However, for the last three years the economy has contracted and the.png Government’s

own forward estimates are for around 2 per cent economic growth perannum. This

implies no improvement in per capita living standards in the coming years.

If we assume ongoing population growth of 2.3 per cent per annum and project

economic growth of only 2 per cent per annum out to 2020, the impact is quite

clear—average per capita incomes fall away and there islittlepotential

for poverty alleviation or improvements in living standards within.png (See

Chart 6).

I should add that the proposition that economic growth is central to development

does not indicate that policies to build capacity through education, health

and physical infrastructure are not important. Indeed, development potential

will not be realised without a focus on these needs. But building hospitals,

schools and roads is no substitute for economic policy.

Economic policy is essential to allow resources to be used more productively,

incomes to be increased and social and physical infrastructure to be developed

for the benefit of the whole community. Such policy leads to a virtuous circle

of increasing private and community wealth.

How can developing and developed countries work most effectively to achieve

the Millennium Development Goals?

The successes and failures in development over the past 30 years suggest that

integrated and coherent polices to promote sustained economic growth are necessary.

This leads to three clear policy prescriptions going forward:

1. Development is not possible without a sustained long-term commitment to

sound domestic policies and institutions.

2. Developing countries prosper from participation in a strong stable global

economy.

3. Aid can play an important complementary role in promoting development, but

without suitable policy settings, aid alone will not deliver continuing reductions

in poverty.

1. Sound domestic policies and institutions

The stark lesson from the past 30 years is that countries cannot develop without

appropriate domestic policies.

The developing countries that have made the most progress have utilised their

own domestic resources, made hard decisions, and taken advantage of global market

opportunities — predominantly international trade and, to varying extents,

foreign direct investment — to accelerate growth.

Development depends upon individuals having the incentives to participate in

markets and increase their incomes.

This is not to suggest that there is no role for government. Indeed, effective

governance is critical. Governments need to provide strong macroeconomic policies

that encourage domestic savings and investment; independent and robust public

institutions; domestic political stability; and the rule of law to protect property

rights and allow contracts to be enforced predictably and economically.

An area of increasing focus has been how individuals can utilise their property

to increase their incomes. Within the West, property rights, in particular individual

ownership, underpin the economic growth and standard of living we have today.

In contrast, many of the world’s poor already possess the assets they

need for success, but are unable to use these assets to their full potential:

houses are built on land without formal title, unincorporated businesses have

undefined liability and cannot borrow to finance growth, industries are hidden

in the informal sector where investors and financial institutions cannot see

them or safely lend to them.

In the Pacific we have also seen that imported national institutions can find

it difficult to deal with traditional practices, especially in relation to authority

structures, land ownership and land use.

Australia is playing an important role in the area of promoting sound domestic

policies and institutions through both its contributions to multilateral institutions

and its bilateral aid program, particularly in Solomon Islands and Papua New

Guinea, a topic that I will return to later.

2. Participation in the global economy: — Trade

We have seen some outstanding examples of developing

countries prosper from participation in a strong stable global economy. This

participation provides direct benefits to developing countries through increases

in trade and foreign investment, as well as from the flow of remittances from

migrating workers. But just as importantly it encourages the adoption of modern

business practices and helps build a range of public and private institutions

critical to ongoing development.

This underscores the urgency of Australia’s efforts to secure a pro-development

outcome from the current Doha round. At present developed country trade barriers

are often highest on products of major export interest to developing countries

— namely agricultural products (See Chart 7).

Australia, with the Cairns Group, has played a leading role in arguing that

the successful conclusion of the Doha Round would be the largest single positive

factor that could boost the development of low-income countries. I have also

urged the international financial institutions and the world’s finance

ministers to use their influence and leadership to push trade reform, both globally

and in their own countries.

I am pleased that Australia has already provided duty-free access to Australia’s

market to the world’s least developed countries.

As well as our efforts to convince other developed countries to lower their

trade barriers, we have entered into a dialogue with developing countries themselves

highlighting that some continue to have very high barriers to trade, often directed

against other developing countries. Going forward, reducing so called

“south-south” barriers is an area where developing countries collectively

could act to boost their own development prospects.

There is also much that can be done in reducing “behind the border”

barriers to trade. Services such as customs clearance, product labelling and

standards, transport and telecommunications infrastructure and access to financial

markets have a crucial impact on a country’s trade performance. Australia

has been a strong supporter of efforts to reduce these barriers in both developed

and developing countries alike.

3. Effective aid

Foreign aid is the most visible vehicle for assistance from rich countries

to poor countries. The Australian people have a long history of giving generously

to those less fortunate than themselves.

While aid can assist in promoting long-term development, it is in itself not

sufficient. Countries that have graduated from aid —

such as South Korea, and Malaysia — have done so by achieving significant

economic growth.

There has also been a lot of discussion around the need to increase aid in

order to achieve the MDGs, with estimates that an additional US$50billion a

year in development assistance is required.¹

The problem with these estimates is that the historical evidence suggests at

best a weak statistical correlation between the volume of aid and economic growth.²

While perhaps not a popular observation it is the case that aid can hinder

as well as help — it sometimes allows governments with poor policies and

weak institutions to stave off essential reforms and rely on donors to provide

essential services to their people.

A striking example of the limitations of aid has been the economic performance

of the Pacific in recent years. If we look at the Pacific growth record from

1992-2002, average GDP per capita growth was less than onepercent, in a period

of time when annual aid flows per capita to the region averaged US$96 —

the highest of any region in the world (See Chart8). ³

Excluding transfers to French territories, Australia is the single largest donor

to the Pacific region.⁴

Australia has a special responsibility in the Pacific. Whilst European countries

naturally focus their aid efforts in Africa, partly as a consequence of historical

links, partly because of proximity, Australia’s historical links and proximity

are in the Pacific. But the evidence of recent years has caused a rethink on

how to enhance the effectiveness of that aid, which I will return to later.

I have suggested here that aid is no substitute for economic growth. But aid

does have an important role to play in alleviating human suffering.

At last month’s Second Asia-Pacific Ministerial Meeting on HIV/AIDS in

Bangkok, Australia announced a $350million funding boost over six years to

combat the disease — more than doubling our commitment by 2010.

In the Asia-Pacific region, there were one million new infections last year

and a staggering 7.4 million people are now living with the disease. HIV/AIDS

impacts mostly on the young and working age population of developing countries,

diverting scarce resources to combating the disease while reducing a country’s

capacity to generate economic growth to deal with poverty.

Well-targeted aid also has an important role to play in assisting developing

countries to improve governance and build institutions. The evidence is that

countries with good policies and institutions are best able to make effective

use of aid, whether it is through social or physical infrastructure.

The link between good governance and the effectiveness of aid gives rise to

a dilemma where countries have relatively poor governance. In such cases, we

need to move beyond discussions about increasing overall aid levels —

which we know will be of limited value in such circumstances — to how

we can use existing aid to improve governance, unlock capital and build institutions.

Here I am glad to say that internationally Australia continues to play a key

role in encouraging a focus on the effectiveness of assistance. While the multilateral

development banks, in particular, have traditionally focused on lending volumes,

they are increasingly focusing on meeting countries’ specific needs, as

agreed by the country and donors. A good example of this is the joint country

strategy for.png agreed to by Australia, the World Bank and the Asian

Development Bank. The joint country strategy seeks to improve coordination

in the provision of development assistance by these donors.

The Government and NGOs also share a common interest in promoting transparency,

efficiency and accountability at the international financial institutions. Australia

is often at the forefront of these efforts. For instance, Australia has played

a key role in making the Asian Development Bank processes more transparent,

including by chairing the Board Inspection Committee.

Australia strongly supported the opening up of the replenishment processes

of the Asian Development Fund and the International Development Association,

including making the papers available on the web, inviting representatives from

borrowing countries and hearing from non-official representatives in developing

countries.

Debt relief

There isno doubt that debt can become a major obstacle to alleviating poverty.

For this reason the Government has been astrong supporter ofinitiatives such

as theenhanced Heavily Indebted Poor Countries (HIPC) Initiativedesigned to

assist countries with unsustainable debts. This initiative is yet to run its

full course, but substantial relief has already been provided to qualifying

countries, with more in prospect.

Since 1996 Australia has moved away from giving financial assistance to developing

countries by way of loans. In reality many such loans are not aid at all —

merely trade promotion activities. This is why Australia has very little in

loans outstanding to the very poor countries. Many of those countries that have

large loans outstanding were not actually trying to assist the developing country

so much as to assist their domestic producers.

It is clearly not sensible for countries with high levels of debt to continue

to receive assistance in the form of loans. Of course this is acomplex issue,

andcare needs tobe taken againstrewarding countries with high levels ofdebt,

while continuing to charge interest on loans to countries who have managed their

debt prudently. Countries can borrow the same amount but end up with very different

debt burdens depending on the extent they employ those loans to productive ends.

Policy Coherence: Relative benefits of aid, trade and economic reform

In addressing the challenge of development it is crucial to maintain perspective

on the potential benefits from our actions. Ultimately we are in the business

of providing the poor with opportunities to improve their lives. Policies should

be measured against their outcomes, not their intentions.

It is now being suggested that an additional US$50billion per annum is required

to meet the MDGs. Let me put this in perspective, the World Bank has estimated

that trade liberalisation would deliver an additional US$350billion in income

to developing countries per annum by 2015.⁵

In other words a doubling of global aid budgets — significant as that

would be — would deliver about one fifth of the direct benefit to poor

countries that trade liberalisation would deliver.⁶

Faced with this kind of information those interested in aid and helping

the poor in developing countries should be the most vociferous supporters of

global free trade.

It is also worth noting that aid comprises a decreasing proportion of financial

flows to developing countries⁷

(See Chart 9):

• Foreign Direct Investment (FDI) in developing countries totalled US$135billion

  in 2003.

• Workers’ remittances to developing countries totalled an estimated

  US$93billion in 2003, an increase of more than 20 percent from 2001, and

  now rank second after FDI as a source of external finance to developing countries.

  • The cost of sending remittances home can be as much as 20 percent

    of the remitted amount. If we reduce transaction fees to 5-10percent

    it would yield an additional US$9-14billion in annual remittance flows

    to developing countries.

The challenge of achieving a coherent policy approach by developed countries

is to maximise the synergies between official development aid, trade liberalisation

and private capital flows.

FDI is an important channel for directing capital to the developing world.

While the ability to attract private investment flows depends primarily on developing

countries’ domestic policy settings, developed countries can also play

a role.

Recognising this role Australia is a signatory to the OECD Declaration on

International Investment and Multinational Enterprises (MNEs), which includes

a commitment to promote the OECD’s Guidelines for Multinational enterprises,

a voluntary code of good corporate behaviour. As I noted as Chair of the OECD

Ministerial Council Meeting in 2000, which endorsed the latest review of the

Guidelines, they seek to build an atmosphere of confidence between MNEs and

the societies within which they operate.

Recent events have brought home the importance of Australia acting as a

good neighbour to our region

Australia’s rethinking of the role of aid in development is most clearly

seen in our engagement with our immediate region. Australia has a clear national

interest in our region of the world being safe, stable and economically prosperous.

We have a long history of engagement with the Pacific, including close economic

and cultural ties. Reflecting these ties, Australia has traditionally devoted

considerable resources to helping our neighbours along the path to becoming

stable, prosperous democracies.

In recent times Australia has accepted (through the Regional Assistance Mission

to Solomon Islands (RAMSI)) that we share responsibility with others in the

region to restore law and order as a basic precursor to economic development

in Solomon Islands.

We have also entered a new era of cooperation through the Enhanced Cooperation

Program (ECP) to address.png’s economic, social and developmental challenges.

The immediate goal is to stabilise law and order. Longer term success will

hinge on stabilising budget finances, settling on the appropriate role for government

and energising private and public resources to create a pro-growth environment.

As with any assistance, unless accompanied by economic development, any improvements

in social indicators will not be sustainable.

The RAMSI and ECP missions represent an integrated whole of government approach

to improving governance. This is about much more than law and order, it includes

improving the justice system, economic management, public sector reform, customs

and border management. For example, there are now around 15 senior Treasury

staff working in.png, Solomon Islands and Nauru alongside local staff in key

areas such as budget control, debt management and economic reform.

Conclusion

There is a growing consensus that development cannot happen unless countries

can establish progress in the areas of governance, law and order, and economic

management.

Australia is doing its utmost to help in these areas.

In real terms we have increased our overseas development assistance by 10.4percent

since 2002-03 and focused our effort in a number of key areas, including promoting

improved governance, the delivery of basic services and strengthening regional

security.

Through the Doha round we are working to secure a pro-development outcome on

trade. More than any other single breakthrough trade liberalisation would open

developing countries to a huge lift in income and economic growth without which

the reduction in poverty, the improvements in health and education, are not

sustainable.

Australia has a special commitment to our region. And we recognise the particular

challenges involved. In cooperation with the governments of the region, we are

re-focusing and re-doubling our efforts to help them deliver a secure and prosperous

future for their people.

¹ Devarajan, Shantayanan,

Margaret J. Miller, and Eric V. Swanson, Goals for Development: History,

Prospects and Cost, World Bank Working Paper 2819, Washington, D.C, 2002.

and

United Nations, Report of the High-Level Panel on Financing for Development,

United Nations, 2001.

² Richard N. Cooper,

A Half Century of Development, Annual World Bank Conference on Development,

Washington, D.C, 2004. and

Michael A. Clemens, Charles J. Kenny, Todd J. Moss, The Trouble with the

MDGs: Confronting Expectations of Aid and Development Success, Working Paper

No. 20, Center for Global Development, Washington DC, May 2004.

³ If US contributions

to Palau, Micronesia and the Marshall Islands are excluded, average aid flows

per capita to the Pacific region for 1992-2002 are US$71. OECD International

Development Statistics Online Database.

⁴ In 2002 Australia contributed

US$270million of US$709million in total ODA to the Pacific region (excluding

French contributions to New Caledonia and French Polynesia). OECD International

Development Statistics Online Database.

⁵ World Bank, Global

Economic Prospects 2004: Realizing the Development Promise of the Doha Agenda, Washington, DC, 2003.

⁶ Estimates are that

Official Development Assistance from OECD Development Assistance Committee Countries

in 2003 was US$68.5 billion, of which US$2 billion was reconstruction aid to

Iraq. Source: Organisation for Economic Co-operation and Development Press

Release 16 April 2004. Modest Increase in Development Aid in 2003.

⁷ World Bank, Global

Outcomes, Washington, DC, 2004.