World Bank's Aid for Poor is Just Wasted

THE SUNDAY TIMES April 16, 2000

Protests in the streets of Washington and press releases from the inner sanctums of the International Monetary Fund and World Bank are largely irrelevant to the big issues confronting the world's trading nations.

There is one exception, however. The gathering of finance ministers usually evokes a large yawn from the press and people of Washington, but this weekend they will take notice, if for no other reason than the traffic snarls produced by the elaborate arrangements made by the police to avoid a rerun of the battle of Seattle.

The real issues have little to do with those that rouse the passions of the trade unions, environmentalists, human-rights activists and students with too little homework to do. After all, the poor nations protesters claim to represent know better than anyone their salvation lies in an open trading system that accepts their goods and allows international capital to flow freely into their emerging economies.

What the finance ministers have to consider is a fundamental reform of the institutions that have convened the meeting; American pressure on other nations to step

up their growth rates and their purchases of American-made goods; and the fate of the dollar after the recent decline in high-tech shares.

Let us start with the fundamental reforms. The pressure for this comes from two directions - from Gordon Brown, British chancellor, and Allan Meltzer, economics professor at Carnegie Mellon University in Pittsburgh, whose congressionally created committee has called for reform of the international lending institutions.

Brown wants the IMF to develop a more effective early-warning system so it can head off crises. Few would dispute that such a system may prove useful. But Brown's opposition to getting the international lending institutions out of the economic development and income-redistribution businesses puts him on a collision course with many in Congress who want these organizations to do just that.

American critics of the World Bank and the IMF received unexpected and, I suspect, inadvertent support last week from Chris Patten, commissioner for external relations for the European Union. In his Reith Lecture, Patten said dictatorships tended to squander international aid. This is true.

But his listing of the results of some aid projects suggests the international lending institutions were not as careful with the taxpayers' money as they might have been. The EU commissioner saw with his own eyes "the brand new high-tech hospital in East Africa, with no money or skill to repair the equipment, no doctors to provide treatment ... factories full of clapped-out equipment" and "everywhere, everywhere, clapped-out Land Rovers ... the heroic warhorse of development policy" that donor nations have traditionally provided to poor countries.

Coming from no enemy of aid to poor countries, Patten's is a telling indictment. For if dictatorships squander aid and most democracies have little need for it, they already being rich or at least non-poor, what justification can there be for allowing the IMF and the World Bank to continue pouring money down various rat holes?

The battle to redefine the roles of the World Bank and the IMF will continue in America long after the finance ministers have downed their last lavish meal and left Washington. Meltzer's authoritative report has put the issue of America's contribution to the funding of these agencies on Congress's agenda.

Nor will the issue of trade imbalances be solved at the meetings today and tomorrow. America's record trade deficit has the treasury secretary, Larry Summers, and the Federal Reserve chairman, Alan Greenspan, more than a little worried - and for several reasons.

Summers knows the trade deficit makes it difficult to get Congress to go along with the president and normalize trade relations with China since such a deal is likely, at least in the near term, to increase imports from China more than it will boost American exports, thereby widening the trade deficit.

And Summers and Greenspan know the recent volatility in American share prices may make America a less attractive place for foreigners to invest the stack of surplus dollars they have earned by selling their goods and services to America. If foreigners begin dumping dollars - converting them to other currencies - the dollar will fall. This will make imports more expensive, increasing the inflationary pressures already being created by a tight labor market.

That would force Greenspan to raise interest rates by even more than he is planning to do, perhaps turning a soft landing into what some, although not this writer, predict would be a jarring crash.

Summers, undaunted by the fact that the economy is already producing just about all the goods it can, wants America's trading partners to help reduce our trade deficit by buying more from America. To do that, they will have to expand their economies, and more rapidly than at the 3.5%-4% annual rate now expected in Europe.

That would require the European Central Bank (ECB) to stimulate growth by cutting interest rates. But this is exactly the opposite of what it is planning to do.

The ECB is worried about overheating in euroland's fringe economies, most notably Spain and Ireland, and by the inflationary pressures caused by the sinking euro. A cut in interest rates, indeed, even a failure to raise rates, would probably drive the euro down still more, with economic and political consequences that the architects of Europe's single currency and one-size-fits-all interest rate find unacceptable.

So expect a cheerful communique from the finance ministers. But do not think for a minute that they have accomplished much. In that, they have a great deal in common with the demonstrators gathered to taunt them.