Building Better Development Aid

A congressional commission last week recommended radical changes in the operation and functions of the World Bank and the International Monetary Fund, opening a discussion that is long overdue. Half a century old, both institutions have strayed from their original goals, wasted billions on ill-conceived loans and failed to adjust to dramatic changes in the global economy. Congress cannot directly order reforms of either international body, but the U.S. share of funding for both is so high that its opinions must be regarded.

Some of the appointed bipartisan panel’s recommendations, such as writing off debt for the poorest countries and taking the IMF out of the business of Third World economic development, are sound and should be adopted.

Other recommendations, especially drastic cuts in World Bank operations, would not be accepted either by the full Congress or other governments. Previous attempts to even cut staff proved divisive. Still, the panel’s recommendations are a good start.

Changes at the international institutions have been discussed for years, but the talk has produced little more than grand notions, slogans about transparency and accountability and calls for more studies. The congressional commission’s report represents the first detailed blueprint for change.

For the IMF, the report suggested returning the institution to its roots as a guardian of global currency stability. Instead of making long-term loans to poor countries, the IMF would lend only to countries whose currency was under siege. To qualify for assistance, the countries would have to open their financial markets to foreign banks, report on their indebtedness and maintain fiscal discipline. Debt forgiveness is broadly accepted as a good idea, and Congress should quickly appropriate the $210 million needed to implement it.

The World Bank is a bigger problem. The institution, originally established in 1946 to help the poor countries in their struggle to develop, acknowledges that three-quarters of its programs have been failures. It took a stab at internal reform in 1997 but did not go far enough.

The congressional panel was right in emphasizing that the bank should lend to countries that cannot attract private capital, rather than compete with commercial markets.

The role of the World Bank is to help build credible legal systems, economic policies, universal education and honest bureaucracies in the poor countries, not to fund infrastructure. The panel’s report rightly calls for redefining development aid to encourage stable governments. The goal is useful development, not grand projects.