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International Aid Agencies Still Crucial to Global Economic Growth

February 2005

STANFORD GRADUATE SCHOOL OF BUSINESS—Despite the significant growth that middle-income nations have witnessed over the past few decades, the role of aid agencies, like the World Bank, is still critical to global economic growth, said Peter Woicke, who recently retired as one of the World Bank's managing directors.

At the World Bank, Woicke spent six years at the helm of the International Finance Corporation (IFC), which provides loans and equity to the private sector in emerging markets. Addressing Business School students, Woicke challenged the notion that aid agencies have become obsolete—a viewpoint that some prominent economists maintain. "One of the implications to be avoided is the notion that progress inside middle-income countries signals the beginning of the end of all aid," he said, referring to nations like China, India, Russia, Mexico,and Brazil. "Yes, it is true that mid-income countries are growing and their companies are becoming more competitive in selected areas. Yes, this has all been very sudden, and yes, very few people predicted that this would happen,but that does not mean these countries are 'developed' by any fair definition."

According to Woicke, the most important trend affecting the development environment is the increasingly important role of the private sector. "The role of private-sector flows in cross-border finance has been one of the single biggest changes in development," Woicke said. "Just a decade ago,there was a one-to-one ratio between official development assistance to developing nations—which was about $60 billion—and private-sector investment," Woicke said. "Today, aid from public institutions and from donors still totals about $60 billion, but the private sector is investing four to five times that amount in emerging markets." More than ever, he explained, developing countries are asking organizations like the IFC to facilitate—and help manage—this type of private-sector investment.

"These countries see the immense catalytic effects these flows can have on their economies, and they know that they don't have the capacity to generate this kind of growth on their own," Woicke explained. "Private-sector investment helps to keep developing countries' economies on a virtuous circle:private-sector investment leads to job growth, which generates tax revenue,which pays for further investment in human capital, which stimulates further economic growth," he said.

In addition to the increasing importance of private-sector investment in development initiatives, companies' emphasis on sustainability—otherwise known as corporate social responsibility—is another important trend characterizing the development landscape. Woicke defined sustainability as "the intersection of private-sector investment and public goods," or a sensitivity to issues such as biodiversity, ecosystems, HIV/AIDS, and climate change. Until very recently, many companies viewed these issues as risks to be minimized; today,many companies consider socially responsible practices critical to their fundamental business objectives. "The IFC has made environmental and social sustainability a core part of its strategy. We see opportunities there that we have never seen before," he said. According to Woicke, private-sector companies are following suit. Some of the world's largest commercial banks—powerhouses such as Citigroup, Barclays, ABN AMRO, the Royal Bank of Canada—have adopted IFC's environmental and social standards and made them mandatory for their project finance initiatives in developing countries."They recognize that the rules of the global economy have changed and that you cannot separate environmental and social issues from business issues any longer," Woicke explained.

For Woicke, it's this type of evolution within the development landscape that will continue to provide compelling professional opportunities for motivated and innovative young professionals. "Think about this," Woicke said:"You have a chance to do two things that no generation in history has had the opportunity to do: help entire nations to lift themselves out of poverty in a single generation, and help to create new business models and markets to solve global problems that are beyond the reach of governments to solve alone."

—Lisa Vollmer

Stanford GSB News

International Aid Agencies Still Crucial to Global Economic Growth

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