[stop-imf] O'Neill: Grants not loans for poorest countries

[Robert Weissman]

[snip] Grants are the right way to help an already heavily indebted
country provide education, health, nutrition, water and sanitary needs for
its poorest people and to help fight AIDS and other infectious diseases.
Loans should be made only when there is an expectation that principal and
interest will be paid back in full and on time. [snip]

JUL 17, 2001

The Best Investment in Helping Poor Nations

By PAUL H. O'NEILL

WASHINGTON =D1 With more than 1.2 billion of the world's people still livin=
g
on less than $1 a day, there is no more important challenge than improving
living standards and eliminating poverty. The World Bank and other
multilateral development banks have a crucial role to play in meeting this
challenge. To do so, they need to change their ways of doing business.

Today President Bush will speak about how we might spread development and
prosperity to other parts of the world. In addition to
describing the benefits of trade expansion, the president will point out
that the key to improving living standards in poor countries is to
design development strategies that focus on economic growth.

Earlier this month in Rome, at a meeting of finance ministers, I had the
opportunity to share ideas for improving the development
banks with both officials of G-7 nations and heads of several of the banks
themselves: the World Bank, the African Development
Bank, the Asian Development Bank, the European Bank for Reconstruction and
Development, and the Inter-American Development
Bank.

All of these development banks, whether they operate worldwide or
regionally, try to use capital provided by richer nations to
modernize the economies of the world's poor countries. But too often the
millions or billions of dollars they have lent to finance
development projects have not led to the hoped-for economic growth. To
improve the lives of the poor significantly, these banks need
to be more effective.

First and foremost, the development banks must focus their efforts on
raising productivity growth in the developing world. Virtually all
differences between rich and poor nations can be explained by differences
in productivity =D1 the amount of goods or services each
worker produces per hour of work. Higher productivity translates directly
into higher incomes. To start, the banks should devote more
resources to the development of human capital. Education is inextricably
linked to improving living standards, and it is critical that the
banks place greater emphasis on it. Over the past five years, education
projects accounted for only 7 percent of total World Bank
lending. My colleagues in Rome agreed that this must change.

The banks should also promote the right kinds of investments in physical
capital. Not all capital investments are equal. Economic
history has taught us, for example, that investing in agriculture while
laying the foundation for diversifying into competitive, privately
owned manufacturing is a key to development. Investments should support
the production of real products for real customers in
competitive markets: it is important that the banks do not induce
countries to invest in business sectors that are already globally
oversupplied.

Because a market economy relies on institutional bedrocks like the rule of
law, enforceable contracts and a stable government free of
corruption, the development banks should actively promote sound governance
and public-sector management in borrowing countries.
They should lend only to those with governments committed to meeting these
standards.

The banks must also adopt a bolder, more aggressive stance on the use of
outright grants of money, as well as loans. During the past
two decades, many of the poorest nations became so highly indebted that
now they are unable to make payments on their current loans,
let alone borrow and pay back more. Grants are the right way to help an
already heavily indebted country provide education, health,
nutrition, water and sanitary needs for its poorest people and to help
fight AIDS and other infectious diseases. Loans should be made
only when there is an expectation that principal and interest will be paid
back in full and on time.

Countries that do not have access to capital lent by private financial
institutions are in the greatest need of the development banks'
resources. As the financial conditions of individual countries improve, we
should create a system of loan rates that moves toward the
private-market interest rate. This will keep the development banks from
competing with the private sector and help concentrate their
lending on countries that lack access to the private financial markets.

Finally, it is essential that the multilateral development banks become
more rigorous about measuring their own results. In education, to
take an illustrative example, measuring inputs =D1 classrooms, teachers =D1=
 is
secondary to measuring the product =D1 ability to read and
write and compute at an appropriate level. Similarly, in assessing the
performance of the development banks, we need to develop
specific ways to assess progress toward development objectives; we must be
hard-minded and demanding about the necessity that the
money lent really produce results.

I strongly believe that the multilateral development banks can be more
effective in promoting world economic development by focusing
their knowledge and resources on improving the lives of the world's poor.

Paul H. O'Neill is secretary of the Treasury.