Economic Policy, Export, and Trade Promotion Subcommittee of the
Senate Foreign Relations Committee is planning to hold a September
12 hearing on the 13th replenishment of the World Bank's
International Development Association (IDA), of which the U.S.
would pay $850 million annually in FY 2003 (an 18 percent increase
over America's commitments to the 12th replenishment) and up to
$2.85 billion over three years provided the IDA meet certain
IDA is the World
Bank's concessionary lending arm and is focused on encouraging
development in the least developed nations-those with a per capita
gross national income of $875 (2001 GNI per capita) for 2003,
although some countries with higher incomes are given special
access to IDA loans. Due to the poverty of IDA recipients, IDA
loans have been extended interest free (except for a 0.75 percent
service fee) for 40 years. Repayment of the loan is scheduled over
30 years following a 10-year grace period.
There is no
questioning the need for these desperately poor countries to
develop. The record shows, however, that IDA loans are not the
means for achieving this goal. The majority of IDA's 80 eligible
borrowers have not
achieved strong or stable growth despite vast amounts of
All told, IDA has
disbursed $71.5 billion between 1980 and 1999 ($81.2 billion in
constant 1995 dollars) to the 78 eligible borrowers for which
information is available on the World Banks' World Development
Indicators. This is approximately $1 billion for every IDA-eligible
country-an amount greater than the total GDP of 20 IDA recipients
in 1999. However, this assistance has not spurred economic growth.
For instance, of the 74 IDA-eligible countries for which per capita
GDP data are available:
experienced negative compound annual growth in real per capita GDP
from 1980 to 1999 (in constant 1995 U.S. dollars);
experienced marginal compound annual growth of less than 1 percent
in real per capita GDP from 1980 to 1999 (in constant 1995 U.S.
compound annual growth greater than 1 percent in real per capita
GDP from 1980 to 1999 (in constant 1995 U.S. dollars), but only 5
achieved per capita growth over 4 percent.
Why is this
important? The average per capita GDP of these IDA recipients in
1999 was $682 (in constant 1995 dollars). To reach
lower-middle-income status at $1,500 per capita GDP, they need to
grow at over 4 percent annually for 20 years. To reach America's
1999 per capita income of $31,073 (in constant 1995 dollars), they
must grow at over 4 percent annually for just under 100 years.
In recognition of
IDA's failure to elicit growth, the Administration has sought three
reforms at IDA: increased focus on economic growth, adoption of a
means to measure results, and changing 50 percent of IDA assistance
from loans to grants.
The other IDA
donor nations have agreed to provide between 18 percent and 21
percent of IDA assistance as grants, including most assistance
for education, health (including HIV/AIDS), nutrition, potable
water, and sanitation. The Administration convinced them to agree
to an increase in donor funding (the U.S. will pay an additional
$100 million) if IDA demonstrates "concrete measurable
results." IDA is also
supposed to "devote significant resources over the next three years
to projects and programs that raise productivity."
These reforms are
welcome, although the donor nations should hardly be required to
provide more IDA funding for the organization to do its
job-achieving "concrete measurable results." But the focus on
increasing productivity glosses over the primary requisite for
increased economic growth-economic freedom.
focus should be on improving economic growth in developing
countries and reorienting development assistance to facilitate that
growth. The way to achieve that growth is for countries to adopt
sound economic policies and the rule of law, which are measured in
the Index of Economic Freedom co-published by The Heritage
Foundation and The Wall Street Journal. As shown in the
Index, free countries on average have a per capita income
twice that of mostly free countries; mostly free countries have a
per capita income more than three times that of mostly unfree and
repressed countries. This happens because countries that maintain
policies that promote economic freedom provide an environment that
facilitates trade and encourages entrepreneurial activity, which in
turn generates economic growth.
help poor nations, but without economic growth these achievements
are not self-perpetuating. In other words, some benefits may
accrue, but those are not the benefits of development. The Senate
should take the opportunity of Thursday's hearing to focus the
President and the World Bank on the importance of economic growth
and the economic freedom that leads to such growth.
The Millennium Challenge Account: An Opportunity to Advance
Development by Brett D. Schaefer, July 12, 2002
America's International Development Agenda by Brett D.
Schaefer and Aaron Schavey, May 6, 2002
The Bretton Woods Institutions: History and Reform Proposals by
Brett D. Schaefer (Preface by Representative Jim Saxton), April 1,
2000 (Economic Freedom Project Report #00-01)
Reforming International Financial Institutions, Priorities for the
President: Chapter 15 (pdf)
2002 Chapter 24: Africa: Fostering Development and