How Wall Street Can Aid The Poor of The World
By Nancy Birdsall and Todd Moss
This op-ed originally appeared in the Wall Street Journal Asia and European edition on April 4, 2004.
The distance between a Wall Street bond trader and a two-year-old in a village in Mozambique is shrinking. What is bringing the two together is a recognition that it may be possible to reduce one kind of risk - the risk of disease that the Mozambican child faces - by buying and selling another kind of risk that is more familiar to those who trade, hedge and option for a living.
Private capital markets use sophisticated instruments to cope with all kinds of uncertainty, especially the pricing and sharing of future risk. The financing of global development aid, which currently does not work very well, could benefit from these instruments.
Some countries are not good at employing development aid because of corruption or just plain incompetence. For them, no amount of financing in any form can make a real difference.
But many poor and well-run countries cope with a different problem. Foreign aid flows are subject to the ups and downs of legislators in rich countries grappling with fiscal deficits and the ever-changing demands of geo-strategic politics. So Afghanistan, for example, is not receiving nearly all the aid donors pledged just two years ago.
The best-performing countries, such as Mali, Ghana, Mongolia and Bolivia, find that the problem of unreliable aid is compounded by the vulnerability of their exports to the constant risk of natural disasters and other shocks. The shocks that country officials cannot control often lead to bouts of inflation and political instability and scare off aid donors just when aid is most needed. Perversely, the way that aid is currently delivered concentrates risk in the poor countries themselves, the places least able to manage it.
Now comes an idea from Gordon Brown, the chancellor, that invites private markets to help close the distance between global financial power centres and the world's poor. The proposal calls for an international finance facility to employ capital markets to tap private money now, borrowing against the promise of future legislators' appropriations of tax revenue to service the resulting debt.
The UK sells Mr Brown's proposal as a way to ramp up the amount of foreign aid quickly without asking legislators and taxpayers for more funds.
But in fact the real benefits of tapping capital markets lie elsewhere. Such markets can create a virtual pot of accessible aid flows which ensures more predictability for well-performing recipient countries. Callable money also frees donor bureaucracies from the pressure to push money out of the door simply to buttress the case for the next legislative round.
Mr Brown's proposal is meanwhile sparking other innovations to use private markets to improve the lives and prospects of the poor. The British government and the Global Alliance on Vaccines and Immunization (Gavi) are joining forces to address the problem of providing the poorest countries with steady vaccine supplies. Vaccine producers in the rich world who doubt that the governments in the developing world have the capacity and willingness to buy their products are not willing to bet on future unpredictable and unreliable flows of aid. Their sensible hesitation to invest in expansion capacity has created shortages and high prices.
The UK-Gavi plan would use capital markets to securitise future aid for vaccines, ensuring demand and creating incentives for producers to invest in expanding capacity today. Since vaccines are bought in bulk on the global market, predictable funding can also translate into lower prices. It is a rare win-win situation in which poor children could benefit from better and cheaper vaccines and donors could save more lives for less money.
Other creative applications are possible: insuring Nicaragua and Uganda against coffee price volatility; shock-proofing the debt-service obligations of Bolivia and Ghana; securing a steady flow of funds to encourage the ambitious long-term planning needed to fight HIV/Aids in South Africa; guaranteeing secondary school stipends for first-grade girls who complete primary school in Cambodia and Pakistan. Proposals for these kinds of application are already in the works.
In all these cases, risks are shifted from poor countries to the private market. The risk transfer, of course, comes at a cost, as the private market will insist on a profitable return. But with 2bn people still living in poverty, the cost of carrying on with business as usual is certainly higher.
Nancy Birdsall is the president and Todd Moss a research fellow at the Center for Global Development in Washington, DC