Asia Times: US set to cut loan lifeline to emerging markets By Jim Lobe


	April 28, 2001	atimes.com

Asian Crisis

In defense of loans to emerging markets
By Jim Lobe

WASHINGTON - Donor countries would make a major mistake if they halt loans by the World Bank and regional development banks to emerging market economies (EMEs), such as China, Indonesia, Malaysia, Russia and Thailand, according to a new report released on Thursday by an international commission.

Although the amount of foreign private investment flowing to these economies far exceeds the amount of loans they receive from multilateral development banks (MDBs), MDB lending can still fill key gaps that private capital cannot, according to the commission which was cochaired by former US federal reserve chairman Paul Volcker and former Mexican finance minister Jose Angel Gurria.

The 57-page report, "The Multilateral Development Banks in Emerging Market Economies", marks the latest turn in the debate launched in 1999 by a US Congressional commission which proposed a five-year phase-out of World Bank lending to EMEs whose per capita incomes exceeded US$4,000. It also called for the bank to focus its work instead on the world's poorest nations.

The so-called Meltzer Commission, named after its chairman, conservative US economist Allan Meltzer, noted that some 70 percent of the World Bank's non-concessional lending went to only middle-income countries, primarily in East Asia, Latin America, and Central Europe, all of which receive billions of dollars in foreign investment each year.

EMEs with per capita annual incomes greater than $4,000 include Argentina, Brazil, Chile, the Czech Republic, Hungary, Mexico, Poland, and Uruguay. EMEs with lower per capita incomes - for which the Meltzer Commission called for reduced support - include China, Colombia, Costa Rica, Indonesia, Malaysia, Panama, Peru, Philippines, Russia, South Africa, Thailand, Turkey, and Venezuela.

The commission was particularly critical of the MDBs' participation in financial bail-outs of EMEs in recent years following the Asian Crisis, claiming that their intervention contributed nothing to the countries' long-term development and reduced the "moral hazard" to investors who may have made poor decisions in the first place by essentially compensating them for their losses.

Aside from the World Bank, MDBs include the Inter-American Development Bank, the Asia Development Bank, the African Development Bank, and the European Bank for Reconstruction and Development.

While the Meltzer Commission's recommendations were largely rejected both by the World Bank itself, as well as the administration of US president Bill Clinton, some analysts believe they will be taken much more seriously by the new administration of President George W Bush. His Treasury Secretary, Paul O'Neill, has taken no clear position on the role of the MDBs, although he has been outspokenly critical of several bail-outs, notably Russia's and Indonesia's, in which the MDBs took the lead.

Like Meltzer, Bush's chief economic adviser, Larry Lindsey, is also seen as philosophically opposed to the intervention of public institutions in the market. With the annual spring meetings of the World Bank and the International Monetary Fund (IMF) taking place here this weekend, the new report was clearly timed to influence the new administration's stance. "All of the [weekend's World Bank/IMF-related] meetings will be focusing on this issue," noted Gurria.

The new report, which, in addition to Volcker and Gurria, was signed by 25 prominent individuals - including former US treasury secretary Nicholas Brady, who served under Bush's father; Ronald Reagan's treasury under secretary for international affairs, David Mulford; and a senior adviser to the Meltzer Commission, economist Adam Lerrick - essentially argues that markets by themselves will not address certain needs by middle-income developing countries no matter how much investment they attract. "The markets are quite imperfect," said Gurria.

The report offers several major areas where MDB roles cannot be filled by private investment:

Loans from MDBs can encourage public investments in education, health, rural infrastructure, and institutional reforms which private investment generally avoids;

In crisis situations, which are often caused by volatility in the capital markets, the poor are often hardest hit. In those circumstances, MDB lending can be used to aid the most vulnerable sectors and thus contribute to the countries' long-term development, and;

Lending by the MDBs can be tied to policy changes that promote specific objectives in which private investors may take little or no interest. These include reducing poverty, protecting the environment, curtailing corruption, and promoting financial accountability and competition.

At the same time, the commission called for MDBs to "move more aggressively to adapt to the changing needs of EMEs" and to ensure that their lending in those countries contributes to broader policy objectives. In particular, the report calls for the MDBs to simplify conditions on their loans and by focusing them more consistently on promoting equity, as well as economic growth, in borrowing countries.

It also calls for MDBs to stop lending to borrowers which are not committed to the policy changes which it has promised and to ensure that policy conditions negotiated between the MDBs and its borrowers are open to public debate. "Once conditions are agreed and a loan is approved, the relevant documents should be fully available," according to the report.

MDB shareholders should also create mechanisms for independent, external evaluations of MDB programs with particular attention to assessing how well MDB loans to EMEs are meeting their policy purposes, such as poverty reduction, and to make those findings publicly available.

The commission also agreed that the MDBs should continue to lend to EMEs during market or economic crises, but should do so only in a way that supports medium-term development programs rather than as one component in a bail-out package put together by the IMF.

In light of the recent wave of privatizations and the issuing of concessions by EME governments for long-term private management of power, water, and transport, the MDBs should boost their lending to the private sector in order to support needed investment, especially in big infrastructure projects where investment is lagging, according to the report. At the same time, they should ensure that, by doing so, they are not "crowding out" private lenders.

The commission also proposed a new financing model for EMEs, similar to the Caracas-based Andean Development Corporation (ADC) and the Nordic Investment Bank, where all of the owners or shareholders are also borrowers. Such a "borrowers' club," which would complement rather than replace the MDBs, could be a mechanism for EMEs to set their own collective development agenda, according to the report.

ADC president L Enrique Garcia was one of the signatories of the report, as were the last World Bank vice president for Latin America and the Caribbean, Shahid Javed Burki; former executive vice president of the Inter-American Development Bank, Nancy Birdsall; former Chilean finance minister Alejandro Foxley; former Venezuelan central bank chief Ruth de Krivoy, and; former World Bank president Robert McNamara.

The Carnegie Endowment for International Peace, the Inter-American Dialogue, and Burki's EMP Financial Advisers group sponsored the commission.

(Inter Press Service)

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