includes helping countries design andimplement market-oriented policies andstrengthen institutional capacity in order toimprove economic governance, reduce corruptioand oster broad-based, private sector-led growt

The need or USAID support does not necessaily diminish when countries become eligible oMCA assistance, or even when they signCompacts. Although policies in MCA-recipient

countries compare avorably with those in othepoor countries, they remain much weaker thanneeded or MCA recipients to achieve andsustain growth, join the middle-income tier, andemerge rom urther dependence on aid. In allsuch countries, ongoing improvements inpolicies and institutionsthe drivers o eco-nomic growthremain essential or achievinggrowth that is rapid, sustained, and broad-basedIn contrast, most MCA Compacts have ocusedon a relatively narrow range o investment nee

primarily in in rastructure and rural develop-ment. Continuing USAID support or a broaderange o policy re orms and institutional capacbuilding is needed to complement and rein orcMCC investments, and, in act, may be criticalto their ultimate success. Finally, unlike MCC,


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USAID can provide support or regional integra-tion, which can be essential or countries torealize the market opportunities created throughMCC Compacts.

MCC enthusiastically supports these comple-mentary USAID e orts. Both agencies consultcloselyboth in Washington and in the eld

to ensure that their e orts are mutually rein orc-ing and not redundant.

Meanwhile, inappropriate prices lead to costly and o ten irreversible decisions, as when low water tari s contribute to the depletion o aqui ers and salinization o armland. Inadequateenvironmental policies can lead to seriousenvironmental and health impacts and stress to water, orests, energy, and other natural resourcereserves. To reduce these impacts and achieve

truly sustainable growth, it is essential to developand en orce sound environmental policies andregulations, to create incentives or private andpublic enterprises to invest in environmentally sound production technologies, and or house-holds to adopt more environmentally riendly consumption practices.

Broad-based re ers to growth that includesmajor income groups, ethnic groups, and women, and that signi cantly reduces poverty.

Growth in low-income countries has typically,but not always, met these criteria. Donors andgovernments have a range o opportunities torein orce the impact o growth on the poor andon speci c groups; some are discussed below.

Three approaches will help achievethis goalTo help partner countries achieve rapid, sus-tained, and broad-based growth, USAID will:

De e op we - unctioning markets, working

with the drivers and enablers underlyinggrowth, to create the conditions or sustainedgrowth in productivity, output, and incomes;

Enhance access to producti e opportunities or the poor, women, and other disadvantaged

groups, to help ensure that they bene t romgrowth; and

Strengthen the internationa ramework o po icies, institutions, and pu ic goods thatsupport growth prospects and opportunities

or poor countries.

These approaches are distinct but related.Measures that strengthen the overall per or-mance o markets, or example, also tend toenhance poor households access to economic

USAID Will Pr m te Rapid, Sustained,and Br ad-Based Gr wthUSAIDs goal is to help countries achieve eco-nomic growth that is rapid, sustained, and broad-based . Rapid means growth o at least 2 percentper capita per year, and pre erably aster. Any developing country that grows at this rate willdramatically improve the living standard o itspopulation within a generation. Growth at thisrate will also enable most low-income countries tomeet the Millennium Development Goal o cutting extreme poverty in hal within 25 years.Experience shows that per capita growth rates o 3 percent, 4 percent, or 5 percent and higher are

easible, and lead to more rapid progress inreducing poverty and improving other measureso the quality o li e.

Sustained re ers to growth that is maintainedover the long term. Sustaining a higher rate o growth requirescontinuing improvements in thedrivers and enablers o growth, giving producersboth the incentive and the means to keepadapting and improving. In the many low andmiddle-income countries where natural resourcesplay a large role in the economy, sustainedgrowth also requires appropriate prices, clear andconsistently en orced property rights, and other

incentives that encourage responsible resourceuse. Weak property rights discourage investmentby creating uncertainty, while encouragingunsustainable resource-stripping like de oresta-tion. In the worst case, disputes over resourceownership can lead to violent confict.


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24 USAID

opportunities. Much o the microeconomicre orm agenda alls into this category. Similarly,measures to improve access will in most casesalso improve the per ormance o markets.Nonetheless, most USAID interventions will beprimarily directed toward one or another o theseapproaches, and should be judged accordingly.

USAID helpedl cal gr wers in the

illage Geguti,

Ge rgia ren ate a wareh use r thepreparati n andpackaging e p rtpr duce.

M a y a M a t e s h V i L i ,

a g V a N t a g e

Developing well- unctioning marketsThis is the central challenge and the main area o opportunity or USAID. Widespread improve-ment in macroeconomic policies and thecapacity to implement them means that micro-economic distortions to the business climate

have emerged as the binding constraints togrowth in many countries. Nevertheless, certainaspects o macroeconomic assistance will remainimportant in many situations, including:

Fisca po icy and administrati e re orm, tohelp countries adopt tax systems that are

airer, easier to implement, less vulnerable tocorruption, and less distorting to economicactivity, and to help them develop the admin-istrative capacity to implement tax policy

transparently and accountably. Monetary po icy and capacity- ui ding, to

help central banks apply exchange rate andinterest rate policies that respond to themarket and contribute to the development o a healthy nancial sector.

In the emerging eld o microeconomic re ormin-country presence has helped USAID developmany areas o strong comparative advantage,allowing it to become a leading supporter o such re orms in the developing world. 35 In manycases, success has involved working with businassociations to identi y the most burdensomeregulations and lobby or their simpli cation o

removal. Another approach involves working with both governments and private stakeholdersto re orm laws and strengthen the institutionsthat carry out unctions o economic governanessential or the e cient operation o marketImportant areas include:

Re orming regu atory systems to reducebarriers to entry, oster competition, andremove obstacles to enterprise growth. Ingeneral, greater reliance on market orces an

less on administrative discretion promotesaster productivity growth and reduces thescope or corruption; 36, 37

Strengthening systems to esta ish anden orce property rights to reduce investmenrisks; and

De e oping systems o commercia awandthe public and private institutions needed toimplement them e ectively, transparently, anaccountably, including judicial and alternative

systems o dispute resolution and en orcemeOther areas where USAID can work to improvethe unctioning o markets include:

Agricu tura de e opment programs to helpincrease the productivity o armers, agricul-tural input distributors, and ood processors,and to improve their access to domestic andexport markets. Developing well- unctioningmarkets stimulates growing demand orcost-reducing and quality-enhancing technologies rom USAID-supported agriculturalresearch. Increased productivity within theagricultural supply chain boosts the income o

arms and related businesses, and helps themdiversi y into high-value, labor-intensiveproducts, contributing in turn to more rapid


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growth in other sectors and in the nationaleconomy. In countries where agricultureaccounts or a large share o national income,increased agricultural productivity can play animportant role in boosting productivity andincome overall. In addition, a more nutritious,stable, abundant, and lower-cost supply o oodand ber raises the real incomes o urban

residents and improves the health and produc-tivity o the work orce. Opportunities orpromoting agricultural development are coveredin much greater detail in USAIDs 2004 Agriculture Strategy: Linking Producers to Markets. 38

Support or in rastructure to better servegrowing populations, including in urban areas where economies o scale can boost e cienciesin the production and distribution o services

rom electricity to health. USAID will nancelittle in rastructure directly, except or post-confict and post-disaster reconstruction andin some strategic states. But USAID has worked success ully, and will continue to work in many countries to improve policies inenergy, telecommunications, water, transport,and housing in ways that leverage the eco-nomic impact o in rastructure investments by others. Power grids and other networkedin rastructure o ten represent natural monop-

olies. As such, they require governmentoversight and competent, transparent, andaccountable regulatory institutions to main-tain an enabling environment that ensuresgood per ormance, rational prices, andenvironmental protection, while encouragingmuch-needed private investment.

Trade capacity- ui ding, which complementsand integrates many other categories, and which assists countries to participate in theglobal trading system. Training and technicalassistance help countries analyze and partici-pate in international trade negotiations,implement commitments made in tradeagreements, acilitate the e cient import andexport o goods and services, and build the

supply-side capacity needed to participate inthe global trading system. Trade enhances thecompetitive orces that drive productivity change and growth. Opportunities in tradecapacity-building are the ocus o a comple-mentary USAID strategy, issued in 2003. 39

Financia sector re orm and capacity- ui ding

to encourage the growth o competitivenancial systems while strengthening transpar-ency and supervision to enhance the stability o

nancial markets. Financial sector per ormancestrongly a ects productivity growth: wherespurred by competition, banks and other

nancial rms must search or the mostproductive investments to nance, rather thansimply relying on business rom establishedclients.40 By doing so, they enable entrepre-neurs to invest in new technologies and expand

rapidly in response to new market opportuni-ties. Priority should be given to systemicre orms and capacity building to help mobilizesavings and channel domestic and internationalprivate capital to support productivity growth,rather than nancing development directly.41

A bank client inB snia-Herzeg inauses an ATM.De el pment

the fnancialser ices industrenc urages sa ingsand makes undsreadil a ailable

r c nsumersand pr ducti ein estment.

u s a i d

Enterprise de e opment and pri atization tohelp accelerate the private sector response toan improving businessclimate by acilitating thefow o knowledge andexpertise to rms andindustries that wouldotherwise adjust slowly.Privatization, when done well, improves theincentives or businessmanagers and owners toenhance the productivity o their enterprises.Developing a localcapacity to providebusiness services andeducation to local rmscan help enterprisesadapt to changingenvironments. Synergies


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26 USAID

can be developed with other areas o USAIDocus. The development o private ecotourism

industries, or example, acilitates enterprisegrowth with speci c bene ts or environmen-tal and natural resource sustainability.

Work orce de e opment to ensure thatyoung people and adults can gain the voca-

tional skills they need to nd jobs and remainproductively employed in a changing econ-omy. The private sector holds a strong com-parative advantage in delivering the job skillsdemanded by the market. Where appropriatepolicies are in place, private sources o trainingemerge to deliver job skills, either on-the-jobor through stand-alone training providers. Asa result, priorities include li ting burdensomeregulations that discourage private sources o skills training, and limiting subsidized compe-

tition rom government training acilities.USAIDs 2005Education Strategy briefy reviews priorities in work orce development.42

The potential or improvements in these di erentareas to contribute to aster and more sustainedgrowth will di er considerably rom one country

and one region to another, as will the opportuni-ties or achieving such improvements. Settingprogrammatic priorities among them is beyondthe scope o this strategy. Rather, such prioritiesshould be set on the basis o speci c country circumstances, a ter care ul consideration by experienced economic growth experts with a cleunderstanding o those circumstances.

HartellManu acturingSer ices, anemerging blackbusiness in Pret ria,

S uth A rica,empl s 41 pe plemanu acturing

in l pr ducts rinternati nal bu ers,including aer spacefrm BAE S stems.

u s a i d

Enhancing access to productiveopportunitiesFaster growth is the basic source o new economopportunities or the poor as well as the non-pooMany o the microeconomic distortions thatimpede growth arise rom policies adopted toadvance the economic interests o elites relativethose o the politically less power ul. Correctinsuch distortions can be especially bene cial orpoor people, women, and other disadvantaged

groups. Even in a sound policy environment,however, economic and social obstacles may stillimit access to emerging opportunities. USAID works to identi y and remove such obstacles.Some o these interventions all outside the scoo economic growth programs. In particular,arguably the most power ul means to improveeconomic access is to expand the coverage o baeducation to include more poor children and girl while improving educational quality so that allchildren gain literacy and other basic skills.

Other interventions to enhance access to opportunity all squarely within the scope o economicgrowth programs. These o ten run parallel to thoaimed at strengthening markets economy-wide,but are more sharply ocused on the particularproblems con ronting the poor, including:

Inadequate access to nance. In many poorcountries, poor householdsand poor women in particularlack sa e places to ketheir savings, lack access to credit due to the

inability to o er collateral, and cannot obtainsurance to protect themselves or theirbusinesses.43 Micro nance programs o USAID continue to address these problems, with a particular ocus on women.


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Poor access to usiness ser ices. Along withnance, micro and small enterprises require

access to non- nancial business services suchas technical and supply chain expertise inorder to improve their productivity and allow them to participate in the global economy.USAID encourages development o localprivate providers o these services.

Insecure and tenure and other propertyrights. Lack o secure tenure to land is a particu-larly large threat to the poor, and especially or women who own less than 2 percent o all landin developing countries. More secure rights toagricultural land encourage greater investmentsin irrigation and other land improvements, as well as more productive cropping patterns.Urban land rights are also important. USAIDsupports land titling, ormalization o de acto

tenant rights and, generally, the policies andinstitutions needed to make land and otherproperty markets work or all.

Infe i e a or markets.For workers toreceive higher wages and contribute to risingproductivity, labor markets must continuously create new jobs and help workers move romless productive to more productive employ-ment. Excessive job protections make it risky

or rms to hire ull-time employees, leavingmany poor workersespecially youtheitherunemployed or stuck in low-paying jobs inagriculture or the urban in ormal sector, wherethey enjoy neither bene ts nor legal protec-tions. USAID encourages countries to reduceunnecessary barriers to job creation and labormobility, helps improve workers job skills andproductivity, and assists rms in understandinghow good labor practices can contribute toproductivity and competitiveness. In addition,USAID encourages governments to adoptpolicies that respect internationally recognizedcore labor rights, while helping them designand implement fexible and e ective laborprotections and bene ts programs.

Weak and inaccessi e judicia systems. Inmost developing countries, poor people lack

access to an independent and impartial justicesystem. This disen ranchises the poor in cases where the power ul in ringe on their rights. Women o ten su er an additional disadvantage,holding ewer legal rights than men in key economic areas such as land ownership andinheritance. USAID works to strengthen judicialsystems and encourage equal rights or women.

burdensome usiness regu ation. In many countries, regulatory obstacles to operating a

ormal enterprise cause many rms to remainin the in ormal sector, where opportunities orgrowth (and access to nance) are limited.44 Women constitute the majority o those working in the in ormal sector in many countries, and so are particularly a ected.

Inadequate in rastructure. Many poorcountries have inadequate basic in rastructure(water, sanitation, electricity, roads, etc.) inurban centers and even more limited coveragein rural areas. Small arms, small and microen-terprises, and low-income households gener-ally have the poorest access. For example,inadequate and

Documents

Securing the Future; A Strategy for Economic Growth