Vatican hits US, EU on HIPC debt; Meltzer op-ed

Doug Henwood dhenwood at
Fri Apr 28 10:24:30 PDT 2000

[from the World Bank's clipping service]


The secretary of the Vatican's Pontifical Council for Justice and Peace, Irish archbishop Diarmuid Martin, yesterday slammed the US and the EU for not delivering on promises to reduce the debt of developing countries, reports Agence France-Presse. Only $11 billion of the $100 billion that the G7 decided to allocate to reduce the debt of developing countries had been provided, the archbishop said while attending a conference on papal social doctrine.

"The funds put aside by the US are blocked by Congress and the EU refuses to allocate its own funds if the Americans do not assume their responsibilities," said Martin, who also criticized the misuse of aid in developing countries. "Rich countries should respect their promises and the poor countries should continue their policy of reform and not buy very costly planes for their presidents, as has happened in Uganda," he said.

The archbishop called for debt-reducing agreements to be honored, for the transfer of the money to international organizations and the swift cancellation of debt owed by those countries which have introduced proper reforms. He also called for a simplification of the administrative process of debt reduction, as suggested by the World Bank and the IMF, notes the story.

Meanwhile, US Senate Banking Committee Chairman Phil Gramm said yesterday he would support a second phase of debt relief for poor nations only if it is accompanied by a package of IMF reforms, Market News reports. Speaking at a Senate Banking subcommittee on the IMF and the World Bank, Gramm said he would support IMF action to revalue 14 million ounces of its gold reserves in order to fund its contribution to the Highly Indebted Poor Countries (HIPC) debt relief initiative "only if there is fairly substantial reform of the IMF."

While Gramm did not say specifically what would constitute such reform, he did argue repeatedly that the IMF should only be involved in short term lending and that those nations that do receive debt relief should be required to demonstrate that the funds are used to implement sound economic reforms. "I don't see any possibility we will revalue the gold without reform," Gramm stressed.

US Treasury Undersecretary Timothy Geithner pledged to work with Gramm on the effort, but made clear that the Treasury opposed linking the two issues. He argued that debt relief should not be used as a vehicle to "engineer a fundamental reform of the IMF." The Treasury believed the debt relief initiative should proceed on a different and faster track than the effort to overhaul the IMF, he said.

He also voiced strong objections to Gramm's call for the IMF to concentrate exclusively on short-term lending, notes AFP. "Successful development only comes where you have a durable basis for growth and where you put in place the conditions that allow markets to function, private enterprise to function," he said. "The IMF is the only really effective vehicle we have" to meet such goals and to ensure that money lent does not "end up in a Swiss bank account."

Responding to Geithner, Gramm said the only way that debt relief could move quickly through Congress this year is if it were part of a larger package of IMF reforms, Reuters continues. Gramm added that he did support the notion of the US unilaterally writing off the debt owed by the HIPC nations as a way of demonstrating international economic leadership. AP also reports.

The news comes as IMF External Affairs Director Thomas Dawson writes in a letter to the editor of the Wall Street Journal Europe and Wall Street Journal (p. A19) that US Treasury Secretary Lawrence Summers agrees with acting IMF Managing Director Stanley Fischer that there is no good reason to shift the macroeconomists who work with poor countries from the Fund to the World Bank, when the principles of good macroeconomic management the Fund promotes apply equally to rich and poor.

Dawson quotes Summers as saying to fellow finance ministers recently: "Rather than withdrawing the Fund from these countries altogether, as some argue, the new framework sets out a clearer division of labor between the Bank and the Fund. Given the Fund's unique expertise, it will appropriately focus on promoting sound macroeconomic policy and structural reforms in related areas such as tax policy and fiscal management."

In a Financial Times op-ed (US-edition, p. 19), Allan Meltzer, a Carnegie Mellon University professor, adds that Lawrence Summers, the US Treasury secretary, followed his commission's report by suggesting four core principles for reform of the IMF: clear delineation of responsibilities between the IMF and the development banks; more focus on short-term liquidity lending; establishment of preconditions to strengthen local incentives to forestall crises; and dissemination of more, and more timely, information to markets. The IMF has now accepted some of these principles.

Meltzer further notes that the World Bank opposes his commission's proposals, arguing that substituting grants for loans would not reduce the Bank's resources.


Financial Times - April 27, 2000

A better way to help the world The World Bank is overstaffed, inefficient and bureaucratic. It should be more open to pleas for reform, argues Allan Meltzer

The signs carried by demonstrators in Washington last week indiscriminately condemned all the main international economic institutions. Like the demonstrators, the institutions are a mixture of good and bad, right and wrong. Their judgments are mainly well intentioned, but often mistaken. And both the demonstrators and the institutions suffer from a common Washington affliction, a firm conviction that they act on behalf of those whom they claim to assist.

Most of the demonstrators oppose the "Washington consensus", the long list of conditions that countries must accept in exchange for financial aid. They are right to do so. Many of the conditions are intrusive and of little value.

Much research at the World Bank, and elsewhere, shows that foreign aid fosters development only if officials in recipient countries are willing to promote and sustain reforms. But the required conditions are often ignored and given lip service - Russia is a case in point. And aid is often used to finance monetary, tax and regulatory policies that restrict growth. Even worse, it has helped support the Mobutus, Suhartos and Marcoses of this world.

While the demonstrators are right to challenge the Washington consensus, they neither speak with one voice nor offer valid alternatives. The overwhelming impression is that the groups organising the demonstrations are as eager as the International Monetary Fund or the World Bank to impose specific policies on aid recipients - policies that most developing countries reject. Both labour unions and environmental activists promote such policies to secure their own interests at the expense of people in developing countries.

While the media focus was on the streets, the main action for reform has come from the US Congress. It created a commission, which I chaired, to propose changes and is now considering legislation that would require the IMF to adopt the commission's main, bipartisan recommendations.

Lawrence Summers, the US Treasury secretary, followed the commission's report by suggesting four core principles for reform of the IMF: clear delineation of responsibilities between the IMF and the development banks; more focus on short-term liquidity lending; establishment of preconditions to strengthen local incentives to forestall crises; and dissemination of more, and more timely, information to markets. The IMF has now accepted some of these principles.

Mr Summers' proposals, although insufficient, echo the commission's view on how to help the world's poorest countries. He assigns to the development banks the responsibility for assisting these countries and for addressing problems such as disease and pollution.

The commission recommended two additional types of programme to help poor countries: the substitution of subsidised grants for loans to alleviate the worst symptoms of poverty, and the provision of subsidised loans to support institutional reforms. Whatever some demonstrators may claim, open markets, property rights, and individual incentives are necessary for successful development.

Unlike the IMF, the World Bank opposes the commission's proposals. The Bank's management has made several erroneous claims: that the proposals would reduce aid to the poorest countries; that the Bank's programmes in the poorest countries would be financed through reduced lending to middle-income countries; and that private investors would not fund improvements in social services.

Some of these claims are shocking because they are based on a misunderstanding of the Bank's own activities. The Bank does not profit from loans to middle-income countries, for all it charges is the cost of borrowing. As for private sector funding, Bank officials seem to ignore the obvious: private lenders do give loans to countries if the countries issue guarantees of repayment of the sort given to the Bank. It is, then, up to the governments of recipient countries to decide whether private money is to flow into social programmes.

Moreover, substituting grants for loans would not reduce the Bank's resources. Adam Lerrick, one of the commission's staff members, has shown that a properly run grants programme would finance more aid to the poorest countries than a loan-based scheme.

The World Bank is an overstaffed, ineffective, bureaucratic institution. Including its subsidiaries, it has about 12,000 employees, mostly dedicated professionals who are committed to development and poverty relief. Yet the Bank's record is fairly poor. By its own admission, half its projects are unsuccessful, and the failure rate is even higher in the poorest countries.

The Bank's management must stop its current public relations flim-flam and start improving its effectiveness in reducing poverty. If the demonstrators help achieve that, their efforts will have been worthwhile.

The writer is professor of political economy, Carnegie Mellon University, and visiting scholar, American Enterprise Institute.

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