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World Bank Grants Would Reduce Poor Country Debt Without Cost to U.S.


Naiman

President Bush proposed in Genoa that up to 50% of the World Bank’s lending to

the poorest countries be converted to grants focused on education, health care,

access to clean water, and sanitation. This would be a step towards addressing

the unbearable external debt burden of poor countries. The World Bank claims

that the proposal would require increased contributions from the United States

to compensate the World Bank for the loss of loan repayments, implying that poor

countries would suffer under President Bush’s proposal if U.S. contributions

were not increased.

The

World Bank’s implication is false. If there were no increase in U.S.

contributions, the resources available for World Bank loans would decrease in

the future. It does not follow that this would hurt poor countries. A shift from

loans to grants would not result in a reduction of net flows from the World Bank

to the poorest countries, if we assume that the set of "poorest countries" is

fixed for the foreseeable future. Furthermore, if 50% of World Bank loans to

poor countries were converted to grants, it would reduce poor country debt by

about $800 million a year. Such a debt reduction would match debt relief

proposals backed by some development organizations.

The

World Bank’s lending arm to poor countries, the International Development

Association, loaned $4.4 billion last year. These loans are about 2/3

subsidized; that is, each dollar loaned is equivalent to a grant of 64 cents and

a market rate loan of 36 cents. If $2.2 billion were used for pure grants, it

would result in $800 million less debt ($2.2 billion times 36 per cent.)

Of

course, there would be some consequences for World Bank lending. Converting

these loans to grants would cause the World Bank to have less money in the

future. These loans have a 10 year grace period, so converting half of them to

grants would mean that 10 years from now the World Bank would have $800 million

less, in present dollars. And therefore the World Bank would have $800 million

less to lend, 10 years from now.

However, focusing on the reduction in lending alone is misleading, because this

would have no effect on net flows from the World Bank or from the U.S. to poor

countries. The $800 million the World Bank won’t have is $800 million it won’t

take from the poor countries. Poor countries won’t be worse off as a result of

not having the World Bank take $800 million from them and lend it back to them.

This

wouldn’t necessarily be true if, as a result of the World Bank’s largesse and

helpful advice, the poorest countries took off economically, so that ten years

from now they were no longer needy, and at that time there were some other

countries which were now the "poorest." Then it might make sense to transfer

money from the formerly poor countries, now rich, to some other countries that

were now poorer. But few analysts believe that such a take-off is plausible. The

poorest countries are not likely to change their relative position in the world

economy for the foreseeable future. Indeed, World Bank loans and advice have not

enabled these countries to increase their economic growth in the past.

There

is broad consensus that a much larger share of external assistance to these

countries should be directed to basic human needs such as education, health,

clean water, and sanitation. Such expenditures cannot necessarily be expected to

contribute to productivity and economic growth within the next 10 years. If

children stay in school to age 14, then policies such as universal education and

health care for children would not show up in productivity statistics for 14

years after birth. A loan for education or health care today will not

necessarily create increased capacity to service debt 10 years from now, and the

money to service that debt would have to be diverted from something else.

Some

might favor loans over grants for other reasons. But there is no reason to

expect that substituting grants to the poorest countries for World Bank loans

will require more money from the U.S. or reduce these countries’ access to

resources.

 

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