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.
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.
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.)
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.
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.
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.
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