Rethinking Development

Rethinking Development

Washington-Post Monday , March 13, 2000

 

LAST WEEK'S report on the World Bank and International Monetary Fund, commissioned by Congress and written by a

bipartisan group of economists, has provoked paradoxical reactions. Republican critics of international aid, such as Rep. Dick

Armey and Sen. Phil Gramm, have hailed it as the basis for expanded development assistance. Democrats regard it as a

"neo-isolationist" threat to the cause of poverty reduction. The truth is that the report grapples with hard questions that need to

be debated.

 

The report proposes a dramatic refocusing of the World Bank. In the bank's early years, private lenders spurned developing

countries, which therefore had an obvious need for public financing. Half a century later, all but the poorest countries have

access to private capital. Rather than respond to that change by concentrating on the poorest of the poor, the bank finds it

easier to identify viable projects in places like Brazil or Poland. Three-quarters of its lending now goes to countries that could

also have borrowed from private sources.

 

The bank needs to shift its emphasis from the semi-poor to the poorest. But it would be a mistake to follow the report's

recommendation and pull out of countries like Poland entirely. The bank's activities there pay for themselves--and encourage

the private sector to follow. The overlap with the private sector is not obviously harmful. And, as the bank's president argues on

the opposite page, there are some worthwhile projects even within relatively rich countries that might not get private financing.

 

Moreover, there are political reasons for preserving the bank's presence in a large number of countries. The bank's critics

complain that the institution is used too much as a foreign-policy slush fund, and it is true that politically directed loans are often

wasted: With hindsight, this was in large part the case in Russia. But the bank cannot and should not ignore political goals. It

helped secure Poland's transition from communism. It promotes peace in Gaza and Bosnia. Political and economic factors alike

are in play.

 

On the IMF, likewise, the report offers good ideas and pushes them a bit too eagerly. It notes that the IMF's long-term lending

to poor countries duplicates the bank's work, and recommends that it be terminated. But the IMF does have a distinct role in

developing countries: It serves as judge and sometimes author of those countries' fiscal and monetary policies. Of course it

makes mistakes. But no other institution is better equipped to monitor macroeconomic policies.

 

The IMF's other role is to control speculative crises, as in the recent bailouts in East Asia. To make bailouts rarer, the report

urges the IMF to promote stabilizing reforms: Countries that strengthened their banks, controlled their budgets and took other

steps to fortify their financial systems would be rewarded with a promise of IMF support in the event that capital suddenly fled

their markets. This shift to pre-qualification for bailouts is a good idea, and the IMF has already gone some way toward

adopting it. But it does not--nor could any reform--entirely solve the core dilemma posed by financial crises: A bailout might

encourage further reckless investment in the future, but withholding a bailout might allow chaos to spread to other countries.

 

Any organizations with the clout of the IMF and World Bank should expect critical scrutiny. But if congressional Republicans

make good on their talk of writing the report's ideas into law, they need to proceed carefully. Reforms should aim to strengthen

the institutions, not undermine them. Otherwise the Republican talk of rebuilding the consensus for aid will look insincere, and

the Democratic warnings of neo-isolationism will have been substantiated.