Report Trade

World Bank Loans Are Not the Key to Development

September 11, 2002 5 min read

Brett Schaefer

Jay Kingham Senior Research Fellow, Margaret Thatcher Center

Brett is the Jay Kingham Senior Research Fellow in International Regulatory Affairs in Heritage’s Margaret Thatcher Center for Freedom.

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The International Economic Policy, Export, and Trade Promotion Subcommittee of the Senate Foreign Relations Committee is planning to hold a September 12 hearing on the 13th replenishment of the World Bank's International Development Association (IDA), of which the U.S. would pay $850 million annually in FY 2003 (an 18 percent increase over America's commitments to the 12th replenishment) and up to $2.85 billion over three years provided the IDA meet certain goals.

IDA is the World Bank's concessionary lending arm and is focused on encouraging development in the least developed nations-those with a per capita gross national income of $875 (2001 GNI per capita) for 2003, although some countries with higher incomes are given special access to IDA loans. Due to the poverty of IDA recipients, IDA loans have been extended interest free (except for a 0.75 percent service fee) for 40 years. Repayment of the loan is scheduled over 30 years following a 10-year grace period.

There is no questioning the need for these desperately poor countries to develop. The record shows, however, that IDA loans are not the means for achieving this goal. The majority of IDA's 80 eligible borrowers[1] have not achieved strong or stable growth despite vast amounts of assistance.

All told, IDA has disbursed $71.5 billion between 1980 and 1999 ($81.2 billion in constant 1995 dollars) to the 78 eligible borrowers for which information is available on the World Banks' World Development Indicators. This is approximately $1 billion for every IDA-eligible country-an amount greater than the total GDP of 20 IDA recipients in 1999. However, this assistance has not spurred economic growth. For instance, of the 74 IDA-eligible countries for which per capita GDP data are available:

33 have experienced negative compound annual growth in real per capita GDP from 1980 to 1999 (in constant 1995 U.S. dollars);
15 have experienced marginal compound annual growth of less than 1 percent in real per capita GDP from 1980 to 1999 (in constant 1995 U.S. dollars);
26 experienced compound annual growth greater than 1 percent in real per capita GDP from 1980 to 1999 (in constant 1995 U.S. dollars), but only 5 achieved per capita growth over 4 percent.

Why is this important? The average per capita GDP of these IDA recipients in 1999 was $682 (in constant 1995 dollars). To reach lower-middle-income status at $1,500 per capita GDP, they need to grow at over 4 percent annually for 20 years. To reach America's 1999 per capita income of $31,073 (in constant 1995 dollars), they must grow at over 4 percent annually for just under 100 years.

In recognition of IDA's failure to elicit growth, the Administration has sought three reforms at IDA: increased focus on economic growth, adoption of a means to measure results, and changing 50 percent of IDA assistance from loans to grants.

The other IDA donor nations have agreed to provide between 18 percent and 21 percent of IDA assistance as grants,[2] including most assistance for education, health (including HIV/AIDS), nutrition, potable water, and sanitation. The Administration convinced them to agree to an increase in donor funding (the U.S. will pay an additional $100 million) if IDA demonstrates "concrete measurable results."[3] IDA is also supposed to "devote significant resources over the next three years to projects and programs that raise productivity."[4]

These reforms are welcome, although the donor nations should hardly be required to provide more IDA funding for the organization to do its job-achieving "concrete measurable results." But the focus on increasing productivity glosses over the primary requisite for increased economic growth-economic freedom.

IDA's primary focus should be on improving economic growth in developing countries and reorienting development assistance to facilitate that growth. The way to achieve that growth is for countries to adopt sound economic policies and the rule of law, which are measured in the Index of Economic Freedom co-published by The Heritage Foundation and The Wall Street Journal. As shown in the Index, free countries on average have a per capita income twice that of mostly free countries; mostly free countries have a per capita income more than three times that of mostly unfree and repressed countries. This happens because countries that maintain policies that promote economic freedom provide an environment that facilitates trade and encourages entrepreneurial activity, which in turn generates economic growth.

Assistance can help poor nations, but without economic growth these achievements are not self-perpetuating. In other words, some benefits may accrue, but those are not the benefits of development. The Senate should take the opportunity of Thursday's hearing to focus the President and the World Bank on the importance of economic growth and the economic freedom that leads to such growth.