By Jim Lobe
WASHINGTON, Mar 21 2000 (IPS)

The United States wants the World Bank and other multilateral development banks (MDBs) to hone their mission by enhancing efforts to alleviate poverty and phasing out their support for projects that can be funded by private capital.

In a major policy address to the Council on Foreign Relations in New York, Treasury Secretary Lawrence Summers Monday also rejected recent recommendations by a special US commission that the World Bank stop lending to countries with per capita incomes greater than 4,000 dollars a year.

Arguing that debt relief is not sufficient to spur development in many of the world’s poorest countries, Summers also called for more concessional aid for beneficiaries of the Highly-Indebted Poor Country (HIPC) debt-reduction initiative.

“We should not delude ourselves that HIPC or the reforms that it has inspired will translate into better basic schooling or health care in these countries without a genuine increase in the pool of concessional resources,” he said, adding that Congress should urgently approve some 360 million dollars in requested funding to ensure implementation of the initiative.

Summers’ remarks came less than two weeks after the publication of a report by a special Congressional advisory commission which called for sweeping changes to the way both the International Monetary Fund (IMF) and the MDBs do business. The commission, which called for a major reduction in the functions of both the IMF and the World Bank, drew howls of protest from top officials in both institutions.

Although Treasury officials denied that Summers’ speech was intended to answer the so-called Meltzer Commission, named for its chairman, economist Allan Meltzer, his remarks appeared to be just that. At one point, Summers addressed himself to one of the key recommendations contained in the report: that developing countries with investment-grade bond ratings or per capita incomes greater than 4,000 dollars a year, should be ineligible for MDB loans.

“We … categorically reject the idea that these countries should not be in a position to obtain the additional finance, expertise and insurance against instability that access to MDB programmes can provide,” he said in one of several remarks that cheered World Bank officials.

“We strongly welcome his categorical rejection of some of the core elements of the Meltzer report,” said Caroline Anstey, the Bank’s chief spokesperson. She called the speech as a whole “constructive and supportive” in re-affirming a number of Bank initiatives.

While the Meltzer recommendations and Summers’ reply so far have involved mainly US actors, they have global ramifications due to the importance of the United States on the boards of the major Washington-based international financial institutions, the World Bank, the IMF, and the Inter-American Development Bank (IDB).

While Washington does not have the voting power to dictate policies to these institutions and other MDBs, it can block major policy changes and, as the biggest shareholder in each of them, it exercises great influence.

Summers and his predecessor, Robert Rubin, have not been shy about using it to bend the two institutions to their will.

Last December, Summers laid out a package of reforms Washington believes should be adopted by the IMF. Among other things, he called on the Fund to phase out long-term lending to countries able to tap private markets, and to concentrate its efforts instead on helping countries achieve macro-economic stability. He also called for a clearer separation of powers between the Bank and the Fund, with the IMF ceding poverty- alleviation and development strategy to the MDBs.

The Meltzer Commission, which included members chosen by both political parties, went much further. It called for the IMF to stop lending to the poorest countries altogether and instead confine itself to acting as the lender of last resort to countries which lose access to private financial markets.

It similarly urged that the Bank and the MDBs to restrict their roles. The Bank, it said, should not only stop lending to middle-income countries, but should limit loans to countries with a per capita income of more than 2,500 dollars and concentrate instead on providing grants to the world’s poorest nations, particularly in sub-Saharan Africa. It also called for wiping out the debt of many of these countries in exchange for structural reforms.

In addition, the Commission majority urged that the Bank’s private sector arm, the International Finance Corporation (IFC), should effectively go out of business. The IFC provides loans or guarantees to private sector investments in developing countries.

The Bank reaction was less than enthusiastic. “Poor people in developing countries,” wrote the Bank’s president, James Wolfensohn, “will be the losers if these proposals are implemented.”

He argued that private sector investors will not fund improvements in health, education and other essential services which are denied them in many middle-income countries and that the Bank’s unique “cross- regional perspective” on development could not be brought to bear on the problems of many countries with large numbers of poor people.

In his speech, Summers, himself a chief economist at the Bank in the early 1990s, appeared to place himself between the Commission and the Bank, perhaps to co-opt the Commission’s more radical recommendations.

For the poorest countries which generally cannot attract foreign investment, he said the Bank should focus less on macro-economic issues – the IMF’s domain – and more on poverty alleviation, particularly through investments in health and education. Under the new “division of labour” between the IMF and the Bank, the latter should “more clearly (take) the lead,” he said.

In addition, the Bank and the MDBs should increasingly favour countries which adhere to poverty-reduction strategies and deny support to countries “where (it is) likely to be misused, particularly in cases of corruption.”

For emerging market economies which have some ability to tap private financial markets, the MDBs should confine themselves mostly to lending for key public investments, especially health, education and social spending,

in which the private sector is unlikely to take an interest, Summers said.

“We believe there should now be a strong presumption that the MDBs have no business lending in countries for sectors in which private financing is available on appropriate terms, and where there is a risk that such lending will simply supplant private financing,” he said.

However, in sectors where there is private sector interest, the MDBs, including their private sector arms like the Bank’s IFC, should be able to enter into co-financing arrangements that substantially increase the client country’s capacity to borrow in private markets, he added. Over time, this lending should decline.

Finally, he called for the MDBs to enhance their already fast- growing focus on dealing with problems, such as combatting money laundering, global warming, infectious diseases, and global bio-diversity loss, which are essentially transnational.

He cited in particular new, US-backed initiatives to provide incentives for pharmaceutical companies to develop vaccines against HIV/AIDS, malaria, and other killer diseases and the Bank-based Global Environment Facility (GEF) which provides grants to poor countries to fight transnational environmental problems, including climate change and ozone depletion.

He said the MDBs’ works should be guided by three additional Imperatives: greater co-ordination by the MDBs, other donors, and non-governmental organisations (NGOs); a clearer division of labour between the World Bank, which “should take prime responsibility for core programme-lending,” and regional MDBs which might take more responsibility for project lending; and a willingness by the World Bank to play a supporting role to other donors and UN agencies in circumstances, such as post-conflict situations, in which they have a comparative advantage.

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