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With high deficits across the developed world, aid budgets are tight and likely to remain so. However, a simple change in how the World Bank organizes its lending could free up an extra $7.5 billion for the world’s poorest countries over the next three years. My guest on this Wonkcast is Ben Leo, a research fellow here at the Center for Global Development and the author of a new working paper that sets forth this straightforward and potentially incredibly impactful proposal.
To understand how Ben’s idea would work, it’s necessary to know that the World Bank has two lending arms: the International Development Association (IDA) lends money to very poor countries at highly concessional rates; the International Bank for Reconstruction and Development (IBRD), borrows on international capital markets and re-lends to relatively better-off countries, at somewhat higher rates, leveraging the Bank’s AAA credit rating to offer better terms than those countries could obtain on their own. Some countries, such as India and Vietnam, are so-called “IDA blend” – they get some loans from IDA and some from the IBRD.
Ben proposes that IDA-blend countries with access to world credit markets graduate early to full IBRD status. (Such countries currently account for about a third of all IDA lending.) Instead, these countries would get loans of similar size from the IBRD, accompanied by much smaller grants or concessional loans from IDA to cover the additional interest and fees associated with IBRD lending.
In short, as Ben explains on the Wonkcast, “by leveraging the IBRD’s balance sheet, IDA is able to save and then reallocate what they would otherwise provide to these countries.” The associated payments ensure a smooth transition from IDA to IBRD lending, and keep the IDA-blend countries from being penalized for their success. This proposal would provide significant additional capital to the poorest countries at a time when many people are hoping for an acceleration of progress ahead of the 2015 deadline for the Millennium Development Goals.