August 20, 2001

August 20, 2001 | News Releases on Foreign Aid and Development

Grants, Not Loans, Hold Greater Promise for Poor Nations, Analyst Says

WASHINGTON, Aug. 20, 2001-Instead of doling out loans that never will be repaid, the World Bank should begin to offer poor countries "performance-based" grants, according to a new report from The Heritage Foundation.

The World Bank's International Development Association (IDA), which seeks to produce "a world without poverty," offers extremely poor nations virtually interest-free loans with a delayed repayment schedule. Yet this approach has not worked and, in many cases, has made matters worse, says Brett D. Schaefer, an analyst in Heritage's Center for International Trade and Economics.

Schaefer studied economic growth rates in the 85 countries that received IDA loans in the 1980s and 1990s and found that, in two-thirds of those countries, the people derived little or no benefit from the loans. Indeed, nations that received IDA loans were more likely to experience a drop in per capita wealth than to achieve significant economic growth.

The reason? "IDA loans often only sink poor nations further into debt," Schaefer says. "Recipients get on a debt merry-go-round, with new loans used to pay off old loans. IDA loan-repayment becomes a fiction."

The solution, he says, is to shift from the current lending program "which has proven an abject failure in promoting economic growth" to a system of performance-based grants. These grants would require that:

· grantees put up some of their own money for the projects being financed-from 10 percent to 90 percent, depending on their wealth and access to financial markets,

· funded projects be open to competitive bidding, and

· grants be paid only after work is performed by contractors and its completion verified by independent auditors-unlike the current "up-front" loan payments.

Schaefer views the last rule as the most important because past loans often have bankrolled ineffective, never-completed projects or were diverted to the personal accounts of unscrupulous officials. Fewer than a third of World Bank projects in poor countries produce "satisfactory, sustainable results," Schaefer says. Performance-based grants were a top recommendation in the March 2000 report of the International Financial Institution Advisory Commission, the group appointed by Congress to consider the future roles of seven international financial institutions, including the World Bank Group.

The Commission report said that by shifting from loans to a performance-based grant program, current Bank resources could go much further. "Every dollar of annual grants replaces $17 of loans," according to Adam Lerrick, senior adviser to the Commission.

Both the administration and Congress seem to have paid attention. In a July 17 speech to the World Bank, President Bush proposed a version of the Commission's plan, urging that "the World Bank and other development banks dramatically increase the share of their funding provided as grants, rather than loans, to the poorest countries."

And the House overwhelmingly (381-46) passed an appropriations bill that provides funding for the IDA and directs the treasury secretary to "accord high priority" to giving it the policy flexibility to provide new grant assistance to countries eligible for debt reduction.

Schaefer calls the bill "a solid first step." But, he says, the bill should be strengthened to prohibit IDA funding until the agency implements the grant proposal and begins to require independent audits of funded programs.

"The president's plan would benefit the people in poor nations and protect Americans' tax dollars-ensuring that boondoggles are not funded in perpetuity," Schaefer says. "The only ones who wouldn't gain are unscrupulous Third World officials, who no longer could use international assistance for personal gain, and World Bank bureaucrats, who would be forced to provide results instead of mere platitudes."

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