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GRANTS OR LOANS ? THE FULL DEBATE
9 a.m. to 11 a.m.
Friday, October 1, 2004
1750 Massachusetts Avenue, N.W.
Peter G. Peterson Conference Center, IIE
Washington, D.C.
[TRANSCRIPT PREPARED FROM AN AUDIOTAPE.]
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AGENDA
PANELISTS PAGE
Francois Bourguignon
Senior Vice President & Chief Economist,
World Bank
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John Taylor
Under Secretary for International Affairs,
U.S. Department of the Treasury
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Pierre Jacquet
Executive Director, Strategy,
Agence Francaise de Developpement
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Hiroto Arakawa
Director General,
Development Assistance Strategy Department,
JBIC
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Wolfgang Kroh
Member of the Board,
KfW Bankengruppe
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Matthew Odedokun
Technical Advisor,
Debt Management Office,
Presidency of the Federal Republic of Nigeria
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QUESTION & ANSWER SESSION
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MODERATOR
Nancy Birdsall
President,
Center for Global Development
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PROCEEDINGS
MS. BIRDSALL: [In progress.] --Development, taking place in our
sister organizations' beautiful conference space. I am Nancy Birdsall, the President of
the Center, and I'm very grateful to my colleague at the IFC, at the International Finance
Corporation, Michael Klein, for working to organize, put together this incredible panel,
which I will be introducing in a moment.
The purpose of the discussion today is to explore the issues from a
substantive, conceptual point of view, bringing to you people who have been working in
the field and people who have been thinking about the issues, this issue of loans versus
grants, from an economic point of view. This is not meant to be, in any way, an official
discussion.
There are, as you know, maybe negotiations going on, even at these
meetings of the IMF and the World Bank this weekend, that are relevant to the issue of
loans versus grants, but this discussion is not about those negotiations. It is, instead, an
opportunity for all of us to hear from people who have experience in the field and who
have been thinking about the issue for some time from the larger conceptual point of
view. It is, in short, a kind of professional exchange.
What I will do is I will ask the speakers to help us have a conversation
amongst themselves and then with your participation. So I have asked each of them to
make a very short statement at the beginning to get us going of three to five minutes. I
will try to be a little bit firm about that, but sometimes it's difficult, and then I will pose
some questions to some or all of them. We'll see how that goes for a while and, at some
point, we will open up the discussion to your questions and to your comments.
I will go in the order in which the panelists are listed, and I'll introduce
each of them as we go along. You will see that John Taylor, the Under Secretary for
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International Affairs of the U.S. Treasury, has not yet arrived. He is a busy person. So,
if he arrives later, then we'll introduce him--I hope he does arrive, and we'll introduce
him when he gets here.
That means that we are starting with Francois Bourguignon. Francois, as
all of you must know, is now the Chief Economist and Senior Vice President for
Development Economics at the World Bank. I knew Francois a long time ago--oh,
good, John. Glad you could make it. Thank you for joining us just in time. John, let me
repeat, I'm not sure that you would have known that we're going to ask each person to
make a short statement at the beginning, three to five minutes, and then we will try to
have a conversation among the panelists, and our idea is very much to raise the
conceptual issues and the issues from the field and not to pretend to think that anyone
here is representing an official position in what may be the ongoing discussions at the
official level of this critical issue.
So Francois. I knew Francois as one of the world's outstanding
economists, working on issues that I think are critical for all of us, including income
distribution, pulling together the micro and the macro. You have a long bio for him. I
think the critical point is that he is bringing to the World Bank a new round of thinking
about inequality, growth and public policy.
Francois?
MR. BOURGUIGNON: Thank you very much, Nancy.
The question of loans versus grants is loaded with some political debate.
So let me, for this panel, forget for a moment who I am and go back to the happy days
where I was a humble academic in search of the truth. I know there is something like an
illusion behind this.
[Laughter.]
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MR. BOURGUIGNON: But I believe that the debate may be more
rigorous and, to some extent, easier if, for a moment, I try to hide my World Bank hat.
Now, with this in mind, I would essentially like to develop three points.
The first point is really a statement on the arithmetics of finance. It is
simply to note that if we are in a perfect world, then it is easy to prove that it is better to
channel one dollar of aid through concessional loan rather than grant. It is better to say
that the recipient will get more benefit if the one dollar is channeled to loans, which does
not mean that there is one dollar alone. In order to channel one dollar in aid through
loans, you have to lend more than one dollar, maybe three, maybe four, and the one
dollar at the end is a grant element in the concessional loan which is being made.
Now, my first point is simply that on a very simple basis it can be shown
that because more projects can be financed out of the loan channel, it is true that,
through the loan the country will have to repay at some stage, which will reduce return
on the project, but we can prove that under some very simple condition the total size of
the number of projects increases more than the return to the country decreases, and the
condition is simply that the rate of return of the project must be higher than the discount
rate of the dollar.
So this is a very strong and very simple statement. It is a statement that is
the principle which is behind the way in which IDA, this multilateral organization for
channeling aid to low-income countries is organized. This is the principle of the reflow.
At some stage, because of the reflow, graduates from IDA will be contributing to the
general pot, and because of that, it will be possible to allocate more to finance more
projects than it would be the case with the money given by the donors. Today, China
would be a big contributor, tomorrow, it will be India, and the reflow will be increasing
all the time. This is the first point.
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The second point is that in this debate, there is some emphasis on the
incentive aspect--is it better for donors and recipients to have loans or grants? From that
point of view, I believe that there is an asymmetry between donors and recipients. From
the donor point of view, it is clear that the loan is a better incentive to monitor the
project simply because, through grants, that it would be easy to apply the principle
"bygones are bygones," and there is no incentive once the money has been given once to
monitor a project. When we are expecting repayment, things are different.
For recipients, it is not clear whether there is more incentive on the side
of grants, on the side of loans. On the side of grants, you can say that, dynamically, the
recipient would like to continue benefitting from grants in the same way as dynamically
the recipient who liked to continue to benefit from loans, and because of that there is an
intertemporal incentive to be successful with the project. So, from that point of view on
the incentive side, I believe that the emphasis should be put on the donor and not on
recipient.
Last point. The last point is that my first argument is finding the perfect
world. We are not in a perfect world and, in particular, we are in a world where there is
a probability that borrowers will default. And because of that the first statement that
loans are better grants may be absolutely wrong because we are confronted to a country
that has a high probability to default.
Now, what does that mean? Does that mean that we should simply ban,
on the basis of that argument, loans and switch to grants? Everything will depend on the
particular circumstances of the countries. Everything will depend on the assessment that
can be done of the probability that the country will actually repay. And here, like in
many other instances in development issues, one size certainly does not fit all. The
probability of repayment by a country will depend on several factors. It will depend
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certainly on the level of the debt relatively to, let's say, exports or GDP. It will depend
on the type of governance in the country. Is a country well-managed or not? It will
depend probably on the potential rate of growth of the economy, et cetera.
So what we should be looking to is not so much a final definitive
statement, loans or either loans or grants. We should look at what is the optimal grantloan combination and to make sure that this optimal grant-loan combination is a function
of the parameters that I just mentioned. And, as a matter of fact, the discussion which is
taking place today--or these days, I should say--in the Fund and in the Bank, and here
my WB hat is coming back, the discussion is really precisely about this.
Now, we may have, we may disagree on the formula that has been
accepted, that has been agreed, but the debate should be really on that relationship more
than on grant, on the one hand, loan on the other. And, implicitly, it seems to me that in
this debate, everybody was saying, "I'm in favor of 100-percent loan. I'm in favor of
100-percent grant." Everybody has an implicit formula of this type. And I think that for
the whole debate, it would be much better to have explicitly this statement on debt
sustainability on the table rather than simply making a recommendation in terms of loan
and grants.
Thank you.
MS. BIRDSALL: Thank you very much, Francois.
I think it's a good coincidence that we start with two distinguished
economists; the second one, of course, being John Taylor. He is currently the Under
Secretary for International Affairs at the U.S. Department of the Treasury, and he has
previously served at the Council of Economic Advisers and is a Professor of Economics
at Stanford and has taught at Columbia and Princeton. He is a distinguished contributor
to monetary economics. So we ask him now to take off his hat-- it's not easy to do--as
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the Under Secretary and put on, well, I guess he wears both hats all the time, as a good
economist, and make his contribution to this discussion
John, it's really a pleasure to have you. We're very privileged to have
you.
MR. TAYLOR: Thank you very much, Nancy. Thanks for organizing
this. It's really good to see so many people here interested in this topic. I can't tell you
how-MS. BIRDSALL: John, I think it's important to get as close to the mike.
I see people waving in the back. Thank you. Please do wave if you can't hear people,
and I'll remind them.
MR. TAYLOR: Let me just repeat because it does deserve repeating, to
thank you and to welcome all of you here. The crowd is just terrific. I mean, I can't tell
you how pleased we are to see this subject of grants versus loans be so popular, so many
people here. So thank you for organizing, and thank you for coming.
I do have different hats to wear occasionally, but I have trouble figuring
out which hat I have on right now. I know I don't have any hat on right now, as best as I
can say, but I want to speak I think, generally, as much as we can in public policy, make
sure that our policies are good economics. So I feel almost always, I mean, obviously
it's not 100 percent, but so often the economics and the policy go together. Actually, I
think good economics is, generally, with very exceptions, good politics. And I believe I
think my remarks will reflect that.
I will say three or four things just like Francois.
First, my sense is that the grants that have already been disbursed through
IDA, African Development Fund, have been received by the recipients with, not an
understatement, wild enthusiasm. Just the reason I was late, I just had breakfast with
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several HIPC Finance Ministers over in the Treasury. It's a dialogue that we've been
going through for years, basically, and some of the Ministers were from some countries
we visited this year to see how the grants were operating.
Rwanda, for example, has used the grants for HIV/AIDS. The
enthusiasm, in this case, is not just from the Ministers, but from the recipients, the
people themselves. You can see it--wow, we got an IDA grant. That really means
something, and they feel good about. It's support from the international community.
Kenya, we saw grants being used for textbook distribution in a way,
which again had a great degree of enthusiasm and thanks from IDA, thanks from the
international community. And I think it's important to mention that at the start because
it's something we didn't really expect so much because the proposal on grants was more
along the debt sustainability, analytical grounds, that Francois mentioned.
The second thing I'd mention is that the grants, in many respects, were
also motivated by another, if you like, nonfinancial reason, and that is that certain kinds
of projects, just you don't think about as a rate of return which is going to be paid back.
There may be soft projects, if you like, but HIV/AIDS I think is the best example, and
the notion of having a loan to deal with HIV/AIDS just goes against the grain of most
people. That's why, in fact, the original proposal from President Bush in 2001 was
oriented towards HIV/AIDS and other kinds of projects.
The third thing I'd like to mention is the reflows issue. We brought some
fact sheets along with us today, and they will be on the table when you leave. I really
urge you to take a look because this is an area where the facts and the details are
essential to get straight.
In one of the charts that we have, I'll just show you the general visual
here, but one of the charts that we have distributed outside--you can take it when you go
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home--has a big read swash at the top and a tiny, little blue thing at the bottom. These
are disbursements and payments by HIPC countries to IDA. The big red part is
disbursements from IDA to the HIPCs. The little, tiny blue thing at the bottom, which
you can hardly see--I know in the back you can't see it at all, but here at the table we can
see it--it's the reflows. It's a very, very small fraction. This is not just the history. This
is the projection of the next 10 years.
So you have to understand that the reflow issue that Francois mentioned,
the magnitude of it at this point, for the HIPC countries--I'm not talking about China or
India, the HIPC countries--is quite small and is going to be small for a while. So it's not
like this is a change in the financing of IDA.
And I would also mention that counting reflows as a source of financing
always is something I just can't accept ever. Because if you think about Rwanda and
Niger, their reflows, they are giving money to IDA. It's not the United States giving
money for those reflows. Those are the poorest countries in the world paying money to
IDA, and we shouldn't really count those as part of the income of IDA. Those are really
the poorest countries in the world paying back.
The fourth point is the debt sustainability issue that Francois touched on.
And it's a concern to us because, if you have poor countries whose debt levels are very
high, then it's hard for them to attract capital, it's hard for them to grow. So getting the
debt levels down is, per se, an important part and, of course, grants are a way to do that.
In the years from 1989 to 2002, and this is in the fact sheets, there were
$40 billion of loans forgiven to HIPC countries. In that same period, $93 billion of new
loans were given. So, in three years, you forgive $40-, and you give twice as much back
in new loans. And you know what's going to happen with those.
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Grants, to the extent that grants are made and disbursed, they deal with
that problem by not giving them new loans on top of the ones that are just being
forgiven. So that's the lend and forgive cycle that is so devastating to a credit culture
and something that we should not be pushing on the poorest countries.
I would say here there is definitely I think agreement now that this is not
a zero-one proposition. This is not all grants or all loans, and it definitely is the notion
of a staircase. Quite frankly, most of the HIPC countries are at the bottom of that
staircase, and we want to get them moving out of that, up the stairs. That's a common
purpose, through more resources, through the HIPCs, but also to deal with a reform issue
like having debt levels get down.
So, sure, as Niger, and Rwanda, and the other HIPC countries begin to
grow and get on their sound footing with respect to loans, yes, additional loans make
sense, but that could be 10 years. We don't know exactly. But to have a debt
sustainability analysis, which now says--and this is, unfortunately, a problem with the
IMF/World Bank calculations right now--it's now saying that some of these HIPC
countries can take loans that brings them to 300-percent debt-to-export ratio. Say that
again. Three hundred-percent debt-to-export ratio in some circumstances is going to be
new loans from IDA to the poor countries, and that's not good, let's face it. That's got to
be fixed.
The last thing I'd say is I think, as some of you may have been hearing,
there is also the need for some debt relief on top of the grants that deal with the debt
sustainability issues. I know that's not the topic for today, but in many respects they are
moving together, and especially with some of the proposals and ideas that are out.
Secretary Snow delivered a speech yesterday to the Bretton Woods
Committee, where he said that it is time for the international community to see how
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much further we can go on debt relief, and we've been, and we'll continue to work
actively, with all of you and our partners to see what we can do on debt sustainability
more general.
Thank you, Nancy.
MS. BIRDSALL: Thank you very much, John. I'm sure there will be
some discussion as we go along about what the implications of the idea of a credit
culture are.
We turn now to still another distinguished economist. I guess people do
not have bios; is that right? Or you do have bios, good. The next speaker is Pierre
Jacquet, who is the Executive Director for Strategy at the Agence Francaise de
Developpement. And he is himself also an economist. It's interesting to me to see,
among other things, that he's been the Chief Editor of the Quarterly Review in France,
Politique Etrangere, and that he is engaged with a club of 25 economists who contribute
a daily editorial on the French radio channel. So we have someone who knows not only
how to think, but how to communicate.
[Laughter.]
MS. BIRDSALL: Pierre?
MR. JACQUET: World economists are always keen in trying not to
exceed expectations, and you make it harder for me to do so.
[Laughter.]
MR. JACQUET: Thank you very much, Nancy.
MS. BIRDSALL: They can't hear you. They're waving.
MR. JACQUET: Thank you very much, Nancy, and thank you again for
helping our four agencies to jointly organize this panel and to so magnificently host it
here.
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I'd like to make four points, and they are very close to what Francois said
earlier.
The first one is that, indeed, debt sustainability is the central issue. And
the current situation in which we have many poor countries still overwhelmed by very
high debt means that we need to adopt a very pragmatic approach based on debt
reduction, and it is of use to me that we shouldn't resume loans to this country before
sustainability has been restored, before solvency has been restored.
So the question of arguing for loans doesn't mean that we want to bring
more debt to poor highly indebted countries. It is simply to invite to make a difference
between a pragmatic response and doctrine. The fact that, for pragmatic reasons, we
need today to reduce debt doesn't mean that debt should be ruled out as a useful
instrument. And, indeed, the rest of my remarks will try to point out that there is a value
added in using loans as an instrument of overseas development aid.
I would add to that that classifying countries between grants-only
deserving countries and other countries is very dangerous.
First, it is not appropriate on basic economic reasons, simply because
debt can be sustainable even in very poor countries, and the crucial relationship there is
between the rate of interest and the rate of growth.
And, second, if we create a class of countries deserving grants only, we
further divert them from international financial markets, and I think that would be very
costly over time, therefore on development and therefore for the completion of the
Millennium Development Goals.
My second point is that, even though when we think at a country level
this is much too growth, we need to differentiate between actors within the country,
between public and private actors, and even, among public actors, between state
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administrations and public companies. If we start with a public-private distinction, there
is a case to use ODA to finance a private sector for many reasons.
The first one is imperfection of information in the markets; the fact that
markets don't know the risks involved in lending to the private sector in poor countries,
and since they don't know it, they ask for an excessively high risk premium. Aid
agencies know better, and they can't take those risks.
And the second reason why it might make sense to use ODA to help
finance the private sector in poor countries is that the private sector can produce public
goods. And the link between the private-sector investment and the completion of the
MDGs is also a link that we need to work on and, as an aid agency, we try hard to
promote investment in poor countries, whether local investment or, of course, from
private direct investment.
The distinction between state and public companies matters a lot. In
many poor countries, we have productive, profitable public companies. When the debt
of these companies is included in the parameter of debt reduction, that will over time
create for them a liquidity constraint. They won't be able to borrow further, and that will
be a problem for their own finance. Beyond that point, you could argue that using ODA
to bail them out, while they don't need to be bailed out, is diverting resources from more
productive uses and from helping poor people elsewhere.
So I would think that, again, we need a pragmatic approach, and we need
to look very hard at what debt sustainability means not for countries, but also within
countries between the different actors.
My third point is that there is, indeed, a value added in using loans as an
ODA instrument in a world of imperfect information and markets. Why? Because the
arithmetic of loans indeed tells us that there is an equivalence between a concessional
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loan and a combination of a grant, of the value of the grant and the amount of the loan,
and a pure market loan. My point is that aid agencies will make cheaper "market loans"
than the market precisely because not knowing the risks. The risk premium on the
markets will be much higher. Therefore, the combination of a grant and a true-market
loan will be more costly than an ODA package involving both grants and loans, and
therefore I would argue that, indeed, we need to think of unbundling these two things-grants and loans--but the right locus to recombine them are aid agencies and not the
market.
Finally, I think that, and this is my last point, that aid is, of course, not
likely to solve by itself the development problem. Development hinges on domestic
settings and investments. So the crucial question for ODA and ODA agencies is to find
out how to promote private settings and how to promote an efficient use of these private
settings in the countries. That cannot be done with grants only because it has to do also
with a number of other issues involving, for example, the strengthening of local financial
markets. And it would be, I think, totally counterproductive to use grants to strengthen
private financial institutions in poor countries.
So we need to be a little bit more subtle in differentiating between several
ODA instruments. It would be unduly restrictive to argue that development finance
should be met with only one instrument--grants. Why would we deprive actors
worldwide to mix several various instruments from grants, loans, guarantees and so on
and consider that development projects are complex projects in which you have many
actors involved, many borrowers, more than one lender most of the time, and different
kinds of risks.
And I think that nowadays financial engineering allows us to unbundle
the financial package and be very subtle about how risks are taken by whom and to put,
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in face of each of these risks, a different kind of financial instrument--again, from grants
to market loans, to concessional loans, to guarantees and to even taking shares, stocktaking in some of these private companies.
Thank you very much.
MS. BIRDSALL: I thank you very much, Pierre. Thank you also for
reminding me I neglected to make clear that there are four sponsors for this event: the
IFC, which I mentioned, and the Japan Bank for International Cooperation, and the
French Aid Agency and the KfW of Germany. So we are pleased now to have three,
Pierre and two subsequent speakers, coming from those agencies, people who have spent
time in the field and have thought about implementation of transfers, be they in the form
of grants or loans.
Our next speaker is Hiroto Arakawa. He is the Director General of the
Development Assistance Strategy Department at the Japan Bank for International
Cooperation. He has extensive experience in the field, including in India, and has served
as a manager for various groups at the Japan Bank for International Cooperation
covering Sri Lanka, Bangladesh, China, and Indonesia.
Mr. Arakawa?
MR. ARAKAWA: Thank you. Thank you, Nancy.
First of all, I would like to express my thanks for CGD, Nancy, and
Michael, and the other colleagues who contributed to materializing this important
seminar.
I am the only participant from Asian countries, so my perception or my
view could be based upon my experiences in Asia, mainly.
As you know, the MDGs are very far-reaching goals, and the first goal is
poverty reduction. And, still, now the Asian country have the largest number of
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population under poverty. Therefore, I feel that it's a very important task for JBIC to
tackle this issue. So, along this line, I'd like to argue for a few minutes.
First of all, if you look at my resume, the conventional view --most of the
things were already touched by Mr. Bourguignon, so I don't like to refer this. But
sustainability is very critical and also the continuance, particularly from aid dependency,
like a grant, to much more market dependency type. Therefore, there should be some
road map to graduate from aid. So, in this context, it might be better to discuss this grant
versus loans and also the aid predictability. This is very important from the viewpoint of
the stability of the policy in developing countries and autonomy as well.
The next point is the very famous issue, particularly so-called aid policies
and growth puzzle. If you recall, Burnside and Dollar, 2000, they think that the impact
of aid on growth is positive with good policies. And then, 2003, Easterly, Levine and
Roodman, they showed this linkage, the good policies and impact of aid on aid, breaks
once the data is extended
Then, the Japanese scholars, Mr. Sawada, Kohama and Kono, in 2003,
they supplement some data, and they decomposed the aid variables into loans and grants.
Then, they point out that there might be positive effect on economic growth on the loan
more than the grant, but still this discussion has not been conclusive yet. Therefore, it
might be worthwhile to see more detail and to follow this discussion. Then, this
discussion may give a hint to this loans versus grant issue.
The next point is the most important, I think. The issue, real issue, is not
the grants versus loans, but the most important point is how the funds, regardless of
grants or loans, will be used. If you look at this, we studied the so-called impact study
on the highway project and the port project in Vietnam, and the study will be available at
the entrance, I think.
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And we found that most important is how to secure the benefit of the
investment projects. This is basically not an easy job. But when you look at this, the
policy, good policy should be accompanied with some sort of additional or supplemental
investment. The main core part is the road construction or port project, but it is not
necessarily enough to materialize the benefit of the project. So much more, something
like vocational training and agriculture credit or extension services, this kind of
supplemental component are very crucial to materialize the project. Therefore, the
matter is not loans or grants.
And in addition to that, the grants assistance, in the case of Japan, the
Ministry of Foreign Affairs and the JICA give this kind of grant assistance, small grants.
Therefore, once we collaborate with each other, there is a very good way to enhance the
benefit of the project. That's my point.
In the case of Thailand, for instance, now there is no grants assistance
from Japan, and nearly this country is almost a graduate from JBIC loan. If you recall,
30 years ago, the per capita income of Thailand was the same as that of Ghana. So, the
combination and the road map to assist the developing countries are quite crucial.
And the last point is the way forward--how to secure the incentives of the
recipient countries for efficient use of the development funds. In short, the first point is
ex ante incentive, for instance, the performance-based allocation which is now being
discussed in IDA, and also as an ex post incentive. If the project is completed very
timely and materializing the benefit, then we may reduce the repayment amount. That
could be the way, but we need to further investigate in this matter.
The last point is how to strike a balance between grant and loan while
those two are equivalent. Just in case you recall the forestry project, this is a very, in
other words, risky project, but very good for environment. Then, if we use grant at the
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pilot stage and we experience a lot of lessons learned, then, if there are good results, then
we can disseminate this kind of practice nationwide so that our loans could be used more
efficiently. The point is it's not the dichotomy, but a combination of these kind of
modalities.
Thank you so much, Nancy.
MS. BIRDSALL: Thank you, Mr. Arakawa.
We turn now to Wolfgang Kroh, who is a senior official--he is probably
more than that--at the German aid agency, KfW. I won't try to say it, but I will make
sure that you all know that the KfW is well known for its excellent work on the technical
assistance side in the developing world. He is a member of the Board and previously
served as Senior Vice President, Secretariat of International Credit Affairs at KfW.
Mr. Kroh?
MR. KROH: Yes, thank you very much, Nancy, and thanks to all of the
organizers for making this meeting possible.
I just might correct you slightly. KfW is a development bank and really
doing the financial-MS. BIRDSALL: Oh, I got them mixed up.
MR. KROH: --corporation, although, in many cases, we add an element
of technical corporations with our loan financing.
MS. BIRDSALL: So it's your sister agency. GT said I'm mixing you
up.
MR. KROH: So it's not really just providing the funds, and this is part
of the discussion I think. Development bank's role is to bring an element of expertise
into the lending operation and also an element of transparency and, by that, adds quiet
value to the operation.
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Many things that have been said I can underpin only. Let me just add
some pragmatic consideration from a practitioner's point of view. We are now talking
about ODA, but Monterrey has put this into perspective of the overall financing needs of
developing countries. And I think, at that time, agreement was reached that financing
for development will very much depend on resource mobilization in the countries
themselves. It will very much depend on foreign direct investment and access to
international capital markets. Of course, this will require fair trade regimes and
practices, good governance, and all the like anyway.
We all, I think, agree that more ODA is needed, badly needed, to pull
people out of poverty. So there was a commitment given at Monterrey to increase the
net flows by about 30 percent, and I think this is already a major challenge to a number
of the countries who really have to pay the bill in view of persistently low economic
growth, high levels of unemployment and very serious budget constraints.
Furthermore, the World Bank has estimated that the Monterrey increase
will not suffice to meet the Millennium Development Goals. So another $50- to $70
billion per annum will be needed. This is quite an additional challenge. And now we
have a discussion on going to ODA informal grants only.
Yesterday, I heard a very radical proposal at the Bretton Woods
Committee when one of the speakers, Professor Rogov had demanded to turn IDA into a
grants-only facility and at the same time close down all World Bank lending and IFC
operations. I think this is rather far away from the real needs of our partner countries,
and I am happy that we have at least one person who can also give them a voice.
I think the world is not such that we just can make these simple choices,
whether we want more resources or more grants. It's always nice to have a grant, but the
real choice seems to be that more grants will not be without repercussions on total flows,
21
and I think this also already has been mentioned. So we are really having to decide
when they exceed Monterrey commitments, whether we have more grants and less
cross-commitments or do a higher leverage, together with the available grants.
I think, in such a situation where resources are scarce, we have to
consider the rationality of the actual division of labor and whether the most in need of
grants really do get it or others who are not so much dependent on grants are not given it
too easily. So, if you look at the figures, you can see that 10 countries in 2002 who have
an investment grade received all the grants at the amount of $3.3 billion. So this was
almost 70 percent of the net commitments to these countries. Also, we know that the
European Commission extends grants only and about half of their aid is going to middleincome countries.
So I'm not doubting that the countries most in need, the HIPC countries,
the least-developed countries will need grants. Without excluding them from further
debt financing, this should reflect the success of a development process that they have
become credit worthy again. And I know from countries who have gone through HIPC,
now have difficulties getting foreign finance even on the private side and are barely
struggling to get investors newly interested in their countries.
I remember last year, at the IMF-World Bank Conference, there was a
presentation by Ghana. They had invited, with the help of the U.N. family, Standard &
Poors to give them a credit rating as a sovereign debtor as a signal to the market.
Yes, I come to an end. What I really think we should look for, a better
mixture, maybe a redistribution between grants and loans, not forgive the chance of
bringing more resources by using the leverage effect of market loans. And if some
donors prefer grants or loans only, they should concentrate on the right countries.
22
I would also mention that loans and such are really an opportunity and
not a danger. It very much depends on the spending side of it, but it's really efficiently
spent. And we know from experience with giving credit to poor people, if the credit
technology is right, if the spending is right, this is a real opportunity to get out of
poverty.
Thank you.
MS. BIRDSALL: Thank you very much.
Finally, we come to a person who has been sitting at the other side of the
table, at least recently. Matthew Odedokun is the technical adviser in the Debt
Management Office in the Presidency in Nigeria. He has spent years thinking about
these issues, including most recently as a research fellow and project director at WIDER,
the World Institute for Development Economics Research, in Helsinki.
Matthew, you have the floor. I'm going to have to be a little bit more
strict than I'd like to be with you, but I promise, if I cut you off, to bring you back into
the conversation. That's because at least one of our panel members has to leave shortly,
and I want to make sure that he has a chance to answer some questions.
Matthew?
MR. ODEDOKUN: Thank you. Good morning, everybody.
Issues on loans versus grants can be divided into several parts, but only a
few of them will be able to attract attention in this forum because of time.
One of these which is very important is the implication of loans versus
grants on sustainability of aid volume. Francois has mentioned that, based on the
arithmetic of loans and grants, that loans will result into greater volume of resource
transference and grants. I don't think there is much dispute about this. However, there's
another issue--whether the aid agencies, whether bilateral or multilateral aid agencies,
23
whatever, they are financing their current resource transfers from repayment of past
lending.
If they are not financing their resource transfers from repayment from
past lending, then it means that it will not affect the volume of transfer materially, other
than the volume planned in the arithmetic, but if they do, then it will have serious
consequence for the volume of financial transfer.
We shed light on this issue by carrying out an income(?) test. We look at
the financial transfers and resource transfers by bilateral donors over the past 30 years or
so, about 22 of them, and we found that there is no relationship between the resource
transfers presently and the payments they are getting from past loans. In other words,
the two appear to be separate. In other words, they are not financing their current
transfers from what they are receiving from repayments made in the past. That is one
aspect.
The second aspect is efficiency and financial discipline on the part of
recipients-- loan versus grant affect efficiency. Again, this has dominated discussion in
the literature and policy discussions, and we tried to shed some empirical light on the
issue. We studied the past resource receipts by the recipient countries, but our efficiency
in this context is limited. It simply refers to budgetary efficiency--how do they allocate
budgetary resources. If they receive more grants, would that affect the capital spending
on investment? Would it affect government consumption expenditures? Would it affect
government tax efforts? Will it affect the domestic deficit; that is, deficits financed
mainly by borrowing from a central bank and so on?
So that is what we tried to examine--whether it's budgetary efficiency or
not efficiency in broad terms. And our finding is that, well, the evidence is slightly
mixed. For high-income developing countries, the evidence is not always the same as
24
for the low-income group of countries. But, generally, notwithstanding the differences
between high- and low-income group of countries, the evidence suggests that a
preponderance of grants in total aid is anti-budgetary efficiency. That is the summary of
our findings.
Then, the third issue is implications for future debt burden. If you give
loans, loans as a distinguishing feature of repayment liability, it has to be repaid. So the
argument is that it wasn't(?) the existing debt situation in the recipient countries.
We look at whether in the past in Nigeria, especially so-called
concessional lending, has been a factor that accounted for the debt burden of the
recipient countries. We separately wanted to find, I mean, we tried to find out whether a
grace period, that is, if the grace period is very long, whether it encourages borrowing by
the recipient countries; also, if interest is very low, whether it affects borrowing and so
on. And that's what we tested for.
And we used statistics for, I mean, we found that developing countries,
we analyzed their lending in the past 30 years and so on, and the evidence is
overwhelming that it affected the level of debt; that is, safety net of loans, not just loans,
but how soft it is. So that is the third issue.
Then, we also examined a number of other issues. On the basis of our
examination, we arrived at certain axioms about what is the comparative advantage of
loans, I mean, loan concessions, and what is the comparative advantage of grants.
On this, we found out that if there is externality, like in the case of maybe
what we call global public goods, which has an externality element, like HIV epidemic
and so on. There tends to be no alternative than to give grants. Grants has a
comparative advantage in that sense.
25
Then, there are other issues that maybe if the donors who want to
promote certain interests, maybe self-interests, like if they want to tie aid or something
like that or maybe if they want to encourage, I mean, cajole recipient countries to behave
in a certain way, it's what we call conditionality lending and so on. In this case, a
concessional loan is superior to good grants and nonconcessional loans.
If there are temporary economic shocks, as compared with long-lasting
downturn begins, this has implications for the relative comparative advantage of loans
versus grants. The ultimate of benefit of loans to the recipient is to enable them to
smooth in their consumption over if it's a good time horizon. So, if the potential
recipient's problem is just a temporary, reversible liquidity shortfall, and possible future
recovery is supported by fundamentals, then loans will be more appropriate than grants.
But if your potential recipients have any protracted solvency problem that is likely to be
long-lasting, providing loans may worsen the country's situation because at the time of
repayment maybe the condition is even worse than the time of taking the loans.
MS. BIRDSALL: Okay. I'm going to interrupt and ask you--you're
giving us some excellent information, which I will try to refer back to, Matthew, on
empirical work.
I think that my sense is that there's more agreement at the table than you
might believe, listening to what people are saying. The one kind of agreement seems to
be around the point that it depends a little bit on the country situation what the right
instrument is for transfers.
Since John Taylor cannot stay for much longer--he naturally has meetings
in association with the Annual Meetings of the IMF and the World Bank--I want to ask
him, and then Pierre Jacquet, to respond to this question.
26
Could you characterize for us the countries, the characteristics of
countries which ought to get somewhat more grants for somewhat more concessional
loans or other loans, in terms of their past growth, their future expected growth, their per
capita income, their performance, in terms of their ability to manage their economies
well. What is the relationship that you see? And if you can link this to the question of
incentives, that would be useful as well.
John, can you-MR. TAYLOR: Sure. Yes. By the way, I think I agree very much with
your summary, that there is quite a bit of agreement on, for example, debt sustainability
as a major consideration in the decision about grants versus loans or the nature of what
the project is. For example, the HIV/AIDS, I think we now all agree should be grants,
and also this mixture that there is a sense of countries, at very bottom, if you like, having
more grants, and then moving up along the staircase towards loans.
And I think that is how I would answer your question, is it's partly where
countries are starting right now, and the HIPC countries have now been in a category,
which we want to get them out of, by the way--they'd love to shed that name. If you had
that name, you wouldn't like it--but to get out of that category, and I think that should be
the focus at this point.
And, of course-[Tape change: T-1A to T-1B.]
MR. TAYLOR: [Continuing] --on the table. We want to really make
sure that it's done well. So I think that would be a strong criteria that I would add.
I think there's also the sense of good policy. And a number of the
panelists have mentioned that. I think the performance allocation system of IDA needs
to be stressed. In the allocation, obviously, the amount of funding, we want to work
27
more on that, make the CPIA public, and I think there is a movement in that direction.
So the funds are allocated on the basis of policy performance.
And then this notion of measuring the results. In many cases, we have
found, and we have asked that the World Bank distinguish their grant support from the
loan support so that the measurable results system can be applied on a project level to
the grants, and I believe it is doing well in that respect. In fact, the measurable results
are better, as far as we can see, in the form of grants.
And, finally, Nancy, if I could just add, because I think Wolfgang Kroh
mentioned the Monterrey commitments, and I think it is important to emphasize that we
are talking about trying to find ways to have additional support for the countries. And I
know in our case, in the United States, that for us to make the case to the taxpayers and
their representatives that this debt sustainability issue, that the notion they're giving
loans and forgiving them right away or soon is just not an attractive feature to our
representatives in Congress.
So to make the case for more assistance, and more aid which we are
making, we have to make sure that we get this reform underway, so we don't have this
lend-and-forgive cycle. And the Bush administration, by the way, has met its Monterrey
commitments, as Wolfgang mentioned. So that indicates where we're going on this.
The more we can go to have the efficiency that your question implies, in other words,
have the grants be given in a way that makes the system work better, makes IDA work
better, the better we're going to do in terms of additional assistance for the poor
countries.
MS. BIRDSALL: Let me press you just a little on the issue of countries.
Let's do a mental exercise. We have a HIPC country today which, in three years, has
begun to grow very rapidly and is demonstrating, in the context of, say, the measurement
28
of the CPIA, very good performance and is actually trying to put together what it needs
to do in order to approach the private capital markets.
Is that a situation where you would see it would be consistent with what
you're saying, that the country might then have an opportunity to come to a place like
IDA and say, "We'd rather have the larger gross amount today associated with the loan"
or would you say, based on the fact that it has a history and still a high stock of debt, for
example, that it should continue to receive grants because of the debt stock?
MR. TAYLOR: I think the history is very important, and sometimes it
takes a while to have a clean slate, to move without the accumulation of debt.
Credibility takes a long time to establish. And so I would emphasize making sure that
you're beyond the case where they're going to go back into the debt. So it's erring on the
side, I'd say, of grants.
And by the way, the way that the grants-loan debate has taken place, at
least with respect to the MDBs, is really the volume. You're not talking about having a
smaller grant compared to a loan. We're talking about these grants are just as big as the
old loans in volume. So they're actually much more generous just at the start--grants
obviously more valuable than a loan.
MS. BIRDSALL: Let me turn now to Pierre to address the same
question, and you may want to fold in, in the way you respond, some of the points that
John made.
MR. JACQUET: Thank you. Let me reiterate that I don't think we
should classify countries in all-grant countries and loan-deserving countries. I think
what matters is that we look at the current situation. Indeed, debt sustainability is a
major factor, but the crucial objective that we should pursue is to restore credit
worthiness of these countries not to provide them lasting, pure assistance. We need to
29
help them rebuild their credit worthiness. And I would argue that credit worthiness has
little to do with the average income per head. That is for two reasons:
First, we can think of debt path in poor countries that are sustainable. It
really depends on the relationship between the future debt repayments and the flow of
export receipts. There are many cases in which poor countries have been able to sustain
debt.
And the second reason is that, as I argued earlier, we need to be a little bit
more subtle in looking within the countries at the projects and the actors. I agree with-MS. BIRDSALL: Let me interrupt you, Pierre, in order to thank John
Taylor, who is a very busy man, for bringing an excellent measure of calm and good
persuasion to this panel.
Thank you, John, for being with us.
[Applause.]
MS. BIRDSALL: Sorry, Pierre. Go ahead.
MR. JACQUET: That's okay. I agree that there are indeed projects or
programs that are more likely to have to be financed through grants, and these are the
"social" projects like education, health. In poor countries, it would certainly not be a
good idea to finance education and health through loans simply because the country has
not reached a level of development through which it is able to collect, through the tax
system, the long-term profitability of this investment. So, in a way, it makes the grant
solution for these kind of projects totally appropriate.
But I would argue that meeting the MDGs goes beyond social spending
and that we need to restore and revive the financing infrastructure, for example.
Financing infrastructure requires a lot of resources, and I wouldn't think why we should
30
find that only through grants, why a major actor of infrastructure, either building or
maintenance or exploitation, will have to be a private company.
So, in a way, I think that the whole point is to think of a bundle of
borrowers, beneficiaries and to think of aid finance as a package of several various
instruments, all of them adapted with specific kinds of actor and risk. So it's a bit more
complex than simply grants or loans, but I think it puts financial engineering at the heart
of the efficiency of ODA.
Let me end by arguing about aid allocation. I think the major question
about aid allocation shouldn't be where we should help countries or what kind of
countries we should help. We are in a world of interdependence in which we cannot
lead countries astray. And therefore, even in countries in which the CPIA is very poor,
although I don't know the CPIA because it's not public, but even in countries where
governance is not working, we need to do something.
So the question is what do we do? What kind of instruments do we use,
what kind of policy do we devise for these countries? It's a totally different question
than the question of allocation, as it is currently posed, which is where should I put my
money. I think we need to put ODA everywhere, but certainly very, very differently.
Thank you.
MS. BIRDSALL: Let me turn to another representative of a bilateral
agency on this question of--but I want to go back to the past and some history. If we
look across the countries in Africa that are now HIPC countries, what we can observe is
that it's been 10 or 15 years since the European bilaterals began shifting very strongly
from loans to grants. So there's a kind of irony in the fact that the European bilaterals
have been concentrating on grants for quite a long time.
31
So I'm hoping that Wolfgang Kroh would address that question in the
context of something that Mr. Odedokun mentioned, which is his empirical evidence
that, in general, a country's revenue effort is hurt when they are the recipients of--I don't
want to bias the discussion--but easy money, as opposed to loans which presumably
create some demand for repayment.
Mr. Kroh, maybe you could go to this issue of why grants so early on in
Africa.
MR. KROH: I think this started after the oil crisis already, and there
was a debt forgiveness initiative on the German side for the least-developed countries
and those most hard hit by the oil crisis, in view of their already high debt burden at that
time.
Over time, the grant portion was generally increased for special purposes.
For instance, in so-called loan countries, we introduced grants as an exception for selfhelp projects, for basic social infrastructure, for certain environmental purposes, for
HIV/AIDS projects, so, to give a specific incentive and to avoid projects which are not
generating revenue for a long time, although one can easily calculate nice rates of
economic return on such investments, but the money is still not there for servicing debt.
This was a basic consideration.
When it comes to the efficiency, well, we find in countries where we
have both loans and aids, that the receiving structures are structured accordingly. So
there is a different ministry or agency in charge of grants, and the attitude--this is an
empirical observation--is different. So where it is loans, there is, from the very
beginning, more thought given to the type of expenditure and also to the long-term
question.
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I think most donor countries really are aware that they are not just getting
the money, but they have to pay at least a portion back, which is usually, as a
concessional element, not too high. But anyway, there is a difference. This is a very
practical observation. I cannot prove this with empirical figures, but it has happened.
And what was said about a noneffect of revenue on the volume of grant may have to do
with changes in donors' preparedness to provide more assistance and a higher grant
portion. So this may be an explanatory overlay on what our colleague from Nigeria
observed.
MS. BIRDSALL: Thank you.
Let me turn to Francois and ask him to reflect for a moment on the point
raised, indirectly and directly, by some others on which kinds of countries ought to get
which combination or which permutations of grants versus loans.
One of the characteristics that obviously does matter is existing debt
stock. And I think it was John Taylor or one of the other panelists who made the point,
if the debt stock weren't there, then it might make more sense to go, when a country
begins to grow, independent of its level of income. I think this was Pierre's point. The
implication was, then, it might be ready for concessional loans.
How do you see this interaction between the problem for IDA and the
World Bank of the debt stock, if that's forgiven, that obviously reduces IDA resources if
it's done using World Bank internal funds and the potential in the future to move to loans
which would generate reflows in the more distant future versus staying with grants to
those countries? I hope my question is clear.
There's a trade-off, clearly. You can't necessarily do everything. Where,
at the margin, does one go? With what portion of debt stock reduction, which might
33
then permit somewhat more from the country's point of view, loans versus straight
grants?
MR. BOURGUIGNON: Yes, I hope I understood the whole trade-off
that you're referring to.
But the first part of your question is really about the same issue of which
countries, on what basis would we say that a country should be given a little more grants
or a little more loans. And I think, from what I heard, there is definitely very much
agreement on this table. We certainly want to use existing debt or some ratio link to the
debt, debt to export or debt to GDP ratio.
We certainly want to use some governance indicators. So we told you
about the CPIA. Okay, the CPIA. There are also indicators.
MS. BIRDSALL: Better performance leads to more transfers, but in
what form?
MR. BOURGUIGNON: No, no, no. Just a moment. It is extremely
important to make a distinction between the total aid that is being given to a country,
which may be based on the governance indicator, the CPIA, which is certainly to be
based on the level of income at this time, and the way in which this total aid is coming.
MS. BIRDSALL: Right. So better performance-MR. BOURGUIGNON: And we are talking, it seems to me that the
debate we are having today is more on the combination of grants and loans within the
total ODA that is being given to a country than on this total ODA. On this total ODA,
things have been said at this table. We totally agree that the total amount must been
increased if we want to reach the MDGs, and probably we are not doing enough today.
And I'm not totally clear that everybody will be meeting their Monterrey commitments.
But this is, from my point of view, another issue.
34
MS. BIRDSALL: Let me clarify for myself and for the participants or
try to bring out what your view is, actually.
With better performance, there is general sense that a country can use
resources more effectively and resource flows ought to be greater. Now, you're making
the point that you can transfer those flows in two different ways. But what's clear is that
if it's a loan, the initial, the short-run transfer, in gross terms, will be greater. So I'm just
trying to understand if how you link that reality, you have a good-performing country
which may be able to absorb in the short run more resources, that would imply a
concessional loan if there's a binding constraint on the total amount.
MR. BOURGUIGNON: Sure.
MS. BIRDSALL: On the other hand, if it has a debt stock which is very
high and a history of inability to pay back the loan, you have this offsetting issue. So
I'm looking for where you come out on that.
MR. BOURGUIGNON: You've got it. So I don't have anything else to
say. You just got it. I mean, the governance, the country is doing well, which means
that it will get more total aid being transferred to it. And the way in which the money
will be transferred will, again, depend on the governance of the country. If the country
has a very satisfactory level of governance indicators, then a higher proportion of the
total debt will be transferred into the form of loans, and if this is not the case, then it will
be in the form of grants.
You may have a country with a very satisfactory governance indicator,
but a very high level of debt. So, at the first level, the total aid being allocated to the
country, it will perform well because the governance is satisfactory, but this total aid
will be transferred more in terms of grants than loans because of the existing level of the
debt.
35
And we have to take into account those various dimensions. Again, I
really believe that on this point there is agreement. The problem is to know what is the
formula that we have to use. I mean, could we say that because a country is called HIPC
the country cannot get any loan again or must receive anything in terms of grants? We
know that HIPC countries, I mean, if you look at a snapshot to HIPC countries, the
composition will change over time. What do we do with that?
So it seems to me that the problem is more general than the HIPC country
and what should we do with them. The problem is really again to find what is the
general formula--formula is a very ambitious word--what is the relationship that we want
to have between the characteristics of the country and the two or three dimensions which
are important and which have been singled out in this table and the combination loan
and grant percentage.
MS. BIRDSALL: This is very good. I think that it makes a lot of sense
that the discussion is moving around to the general question of what works in these
countries that are receiving some combination, some form of transfers, and to the
question of performance.
Let me ask Mr. Arakawa and Mr. Odedokun to comment on this point
about performance. Mr. Arakawa works in a part of the world where there has not been
the same problem of a debt build-up because of debt owed to the official creditors, at
least on the part of the low-income countries.
And Mr. Odedokun has made the point that conditionality seems to work
better, and I think he means the kind of benign conditionality. We don't want to get into
a discussion about the larger issues around conditionality, but the kinds of sensible
demands which countries agree to as part of their own management of their economy,
that that generally has seemed to work better in the context of loans.
36
Could each of you comment very briefly on that point, and then we will
open it up to questions from our audience.
MR. ARAKAWA: Regarding the performance of the countries, like the
CPIA, I think one of the fundamental questions is how to deal with weak performers.
We can deal with anyway the good performers, but the point is how to deal with weak
performers because, theoretically, these weak-performing countries cannot be eligible
for debt relief. That is one point.
The other point is that in the field now we have been doing so-called
PRSP process. There has been a framework to discuss this kind of issue in the field.
Therefore, to some extent, in my experiences, there are mechanisms to reflect the
performance of the recipient countries. And that issue could be much more focused on
now the social and governance issue. But as bilateral agencies, it's not so easy to deal
directly with this. Therefore, PRSP framework could be very efficient and a good
mechanism.
And in case of Japanese Government, we do so-called policy dialogue
each year for annual recipient countries. We cover not only the performance of the loan
projects, but also investment climate, trade regime and evaluation of the investment laws
and regulations, that kind of thing is already covered in policy dialogue. But always we
face, when we really reach to the point where the issue is very sensitive, we presumably
it might be better to bring it to the much more like a PRSP process so that Multilateral
Agencies and other colleagues can get together and come up with much more better and
amicable solution.
MS. BIRDSALL: Yes. Thank you. I think that's really a very important
that I'm glad to have brought out, that in most of the low-income countries, the IDA is a
very central player and that all of the issues of coordination and the combination of
37
having cooperation across donors, through a multilateral fund, with the ability to have
that dialogue over the compact, the responsibility of the recipient and the transfers, can
be very well done in the context of a multilateral fund.
So the relevance of all this business of grants versus loans circles, in part,
around everyone's, I believe, effort to ensure that IDA remains a strong player in this
business of aid.
Let me go back to Mr. Odedokun on the issue of incentives and the
relevance of performance to the type of transfer that can be made.
MR. ODEDOKUN: Let me make a very slight correction. I didn't say
that loans, that their conditionalities are good things or bad things or any of that. I think
what I did say, which I have in my paper here, is that nonconcessional loans may not
appeal to recipients if you want to cajole them because that's what conditionality lending
means. You want to cajole them to do one thing or the other.
MS. BIRDSALL: It's a great word, "cajole." We must remember this
word.
MR. ODEDOKUN: So there must be some financial inducements in it,
and that's why a nonconcessional loan will not be appropriate.
But at the same time, the volume of grants may not grant enough to cover
many countries and many recipient countries intensively, and that's one of the few
instances when concessional loans will be superior to IDA pure grants or pure loans. I
think that's what I was saying. But my own concern actually is not, I mean, the need for
international resource transfer is architectural. Because whether you talk of loans or
grants, each of them has their own problems. So which architectural can we devise to
circumvent the problems of loans and the problems of grants at the same time? I think
38
that's what we should probably aim at. Maybe, in this regard, I have only two or three
suggestions to make, if time permits.
The first one is to take a particular volume of so-called concessional
loans. Now, you can unbundle it into these two components, that is, pure grants and
noncessional loans. Because, when you combine the two, we will have what we call
concessional loans. It's just a combination of grants and noncessional loans. So, instead
of combining them, we should unbundle them.
Now, if you want to make a particular volume of transfer, the grants now,
take the grants, give it to the recipient based on whatever core criteria, and then the
nonconcess--concessional component, make it available to recipients up to that
stipulated amount. If the recipient wants, he will receive it. If it wants, it may not
receive it.
Grants are suitable for certain types of projects like (?) and anti-poverty
or something like that, but nonconcessional loans, too, has its own competitive
advantage. If you want to finance private sector development, it appears
nonconcessional loans has a comparative advantage. So the recipient now, the recipient
government now asks, I'm not sure whether to draw (?) pure grants, whether to draw on
the nonconcessional component and up to what limit. I think that will circumvent most
of the problems.
I think in the paper, which I think is probably made available, I have not
stated all of the advantages of this policy. So that is one of it.
But the alternative to this is actually that, I mean, what I would rather call
contingent convertibility to grants. I mean, that is applicable to the concessional
lending. So contingent convertibility to grants should also be considered for
conditionality-based lending. In this case, if the conditions, like policy reforms and so
39
on, are met wholly or partially in the particular year, then the debts for that player should
be written off wholly or partly, too, depending on the extent to which the conditionalities
are met.
And if the conditions are fully met over the last time of the loan, it will, in
effect, become a form of pure grant. An independent third party should determine
compliance with the conditionalities. I mean, that is how, I mean, that was, initially, I
think you understand it is loan, but if you do well, we are going to write-off when the
deficit is due. And if you meet the conditions for the last part of the loan, it becomes
grants. We will not take anything back from you. That will give us a better inducement,
a better incentive, a better way of cajoling the recipient countries.
Then, the third one, that is, but if they are mostly conventional loan
financing that is in the orthodox way, there will be a need for safeguards against adverse
incentives of overborrowing and overlending because those are the two, I mean, some of
the two problems of concessional lending.
MS. BIRDSALL: I'm going to-MR. ODEDOKUN: Sorry. Just, one, the lender should ensure that
borrowers have domestic, credible, prudential borrowing guidelines so that they don't
overborrow; two, they should make sure that the disbursements and (?) the electoral
cycle in the recipient countries so that it is not when the election is coming in the
recipient countries that they will rush and sign the disbursement and so on just to finance
electoral government expenses.
Thank you.
MS. BIRDSALL: Thank you very much.
40
I think this is a very fundamental point that Mr. Odedokun is raising
about the international aid architecture. And he's made a suggestion which would be to
transform loans to grants, in effect, on condition of good performance.
The irony is that, in a rather inefficient way, and it took about 20 years,
this is what the community did with HIPC. It took what had been loans and said, if you
meet certain conditions, we will deem you eligible for forgiveness. I think, however, his
proposal is to do that in a much more strategic, ongoing way.
Let us turn to comments and questions from each of you. Please
introduce yourself. Please keep your questions short. I am going to take three or four,
and then I will ask some members--if you can indicate whom you want on the panel to
respond or I will do that in order to keep things moving.
Please, go ahead. Please, Axel, go to the--in fact, maybe we ought to line
up. Axel, you go first and then, yes, and, Ruth-QUESTIONER: It's a question generally to the panel, whoever wants to
pick it up, but following up on the last point. I wanted to ask you, beyond the theoretical
considerations, to what extent do you think of it practically-MS. BIRDSALL: Did you introduce yourself?
QUESTIONER: My name is Axel Peuker. I am working on private
sector development, and I am working in the World Bank. My question relates a bit to
the aid architecture and to practical aspects of moving into grants.
On a macro level, I felt that the failure of aid at times to help came really
to the forefront when the debt repayment issues were very visible. It didn't come as
much to the forefront for grants which have been misspent or not probably used.
On the micro level, my own limited experience was that it's hard to have
countries report you where their debt is. It is impossible for them to tell you usually
41
what's actually going on in terms of grants. So there is a very little monitoring
incentives even for the recipients when it come to grants.
Now, if you were to move, in practical terms, and as we are moving
towards more grants, to what extent do we have the kind of results measurement
agenda? To what extent do we have the institutional architecture which would actually
allow us to have hopes that grants, under current conditions and procedures, would be
well spent or wisely used and are there incentive considerations as we are seemingly
moving towards more grants which will be reflected in the aid architecture or in our aid
practices?
Thank you.
MS. BIRDSALL: Thank you. We'll have to keep the questions even
shorter.
Please go next, and then I'm going to call on Ruth Jacoby after-QUESTIONER: Hello. I'm John Sanford. I'm with the Congressional
Research Service at the Library of Congress.
I have a statement first and then two questions.
MS. BIRDSALL: No. No statements.
QUESTIONER: No, the statement is I believe that the difference
between IDA grants and IDA loans is that an IDA grant need not be repaid. Whereas, an
IDA loan must be repaid at no interest over 40 years, that that is the fundamental
difference between them.
MS. BIRDSALL: Yes, that's right.
QUESTIONER: I may be wrong.
MS. BIRDSALL: No, that's right. Go to your two questions.
42
QUESTIONER: The first question is are there differences in the kinds
of activities or the way that assistance programs can be carried out, depending on
whether you use grants or loans? I know that Under Secretary Taylor mentioned AIDS
activities. Those are new things that the Bank previously didn't do. So does the
opportunity with grants allow you to do things you didn't do before or does it allow you
to do things that you are currently doing better?
The second thing is whether--the essential issue is whether it is better for
the reflows to be left with the recipient because they don't have to repay a grant or
whether, for the reflows, the loan repayments to come back to the IDA to be relent
again. In my own research, I found that there was a difference of opinion, some who
were-MS. BIRDSALL: Is it a question?
QUESTIONER: Yes. I'm just wondering whether there is a difference,
in the view of the panel, whether assistance is best left, the most effective use of the
money is to leave it with the recipient of the assistance in the first place or the most
effective use of the money is to have it repaid back to the World Bank so that it can be
relent again.
MS. BIRDSALL: I am going to ask Ruth Jacoby to--go ahead, Ruth.
QUESTIONER: Just briefly-MS. BIRDSALL: Would you introduce yourself, please.
QUESTIONER: I'm Ruth Jacoby, from Sweden, Director General for
Development. I thought this was an extremely interesting discussion.
We seem to have a large measure of agreement in that we need some kind
of sensible mix of grants and loans. It depends on history and performance, et cetera.
43
What I'm worried about, though, which is the subject here, what does this
mix look like. And my question is I think one thing that was lacking here or which
worried me is that should it depend on what project or what sector the loans or the grants
go to?
I think Pierre Jacquet was saying some sectors, like health or HIV/AIDS,
as was John Taylor, would be useful for grants. Whereas, others, infrastructure, private
sector, could be loans. That worries me at a time when we believe in harmonization,
coordination, budget support, sector support, and the importance of a holistic view on
development-achieving MDGs.
Can we really go by sectors? I mean, money is fungible, and if we have a
serious policy dialogue with the government of a country, it is of great concern, as I
think somebody was saying--I think it was you, Francois, or somebody--that there are
different, completely different recipients. If it's a Ministry of Finance, on the one hand,
or if it's a Ministry of Health, that is actually undermining the PRSPs and the dialogue
that we're having, how do we get out of that problem? How can we ensure that the mix
we end up with of grants and loans, whatever it is based on, does not mean that we go
into different sectors, different actors, and actually are disrupting a holistic view in
relationship to the country?
MS. BIRDSALL: Thank you, Ruth. I think we should ask some
members of the panel, at this point, but please stay there because I hope you'll have a
chance, as well, if you're there to raise questions.
I wonder if the question from Axel Peuker about aid architecture, Pierre,
you could address that. And why don't we ask Matthew Odedokun to respond to Ruth's
point about whether it makes sense, in a world in which money is fungible, to allocate
44
across. And, Francois, could you take John Sanford's two questions--are there
differences in the activities, which is kind of related.
Now, before I turn to the panelists to answer these questions, I need to
apologize myself and say that I won't be here to hear their excellent answers; that I have
liberated myself from the difficult task of trying to bring it all together at the end, and
because I have to leave to be at a World Bank seminar on the debt issue at 11:00, I have
got the luck to have my colleague, Steve Radelet, who is a senior fellow at the Center,
he is going to come up here and take on the hard duty of finishing with the questions,
giving each panelist an opportunity to say something at the end and then giving it the
magic Radelet wrap-up.
Thank you very much to Steve. Thank you to all of you. Please just keep
going as I quietly leave.
And, Pierre, you go to aid architecture.
MR. JACQUET: Thank you. And thank you, again, Nancy, very much.
I think that the two first questions actually really have to do with the kind
of incentives involved in loans and grants. And I think that Wolfgang Kroh addressed
this question very efficiently a few minutes ago and that, indeed it is our experience that
instructing a loan invites much more keenness in appreciating the risks involved in being
attentive to the nature of the project, to the objectives pursued by the project than
instructing a grant.
In an agency playing both roles, we have the same instruction mechanism
and therefore grant instruction lives up to the standards of loan instruction, but the fear
of an all-grant solution is that seems money gets away, and you are not interested in the
reflow, then the structure of incentive is totally different.
45
In a way, this is the same in the beneficiary countries. Francois came out
to be a little bit agnostic on the issue, but I think that in terms of building local
capacities, repaying a grant is more effective than simply not--repaying a loan, sorry--is
more effective than simply receiving a grant. Because when you have to repay a loan,
you need to have accounting procedures. You need to check also the profitability of the
project.
It doesn't come easily, and this is a very important point, the fact that the
past was not efficient shouldn't mean that we conclude that that instrument should be left
out. And this is I think we can learn, we can learn and we can improve and to believe
that we can learn from past mistakes, and I believe the debt crises comes from mistakes
on both sides, on the sides of lenders and on the sides of the beneficiaries, but I would
still think that the structure of incentives is more effective with loans than it is with
grants.
MR. RADELET: Thank you.
Mr. Odedokun?
MR. ODEDOKUN: If I understand your question properly by Ruth, I
think it depends on the use of transference, that resources are fungible anyway; that only
certain things should be financed instead of donors.
My own thinking about this is just that donors should ensure that the
totality of the policy environment is okay. If it's not okay, then this will divert their
assistance towards that end to make sure that the totality of the environment is okay in
the recipient countries. Thereafter, leave it to the recipient governments to know where
the areas that are of interest to them. I mean, nowadays, most of them are actually not
even elected by the people anyway. By electing them, people are having a say in how
they run their affairs.
46
But make sure that the environment is okay and then leave the rest, I
mean, to say that we must spend this on education, we are not concerned about roads and
so on, resources are fungible, and even to police or monitor this will be very futile. So
that's my own thinking along that line.
But maybe on a different issue I think the second comment on IDA loan
or so. I think the concern about whether it should be in form of pure grants or several
interest loans with 40-year grace period or something like that, I think the concern is
actually with the idea of would it sustain itself or it will go to position that when it
doesn't have resources that come from repayment, how it will get money. I think that
has to be a concern.
But when you look at it very critically, this of course then is not funded.
Because most of this (?) is not the repayment, as such, which I think accounts for
between 40 and 60 percent of their new lending, but because of the commitments,
political commitments by the bilateral donors that fund the IDA, if the commitment
increases, they will fund it, in fact, the IDA will be able to expand its activities whether
there is repayment or no repayment because, as I mentioned earlier, at a bilateral level,
aid agencies have not been found to finance their current resource transfers from
repayments being made from loans granted in the past.
So it is with political commitment at the bilateral level, and these same
bilateral donors own the IDA, I mean, in practical terms. So I think the issue is not
whether it is better to give the recipient governments with the amount for them to repay.
Because if you look at it critically, if your government borrows this, I mean, today, and
an entirely different government is going to make the repayment 40 years from now. I
think if you (?) anyway when the repayment has been made.
47
So, although I am not (?) continuity of government, but when you look at
the reality of it, you know it's an entirely different government. So why are you (?) for
governments for the chance taken now by the governments?
Thank you.
MR. RADELET: Thank you. I think that's a really important point of
the time convention. I actually spent six years working in debt offices in The Gambia
and Indonesia, and they weren't at all focusing on loan obligations 20 or 30 years down
the line. Politicians tend to have a shorter time horizon than that.
Mr. Kroh, you wanted to respond to some of the questions?
MR. KROH: Just a remark as to the monitoring of the projects, whether
they depend, the efforts made, in this respect, on the ground or loan financing. In our
bank, there is no difference whether it's a grant-financed project or a loan-financed
project. We look at them after them and quite critically for about 8 to 10 years. So there
is sufficient attendance.
Another point I wanted to raise, which we're talking about IDA and
grants, but the spectrum is far wider. We should talk about development finance, as
such, and this is a full range from grant to close to commercial market lending operation.
And, of course, what gives concern to the lady from Sweden I think really refers to the
poorest countries, that we do not lose contact with the overall macroeconomic picture,
which really should give a guidance to the amount of grant finance needed. I think this
is the main point, but otherwise, when you come to middle-income countries, then the
question arises whether it's prudent to finance HIV scheme with, say, a loan as a
minimum grant limit of 25 percent.
MR. RADELET: Thank you.
Francois?
48
MR. BOURGUIGNON: Yes, on the two questions, which were being
asked.
First, we know there should be a relationship between the type of activity
that is being financed by aid and the type of funding, grant versus loan. Personally, I
think that it is dangerous to have this kind of mapping, and it would be dangerous to
officialize some kind of mapping between type of activity and type of funding. And
Ruth was absolutely correct when she mentioned the fungibility being an issue.
I think that the problem, and Matthew made an allusion to that in his
answer, one of the problems really is who is managing the project. If you have in front
of you the government, if it is sovereign lending, then the situation is totally different, in
the case where we have to fund or we have to aid some decentralized agency.
So who is responsible at the end for a project is really what matters. Who
is the ultimate actor who will be repaying the loan and does it make sense to have this
ultimate actor being in front of the loan? In some cases, no. If we have in mind
transferring money for health care, for example, it is probably to be (?) to ask a
decentralized health care unit to take responsibility for a loan. So this aspect is
something important. I'm not really sure that we should make (?).
On the use of reflow and whether it is better to have the countries paying
the reflow to IDA or simply the country keeping the reflow for them, which is, as a
matter of fact, the proposal being made today by the U.S., and this is also the kind of
proposal made by the U.K. today, then one very important point is that with the country
paying the reflow to IDA, this is increasing the volume on which IDA is operating at
each moment of time.
And because of that this may allow for better reallocation possibly of
resources within the economy. It may allow for more knowledge being transferred from
49
donors to the country because, again, the size of the operation is larger. So this is a
consideration which must be taken into account.
And the last point I wanted to make, it refers also to a point made by Ruth
about harmonization. There is one thing that we didn't discuss. We all agree that debt
sustainability is an important issue, and it is the crux of the matter.
Now, we have to keep in mind that debt sustainability is, to some extent,
a public good, and there are multilateral agencies and bilateral agencies at this table,
and to make sure that we coordinate on the way in which we allocate aid between grants
and loans, and the way in which we deal with the debt sustainability issue is absolutely
essential. The reason why we got into the recent HIPC episode was very much because
this coordination was totally lacking back in the '80s and the beginning of the '90s.
MR. RADELET: Thank you.
Mr. Arakawa.
MR. ARAKAWA: I would like to respond to the two questions, and one
is the difference of the kind of activities between grants or loans. That's one.
The second point is the question raised by the lady from Sweden, in
reality, how the mixture of modality, grants or loan, are properly implemented in the
different actors in developing countries.
Well, first question, I share what Mr. Kroh said and also Mr.
Bourguignon said, there is no difference in terms of, I mean, a donor country operation,
but I think there should be difference in the recipient country because it is a debt. So
there should be some proper bookkeeping and also proper debt management and,
theoretically, debt management is an already established practice. But, actually, it is
very difficult to implement in the field. And in this regard, we have experiences with the
Thai Government. Because of our giving concessional loans for many years, and now
50
Thai has a very good track record. And also they have already established their aid
agencies to support neighboring countries. And one of the key sections is Debt
Management Office in the Thai Government, and we have been assisting them to
strengthen the capacity of this.
A second question, actually, this is, in practice and in reality, this is not
easy to properly answer because the recipient, as a country, it's one country, but it's
broken down to the ministry or implementing agencies. And in case of loans, always
there should be some grants or lending, even though the recipient country received as a
concessional loans, but as the case may be they give loans, I mean, they're re-lending to
the implementing agency or absorbing all the repayment obligations and then giving a
grant to implementing agency.
In the case of grant assistance from a donor country, sometimes this grant
assistance cannot be recorded on the budget, so-called off-budget. If so, I think it
creates or makes problem. There might be some inequality among the recipient ministry
or recipient implementing agencies.
Therefore, it might be advisable to put all the grants on the budget and
this underlines this kind of a confusion. Then, it could be the Ministry of Finance which
should properly handle this matter, in theory, because if this kind of thing cannot be
reflected on the budget, it's very difficult to get the real picture and also the hidden
obligation of the country concerned.
Therefore, it is very important to carry out policy dialogue, not only
multilateral, but also bilateral donor agencies as well in a very coherent manner.
MR. RADELET: Thank you.
I think we have time, we've got one more question here. Before we hear
that, I just wanted to make a plug for some research we've done at CDG which touches
51
on these issues, a paper that my colleagues, Michael Clemens and Rikhil Bhavnani and I
have done, that look at, not at grants and loans, per se, but on the effectiveness of foreign
aid and on loan repayments, we find looking at certain subcategories of aid, a very
strong relationship between foreign aid inflows and economic growth after controlling
for a variety of other variables. We also find a strong statistically significant negative
relationship between loan repayments and economic growth in low income countries.
So as I say, it's not directly on loans and grants, but it's related to this.
There's a summary of findings out on the table outside and the full paper's on our
website.
We've got one more question here. Let's take that question, and then as
you answer it, please give your summary comments. We'll go through the panel one
more time, if I can take advantage of our panelists--we're a little bit over time, but if I
can take advantage of them for another 5 minutes or so, and we'll wrap this up. So
please introduce yourself and your question, please.
QUESTIONER: Thank you very much. I first of all want to thank the
organizers of this forum for putting together this forum. But I want to express one
regret, that this--it's possible that this meeting could have been more interactive,
enabling people on this side to participate more in the dialog.
Having said that, I want to say my name is Ini Achuwan [ph]. I work for
Liberty Now, which is an NGO that deals with policy reform and environmental justice
in Nigeria. I am also a visiting scholar with the University of Columbia in New York.
The question I want to ask is this: it has been alleged that many of the
borrowing countries, including Nigeria, have paid the loans that they have borrowed
many times over, and still today they need to spend over 10 percent of the entire annual
budget on loan repayments, money which could have been used in poverty reduction,
52
money which could have been used in education, money which could have been put into
(?). Now, let us assume then at this point that the World Bank, IMF and other lending
organizations are nice people, They want to see poverty reduced. They want to see, you
know, the world being--the poor raised. Let us go back then and ask the question. If the
point is that giving loans instead of grants is to make the receiving countries more
accountable, how does the fact that these countries are still repaying loans many times
over, you know, fit into this rationale?
MR. RADELET: Good. I think that's a good question. Thank you.
And based on the assumption that the donors are nice people, as you suggest, we'll go
through one more time. But it's a very good question, and I think that's right at the heart
of the matter for not only the HIPCs but countries like Nigeria that are not HIPCs, but
are heavily indebted and have been for quite a while.
So why don't we go through the panel and respond to that question, but
also give any final comments that you want to make. If we can keep this fairly brief, it
would be useful, but one last chance, starting with you Mr. Jacquet, and we'll work down
this side, this way.
MR. JACQUET: Thank you. Let me sum up and try to respond in the
same time. First I think that the current situation really calls for pragmatic responses
rather than a fixed mix of loans versus grants that would be stable over time. Indeed, we
need to have indicators to find out what proper mix of instruments we use at a given
moment in a particular country, but this shouldn't be fixed over time and they should
respect the evolution of the country.
This is the same thing with the sectors. I didn't want to suggest that some
sectors would deserve grants and some other loans. I just think that in poor countries
nowadays, countries in which there is no fiscal capacity to collect from social
53
investment, there's a long term profitability that is involved in this investment. It is
dangerous to make loans simply because these sectors won't generate the receipts that
might be needed to repay the loans. That's why in poor countries they would argue that
we need, right now, for the time being, to focus on grants to finance the social sectors,
but it's not a rule that would stand over time and over geographies, and over countries.
So, pragmatic answer.
I'm not sure I will respond properly to the remarks made about countries
paying several times over. What I think is that we do have a program in the world to
make the difference between a liquidity crisis and a solvency crisis, and I think that our
debate between loans and grants should evolve over time, and quite soon, a debate on
how to deal with these two central issues of liquidity problems and solvency problems.
On liquidity problems, financial instruments will provide answers. We
could very well imagine financial instruments that are somehow indexed on external
shocks, be it shocks on the terms of trade or even political events that disturb a country's
ability to repay its debt. So in a way there is a case for moving forward to imagining
financial instruments that are geared to responding to short-term shocks that brings
liquidity problems in the countries.
As far as solvency is concerned, we don't have any proper answer
nowadays. Part of the reason why countries were finally to pay several times over were
that debt was rescheduled on the belief that it was a liquidity crisis. And I think that if
we had been able to recognize earlier that it was a solvency problem, probably the
overall cost for the world economy and for the major actors would have been different.
So in a way we need to think hard about what solvency means in developing countries
and what kind of instruments we have. We know that the debate about the SDRM
actually had reached a conclusion, but I think that sooner or later we will have to revive
54
that debate and to restore the debate on solutions to that problem, but it is vital that
indeed if we think that debt is a useful instrument, we need to deal with the solvency
problem because solvency will be with us as a central concern in the future.
Thank you very much.
MR. RADELET: Thank you very much.
Mr. Arakawa.
MR. ARAKAWA: At the end I think there are some rather broad
consensus on this issue. There is no clear answer on this grant process, issue. But I
think a fundamental question, as said earlier, effective use, that is, on the micro level.
And the question about how to be accountable and how to secure the accountability.
There is another issue. It's not micro level but it's a matter of--political
level or a governance issue. Therefore, it is necessary to tackle both ways I think. And
in order to contribute to this latter issue, now that it is ongoing in terms of so-called
harmonization of disbursement or procurement or financial monitoring, or as the case
may be, the safeguards policies. And this kind of effort may increase the transparency
of the agencies' activities, and also the activities in the receiving country as well.
That's my answer.
MR. RADELET: Thank you very much.
Mr. Odedokun.
MR. ODEDOKUN: Yes, thank you very much. I will not be able to
answer the question adequately. First, I'm from the--I'm a technical advisor, the debt
management of this material, so that would be [unintelligible].
[Laughter.]
MR. ODEDOKUN: And I (?) briefly that I should say something (?)
that's to say, on the funding, I can recall when I was at the IMF before coming to present
55
(?) I had to get clearance from the public relations unit. So this time my (?) has not
been cleared, but at the same time, logic, I guess I must not discuss the issue.
Second, the same issues likely to be discussed tomorrow--no, on
Tuesday, by Nancy and (?). This particular clinic on Tuesday, that is Double Standards
and Debt Relief: The Case for Nigerian IDA Reclassification. So maybe again I hope
that she will be able to address such issues.
I think (?) said what I said. I think when you look at it, the Nigerian
situation may not be a common one. If you look at the statistics also, if you look at
OECD statistics, it would really--I mean Nigeria just so (?) recipients on per capita
basis for developing countries in the world, (?). So maybe that explains the debts too.
I mean it's something that's (?) for some analysts, but I'm not even in the position to
present an answer as to why. So maybe (?) and others explains the debt, explains the
debt allocation. So I think that's all I can say at this forum.
Thank you.
MR. RADELET: Thank you very much.
Francois?
MR. BOURGUIGNON: Yes. The question being asked is a difficult
question in the sense that there are different types of debt, and this is something which
came out of the discussion by the panel. There is a big difference between discussing
the issue of loans versus grants as the way of channeling a given amount of aid to a
country, and the issue of the commercial loans, commercial debt which has been (?)
over time, a problem that Nigeria is facing today. There is definitely a problem of (?)
debt, which is a very high burden on the economy. Some word which we didn't choose,
which is an important word, is the expression of arduous debt, when the debt has been
contracted by government which simply didn't use at all (?).
56
So the discussion we had today is not really on that aspect of the debt.
The discussion we had today is more technical, and it is again on the way in which aid
must be transferred. And from that point of view, we have the idea that by transferring
through loans it is possible to be more effective to transfer more aid into--at least when
we look at not only the situation today but when we look at the future. And it is very
important to remember that through repayments which are taking place today, as a
matter of fact, you are generating, you are preparing more flows, more aid flows to
become available in the future.
And this aspect, this intertemporal aspect of this mechanism of reflows is
something important that we must keep in mind, and the reason why we are interested by
the debt sustainability today is really to make sure that the way in which aid is
transferred will not produce servancy problems--to use an expression that Pierre was
using earlier--that the way in which aid is transferred will not cause some indirect
problem on the whole economy because it is obviously not the purpose of aid to make
development more difficult.
But at the end of the day, you know, the most important thing is the
following. When we look at grants and loans and aid, what matters is what is a net
transfer being made to a country. Any country today, as it was said by our colleague
from the congress, every country today is repaying something, but donors all together, or
simply IDA, is taking that money, giving it back to some extent to the country, plus
something, and it is the something which is fundamental. And what we must be striving
toward is to make sure that the total net transfer to poor countries is increasing.
And from that point of view, the fact that we divorced at some stage total
aid being given from the way in which that aid is given may be somewhat illusory.
57
What we really want to achieve is more resources being transferred. It is making sure
that it will be possible to get close to the MDGs.
MR. RADELET: Thank you, Francois.
Mr. Kroh?
MR. KROH: I can be very short. I think the discussion has shown that
this is not the time for a new aid in form of grants, only doctrine. Loans are still
opportunity for development, and we should look, continuously look at the full spectrum
of the needs for development finance and the full spectrum of instruments available.
However, we have to be very cautious as far as indebtedness is
concerned. I would say in the past we have been chronically over optimistic in relation
to the poorer countries and their performance, and we should be more cautious in
building more safety in our projections, and not regard this as a disincentive to work
hard, but really to build in some kind of safety network.
Thank you.
MR. RADELET: Thank you. I think that's a good note to finish up on.
I certainly will not try to summarize all the points that have been made. I will only note
that I'm quite fascinated by how this debate has evolved over the last four years since the
Meltzer Commission first really put this issue on the map. It had been proposed before,
but they really put it on the policy map in early 2000 when the debate really was, you
know, grants only, and a pretty strong rejection of that, and now a much more nuanced, I
think, and deeper discussion about when and how and where and under what
circumstances, and recognizing, as Mr. Kroh just said, for example, that for the really
poorest countries it's a whole different game than for some of the better off IDA-only
countries, and that the mix might really change.
58
So I think this debate has evolved quite a bit. It certainly is going to
evolve some more I think in the years to come, but it's coming to a more sensible
conclusion.
And this, as we move into what is effectively the third round of HIPC and
topping up, I think is a force that will bring a lot of this to more formal policy changes
going forward.
So thank you very much to our panelists. They've done a great done.
They've been here quite a while. And thank you to the audience for your questions and
your attention and participation.
Thank you.
[Applause.]
[End of panel discussion.]