According to the World Bank, the global economic crisis may force donor governments to slash their aid budgets by up to 25 percent. If true, that would translate into a draconian cut of $30 billion. Red ink as far as the eye can see, long unemployment lines, and continued uneasiness in Europe could force donors to unsheathe the budget axe. Even if the World Bank is wrong, the years of historic aid increases are long gone. This couldn’t come at a worse time for developing countries and multilateral aid agencies.
This year, nearly every multilateral development bank is simultaneously requesting billions of dollars of new donor money. Institutions that typically provide market-based loans to middle-income countries, such as the World Bank’s IBRD, need capital after record amounts of emergency lending. Other institutions that provide cheap loans and grants to the world poorest countries, such as the World Bank’s IDA, are looking to replenish their coffers to fund health, education, and infrastructure projects over the next few years. Taken together, these requests could break the back of strapped aid budgets.
Against this bleak budgetary backdrop, I have an idea that would free up to $7.5 billion over three years for the world’s poorest countries. Of this amount, African countries could receive about $5.5 billion – or 30 percent more than current levels. I’ve written and spoken about this idea extensively. See my working paper, policy memo, and podcast for more details.
Looking back at these materials, I realized that my description may seem a little complicated. So, here’s a simplified example of how the proposal would work. Let’s say that Cheap Money Bank (IDA) has two clients, Mr. Gupta (India) and Mrs. Diop (poorest countries). Cheap Money provides $100 in subsidized loans to Mr. Gupta every year and $100 to Mrs. Diop. Mr. Gupta has a pretty good credit score, so he also borrows regularly from Cheap Money Bank’s affiliate, the Commercial Credit Union (IBRD). Under my new proposal, the Commercial Credit Union would finance the $100 that Mr. Gupta currently receives from the Cheap Money Bank. To ensure that Mr. Gupta keeps his credit rating, Cheap Money Bank would pay $25 to cover his interest payments. This means that Cheap Money now has an extra $75 ($100 minus $25) that it can give to Mrs. Diop. With this change, Mr. Gupta still receives $100 and Mrs. Diop now receives $175.
Granted, the additional money must come from somewhere. The IBRD would have to issue more loans, which means they need more capital. As it happens, the World Bank shareholders just agreed to an $86 billion capital increase for the IBRD in April. So, it has the capacity to take over IDA’s share of loans.
One of the World Bank’s sister organizations – the Inter-American Development Bank – already utilizes a similar approach for its lower-income clients. It’s time for World Bank shareholders to seriously consider the same resource-maximizing model. And they have a brief window of opportunity to take action. This week IDA’s donors will meet in Bamako, Mali to negotiate a new three-year funding framework. This will be the last IDA framework before the Millennium Development Goals deadline in 2015. By taking innovative action, donors may be able to put down their budget axes – or at least dull their destructive impact on the world’s poorest countries.