The Foreign Service Journal, June 2006

she said. Thereafter, the staff of USAID economists and private-sector officers quickly declined. At the macroeconomic level, there cannot be any doubt that the World Bank has the best economics pro- fessionals in the development business. Unfortunately, most World Bank staff members live near Washington, D.C., and only make short “economist tourist” visits (though traveling in first or business class) to the countries they assist, so their capacity to address microeconomic issues is far weaker. World Bank President James Wolfensohn made some progress in decentralizing the institution, but in an environment where any overseas posting had to be entirely voluntary the change was not far-reaching. Most World Bank employees prefer the comfortable life in Washington to the often-difficult con- ditions for them, and their families, in poor countries. An even bigger obstacle to World Bank assistance for microeconomic reform is the fact that the Bank only lends to governments (or to others with a governmental guaran- tee). Such agreements usually need to be ratified by the national legislature, sometimes causing long delays and leading to the intrusion of politics into project implemen- tation. In general, World Bank programs to promote the private sector do so by funding government agencies, and they do it with long delays between design and imple- mentation. This is a recipe for ineffectiveness. Here USAID has a strong comparative advantage, vis- à-vis both the World Bank and most other donors — who either lend only to governments or are suspicious of the private sector, or both. For, despite its numerous limita- tions, USAID has some distinctive assets. In the first place, it has substantial in-country knowledge, both from high-quality national employees and from experienced economists and private-sector officers. Second, the agency tends to benefit from a long-demonstrated commitment to partnership with the host country. Finally, it makes grants, thereby eliminating the need for (and the often long delays associated with) legislative approval. So USAID can, for instance, fund business associations or NGOs that lobby for simplified regulation, or that help mobilize the business community to demand pro-growth policies. Numerous anecdotes could be related in support of the claim that USAID can play a uniquely effective role in helping to bring about constructive microeconomic reforms. But the strongest support for it comes from Simeon Djankov, the director of the World Bank’s Doing Business project. He reported in a recent e-mail to USAID that “among the countries identified in each of the past two annual Doing Business reports as the top 10 business climate reformers over the previous year, an average of six of those 10 reform efforts were supported by USAID projects.” As suggested earlier, the reforms USAID promotes tend to be specific to the particular country’s circumstances. In Vietnam it was wholesale reform of the legal environment for business; in Central America, simplification of customs procedures and unifi- cation of customs documentation; and in Georgia, simpli- fication of procedures for starting businesses. In sum, USAID has the tools — in-country staff, a proven commitment to a partnership with the host coun- try, grant funding and (limited) financial resources — to address the key constraint to faster growth in poor coun- tries: the poor environment for business. What Needs to Be Done Economic growth in poor countries is too important to consign to a residual category of the USAID budget, after humanitarian and photogenic earmarks and unfunded mandates take their shares. Only strong action by the executive branch, to make clear the foreign policy impor- tance of adequate funding for economic growth, will make USAID an important actor in ending dependence on hand-outs from the United States and other donors. But a larger budget for economic-growth-promoting activities will not do the job alone. Two other reforms are needed. First, USAID needs to hire more economists and private-sector officers, mostly mid-career people with extensive experience in developing countries. Second, the onerous procedural and contracting requirements that USAID (unlike the MCC) must follow need to be simpli- fied, so that funding can flow to where it is needed when it is needed. The naming of a new head for USAID—who also car- ries the rank of Deputy Secretary of State and is empow- ered, at least in theory, to coordinate the numerous for- eign aid programs of the U.S. government — is cause for some optimism. For the first time in decades, a senior official may be able to look at U.S. foreign aid in its entire- ty and make judgments about whether the numerous allo- cations, earmarks and narrowly-focused aid spigots add up to a sensible program. This author believes that it does not now do so, and that only a larger focus on economic growth will move countries from permanent dependence on U.S. help to eventual self-sufficiency. F O C U S 40 F O R E I G N S E R V I C E J O U R N A L / J U N E 2 0 0 6