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Thursday, 19 July, 2001, 15:16 GMT 16:16 UK
World Bank questions US plan for the poor
World Bank head James Wolfensohn opposes the US plan
World Bank head James Wolfensohn opposes the US plan
On the eve of the G8 summit of world leaders in Genoa, an embarrassing row has broken out between President Bush and other world leaders over how to best help the poor.

The World Bank is also raising questions on Mr Bush's plan to convert its lending from loans to grants.

Mr Bush argues that such a move would eliminate the debt burden for poor countries, since they would not have to pay the money back.

But critics of the proposal say it could lead to radical cuts in the amount of money the World Bank could lend to poor countries, unless the US and other donors are prepared to massively increase their aid contributions.

French scepticism

President Bush made the proposal in a speech earlier in the week, where he suggested that 50% of the World Bank's yearly lending programme should be converted into grants.

"Specifically I propose that up to 50% of the funds provided by developing banks to the poorest countries be provided as grants for education, health, nutrition, water supplies, sanitation and other human needs", he said.

He also promised that "the United States will continue to be a world leader on responsible debt relief."

But his remarks have alarmed other G8 leaders, who fear that it will lead to a marked reduction in the total volume of aid reaching developing countries.

"We believe we should diversify the instruments of the World Bank, but without changing its lending culture and character," a French spokesman said.

Less money

The World Bank, which says it does support the idea of grants in principle, says that the plan would substantially curtail its resources as its ten-year loans - which are interest-free to poor countries - mature and come due for repayment.

Currently the World Bank's lending programme for poor countries is 40% funded by recycled loans, so rich countries would have to nearly double the $10bn they currently provide for the loan facility - including $800m from the US.

World Bank spokeswomen Caroline Anstey told BBC Newsonline that the Bank and other shareholders had been considering a grant element of around $1bn each year, around 10%-15% of total lending.

But they were surprised by the scale of the US proposal, and the fact that it had been floated without prior consultation among US allies.

Critics say that the US administration has no plans to increase its World Bank funding, and it would mean that the cuts to developing country finance would come into place after the Bush administration left office.

But senior US Treasury officials insist that they don't see any issue of reducing resources, while many of these cheap loans have already been forgiven.

However, many European countries argue that having loans rather than grants keeps developing countries honest and encourages them to use aid more wisely.

Meltzer Report

Mr Bush's plans are based on the Meltzer Report, a controversial analysis of the World Bank and the International Monetary Fund prepared for Republicans in Congress while Mr Clinton was President.

Among other things, it calls for fewer bail-outs by the International Monetary Fund, so that private lenders to developing countries are forced to share the cost of restructuring, and a greatly enhanced role for the regional aid banks at the expense of the World Bank.

It also backs the idea of funding "global public goods" such as health and environment funds, and calls for the World Bank to stop lending to middle income countries like Brazil and China.

The world leaders are expected to announce a $1bn global health fund to combat TB, AIDS and malaria in developing countries at the summit.

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See also:

19 Jul 01 | Business
G8 leaders woo world's poor
18 Jul 01 | Business
New 'green' policy for World Bank
18 Jul 01 | Business
Bush favours grants for poor nations
18 Jul 01 | Europe
Genoa set for summit onslaught
15 Jun 01 | Europe
Gothenburgers count the cost
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