The 0.85 Percent Solution for Low-Income Countries

EDITOR’S NOTE: The World Bank should make resources from the International Bank for Reconstruction and Development more easily available to poor countries, writes Homi Kharas, senior fellow on the global economy and development at the Wolfensohn Center for Development. A few excerpts:

A recent, somber report from the World Bank shows what happens when governments find their revenues squeezed, as now. They cut maintenance on roads. That leads directly to more unemployment and poverty, and later on, governments have to spend four times as much to rehabilitate the road. Education and health spending get cut. Young children die (the Bank claims 30 to 50 thousand additional infant deaths in 2009 as a result of the crisis), and for many more children, school drop-out, malnutrition and disease are likely. It’s a familiar story, which we’ve commented on before: high volatility of financing is very damaging to development.

Middle income countries don’t have this problem. The multilateral development banks and the IMF have pumped billions into these countries over the past 12 months. IBRD commitments in its 2009 fiscal year amounted to $32 billion, almost three times the level of 2008 and the IMF has lent middle-income countries a net $26 billion since the beginning of 2008. But in low-income countries, the increase has been pitifully small and does not come close to protecting core spending on infrastructure, social services and safety nets of $11.6 billion, which the World Bank thinks is needed.

The G-20 Progress Report shows a timid move in this direction. Under Item 23, the report notes, “To help tap the potential for commercially viable and fiscally attractive foreign exchange-earning projects in many IDA countries, the World Bank is developing an approach to expand the use of IBRD resources for specific projects in [poor] countries.” Unfortunately, the World Bank is still studying this idea 12 months into the crisis. And what about helping to tap the potential for human development and to save lives? Aren’t those worth paying 0.85 percent per year?

As long as interest rates are so low and crisis needs are so great, it’s time to make IBRD resources much more widely available to promote development.

Re-published with permission by the Wolfensohn Center for Development at Brookings. Visit the original article. 

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