If the new World Bank President calls …

International Economy, The, Spring, 2005

PETER B. KENEN

Senior Fellow in International Economics, Council on Foreign Relations, and Walker Professor of Economics and International Finance Emeritus, Princeton University

It is essential for you to conserve the financial resources of the World Bank and especially those of the International Development Association. The battle against poverty will not be won quickly. There will be a long-lasting need for large-scale financing. It would be therefore wrong for the Bank to write off the debts of the poor countries. Debt reduction is needed to end the merry-go-round of new lending to pay off old loans. But that should be done differently. The old loans should be repaid by the industrial countries. Otherwise, the IDA will be deprived of the financial resources it will need to meet the ongoing needs of the poor countries.

Some say that those countries will not need new financing if the Bank cancels their existing debts, but their argument is deeply flawed. Precisely because many poor countries must use new loans to pay down old debts, the new loans do not help them to wage war on poverty. If their old debts are written off by the Bank, not paid off by the industrial countries, the IDA will lack the resources it needs to make new loans in the future, and the poor countries will still be stuck where they are today, without the additional loans they need.

It is also important for the World Bank to continue lending to middle-income countries--those that are not IDA-eligible. Those countries still look to the Bank, not merely to supplement their market borrowing but also to insulate them from the very volatile cost of long-term market borrowing. That cost can fluctuate hugely for reasons that have little relationship to the creditworthiness of an individual emerging-market country. Because the World Bank can borrow at more stable interest rates, the cost of borrowing from the Bank is likewise more stable.

JOHN WILLIAMSON

Senior Fellow, Institute for International Economics

Mr. Wolfowitz will already be aware that his clients come in two broad categories, the middle-income and the low-income countries. His Bank's role is much more critical in the latter group, since it supplies a far larger share of the financial flows to those countries than to the ones that can draw on the private market. But the agenda in the low-income countries is fairly clear: the Bank needs to make a reality of local ownership of the Poverty Reduction Strategy Papers, and it needs to convert the finance it provides to the really low-income countries from loans to grants.

In contrast, there is much dispute about the role of the Bank in middle-income countries, from the majority of the Meltzer Commission who want it to close shop to the members of the Volcker-Gurria Commission who want it to continue doing what it has traditionally done but better. Kemal Dervis's new book, A Better Globalization, suggests a third and perhaps preferable course of action: to use the Bank (or maybe the IMF, though it would seem better to finance such an operation by selling bonds on the world market, which points to a central role for the Bank) to help highly indebted countries get their debt service down to a manageable level. Under this paradigm an over-indebted middle-income country that had already established macroeconomic discipline would be offered the opportunity of refinancing its sovereign debt at marginally more than the World Bank's borrowing rate, in return for a long-term commitment to lock in its disciplined macroeconomic policies. The combination of the reduction in the cost of debt service, a substantial primary fiscal surplus, and even moderate economic growth would allow progressive reduction in the debt burden until it no longer threatened the stranglehold it too often does today.