Speech

Remarks by Rodrigo de Rato, Managing Director of the IMF

September 20, 2004

Mr. Secretary-General, Distinguished Guests: Good afternoon. I applaud this initiative undertaken by President Lula in cooperation with the governments of Chile, France and Spain.

I am encouraged by the efforts that countries and donors are making to achieve the Millennium Development Goals by 2015. Developing countries have made welcome strides in improving policies and institutions to create a better environment for growth. Donors are making progress in harmonizing their aid agendas, thus rendering aid policies more coherent and effective. But despite these efforts, developing countries cannot make the infrastructure and social expenditures needed for sustained growth and poverty reduction.

Quite simply, developing countries need more and better aid. Despite an upturn in recent years, aid remains in real terms well below the levels seen in the early 1990's and well below the commitments made in Monterrey. Donors must also do better with the aid they already disburse. They must, therefore, continue their efforts to harmonize their aid agendas, make aid more predictable, and reduce the transaction costs of aid disbursements. All this will help developing countries to make more efficient use of their limited resources.

Recent proposals to supplement traditional aid through the creation of innovative financing mechanisms, such as global taxes and the frontloading of aid, promise to increase the level of aid available to developing countries. Many practical details of these proposals still need to be resolved. Nonetheless, I am very encouraged by the resurging interest in finding ways to raise more aid and thus believe that these proposals merit further consideration.

While we support looking into innovative ways of financing an increase in aid flows, the need to increase traditional official development assistance should not be forgotten. Traditional forms of aid could be mobilized immediately whereas new aid financing mechanisms are likely to take several years at a minimum to implement. Also, any new financing mechanisms should not replace current levels of aid, but generate additional development funds. The likelihood that this will happen depends on how efficiently we design these new mechanisms.

Ideally, any new global tax must be efficient, in that it corrects, and does not cause, negative externalities. Or it could take advantage of untapped economic rents associated with the use of global common property. The tax should have broad political support and be simple to administer. Agreement on these technical principles will be essential to garnering the political support needed for any global tax mechanism.

Another option for financing aid is the proposal of frontloading aid commitments. Such a proposal would make future aid commitments available sooner for immediate needs, without increasing donor countries' current budget outlays. The most advanced of these proposals, the International Financing Facility (IFF), appears to be technically feasible. But there are challenges to its sound implementation, such as the treatment of IFF pledges in countries' budgetary accounts. There are also legal issues associated with the administration of the IFF and disbursements of the funds.

Both global taxes and the frontloading of aid, by making disbursements independent of the donor budgetary commitment process, could make aid flows more assured and predictable, and thus more effective.

For its part, the Fund stands ready to help countries make effective use of increased aid volumes. Through our policy advice and technical assistance, we can help countries avoid some of the risks that sometimes accompany increased aid flows. These include debt sustainability problems, capacity constraints, or the erosion of external economic competitiveness through real exchange rate appreciation. These risks are real, and must be addressed through various channels - by choosing the right mix of grants, loans, and debt relief; through macroeconomic, institutional and political reforms; and by improvements in physical and human capacity.

In addition to aid, a number of other factors are important to achieving growth, poverty reduction, and the MDGs. In its work, the Fund advises member countries on policy reforms to enable increased and better use of private sector flows and to promote private sector development. Remittances should play an increasingly important role. The Fund continues to encourage developing countries to open their markets to reap the benefits of freer trade, just as developed countries must reduce trade-distorting subsidies and other barriers to trade.

In short, working within its areas of expertise, the Fund will continue to help countries create an environment that attracts aid and utilizes that aid effectively. Of course, we remain receptive to innovative new proposals to raise aid levels, and we stand ready to assist with the analysis and development of such proposals. But the debate must move beyond the relative technical merits of different mechanisms. Ultimately, a key test for any proposal to increase aid will be the development of a political consensus to move forward. The year 2005 will be a critical marker of international commitment to achieving the MDGs by 2015. Concerted efforts are needed from all sides to mobilize additional aid if we are to reach these goals.

Thank you.