Will grants kill IDA?

10 September 2001

Heated debate is brewing between the US government which proposes that the Bank’s International Development Association (IDA) should provide up to 50 per cent of its resources as grants and some European governments (supported by the Bank) who argue that to do so would deplete IDA‘s resources. The benefit of loans is that repayments can be used for further lending. Many Europeans are critical of the US proposal for failing to offer any new money. “The US call for a shift towards more grants is highly suspicious”, commented Greetje Lubbi, of the Dutch NGO Novib. “The US has not indicated that it plans to increase its contributions.”

The US government has argued that grant lending would increase IDA‘s effectiveness because it could more easily be linked to results, which would encourage governments in the future to donate more money. Some have suggested the US government is trying to use the grants argument as an indirect way to reduce the role of the Bank. However, John Taylor, Under-Secretary for International Affairs, commenting in the Financial Times (19/7/01) said that the plan would reduce IDA income only by about four per cent over 20 years. While the US argues that the loans are often too expensive for the poorest countries the Europeans have retorted that loans ensure money is well used. Several NGOs have supported The US position. Robert Naiman from the Center for Economic and Policy Research commented, “this would have no effect on net flows from the World Bank or from the US to 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.”

Liana Cisneros from Jubilee Plus, UK, commented, “European leaders opposed to Bush’s proposal are simply defending corporate interests in their own countries. World Bank loans effectively provide subsidies to big companies wanting to do business in developing countries” she added. The US 50 Years is Enough! network welcomed the grants proposal but added, “the grants would still come from the World Bank – an institution that has not proved particularly adept at funding projects designed through participatory processes and which avoid environmental and social damage”. Adam Lerrick and Allan Meltzer (chair of the US congressional committee which produced a critical report on the Bank and Fund in 2000), described the Bank’s argument that IDA grants would deplete resources was “faulty”. They suggest that “grants would be project-linked, monitored for results, and paid only for performance. The grant system would count and pay for numbers of babies vaccinated, children that can read, and water and sewer services delivered to villages. No results, no funds expended. And no funds diverted to offshore bank accounts, vanity projects or private jets.” However the poorest countries do not have the resources up-front to invest in these areas. Thus providing money only when results have been achieved may lead to no investment at all.

At present it seems likely that the new IDA agreement will allow for about 10-15 per cent of all IDA resources to be given as grants. The tricky question is how these resources will be allocated. For example, it could be allocated to the very poorest countries, to those countries with the largest number of poor people, to those countries with the most debts, or to primary education and health sectors.

See also World Bank lending to poorest countries examined

Robert Naiman’s comments

Financial Times article