World Bank: IDA Loans or IDA Grants?

Order Code RL31136

CRS Report for Congress

Received through the CRS Web

World Bank: IDA Loans or IDA Grants?

Updated February 8, 2002

Jonathan E. Sanford

Specialist in International Political Economy

Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

World Bank: IDA Loans or IDA Grants?

Summary

On July 17, 2001, President Bush proposed that the World Bank implement a

plan where half of all its assistance to the world’s poorest countries would be grants

rather than low-interest loans. He said this would enable the Bank increase its levels

of assistance for education, health, and other programs aimed at poverty alleviation.

It would also keep poor countries from falling further into debt. The increased

funding would be tied, he said, to clear and measurable results. The International

Development Association (IDA) is the part of the Bank that currently makes low-cost

loans (long repayment periods, very low service charge) to poor countries. IDA loans

are funded with money contributed annually by donor countries.

Although there has been widespread support for the concept of IDA grants

among other donors, multilateral agencies, and the public, many have indicated that

they prefer a much smaller program than the President has proposed. Many are

concerned about the long-term financial impact a large grant program might have on

IDA. IDA funds a substantial portion of its new lending (40% of all commitments

planned during the period 1999-2001) with repayments from prior loans. (These are

often called “reflows”.) Over time, if reflows are not available to help cover the cost

of future IDA assistance, the cost of the World Bank’s concessional aid program to

poor countries will gradually rise. The President did not indicate, in his original

proposal, that the Administration would support increased funding for IDA to help

support the cost of new grants. In December, the Administration said it would be

willing to raise the U.S. contribution level by up to 18% if certain institutional

changes were made in the World Bank, but it did not link the projected increase to the

issue of grants. Some people are concerned that the grant proposal is ultimately a

plan to “defund” the World Bank, to bring about the ultimate termination of IDA

either because it is too costly to donors or because it does not have sufficient funds.

In 2000, a congressionally-appointed study panel, the Meltzer Commission,

made several proposals to replace World Bank IDA loans with grants. One of these

would create a large grant program (funded with new contributions) to address

poverty alleviation and policy reform issues. A second proposal, though, would

basically dissolve the World Bank and use its residual assets to fund a special program

– at no cost to anyone – addressing global needs. Many of those with reservations

about the President’s proposal hear echos of the Meltzer Commission’s

recommendation – particularly the second recommendation – in his grant plan.

The issue is being negotiated in the series of talks currently taking place on

terms for a new replenishment (IDA 13) of IDA resources. In the foreseeable future,

the costs and the benefits from a 50% grant program are not dramatically different

than those available from the present IDA program. Most of the costs and benefits

occur thirty to forty years hence, in a context which may or may not be similar to that

faced by developing countries today. Some analysts believe that the underlying

controversy may be less about IDA finances and more about influence in the

international financial institutions. Should the Europeans develop a common policy

front on IFI matters (as they have in this case), they will be the “largest single member

country” and their leadership role will be substantially enhanced.

Contents

Bush’s Proposal and the Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

The Difference Between Loans and Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Terms for IDA Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

An Earlier Debate on Loans or Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

A Decision to Make Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Comparing the Cost of Loans and Grants . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The Benefit to Recipient Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

IDA’s Repayment Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Reflows as a Share of IDA Usable Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Earlier Proposals for IDA Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

General Support for the Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Meltzer Commission Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

The Commission Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Subsequent Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

The Administration’s Argument for Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

British and Other Views . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Negotiating IDA’s Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Where To Go From Here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

World Bank: IDA Loans or IDA Grants?

Bush’s Proposal and the Response

On July 17, 2001, prior to his trip to Genoa for a meeting with the top leaders

of the seven leading industrial countries (G-7), President George W. Bush called on

the World Bank and other multilateral development banks (MDBs) to provide a major

share of their assistance to poor countries in the form of grants rather than low-cost

loans. Speaking before several hundred World Bank employees, Bush claimed that

his plan would help poor countries without adding to their heavy burden of debt. “I

propose,” he said, “that up to 50 percent of the funds provided by the development

banks to the poorest countries be provided as grants for education, health, nutrition,

water supply, sanitation, and other human needs.” This would be, he said,

compassionate conservatism at the international level. Alluding to protestors who

have been calling for a major cancellation of debt owed by poor countries, the

President said that his proposal “doesn’t merely ‘drop the debt’ – it helps stop the

debt.” The increased funding would be tied, the President said, to clear and

measurable results. 1

The White House noted later that the President sought to convert to grants half

the money the Bank lends to poor countries annually through its concessional loan

facility, the International Development Association (IDA). A few countries borrow

both from IDA and from the Bank’s regular loan window, the International Bank for

Reconstruction and Development (IBRD). Because these “blend” countries would

not be eligible for grants, the President’s plan would actually involve only about 40%

of total IDA funding.

A grant program would have clear benefits, the Administration argued, for

economic development and long-run poverty reduction. Besides, spokesmen said, a

grant program would allow better assessments ex-ante of project effectiveness.

Grants could be tied to clear and measurable policy instruments, to require more

prior commitment to achievement of program goals and to link the actual payment of

the grant to clear ex-post output measures.2 The Administration did not explain at

1

Quoted in Michael Phillips, “Bush Wants World Bank to Make Grants–Switching from

Loans has Large Catch if U.S. Fails to Boost Contributions.” Wall Street Journal. (July 17,

2001), p. A2. For the full text, see George W. Bush, “Remarks by the President to the World

Bank,” Washington, D.C. July 17, 2001. Available from the White House web site at

[http://whitehouse.cov/news/releases/2001/07/20010717-2.htm]

2

White House. (2001) “Fact Sheet on U.S. Proposal to Increase World Bank Grants to the

Poorest Countries.”U.S. Newswire (Washington) July 20, 2001. The U.S. Treasury

Department later released a fact sheet supplying additional points supporting a grant program.

(continued...)

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the time what the President meant by the comment that grant aid should be tied to exante assessments or that the payment of the grant should be linked to ex-post output

measures.

The President’s summit colleagues had little comment on his proposal. The G-8

called on the World Bank and other MDBs to take further steps to help poor

countries.3 They did not mention, however, the issue of IDA grants. In a separate

communique, the G-7 countries – the major MDB donor countries comprising the

G-8 less Russia – said that they might be willing to discuss the concept further. “We

support a meaningful replenishment of IDA and, in that context, we will explore the

increased use of grants for priority social investments, such as education and health.”

They made no comment on the President’ proposal.4

Separately, many other G-7 countries expressed opposition to the plan. “It’s not

something that we agree with,” indicated Beverly Warmington, spokeswoman for the

British Department for International Development. “The World Bank is actually a

bank and there are development agencies to give grants. It’s important that the World

Bank work alongside them instead of competing with them.”5 Michael Hofmann,

director general for Germany’s Ministry of Economic Cooperation and Development,

was also quoted as saying that he thought an important element was missing from the

President’s proposal. If it had been accompanied by an announcement that the

President would ask Congress to increase the American contribution by a specific

amount, he said, “then the whole thing would have had a very different melody.” If

none of the G-7 countries really want to increase their IDA contributions, he said

“such a suggestion can mean only one thing: reducing the business of the bank.” The

French noted that, while they supported the idea of grants, the U.S. proposal went

further than they could support. The German government told a meeting of World

2

(...continued)

It claimed that the President’s proposal would make possible a major new increase in funding

for education. This would be consistent, it noted, with the President’s theme that no child

should be left behind, that every child must be educated. “It is often difficult for [the world’s

poorest countries] to generate the economic returns with which to pay back funds borrowed

for education and other development priorities,” the Department observed. It makes little

sense, either for the borrower countries or the MDBs to be financing projects “with loans that

cannot be repaid,” it said. More assistance could be provided, with grants, it argued, for

health, education, nutrition, water supply and sanitation projects in poor countries benefitting

children. In a subtle change, it noted that, under the President’s proposal, “up to fifty percent”

of IDA assistance to the world’s poorest countries could be provided in the form of grants

rather than loans. [Emphasis added.] U.S. Treasury Department. Fact sheet titled “Increasing

Grants and Improving Education in Poor Countries.” Dated July 10, 2001 but released after

the President’s speech.

3

Communique. Group of 8 (G-8) heads of state and government. Genoa, July 21, 2001.

Available from [http://www.G7.utoronto.ca/g7/summit/2001genoa/finalcommunique.html],

provided by the G-7 resource center at the University of Toronto..

4

Communique. Group of 7 (G-7) heads of state and government. Genoa, July 21,2001.

Available at [http://www.G7.utoronto.ca/g7/summit/2001genoa/g7statement.html].

5

Joseph Curl. “Bush asks billions for poor nations; Takes proposals to World Bank.”

Washington Times. (July 18, 2001), p. A1.

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Bank donors (negotiating terms for a new IDA replenishment) in June 2001 that it

could not go beyond 10% grants without breaking a promise to its parliament.6

Others have also expressed doubts about the President’s plan. Jerome Booth,

an emerging markets fund manager, argued, for instance, that the proposal for 50%

IDA grants was either a preposterous example of ignorance about IDA finances or a

ploy to cut the World Bank down in size. He suggested that the effort to expand the

flow of grants through IDA might be an attempt by the Administration to cover the

fact that the United States was reducing its overall level of bilateral foreign aid.7

Others questioned whether the IDA donor countries would be willing to contribute

the additional funds necessary to make the new plan feasible.8 Columnist Milan

Vesely claims that the new proposal was “posturing.” He noted that Condoleezza

Rice, the President’s National Security Advisor, had said that the grant plan would

have no financial impact on IDA for ten years. He observed, that she had not said

when or whether the Administration planned to ask Congress for money to help fund

future costs.9 Nancy Alexander , spokesperson for an NGO critical of globalization,

suggested that, when combined with the World Bank’s proposed Private Sector

Development Strategy, the President’s plan for IDA grants poses serious risks to the

well-being of poor people by reducing their access to the education, health, and clean

water services it presumably wishes to support.10

6

Sanger, David E. (2001) “Rich nations Offer a Hand, But the Poor Hope for More.” New

York Times. (July 21, 2001), p. 7. This may be a consequence of the German system of

budgeting for IDA contributions. The United States Congress appropriates money for IDA

contributions (budget authority), which is available for many years and can be drawn by IDA

when needed (outlays) to help fund disbursements for IDA projects. By contrast, according

to World Bank sources, the Germans vote money each year for their share of IDA’s expected

annual disbursements. Considerable care must be taken to match the amount voted with the

amount IDA will actually need to draw in the coming year from the German pledge. The

German government has less reason to be concerned than does the U.S. Administration that

its will refuse to provide the money.

7

Jerome Booth. “Burdens that can’t be passed on.” Euromoney, September 2001, pp. 34143. This article was published in the London-based magazine about the same time that the

British government was seeking to persuade other IDA donor countries to resist the

Administration’s plan. Booth is head of research for Ashmore Investment Management in

London, an emerging markets fund manager, and a frequent commentator in the press.

8

See, for example, remarks to this effect by Mikesell, a professor of economics at the

University of Oregon, in his summary of the Commission report.. Raymond Mikesell,

“Review Article: the Meltzer Commission Report on International Institutions.” Economic

Development and Cultural Change 49:4 (July 2001), p. 887. Likewise, remarks by C. Fred

Bergsten, formerly a former high Treasury official during the Carter Administration. Quoted

in Alan Friedman, “‘Shadow’ Group Seeks to Open G-8 to Poor Nations.” International

Herald Tribune. (July 20, 2001), p. 18.

9

Milan Vesely, “Will Bush Back Words with Deeds?” African Business, London. September

2001, pp. 2021.

10

Nancy Alexander, Director of the Globalization Challenge Initiative, telephone interview

with author, January 24, 2002. See the GCI publication “Growing Dangers of Service

Apartheid: How the World Bank Group’s Private Sector (PSD) Strategy Threatens

(continued...)

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On the other hand, the Administration’s proposal for 50% IDA grants has

elicited strong support from many groups that are deeply concerned about poverty

and strongly in favor of programs to promote equitable and sustainable development.

Cardinal Bernard Law, Archbishop of Boston, announced that the U.S. Conference

of Catholic Bishops “welcomes President Bush’s initiative on poverty alleviation.”

In particular, he said, the Conference welcomed the proposal that “up to 50% of funds

provided by development banks to the poorest countries [be] given in the form of

grants rather than loans.”11 John Ruthrauff, senior policy analyst for Oxfam America,

stated that “Oxfam America supports the Bush administration’s position that half of

the IDA funds be grants.”12 Increased grant assistance is particularly important, he

said, in order to meet the 2015 development goals, help countries invest in their

growth, and avoid increasing their debt. David Beckmann, President of Bread for the

World, an aid advocacy group, expressed a somewhat more restrained level of

support. “Bread for the World supports President Bush’s proposal that some of the

next replenishment of IDA should be grants,” he stated, “with the understanding that

10

(...continued)

Infrastructure and Basic Service Provision.” News and Notices for IMF and World Bank

Watchers 2:5 (Winter 2002). Available from [www.challengeglobalization.org].

11

Cardinal Bernard Law. Statement on the President’s Initiative on Global Poverty

Alleviation and Increase in World Bank Grants to the Poorest Countries. Office of Social

Development and World Peace, United States Conference of Catholic Bishops, July 19, 2001.

Available at: [http://www.nccbuscc.org/sdwp/international/gloprov.htm]. Cardinal Law is

Chairman of the Conference’s Committee on International Policy. Catholic Relief Services

and Cafod, the overseas development and relief agencies of the Catholic Church in the U.S.

and U.K., expressed later a somewhat more muted level of support for the grant plan. The

U.S. plan would prevent the accumulation of unsustainable debt by poor countries, said

spokesmen for the two organizations, and it would make maximal use of development funds.

However, the plan is viable only if donors agree “to offset the cost of reduced repayments to

the World Bank resulting from the conversion of loans to grants.” The United States could be

most persuasive in its advocacy of a grant program, they said, if it would make an “upfront

commitment of funds” to allay suspicions that its proposal was merely “posturing in support

of the world’s poor while continuing to starve them for development resources.” They noted

that, compared to the size of its economy, the United States provides less foreign aid to poor

countries than does 21 other donor countries. See: Loans-to-grants plan needs upfront funds.”

Financial Times [Europe and US editions], January 22, 2002, p. 14. Letter to the editor from

the executive officers of both agencies.

12

John Ruthrauff. Oxfam America Position on IDA Loans and Grants. Electronic message

to author, January 11, 2002. His statement was approved by Oxfam America’s top

leadership. It might be noted, though, that Oxfam International, the London-based

organization, has expressed more conditional support for the President’s plan. Kevin

Watkins, a senior policy advisor, was quoted as saying that “We broadly support increased

use fo grants in very poor countries, but not the US proposal because of its failure to

guarantee funding in the long term.” The real problem with the United States, he said, was

“that they never put their money where their mouth is.” Alan Beattie, “NGOs pressed to back

US grant scheme; World Bank move to Replace Loans.” Financial Times [London Edition],

January 17, 2002, p. 9.

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the U.S. government will also agree to provide additional funding for the next

replenishment.”13

This report explores the different ways a switch from IDA loans to IDA

grants might affect recipient and donor countries and the IDA program itself. The

report looks at the role which debt repayments for old loans now play in funding

IDA’s current loan program and identifies some arguments for and against a switch

from loans to grants. It also discusses some earlier proposals for shifting IDA to a

grant basis and suggests issues that may be relevant to reaching an agreement among

the donor countries on this matter.

Initiation of a program of IDA grants might offer opportunities for increased

flows of assistance for education, health, and other social programs. However, as

discussed below, the operational effects of a shift from IDA loans to grants may be

felt only in the second decade after the change occurred and its full impact would be

phased in slowly over a period of up to 40 years. A grant program might allow

donors to require that recipients give them more opportunities for monitoring

program implementation than might be available for programs financed by loans.

However, it might also force the donors to choose between increasing their

contribution levels or seeing the IDA program shrink in size. Likewise, the change

might offer recipient countries some relief from their debt payment burden over the

next forty years (since they would not have to repay the grant.) The efficiency of

grant-funded programs might be enhanced but the recipient country might also feel

less “ownership” for programs when it has little say in their implementation. Some

observers believe that this may have a negative effect on its willingness to continue

funding for the program or to keep the original policies in place once the donor

withdraws and the program becomes its responsibility.

The Difference Between Loans and Grants

The Terms for IDA Loans

The World Bank provides assistance to its countries through two loan

“windows.” Legally, they are separate organizations, though in fact they share a

common staff, management, policies, and rules. The International Bank for

Reconstruction and Development (IBRD) lends mainly to middle-income countries

using funds borrowed at commercial rates in world capital markets. Most IBRD

borrowers have annual per capita incomes well below the $5,280 ceiling on eligibility.

IBRD loans are repayable over a 10 to 20 year period at interest rates slightly higher

than those the Bank pays to borrow funds.

The International Development Association (IDA), by contrast, makes loans to

the world’s poorest countries. Most IDA borrowers have annual per capita incomes

well below the $885 ceiling for eligibility. Some small countries – mostly island

countries – with marginally higher income levels and low creditworthiness may also

13

David Beckmann. Electronic message to author, January 11, 2002.

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qualify. IDA loans are funded with money contributed by donor countries. The

United States presently contributes about 20% of IDA’s new resources. As IDA’s

uncommitted funds are used up, the donors negotiate new plans every three years to

replenish its resources. IDA lends without interest and with principal repayments

stretching (after a 10 year grace period) over a 20 to 30 years. The borrower pays

a 3/4 of 1% service charge to IDA, which the World Bank uses to cover IDA

administrative costs. There is no grace period for the service charge obligation.

Except for fast disbursing adjustment loans (which go out over 1 to 3 years), IDA

loans are disbursed over a period of 8 to 10 years, as work on their projects is

completed.

An Earlier Debate on Loans or Grants

There is no impediment in the IDA Articles of Agreement to grants. The IDA

Articles specify that “Financing by the Association shall take the form of loans.”

However, subsequent language authorizes IDA to provide other types of financing in

“special circumstances.” Deciding whether such circumstances exist is the

responsibility of the Executive Board.14 Perusal of the IDA Articles and IDA

operations will show that a number of activities possible only in “special

circumstances” (local cost financing or non-project assistance, for example) are now

common (if sometimes implicit) procedures.15

As Edward Mason and Robert Asher noted, in their official history of the World

Bank, IDA is “simply a fund administered by the World Bank.”16 It was created

because most poorer developing countries could not afford to borrow from the IBRD.

A U.S. government advisory board, headed by Nelson Rockefeller, and a panel of

experts at the United Nations both proposed, in the early 1950s, establishment of a

new international development agency or authority to provide assistance on a grant

basis for activities that were “desirable on social grounds [but] could not bear the full

burden of loan finance.” Eventually the proponents abandoned the concept of grants

in favor of concessional-rate loans, on the expectation that this would be more

acceptable to the prospective donor countries.

14

IDA Articles of Agreement, at Article V, Section 3. Articles of Agreement of the

International Development Association. Entered into force September 24, 1960. Available

from the Bank’s web site at [http://www.worldbank.org/ida/idaart.htm].

15

IDA’s Articles of Agreement say, at Article V, Section 1(b), that, except in special

circumstances, assistance from IDA “shall be for specific projects.” In some years, balance

of payments support through structural adjustment loans, sectoral adjustment loans, and

reconstruction or rehabilitation loans may comprise upwards of a quarter of IDA lending.

Article V, Section 3(e) says that, in special cases, IDA “may make foreign exchange available

for local expenditures.” This is a regular element of many IDA loans and is embodied in the

IDA rules allowing potential suppliers in the recipient country a marginal advantage in price

when they seek, through international competitive bidding, contracts to supply goods for IDA

projects.

16

Edward Mason and Robert E. Asher, The World Bank Since Bretton Woods. The

Brookings Institution. Washington, D.C.: 1973. The discussion here is based on chapter

twelve, an account of the history and operations of IDA.

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IDA originated in a proposal by Senator A.S. Mike Monroney (D-OK) in 1958

to create a new international body that would finance development in poor countries

by lending to them excess foreign currencies of other poor countries that were

currently owned by aid donor nations. Though economically impractical, the

Monroney plan was transformed by the Eisenhower Administration into an agency

capable of making hard currency loans to poor countries on easy-repayment terms.

Monroney’s original concept, loans of excess foreign currencies, though a dead letter,

is included in the IDA charter. Some donor countries supported Monroney’s idea that

IDA loans might be repaid in local currency. As Mason and Asher note, the IDA

charter “did not foreclose it; but no use has been made of the provision authorizing

such loans.”

World Bank management was reportedly more opposed originally to the

concept of IDA loans than it was to IDA grants, fearing that a concessional loan

window would confuse potential bondholders and drive up the cost of IBRD capital.

Officially, IDA provides aid in the form of “credits” in order to distinguish it from

IBRD “loans.” During negotiations on the IDA Articles of Agreement, many

prospective donor countries spoke in favor of the concept that IDA should have the

authority to make grants. Mason and Asher report that the United Kingdom, France,

Canada and the Netherlands were leading advocates of this view, while the United

States was in staunch opposition. The IDA charter specifies that all the assistance

provided by IDA from original subscriptions must be used for loans, but it holds open

the possibility that resources from future replenishments may be used for grants if

specifically authorized by the donor countries at that time.17

A Decision to Make Grants

As noted above, an IDA grant program may be created only with the consent of

the donor countries as expressed in the new replenishment agreement. The Bank’s

Board of Executive Directors has the authority to determine when “special

circumstances” exist but it has no independent authority to create a formal grant

program.18 A two-thirds vote of the donor countries is needed to approve a new

replenishment for IDA. The Administration will need broad support from other

countries to bring about the establishment of an IDA grant program. In recent

decades, the United States has provided about 20% of IDA’s new resources but, for

historical reasons, it has a 14.8% voting share. Altogether, the principal donor

countries have a 61.3% voting share in IDA. As a practical matter, it is extremely

unlikely that developing countries would oppose a new replenishment for IDA. As

noted before, though, most other donor countries are – at best – lukewarm in their

support for a major IDA grant program. The poor countries would likely also look

askance on the suggestion if they believe it would reduce the flow of aid they receive

from the Bank.19

17

IDA Articles of Agreement, at Article V, Section 2.

18

The Articles specify that the Executive Board shall be responsible for IDA’s general

operations. IDA Articles of Agreement, at Article VI, Section 5 of the IDA.

19

See, for example, comments to this effect in Alan Beattie, “Give and Take: European

(continued...)

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At one time, IDA replenishment agreements could not go forward without the

consent of the United States (and therefore the consent of Congress). In recent

decades, however, the U.S. contribution share had declined to the point where it no

longer has a de facto veto over IDA replenishment plans. The United States also has

limited leverage with other donors on these matters. In 1997, other IDA donor

countries indicated that – if the United States did not bring its payment arrears up to

date – they might create a new international agency to replace IDA. The United

States would not be invited to join. Many in the United States believed that this

would have serious negative implications for U.S. foreign policy. Congress

appropriated $1.035 billion in fiscal 1998 to fully clear the IDA arrears. Many

observers doubt that the United States will be able to persuade other donor countries

to adopt an IDA replenishment plan whose provisions they do not support.

Comparing the Cost of Loans and Grants

Because of the grace period, IDA receives no reflows from its loans for 10 years.

In that respect, IDA loans are the same as grants. Beginning in the 11th year and

continuing for the life of the loan, however, IDA receives a stream of repayments of

principal, roughly (for a 30 year loan) 3.3% of the amount lent initially.20 Those

repayments can be (and are) used to fund new IDA loans. If the IDA donor countries

wanted to keep the IDA loan program at a constant level in nominal terms – $6 billion

a year, for example – they could reduce their contributions annually at the end of the

10 year grace period by an amount equal to the new repayments being received.

Ultimately, IDA would be able to provide a constant nominal level of assistance to

borrower countries without any new contributions by donors. By contrast, if the

donors want an IDA grant program to stay at a constant nominal level, they would

have to contribute the same amount each year for as long as the program exists.

One might also compare the difference in the cost to the donors if they decided

to keep the IDA program at a constant $6 billion annually for 20 years and to close

it thereafter. If IDA were a grant program, the donors would need to contribute $6

billion annually (a total of $120 billion) during those two decades. By contrast, if

IDA were a loan program, they would need to contribute $105 billion to support the

same size program, since reflows would pick up some of the cost during the second

decade. The donors could then choose what to do with the repayments IDA would

continue receiving thereafter. If they chose to have the funds returned to them (rather

than assigning them for another purpose), the donors would receive $105 billion in

reflows during the next 30 years.

19

(...continued)

countries are worried that US proposals to replace half of the World Bank’s loans to some

developing countries with grants could undermine the organization.” Financial Times ,

London. (July 20, 2001), p. 20.

20

This assumes a loan with a ten year grace period and thirty years for repayment of

principal. The annual repayment figure would be higher for IDA loans with shorter

repayment terms. However, these comprise a minority of all IDA assistance.

CRS-9

The Benefit to Recipient Countries

The net-transfer of resources from an IDA grant program to the recipient

countries would be 100%, since no repayments are expected. By contrast, on a face

value basis, the net transfer of resources from an IDA loan is zero, since all the money

lent must be repaid.

This calculation overlooks, however, the time value of money. Because the

repayment terms for IDA loans are very easy, there is a substantial grant element to

IDA loans. The net present value of the repayments from an IDA loan must be

discounted substantially because of their negligible interest cost and their long

payment terms. World Bank accountants estimate that the grant element of an IDA

loan in 2001 was 44% or 47% or 67%, depending whether the comparison is made

to G-7 official borrowing, private borrowing, or the standard 10% discount rate used

by the Development Assistance Committee (DAC) of the OECD.

A grant program is a one-time transfer of money. By contrast, the IDA loan

program is a revolving fund. Thus, it can recycle the grant element of its loans

indefinitely as the repayments from old loans are used to fund new loans. (The real

value of IDA’s future loans will likely be lower in the future, because of exchange

rate fluctuations and inflation.) Each subsequent IDA loan would have a positive

developmental impact, so long as the projects are effectively designed and

implemented. For grants, the money that would have been used for loan repayments

would stay in the country. Its developmental impact will depend on the government

and the economy’s capacity for making effective use of those resources.

IDA’s Repayment Record

Some supporters of the President’s proposal argue that IDA should shift its

assistance program to grants, as they believe there is little likelihood anyway that

IDA’s existing loans will be repaid.21 Mary Ellen Countryman, White House assistant

press secretary for foreign affairs, told the press that President’s plan is simply plain

speaking. “Let’s call it what it is. A lot of the loans aren’t getting paid back

anyway.”22

21

See, for example, remarks to this effect in Newsday, “Poor Nations Need More Grants, but

Who Will Pay?” (Editorial). Long Island, N.Y. (July 19, 2001), p. A36. The Chicago SunTimes opined, favoring Bush’s grant plan, that there is “little difference between loans that

aren’t paid back and outright grants anyway.” Chicago Sun-Times. “Call It What It IS.”

Editorial. (July 26, 2001), p.35. Felix Rohatyn also seems to believe that IDA loans are likely

to be forgiven anyway. He says that grants are more straightforward and “can be tied to a

number of conditions to make them more effective for the recipient country.” Felix Rohatyn,

“Back to Bretton Woods: the anti-globalization protesters have a point, argues Felix Rohatyn,

It’s time to reform the IMF and World Bank.” Financial Times, London edition. (August 20,

2001), p. 17.

22

Quoted in Joseph Curl. “World Bank contributors oppose Bush plan for grants.”

Washington Times. (July 19, 2001), p. A14.

CRS-10

Others point out, however, that by and large, IDA has a good repayment record.

Seven countries are currently overdue in their loan payments. Together, Afghanistan,

Congo/Zaire, Congo Republic, Liberia, Myanmar, Somalia, and Sudan are $469

million in arrears. Much of this balance has been accruing since the early 1990s

(1988 for Liberia).23 The total amount lent to these countries was $3.8 billion, most

of which is not yet due. At the end of its fiscal year 2000, IDA had $85.8 billion in

disbursed loans outstanding to all borrowers.

Those seven countries currently have no effective government or their

government is at serious odds with most of the rest of the world. The World Bank

expects that – as has been the case before – they will settle their overdue obligations

once their current problems have ended or a new government takes the helm. The

World Bank stops making disbursements on its existing loans and it ceases all

consideration of possible new loans when a country becomes 6 months or more in

arrears. Many IDA borrower countries have no real sources of international credit

other than the World Bank.

In their argument that IDA loans are not repaid, the advocates of grants may be

referring more to the HIPC program. Heavily indebted poor countries (HIPCs) may

qualify to have much of their debt owed to bilateral creditors and multilateral banks

forgiven. Qualifying for HIPC assistance remains – though it has been expedited for

20 countries in the past year – a rigorous process. Among other things, countries

need to be current on their loan payments and adopt major programs of economic

policy reform. HIPC debt is being forgiven, not because the borrowers are not paying,

but because the donors are concerned about the human and development costs that

will ensue as the debtors continue to service their debts. Except for debt expunged

through HIPC, the World Bank does not forgive loans.

Reflows as a Share of IDA Usable Funds

The amount which IDA is receiving annually in principal repayments for prior

loans has grown substantially in recent years. Ten years ago, during the World

Bank’s fiscal 1991, IDA reflows totaled $274 million. In 2000, by contrast, the flow

of principal repayments totaled $920 million. By 2005, the amount will likely rise to

$1.95 billion. As will be discussed below, a substantial share of those future reflows

has been earmarked to fund new projects that have already been approved.

The inflow of these resources has enabled IDA to shift a greater part of the cost

of funding its future loans onto reflows, reducing the amounts required from donor

countries. Donors make their contributions in the form of non-interest bearing nonnegotiable promissory notes. The balances on those notes are encashed as IDA needs

money to fund the disbursements on its existing loans. Overall, in 2000, IDA had a

cash flow of $5.6 billion supporting its current disbursement program. Of this, $920

million was from reflows and $4.68 billion was drawn from the donor’s outstanding

promissory notes. On this basis, in terms of its total operations, IDA loan repayments

currently account for 20% of the resources available to fund IDA lending operations.

23

World Bank. Annual Report, 2000. Washington, D.C., 2000.. Volume 2, p. 88.

CRS-11

The figure is different, however, for projects funded from the IDA 12

replenishment plan. In that replenishment, contributions from donor countries

comprise about 60% of the funds available to fund IDA loan commitments approved

during the period 2000 to 2002. Loan repayments account for the remaining 40%.

The pool of IDA reflows earmarked to help fund loans funded with IDA 12 resources

does not include only the repayments IDA expects to receive during that three year

period. It also includes a major share of the loan repayments that IDA will receive

during the following decade during which it will be making disbursements to

implement IDA 12 loans.24

Reportedly, the IDA donor countries plan to use this same procedure in future

replenishments to help reduce the budgetary cost to them from the IDA program. At

some point, though, they will likely find that most of the loan repayments scheduled

for receipt during a future replenishment period will have already been earmarked to

fund loan commitments from earlier replenishments. If successive three-year IDA

loan plans are funded in part with reflows that are scheduled for receipts during the

next eight-to-ten years, the stream of uncommitted reflows will soon be exhausted.

Presumably, at some point, the donors will need to decide whether the existing size

of IDA’s loan program should be maintained through increased payments or whether

it program should shrink to a level that can be supported solely by the donors’

contributions.

President Bush did not propose that IDA’s existing loan portfolio should be

converted retroactively into grants. The World Bank is writing off (through the HIPC

program) some IDA debt owed by poor countries. However, no thought has been

given to writing off all the IDA debt owed by all countries. Reflows would continue

to be available from earlier IDA loans. The current talk about grants concerns the

nature of IDA’s future aid program.

Earlier Proposals for IDA Grants

General Support for the Concept

The concept of IDA grants had been under discussion for some time. There

seems to be a broad base of international support for the basic concept that some IDA

assistance should be provided on grant terms. Until President Bush made his

proposal, however, few proposals seemed to contemplate that a large share of IDA

resources would be allocated on such terms. The IDA eleventh replenishment

agreement (IDA 11) said in 1996 that the World Bank could use some of the

resources from the replenishment (in selected cases, in exceptional circumstances, and

24

In effect, the current arrangement resembles a plan proposed earlier by the author. Both

assume that future reflows can be pledged for use today either because they will not be needed

in the distant future (because of developmental success) or because they will be in replaced

by increased donor contributions. If these assumptions are not well founded, then the

advisability of both plans may be subject to doubt. See Jonathan E. Sanford, “Feasibility of

a World Bank Interest Subsidy Account to Supplement the Existing IDA Program.” World

Development 16:7 (1988), p. 787.

CRS-12

on a limited scale) for grants. The IDA 12 agreement (1999) said that the World

Bank could make some IDA grants in connection with the HIPC program. Until late

2001, at least, most of the donor countries participating in talks about a new

replenishment of IDA resources (IDA 13) had reportedly been willing to consider a

grant program involving perhaps 10% to 20% of IDA funds. Meanwhile, Bank

President James Wolfensohn reportedly favored the idea of an IDA grant program

totaling up to $1 billion annually.25

U.S. Secretary of the Treasury Lawrence Summers proposed, at the World

Bank-IMF annual meeting in September 2000, that IDA should provide more grant

assistance to its recipient countries. Specifically, he said, precautions should be taken

to avoid loading up heavily indebted poor countries (HIPCs) with new debt once the

HIPC program had reduced their foreign debt to sustainable levels. “Further restraint

on concessional lending may also be warranted,” he said, “including though greater

recourse to grant financing.” IDA should also put more emphasis, he said, on

education, health, and other social programs. Summers did not put a number on his

recommendation. Treasury officials suggest, however, that, in private discussions,

Summers was advocating a 20% grant level at the time.26

Discussion of an IDA grant program has taken place in context where, to an

increasing degree, most foreign assistance is given to low-income countries on a grant

basis. On the average, between 1971 and 1973, 55% of the official development

assistance (ODA) the rich countries provided to poor countries on a bilateral basis

took the form of grants.27 Between 1988 and 1989, grants comprised on average

78% of their bilateral ODA. By 1999, almost 90% of the bilateral ODA from the

richer countries was grant aid.28 For many IDA donor countries, all of their bilateral

foreign assistance is provided on grant terms.

Congress has spoken favorably on the question of IDA grants. In 2000,

Congress included language in the fiscal 2001 foreign operations appropriations act

– H.R. 5526, later incorporated by reference into H.R. 4811 (P.L. 106-429) – urging

the World Bank to make IDA grants a component of its plan to assist heavily indebted

poor countries (HIPCs). Specifically, it directed the Secretary of the Treasury to

25

John Donnelly “Change at World Bank Requires Donor Support; Some May Balk at Higher

Costs.” Boston Globe (July 18, 2001), p. A24. See also Phillips, op. cit.

26

Interview with William E. Schuerch, Deputy Assistant Secretary of the Treasury for

International Development, Debt, and Environment Policy, January 10, 2002. Schuerch

served in the same position during the Clinton Administration.

27

Rutherford Poats, Chairman. Development Co-operation: Efforts and Policies of the

Members of the Development Assistance Committee, 1982 .[Annual Report.]. Organization

for Economic Cooperation and Development: Paris, 1982 Table II.A.14, p. 219. The rich

countries included in these figures include the 22 members of the Development Assistance

Committee (DAC) of the Organization for Economic Cooperation and Development (OECD).

28

Organization for Economic Cooperation and Development. Development Cooperation.

Table [from Development Cooperation, 2000, the annual report of the OECD Development

Assistance Committee (DAC).] Available from the OECD web site at

[http://www.oecd.org/oecd/pages/home/displaygeneral/0,3380,EN-home-notheme-2-no-nono-0,FF.html].

CRS-13

seek the adoption of a new policy at the World Bank specifying that all new assistance

should be on grant terms for countries that have reached the completion point in the

HIPC process.

In 2001, the U.S. Congress included language in H.R. 2506, the fiscal 2002

foreign operations appropriations act (P.L. 107-115) reiterating this concern. It

directs the Treasury Secretary to give “high priority” and to “vigorously advocate”

the adoption of policies (during the current talks about the terms for a new

replenishment of IDA resources) which would enable IDA to provide grant assistance

(rather than loans) for countries eligible for HIPC debt relief. The House

Appropriations Committee said, in the report (H. Rept. 107-142) accompanying its

legislation, that IDA should provide all-grant assistance to each HIPC beneficiary

country for a three year period following its HIPC decision point. The Committee also

said that it agreed with the recommendations of the Meltzer Commission (see below)

“With respect to its support for multilateral debt forgiveness under certain conditions

and conversion of IDA into an agency making poverty alleviation grants.” It is not

clear from the report language whether the Committee believed that all IDA

assistance to all countries should be provided on grant terms or whether such grant

assistance should be limited solely to HIPC countries.

Meltzer Commission Proposals

The Commission Report. The President’s proposal was also proceeded by

other proposals seeming major reductions (and sometimes elimination) in the

international financial institutions (IFIs). Most prominent among these was the March

2000 report of the International Financial Institution Advisory Commission, chaired

by Allan H. Meltzer.29 Meltzer is an economics professor at Carnegie Mellon

University. To some observers, many of the arguments voiced by the President – the

points about increased effectiveness and ex-post evaluation, for example – resemble

those made earlier by that panel. U.S. Treasury Department officials maintain that

the Administration’s proposal for 50% IDA grants was not derived from the Meltzer

Commission report. Rather, they argue, it is based on sound development principles.

Linking them together, they say, is guilt by association.

The IFI Advisory Commission was created in 1998, as part of legislation enacted

that year authorizing U.S. participation in the most recent quota increase of the

International Monetary Fund. The eleven members of the panel were appointed by

the House and Senate leadership (six by the Republican majority and five by the

Democratic minority.) The Commission issued its report on the strength of an 8 to

3 vote, although one member signed both the majority and minority reports. Many

of the Commission’s recommendations and findings were controversial. Among

other things, it proposed that the World Bank should cease making loans ( except in

29

Meltzer, Alan H., Chairman. (2002) Report of the International Financial Institution

Advisory Commission. March 2000. NP.

CRS-14

certain circumstances30), focusing instead on special purpose grants. Two kinds of

grant programs were mentioned.31

The Commission recommended that the Bank replace its loan program with a

program of grants aimed at alleviating poverty and promoting structural reform.32 It

would not fund the traditional types of development projects. Healthcare, primary

education, and physical infrastructure were mentioned as possible areas of emphasis.

Focusing on the poorest countries, those with per capita annual income levels below

$2,500, it would be funded by contributions from the industrialized countries. The

new program would be costly, the Commission said, and “[t]he amount of money

requested from legislatures to fund explicit grants should rise.” In addition, it said that

“[t]he United States should significantly increase its support of effective programs to

reduce poverty. The six dollars per capita currently spent is too much for ineffective

programs but too little for effective programs.”33

The Commission also proposed that another grant program should be created,

terminating and replacing the existing World Bank.34 Under this plan, the Bank would

transfer all or most of its callable capital assets to the regional MDBs, to help them

broaden their responsibilities. The World Bank’s paid-in capital and retained earnings

would be transferred, however, to a special trust fund. The income generated by that

trust fund would underwrite a grant program addressing global public goods. These

include environment, communicable disease, inter-country infrastructure systems,

development of agricultural technology, and the creation of improved managerial and

regulatory practices. The Commission did not say how large it thought the program

should be. In 2000, IBRD paid-in capital totaled $11.4 billion and retained earnings

totaled $19 billion. If this were invested in U.S. Government bonds at 5%, the yield

would be in the range of $1.5 billion annually.

In both cases, in what may be the Commission’s most innovative concept, the

grants would be channeled through private suppliers who would be reimbursed for

their costs only if independent auditors found that they had met specific quantitative

performance goals which had been agreed to in advance. If the goals were not

achieved, the service provider would not be paid. In both plans, reimbursement

would be on a sliding scale, declining as a share of total costs as the income level and

credit rating of the recipient country increased. Programs in the poorest countries

would get a 90% subsidy; those in the most prosperous would get a 10% subsidy. The

28

The Commission said that, until the African Development Bank was ready to assume

full responsibility for development lending in its region, the World Bank should continue

making IDA loans to African countries. It also said that IDA should continue making

loans to the low-income countries in the Middle East which currently qualify for IDA

assistance. There is no development bank for that region. Commission report, p. 94.

31

The Commission plan was also described later, with some elaboration, by Adam Lerrick,

who served as Senior Advisor th Chairman Meltzer. See Adam Lerrick, “A better way to lend

a hand.” The International Economy (Washington), November/December 2000, p. 14.

32

Commission report, pp. 89-93.

33

Commission report, pages 91 and 96.

34

Commission report, pp. 93-95.

CRS-15

local government would have no role in the actual implementation of the programs,

but it would be expected to pick up the cost not covered by these grants.

The two plans outlined by the Commission were intended to hold program

managers to a higher standard of accountability and performance than is the case

today. This might increase the efficiency and cost-effectiveness of programs. The

donor countries might also be able to require that the implementing agencies allow

them to monitor programs funded by grants more closely than might be possible for

programs implemented by governments and funded by loans.

Critics contend that there are possibly serious drawbacks to these plans. For

example, they say, it is doubtful that many private organizations would be willing to

implement IDA grant programs if they have to provide the money to carry out the

programs themselves, with no real guarantee that they would be reimbursed later.

Few charitable organizations have such deep pockets. The cost of borrowing money

to implement these programs (based solely on the prospect of a contingent guarantee)

may be prohibitive. Too many things can go wrong – the original goals of the project

may prove unattainable, close monitoring by donors may complicate the process, or

factors beyond the implementing agency’s control may hinder success. For-profit

contractors might be willing to take the risk, critics note, but the cost (likely

substantial) of that risk would need to be built into the price they would charge the

international agency.

In any case, assistance programs channeled through private organizations will

still need the permission and cooperation of governments. Private organizations

(particularly those who are paid only if they succeed) may be vulnerable to demands

by corrupt government officials or requirements that funds be spent for sub-optimal

purposes. In addition, perhaps for legitimate reasons, governments may be reluctant

to pay their share of the costs if they have no control over program operations.

The plan for a grant program addressing global public goods might be a valuable

undertaking, particularly if it could be done at no cost to contributors. However, the

use of World Bank resources in this manner would have major opportunity costs in

terms of other alternatives not pursued. The World Bank and the regional banks

already address many of these issues (particularly health) in their current loan

programs. International agencies, such as the Global Environmental Fund, World

Food Program, and World Health Program address many types of global problems.

The amounts available to fund a grant program for global public goods would

also be much smaller than that envisioned by the Commission’s plan, critics argue.

The regional banks would be unable to make much use of callable capital transferred

to them by the World Bank unless it was accompanied by the associated paid-in

capital. Callable capital alone would not be a sufficient basis for expanding the

regional banks’ borrowing programs. Without matching paid in capital and additional

reserves, such borrowing would increase their exposure. Too much lending funded

in this manner could lead to reductions in their bond ratings. Transfers of paid-in

capital would be needed before the regional banks could expand their operations and

replace the World Bank, as the Commission recommended..

CRS-16

The amount available to fund the trust fund from IBRD retained earnings may

also be less than expected. The Bank’s Articles of Agreement say that, if the IBRD

terminates operations, any funds remaining after all the Bank’s debts have been paid

shall be returned to the member countries. This presumably includes the accrued net

income of the Bank as well as the paid-in capital. There is no assurance – particularly

if major countries disagree with the plan – that many assets would remain after the

breakup to fund a global trust fund.35

Subsequent Proposals. Some observers have expressed concern that the

Bush Administration ultimately seeks the adoption of a plan for IDA somewhat along

the lines recommended by the Meltzer Commission. If so, they wonder what effect

this might have on future U.S. policy towards the World Bank and IDA.

Their concern was heightened by the appearance, in the week following the

President’s speech, of a proposal to shut down the World Bank and to use its assets

to finance grants. On July 26, 2001, the Wall Street Journal published an oped

article by Meltzer and Adam Lerrick, his principal advisor on the Commission.36 It

argued that IDA’s loan program should be replaced by a self-financing grant system.

Meltzer and Lerrick note that IDA currently has $108 billion in rich country

contributions on its balance sheets, partly in loans and partly in cash.37 They argue

that IDA could invest these cash balances at what they claim is a conservative rate of

8%, producing a perpetual income stream which might be used to fund $8.6 billion

in new grants every year without any further need for donor contributions. It is

unclear whether they believe the full assets of IDA should be invested in this manner

now or if the cash should be invested now and the reflows should be invested later

as they are received Both approaches are implied in their article. They say the World

Bank’s resistance to their proposal is motivated by intransigence, institution

arrogance, and its “lack of basic arithmetical skills.”

35

World Bank Articles of Agreement, at Article VI, Section 5. Article V, Section 2 says that

the Board of Governors has the authority to determine the distribution of the Bank’s annual

net income. Section 14 says that the Governors shall determine annually what share of the net

income should be placed in reserves and what share should be distributed to members.

Although the Governors have chosen annually to allocate all net income to reserves, the money

nonetheless the collective property of the member country governments and could be

distributed to them upon vote of the Governors. Articles of Agreement of the International

Bank for Reconstruction and Development. Entered into force December 27, 1945. Available

f r o m

t h e

W o r l d

B a n k ’ s

w e b

s i t e

a t

[http://www.worldbank.org/html/extdr/backgrd/ibrd/arttoc.htm].

36

Adam Lerrick and Alan H. Meltzer, “The World Bank is Wrong to Oppose Grants.” Wall

Street Journal. (July 26, 2001), p. A14. See also the reply by the Bank’s Senior Vice

President and Chief Financial Officer, Gary L. Perlin. Letter to the Editor. Wall Street

Journal (August 6, 2001), p. 13.

37

In 2000, the face value of IDA’s assets was $101 billion, after allowance for $7 billion in

debt written off via the HIPC program. Technically, the $7 billion has not been booked

against total assets and is being carried on IDA’s books as a negative balance in reserves. See

World Bank IDA Special Purpose Financial Statements, June 30, 2001.

CRS-17

The concept outlined in the Meltzer-Lerrick plan may be feasible. However,

critics argue, its potential benefits should be compared with those available through

continuation of the existing program, and that the amount of assistance which might

be available through their plan is likely to be smaller than they presume. IDA’s assets

could be invested, as Meltzer and Lerrick propose, but the fair market value of IDA’s

portfolio is much smaller than they suggest. IDA does not have the contractual

authority to recall its loans or to demand early payment of the balance due. If it wants

to turn its loan portfolio into cash, those assets will have to be sold to another party.

According to this interpretation, if IDA were able to sell its assets and the

purchasers paid what the Bank considers the “fair market price,” it might be able to

get $56 billion which it could invest.38 Ten year U.S. Treasury notes currently yield

5%. Investing the full $56 billion on a no-load, no-cost basis, IDA might be able to

realize something like $2.8 billion annually to fund a future grant program. On a

grant-equivalency basis, this is less than half the size of the current IDA program. It

is also about one-third the amount that Lerrick and Meltzer believe might be available

from implementation of their plan.

Two other considerations might be assessed. First, potential purchasers may be

unwilling to pay the amount the Bank considers to be the “fair market” value of IDA

assets. They may worry that the former IDA borrowers will be less inclined to pay

the new private owners of their notes, since the new owners are unlikely to make

them future concessional loans. In that case, the amount generated by the proposed

investment scheme would be less than that estimated above. Second, IDA’s assets

likely are worth more if IDA remains a functioning organization than they would be

if it were liquidated. In the former case, the debtor countries are more likely to pay

and IDA would not need to discount the value of its assets as it uses loan repayments

to fund future loans.

Professor Meltzer has spoken out strongly in favor of the President’s proposal,

though he has given it his own interpretation. The plan will work, he says, and claims

by Bank spokesmen that donations would have to increase dramatically are incorrect.

“Despite what they say, the grant proposals would be more efficient; that is, they

would be able to give more aid with the existing resources,” he wrote. For instance,

he observed, the World Bank could give half the amount it would normally lend and

38

The face value of IDA’s disbursed loan portfolio is about $86.6 billion. According to

World Bank accountants, its “fair market value” in June 2001 was between $46 billion and

$49 billion. The face value of the portfolio must be discounted, not only for net present value,

but also for credit risk, seasoning, multilateral and sovereign risk preferences and other

factors. The promissory notes from donors and the IDA’s liquidity pool (its remaining assets)

are fully committed to finance existing loans. If someone buys those loans, the price would

presumably be reduced to offset these undisbursed but committed funds, as IDA has already

agreed to use them to cover the IDA share of projects currently being implemented. A new

owner would presumably acquire this obligation as well as the funds. Thus, the value of

IDA’s “cash” resources must be discounted in a manner similar to that used for outstanding

IDA loans. Including the discounted value of these funds would bring the total up to about

$56 billion. See World Bank IDA Special Purpose Financial Statements, June 30, 2001,

p. 24.

CRS-18

countries could borrow the rest commercially “because they would have the Bank’s

guarantee.”39 It might be noted that, under this interpretation of the President’s plan,

countries would pay commercial interest rates for half the money they used to fund

a project and IDA grants would fund the rest. On average, the combined rate they

would pay would be higher than the World Bank and other MDBs now charge for

their ordinary near-market rate loans. Presumably, if the World Bank guarantees the

repayment of the commercial loans, the recipient countries would have to pay the

Bank its usual fee for such service.

Brett Schaefer also stated, in a report prepared for the Heritage Foundation, that

“Clearly the time has come for the World Bank to implement performance-based

grants.” The Administration should make sure, he said, that new funding for the next

IDA replenishment would be used for the grant proposal. He also proposed that the

Administration seek agreement among other IDA member countries for an

arrangement to use existing IDA resources for the grant proposal as they are repaid.

He said that Congress should prohibit any future U.S. participation in IDA

replenishment plans until IDA implements the grant proposal. He said that $873

million would be available to fund grants if the full resources of the next IDA

replenishment (presumably $11 billion) were invested at 8% for that purpose.40

Schaefer’s proposal would also go well beyond that proposed by President Bush.

He would have the existing IDA program (which lends $6 billion a year) replaced by

a grant program about 15% its size (less if – as suggested by critics – a more realistic

interest rate for investments were used and allowance is made for reflows already

committed to support previously approved IDA loans.).

The Administration’s Argument for Grants

U.S. Treasury Department officials deny, as noted earlier, that the current U.S.

proposal for 50% IDA grants is based in any way on the Meltzer Commission report.

They note that Treasury Secretary Paul O’Neill was strongly critical of the Meltzer

Commission’s findings in his required report to Congress, discussing steps taken to

implement the recommendations of the Meltzer Commission.41 Virtually every

argument and finding was refuted, they argued, in detail.

The developmental effects of IDA need to be enhanced, Treasury argues. The

other donor countries say they want to do more, says the principal U.S. negotiator,

but – except for the United States – none seem willing to increase their contributions.

A grant program would intensify IDA’s impact at a relatively modest indirect cost to

donors. The World Bank found that a 40% IDA grant program would reduce

repayments by approximately $570 million a year in the decade following the end of

the 10 year grace period (see below), he mentioned. Considering the overall cost of

39

See Phillips, op. cit.

40

Brett Schaefer, “Real Help for Poor Nations: President Bush’s World Bank Grant

Proposal.” The Heritage Foundation. Backgrounder. No. 1466. (August 20, 2001).

41

Interview with William E. Schuerch, January 10, 2002.

CRS-19

funding IDA, he argued, this would be a rather modest price to pay. He noted that,

with the decline in commercial interest rates in recent years, the grant-equivalency of

IDA loans has fallen substantially (to about 65%, he calculated) from much higher

levels in the 1980s.

In many instances, he argued, grants are a more appropriate way of providing

assistance for long-term needs. Investments in social sector programs are crucial, but

their growth effects are not realized until many years in the future. Consequently,

they generate little income to help countries repay the loans which financed them.

Increasingly, he maintained, most foreign aid is provided on grant terms. Some 99%

of the official development assistance that DAC countries provide to very low income

developing countries now takes the form of grants. Many of the countries most

resistant to IDA grants give most or all of their bilateral aid to poor countries as

grants. He noted that, while the United Kingdom was strongly opposing the concept

of IDA grants, the U.K. Chancellor of the Exchequer gave a speech in Ottawa

supporting the establishment of a new multi-billion dollar trust fund to address

(through grants) millennium development goals. He also recollected that a

Scandinavian country now opposing IDA grants had advocated 100% grants a decade

earlier.

There is no intrinsic reason to believe, he argued, that repayments for IDA loans

needed to be recycled through the World Bank for them to be used effectively for

development purposes. Arguably, he maintained, if the policies and institutions of

recipient countries are sufficient, their governments and private sector should be

better able to make effective use of the income and benefits generated by IDA

projects to promote their own development. In any case, he asserted, the argument

that IDA has an excellent repayment record is misleading. In the past decade, the G-7

countries and others have agreed to forgive most or all of the repayments due from

earlier bilateral aid loans to heavily-indebted poor countries. IDA has become, in

effect, a preferred creditor. The donor countries have been willing to forego

repayment of their old bilateral loans in order to ensure that debts to IDA can be

repaid. Since IDA has no bondholders (like the IBRD) who must be repaid, and since

the countries forgiving bilateral debt are the same ones responsible for most IDA

contributions, he argued, IDA’s high repayment record is not an accurate reflection

of its financial situation.

There is no relationship, the Treasury Department asserts, between the

President’s proposal for 50% grants and the World Bank’s private sector

development strategy. “Treasury is taking its policy leadership from the President’s

speech at the World Bank on grants,” stated the official principally responsible for

implementing U.S. policy.42 “That speech has a list of purposes for which grants

might be used – education, health, water and sanitation, and a couple other things.

That list does not include private sector activities or private provisioning of services.”

He indicated that the IDA deputies had agreed, during their negotiating sessions, that

nobody was against the concept of private provisioning of services per se, though

several countries had reservations. Everybody also agreed, he said, that governments

42

Interview with William E. Schuerch, February 6, 2002.

CRS-20

are responsible for these activities and any private programs would need to be

monitored by them.

British and Other Views

Clare Short, the U.K. minister for international development, has taken the lead

in mobilizing opposition to the U.S. proposal for expanded IDA grants. The

Scandinavians and other European countries have also expressed strong reservations

concerning the U.S. plan. Reportedly, they believe that poor countries will be less

likely to squander World Bank aid if they know they will have to repay it some day.

Some also reportedly suspect that Treasury Secretary O’Neill seeks to undermine

IDA’s financial base through advocacy of the 50% grant scheme.43 Development

Minister Short has reportedly stated that “IDA is very valuable and we are looking to

increase our contribution substantially. But if it is compromised [by a large grant

program], we would look to give more bilaterally instead.” France, Germany and

Japan have indicated, by contrast, that with the declining international value of the

euro and yen, they cannot afford to contribute the same share to the new IDA

replenishment as they gave to the last.44

The British government issued a statement in February 2002 further explaining

its views on the issue of IDA grants or loans.45 It made four points. First, it asserted,

the current system makes more effective use of the limited aid funds which are

available to help poor countries. Reflows from old loans are a major element of the

procedure for financing IDA. With grants, there would be a gap – billions of dollars

a year in the third and forth decades – that would have to be filled by major increases

in donor contributions. “It seems reasonable to assume that there will be an ongoing

need for IDA finance,” it stated. “On this basis, we should be taking a long termview.”

IDA should remain a loan program, the statement argued, because this enhances

ownership and promotes effective cooperation among donor agencies. The World

Bank and the other international development agencies should work in partnership,

not in competition. “A clear and selective strategy for IDA and effective collaboration

amongst agencies are two of the great reforms we have all worked on in the past few

years.46

43

Paul Blustein, “U.S.-Europe Clash Stalls World Bank Aid Plan; Bush Seeks Grants, Not

Loans.” The Washington Post, January 30, 2002, p. E1.

44

Alan Beattie, “Deadlock in dispute over money for poor nations; World Bank

Contributions.” Financial Times [London edition], January 15, 2002, p. 10.

45

[U.K. Department of International Development.]“Loans or Grants: IDA’s Concessional

Lending Role.” ND. Provided to the author by the Office of the U.K. Executive Director to

the World Bank and IMF, February 8, 2002.

46

The British also emphasized this point in an earlier statement on IDA. “Substantial grant

funds are available from other development agencies–particularly the UN, bilateral donors and

the European Commission,” it observed. “It is important that the World Bank should work in

(continued...)

CRS-21

Third, said the statement from Ms. Short’s department, “We do not accept that

IDA’s current terms are always inappropriate for interventions in health or education,

or that cheaper finance would encourage countries to invest in these areas more.”

Donor countries should not try to dictate to developing countries what their priorities

should be, it said. Rather, the donors should encourage countries to establish their

spending priorities through a system of broad national consultation, such as is

embodied in the Bank’s Poverty Reduction Strategy process. Grants should be

reserved for special situations – such as post-conflict recovery or regional programs

to combat infectious disease – where IDA’s normal loan program might be

inappropriate.

Finally, the British disputed the argument that IDA countries could not afford

to repay IDA loans. The statement noted that IDA’s repayment record has been very

good. IDA loans “provide a bridge,” it said, “between grants and non-concessional

borrowing.” By demonstrating that they can repay concessional loans, countries help

lay the groundwork for their future entry into the regular international financial

system. Even the idea that IDA grants should be targeted to HIPC countries (after

they have relieved debt relief) is a mistake, the statement argued. “If poor countries

exiting from HIPC cannot even service new debt on IDA terms,” it said, “then HIPC

will have failed.” Rather than planning for failure, it maintained, the international

community should expect that HIPC graduates will grow, develop, and take their

place in the world economy.

Negotiating IDA’s Terms

During 2001, representatives from the IDA donor countries met on several

occasions to discuss terms for the next IDA replenishment. The World Bank has

reportedly suggested that an appropriate level for the IDA 13 replenishment would

be SDR 18.1 billion (about $23 billion), including SDR 500 million for HIPC debt

forgiveness. Of this amount, some $12.5 billion would be solicited as new

contributions from donor countries. The remainder would be provided from IDA

reflows and other sources.

At the first negotiating session in February, the World Bank presented an

analysis of the potential effects a grant program might have on IDA finances. The

Bank reported that a 20% grant program would drain IDA’s resources by some $400

million during the first ten years and $4.3 billion during the next decade. On the other

hand, the Bank reported, IDA’s financial base could be strengthened if a 20% grant

program were matched by a program hardening the repayment terms for 20% of

IDA’s remaining loans. The Bank suggested that higher interest charges and shorter

46

(...continued)

partnership with these other agencies not in competition with them, with each institution

respecting each other’s comparative advantages.” See: Office of the U.K. Executive Director

to the World Bank and IMF. Statement titled “Loans or Grants: IDA’s Concessional Lending

Role.” ND (Provided to author on August 6, 2001.)

CRS-22

repayment periods might be appropriate anyway for countries approaching graduation

or for countries with per capita income levels near the top of the eligible range.47

President Bush’s proposal for a 50% grant program changed the context for the

negotiations. Instead of 20% being the leading edge, it now became a level far lower

than that preferred by IDA’s largest donor country. The U.S. representatives

reportedly told the other donor countries in October that a failure to move towards

grants could jeopardize the size of the U.S. contribution. The 50% proposal widened

the differences among the donor countries. As noted earlier, the British strongly

opposed the U.S. proposal while some other countries were reportedly willing to go

as far as the 20% figure presented in the February World Bank report. In November,

Ms. Short was reportedly seeking to rally other countries to oppose the U.S.

proposal and to isolate the United States.48 As they prepared for the upcoming

December negotiating session, the Europeans and Japanese lined up, almost without

exception, in opposition to any large scale movement towards grants.49 The

Canadians were reportedly willing to consider steps that would increase the grant

element of IDA lending (by lowering or waiving the service charge and extending the

repayment period) while preserving the basic principle that IDA assistance must be

repaid.

By the December negotiating session, in Montreux, Switzerland, the IDA

deputies had reached agreement on all issues save the actual size and proportional

distribution of the new replenishment and the share allocated for grants. The United

States put on the table in Montreux a two part proposal50. “The U.S. is willing to

substantially increase its individual contributions to the 13th replenishment of the

International Development Association (IDA),” it said, “with agreement on two

important issues.” First, it stated, the United States wanted to see the adoption of a

results-based contribution framework. Second, it wanted a substantial increase in the

share of grants. “If the conditions were met, “ Treasury said, “the full U.S.

contribution would represent an 18% increase from IDA-12.”51

47

World Bank. IDA Eligibility, Terms and Graduation Policies. International Development

Association, January 2001. Prepared for the first IDA 13 negotiating session in Paris,

February 28-March 1, 2001. Available from the World Bank web site at

[http://www.worldbank.org/ida/ida13docs.html].

48

Alan Beattie, “UK minister aims to halt proposal to replace loans; World Bank aid.”

Financial Times, London edition. (November 17, 2001c), p. 8.

49

Alan Beattie, “Feeling the pressure: World Bank, by Alan Beattie; the bank has been beset

by criticism of its direction and management style.” Financial Times, Surveys edition.

(November 30, 2001), p. 4. See also: Jiji Press English News Service. “U.S. Out of Step

with Japan, Europe on IDA Capital Hike Talks.” Tokyo (December 11, 2001), p. 1.

50

U.S. Treasury Department.(2001a) Paper titled “U.S. IDA-13 Objectives.” ND Presented

to the IDA deputies negotiating session in Montreux, Switzerland, December 8, 2001.

Photocopy provided by Treasury Department to author.

51

The 18% increase in U.S. contributions is calculated in dollar terms. In terms of the SDR,

the unit of account for IDA replenishments, Treasury officials said the U.S. increase would

be closer to 25% because of recent movements in the relative value of the U.S. dollar

(continued...)

CRS-23

The U.S. proposal was somewhat vague as to the nature of the results-based

contribution framework it desired. Basically, it said that the U.S. would increase its

contribution in phases contingent on “explicit input actions (such as country fiduciary,

investment climate and poverty diagnostics necessary to design and evaluate credible

lending programs) and development results in areas most crucial to growth and

poverty reduction (such as school enrollment rates, people with clean water, sustained

productivity growth, per capita incomes, and poverty rates.)” The United States

invited other countries to explore ideas for trigger mechanisms along these lines. The

Treasury official heading the U.S. delegation commendted later that, in practical

terms, this probably would require some type of institutional changes in the Bank,

since changes in world poverty levels or the success of IDA programs would not be

measurable (even with maximum effort) in just two years.52

The negotiations were adjourned from Montreux with no settlement of the

outstanding issues. The other donor countries were reluctant to go to, or much

beyond, the 10% level while the United States held firm for the 50% goal. The other

countries had no clear response to the U.S. proposal for adoption of a results-based

contribution system. Many countries were concerned that the changes sought by the

United States might alter the multilateral banks in ways that ultimately would hurt the

poor. Many still had deep reservations about the long-term impact a large grant

program might have on IDA finances. The IDA donor countries plan to meet in late

February 2002 for another negotiating session, if they believe that sufficient grounds

for agreement on a final plan have been developed. The issue is likely to be discussed

at various levels during the series of G-7 meetings scheduled during late January and

early February. Some participants in the discussions are reportedly pessimistic.

Others believe that adequate grounds for agreement will be found. “There is a general

consensus,” said a close World Bank observer, “that there will be a consensus.”53 He

also noted that, until the British and Americans can work something out, “it will be

hard to get a resolution.” Ultimately, he observed, “Everybody knows its going to end

up somewhere in the middle, but they haven’t gotten to that point yet.”54

51

(...continued)

compared to the currencies of other donor countries.

52

Interview with Schuerch, January 10, 2002. He said this was not a plan to make

disbursements for IDA assistance contingent on the recipient meeting specific performance

benchmarks (as proposed by the Meltzer Commission or Meltzer and Lerrick.) Rather,

Treasury had in mind additional improvements in IDA’s new (since 1998) country policy and

institutional assessment procedure. The latter seeks to target the bulk of IDA resources to

countries that score highly on twenty performance criteria. This tries to ensure that most IDA

money goes to countries deemed most likely to use it effectively. Reference was made by

Schuerch to several papers (not available to the public) prepared by World Bank research

staff and to information on the Bank’s web page. For the latter, see World Bank. How IDA

Resources are Allocated. Updated November 2000. Available from the Bank’s web site at

[http://www.worldbank.org/ida/idaalloc.htm].

53

John Donaldson, senior official in the Bank’s external affairs office, in Julian Borger,

“Short Blocks US Plan for World Bank Grants,” The Guardian [Manchester, UK]. January

17, 2002, p. 16.

54

John Donaldson, in Paul Blustein, “U.S.-Europe Clash Stalls World Bank Aid Plan; Bush

(continued...)

CRS-24

As requested by its stockholders, the World Bank prepared another paper for the

December session analyzing the potential financial and program impact of several

different kinds of IDA grant programs.55 These included grants linked to certain uses,

50% grants limited to countries with annual per capita income levels below $350,

both of these options with easier terms for remaining IDA loans, and 50% grants for

all IDA-eligible countries. Substantial differences in the financial impact on IDA were

noted. However, in certain cases (grants limited to certain uses, softening the terms

and perhaps waiving the service charge), the Bank was able to present figures

showing that only 10% of total IDA resources would be needed while 50% of the

projects or programs in the group could be made available on grant terms. For the

categories reserving IDA grants for low-income, however, the share of total IDA

resources devoted to grants was upwards of 20% and for the U.S.-preferred option

the total was (for reasons explained above) about 40%.

The Bank later reported that the U.S.-preferred IDA-only grant program would

have major out-year costs. During the first decade, it said, the cost to donors would

be about $30 million annually. During the second decade, the average annual cost

would be $570 million. In the third decade, if the donors want to maintain IDA at its

existing level, another $1.8 billion annually in new contributions would be required.

During the forth decade, to keep IDA the same size, the donors would need to

contribute an additional $3.5 billion annually.56

Where To Go From Here

Critics hear in the proposal by President Bush echos of the plans put forth by

Professor Meltzer and his colleagues. The conditional reimbursement plan mentioned

in the President’s original speech – no payment to the private supplier of services

unless goals are achieved – is similar to that proposed in the Meltzer Commission.

The President’s call for more IDA aid for education, health, and poverty alleviation

programs reminds many of the Commission’s plan to scrap the World Bank’s other

loan priorities in favor of a special concentration on poverty alleviation and global

public goods. Also, by not discussing publicly the long-term costs or U.S. additional

contributions, the President seemed to suggest in his speech that a major IDA grant

program could be instituted at little or no cost to the donor countries. The Treasury

Department’s later initiatives during the IDA negotiations, including the suggestion

that the U.S. contribution might be increased by 18% and the Secretary’s criticism of

54

(...continued)

Seeks Grants, Not Loans for Poor,” The Washington Post. January 16, 2002, p. E1.

55

World Bank. “Grants and Concessionality in IDA13.” International Development

Association, November 2001. Prepared for the fourth IDA 13 negotiating session in

Montreux, Switzerland, December 6-7, 2001. Available from the Bank web site at

[http://www.worldbank.org/ida/ida13docs.html].

56

[World Bank]. “Measuring the Costs of IDA Grants.” ND. Unpublicized memorandum sent

to IDA donor countries after the December meeting. The amounts are larger than those

reported in the November 2001 paper on grants and concessionality. Provided to author by

World Bank on February 6, 2002.

CRS-25

the Meltzer Commission plan, were not publicized or given much public emphasis.

In any case, it was (and remains) unclear how the Department’s negotiating position

comports with the goals announced in the President’s speech.

Concern on this score is compounded by statements by some supporters of the

President’s plan. For example, Schaefer says that “In all respects, the grant system

proposed by the Meltzer Commission would be superior to the current World Bank

lending system.” He believes that President Bush has endorsed the Meltzer plan. In

the next sentence, he says that “[t]he Bush Administration recognizes this fact,” in

the President’s July 17 proposal. The President’s plan is, he says, “a variation of the

Meltzer Commission proposal.”57

The Global Challenge Initiative (GCI), a long-time critic of the IMF and World

Bank, picked up on this point. “Many of the opponents of the U.S. [grant] proposal

see the U.S. as potentially destroying the World Bank and supplanting it with a small

grant-giving agency that spearheads output-based aid schemes,” it stated. It observed

that this model had been proposed earlier by the Meltzer Commission. A grant

program linked to output-based aid and a broad emphasis on privatization in the

health, education, and clean water sectors would substantially reduce future access

by poor people to public services and open the field to unregulated activity in these

(and other) areas by foreign investors, GCI concluded.58

A World Bank official was quoted as telling the press in mid-2001 that the

President’s decision to put a specific number on his proposal for IDA grants was

“distracting.”59 From this perspective, it raised many extraneous issues and made the

negotiations on the issue more difficult when he announced a figure much larger than

those the other countries had considered. Concern, on the part of other donors,

about the size, implications, and possible hidden motives behind the President’s seems

widespread.

From another perspective, though, the President’s bold announcement pushed

the discussion into new areas which might not have been explored otherwise. John

Taylor, the current Undersecretary of the Treasury, is quoted as saying that the onehalf figure is not negotiable and the other donor countries need to come around to the

U.S. position. “We will go all the way to Bush’s proposal – I don’t see it as a

bargaining situation.”60

This may be an effective strategy, as a final decision on the IDA replenishment

must be reached in early 2002 so there will be time for national legislatures to act

during the year. Many people believe the Administration is less desirous than are

other donors of achieving a large replenishment. On the other hand, Taylor’s firm

language may be a negotiating ploy, some observers note, especially in the light of a

57

Schaefer, op. cit., pp. 7-8.

58

See GCI, “Growing Dangers of Service Apartheid,” op. cit.

59

John Donaldson, quoted in Anna Willard, “USA to Stand Firm on World Bank Grant

Proposal.” Reuters. (August 6, 2001.)

60

John Taylor, quoted by Willard, op. cit.

CRS-26

parallel U.S. campaign to win broad multilateral support in its efforts to combat

international terrorism.

There would appear to be grounds for compromise on this issue. In money

terms, the two sides seem far apart. In other ways, however, the difference between

the parties may be smaller. IDA lent about $2.13 billion for health, education, social

protection, and water and sanitation projects, about 32% of the total. Likewise, IDA

lent $2.87 billion in 2001 to countries with per capita income levels below $350

annually. This comprised about 41% of the total. If half that assistance had been

provided on a grant basis, either 15% or 20% of IDA resources would have been

required. Either approach could be the basis for a split-the-difference type

compromise.

There might be room for a functional compromise. In addition to a modest grant

program, the replenishment might provide that a major share of IDA’s loans to very

poor countries would be repayable in local currency. This would retain the principal

that loans must be repaid and – with a maintenance of value provision – the value of

the repayments would be retained. The local currency could be used for loans to the

issuing country covering local cost financing, recurring costs, or other similar

activities. In effect, though loans, these repayments would not require that countries

find foreign exchange to cover the cost of projects whose economic benefits will not

be realized until many years in the future.

Likewise, there might be room for a procedural compromise which allows

everyone to do what they want. Instead of the IDA 13th replenishment being a single

account, the donors could establish two sub-accounts, with contributions to either

being counted as contributions to the replenishment as a whole. The funds

contributed to IDA 13A would be used to fund loans, as in the past. Those

contributed to IDA 13B would be used to fund grants. If the other donors channeled

10% of their overall contribution to the grant account and the United States

contributed its entire share, the amount available for grants would comprise 28% to

31% of the total replenishment (depending on the final U.S. share.) The grant

component would be even larger if other countries contributed a larger share or if the

World Bank put the entire amount it usually contributes (from IBRD net income) into

the grant account. The latter might be done on the understanding that funds would

be used for projects fighting AIDS and other endemic diseases, for assistance to the

poorest, and for programs addressing global public goods. All have been priority

concerns of the Bank and IDA in recent years.

There might even be room for a hybrid compromise. Half the IDA’s loans to

poor countries might be made on a conditional basis, where the repayments are

automatically waived each year (as a contractual right) so long as the borrower meets

certain specified criteria. For instance, no repayment would be required if the

recipient continued to meet the education, health, poverty reduction or other

performance requirements in the original loan plan. This would de facto convert

future loan repayments into future grants and establish a 40 year incentive plan for

recipient countries.

From the U.S. perspective, it appears that the Administration may need an

agreement where 50% of some type of IDA assistance will be allocated as grants.

CRS-27

Otherwise, the new IDA 13 replenishment bill may face renewed criticism in Congress

as well as opposition by the Administration’s conservative supporters. By contrast,

with a 50% agreement of some type, the Administration might be able to present the

replenishment plan as a victory and a demonstration that the World Bank can be

“reformed.” This would be particularly so if the new replenishment required broadlysupported institutional changes or the adoption of improved methods for monitoring

project implementation and outcomes.

From the perspective of the other donor countries, by contrast, it would appear

important that any agreement for IDA grants should not threaten the financial

integrity of the program. One possibility might be an IDA 13 replenishment plan in

which a larger share of the new resources comes from donor contributions and a

smaller share comes from the advanced commitment of future reflows. More reflows

could be scheduled for use in financing new loan commitments only when they were

actually received. This would leave available for future IDA replenishments a larger

share of the remaining future reflows. On this basis, any long-term negative effects

that a grant program might have on IDA finances would be limited in their impact and

would be spread out over a longer period of time.

Several other observations might be made. First, it is not clear how much grant

money the poor countries could afford to receive, particularly if the assistance

requires increased spending for social sector programs. Grants will relieve countries

of the need to budget for repayments. However, they can add to countries’ budgetary

costs in other ways. The MDBs usually finance the import costs of projects. The

borrower normally pays the local costs as well as the recurring costs for programs or

projects once they are established. The recipients would have to find room in their

national budgets – often a difficult task – for these costs. Health and education

programs generally require larger proportional inputs from the recipients than do

many other kinds of projects. If the recipients cannot afford the counterpart and

recurring costs of new health and education programs, it may be inappropriate for

IDA to set aside large sums for grants to sponsor them.

Second, concern about the long-term implications of the Bank’s prospective

private sector development strategy need not be an impediment to adoption of a grant

program. President Bush said, in his original speech, that performance based

assistance should be part of his proposed grant program. However, it is not evident

from his speech and subsequent Administration statements that all IDA grants need

be provided on this basis. If the parties were willing, the new replenishment

agreement could provide that none or only a small portion (perhaps up to 10%) of

IDA grants could be used in this manner.

Third, the growth effects of different types of programs may merit consideration.

Treasury Secretary O’Neill said earlier in 2001 that he believed the MDBs should put

less emphasis on peripheral matters and more stress on programs that encourage

economic growth and increased productivity. Investments in human capital (through

education, health, and related programs) will improve the productivity of labor in the

long run. However, investments in infrastructure (power, transportation, etc.) and

capital facilities may boost efficiency levels and promote growth and development

somewhat faster. Likewise, programs promoting economic policy reform, better

governance, stronger institutions, and recovery from war or natural disaster can have

CRS-28

strong medium-term growth effects. Also, improvements in infrastructure and reform

are more likely to stimulate inflows of foreign investment. Unless the donors expand

the size of the IDA program, more IDA assistance for humanitarian programs will

necessarily mean less assistance for other types of programs.

Fourth, steps may be required to protect U.N. grant programs from competition

from an IDA grant program. The terms and objectives of an IDA grant program will

need to be coordinated with those of the U.N. Development Programme, World

Food Program, and other international grant-making programs. Some critics of the

President’s proposal worry about “mission creep,”a concern that IDA might compete

or undercut the other U.N. agencies if it has a sizable grant program. However, there

is a great deal of overlap and similarity among the multilateral banks and the U.N.

development agencies these days in the types of programs they all finance. The World

Bank may have made incursions into the other agencies “turf,” but there seem to have

been at least as many incursions in the other direction as well. Supporters of the

existing arrangement argue that an IDA loan program is desirable, if only because it

teaches borrower countries that the repayment of debt has positive consequences.

However, questions have been raised as to whether the principal difference between

IDA and the U.N. development programs should be their repayment terms and not in

the types of activities they support or the skills and priorities they bring to the table.

IDA loans or IDA grants, the issue of overlap among the international aid agencies

is one which merits closer examination.

Fifth, attention might also be paid to the equity effects of future changes in

IDA’s repayment formula. The World Bank has suggested, for example, that IDA

might “harden” some of its repayment terms in order to offset the costs of a grant

program. Caution should be exercised regarding plans for “gearing up” the

creditworthiness of borrower countries or for promoting “efficiency” in IDA

operations. In themselves, these may be worthy concerns. Countries may enhance

their creditworthiness if they are able to pay a gradually increasing interest rate for

their IDA loans. The efficient use of IDA resources may also be improved if less

needy countries pay more for IDA loans. However, if the proceeds of the higher IDA

interest costs are used to defray the costs of IDA grants, then some of the cost of the

grant program will have been shifted from the rich donor countries to the poor

countries who are only slightly better off than their poorer neighbors.

Sixth, the claim that recipient countries will be more likely to waste IDA

resources if they receive assistance in the form of grants rather than loans might be

questioned. This argument seems to presume that the Bank’s normal oversight

mechanisms would break down or the Bank would be more willing to fund weak

projects through grants than it would through loans. There is no evident reason why

the Bank would use different standards for evaluating or implementing grant projects

than it would for loan projects. Likewise, there is no way of knowing beforehand

whether the Bank will make better use of IDA resources if it gets them back as loan

repayments than the recipient will do if it had them as a grant. Nobody knows whether

the governments of IDA-recipient countries will be wise or foolish thirty years from

now. An appropriate concern might be whether the poor in those countries are the

principal beneficiary of the activities funded by the hypothetical loan repayments. In

any case, future country performance issues can be addressed at least as easily

through the Bank’s country review process as through future loan programs.

CRS-29

Seventh, it seems apparent to most observers that little real progress can be made

in a discussion about IDA grants if other participants harbor serious reservations

about the long-term motivations of the United States. From press reports and

discussions, it seems that some countries worry that the President’s grant proposal

would “defund” IDA, substantially increasing the future cost of the program and

possibly leading to its closure or substantial reduction in size. Few people seem to

know about the Administration’s statement in December 2001 that it might support

an 18% increase in U.S. contributions. Progress in the negotiations might be enhanced

if all donors were willing to discuss and include language in the final report describing

their long-term plans and expectations. In particular, they might state whether they

believe their countries’ future contribution levels to IDA should increase (as a decline

in future reflows diminishes the amounts of money IDA has available to support new

loans) or whether they believe the IDA program should shrink in size as the inflow of

future debt repayments gradually declines.

In many respects, it appears that the controversy about IDA loans and grants is

not really one about IDA finances. The costs and benefits of a grant program would

be phased in gradually and would become significant only thirty to forty years hence.

The real benefits from a grant accrue, not at the time of the award, but at the time the

repayments for the alternative loan would need to have been made. In fact, IDA

could reduce its assistance levels to former grant recipients by amounts comparable

to the hypothetical loan repayments and countries would have the same amount

available in future years to fund new development projects as they would have if all

assistance had been financed through loans. Whether or not they would use it wisely

and for anti-poverty purposes is a different concern.

The World Bank reports that a grant program would require billions of dollars

in new annual contributions from donors thirty or forty years hence if IDA is to be

kept at the same level as before. This presumes that the donor countries continue to

include a 50% grant provision in future replenishments. It also assumes that the

demand for development aid will be as great forty years from now as it is today and

the World Bank will need those IDA reflows in 2040 to fund new IDA loan programs

whose repayments would stretch to the end of the century and fund new loans going

well into the next. All these contingencies are speculative. If they were agreed on

basic principles, the donor countries and the Bank should be able to work them out

over the coming decades.

On another level the controversy seems to be, not IDA finances, but the donor

countries’ relative influence in international agencies. Until recently, the United States

has been the predominant voice and influence within the World Bank. Increasingly,

however, it seems that the other donor countries are becoming more assertive in their

views. In part, this may be due to concern about the direction of U.S. policy. In part,

though, it also seems a function of their growing relative size. Already, it appears that

the European countries are devising their policies more in consultation with one

another than in separate consultations with the United States. Should the countries

of the European Union ever develop a common policy position, they would be in

effect the largest single “member country” in the Bank. The debate on IDA grants

seems to presage a situation where influence in the multilateral banks will be more

evenly distributed and where – unless the United States makes major efforts to

increase its financial support and to reshape the way it tries to influence policy – the

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Europeans in particular will seek and find a larger role. What effect this may have on

the organization and operations of the multilateral agencies remains undetermined.