US Firm On World Bank Grant Proposal
WorldNews.com, Tue 7 Aug 2001

World Bank News Roundup.

A proposal by the US President George W. Bush to change half of the World Bank's future funding to the world's poorest nations into grants rather than loans has generated a heated international debate, reports Reuters, but US Treasury Undersecretary John Taylor says the US will not compromise on the plan-one that the UK, along with other World Bank shareholders, opposes.

Other countries, like France, have said they will only support turning 10 percent of the funding into grants. This has given rise to speculation that shareholders would forge a compromise on an amount lower than 50 percent.

But Taylor is quoted as saying in an interview, "We will go all the way to Bush's proposal-I don't see it as a bargaining situation." He added, "I think the quota idea is so good and that the momentum is in that direction and more and more people are beginning to realize that this is the approach to take."

Bush has proposed that 50 percent of all funds to countries that borrow from IDA, the World Bank arm that lends at heavily discounted rates, should in fact be grants. IDA lends to those countries that had a per capita income in 1999 of less than $885.

But the UK has said it will not back the proposal. "The UK position is that IDA needs to remain a lending institution," a British government spokesman said yesterday. "Other agencies are providing substantial grant funding and we think that loans promote responsible lending practices." The UK also argues that loans that are accompanied by a poverty reduction program promote ownership of the programs by the countries that use them.

Austria, Denmark, Finland and the Netherlands join the UK in strong opposition to increasing the proportion of grants to loans. Other countries are in favor of some grants but a much smaller amount. A French government spokeswoman said last month that 10 percent was a good level. "We do not believe it would be a good idea if too many grants were handed out," she said.

Despite the heated words, John Donaldson, the World Bank's adviser on US relations, said he thought a compromise would probably be reached. "My guess is that they will come to some agreement on the limited use of grants," he said.

The World Bank has said that in principle it supports the idea of increased grants. But it has warned that IDA is partly funded by money flows from existing loans, so if that cash no longer has to be repaid, the institution would need an increase in funding-something for which it has been notoriously tough to win US Congressional approval.

Taylor does not see the replenishment of IDA as a problem, notes the story. He thinks that if the multilateral development banks are made more efficient, people will be more inclined to approve funding to support their activities. "It is important to get these banks more efficient and then maybe down the road people will support them more," he said.

The next high-level discussions on grants are not due until the IDA deputies meeting later this year, notes the story. However, there is likely to be much debate on the subject at the annual meetings of the IMF and the World Bank at the end of September. In the meantime, the World Bank is carrying out its own research to assess the feasibility of the idea.

Also reporting, Marchés Tropicaux (France) says Bush's proposal must have left the Bank's senior management perplexed, as inversing the Bank's loans to grants ratio would erode its financial base and at the same time limit its capacity to intervene, especially since Bush did not accompany his proposal with a proportionate increase in shareholders' contributions.

Other members of the G8 point out in private that although the US is the richest country, it has failed to distinguish itself in the amount of development aid it gives, the story says. World Bank President James Wolfensohn recently noted in a speech to the UN Economic and Social Council that the level of US development aid is no higher than 0.1 percent of GNP.

Meanwhile, Shann Turnbull, author of Democratizing the Wealth of Nations and co-author of Building Sustainable Communities writes in the Australian Financial Review that the need to forgive Third World debts is forcing reconsideration of the role of the World Bank and related development institutions. Instead of making loans, the World Bank would provide know-how for countries to self-finance their development.

Development institutions and governments have heard the global demands to forgive debt, Turnbull notes. A start has been made. But as banks forgive debt, the value of their shareholders' funds decreases. This reduces their credit rating and so the cost at which they can raise funds for lending on to poor countries.

This would not matter if the World Bank could immediately change its role so that it would not need to raise funds to finance its loans, says Turnbull. However, such a change requires time, and one way to provide time and relief to poor countries is for debtor countries to buy their loans from the World Bank. The purchase would be financed by debtor countries setting up an Economic Development Facility to issue 20-year local currency bonds to the World Bank in exchange for their loans.

The president of the World Bank has asked his staff to investigate this approach and added the idea that loans to the private sector of client countries should also be sold back, Turnbull says. The arrangements would make the World Bank a genuine partner with developing countries. If self-financing development were successfully established, then the balance sheet of the Bank would not be affected. However, if the development process did not generate wealth, then the 20-year bonds may eventually have to be written off. But the plan provides time for the World Bank to turn bad loans into good.

The proposals would not eliminate the need for international aid to augment the cost of improving education, health and welfare in less developed countries, Turnbull notes. The management of these transfers and the know-how of self-financing development to provide local income for these services could become the new mission of the World Bank.

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