WHY IS THE WORLD BANK STILL LENDING?
November 1, 2005
At a time when the need and demand for its services are falling, the World Bank is struggling to maintain market share by lowering the costs to borrowers and cutting down on the social demands that are the very reason for its lending, says Adam Lerrick, professor of economics at Carnegie Mellon University and a scholar at the American Enterprise Institute.
Major middle-income countries, the cream of the Bank's lending portfolio, are curbing their borrowing and paying down their balances, setting off alarms at the Bank.
- Net loan flows have shifted from a positive $10 billion in 1999-2001 to a negative $15 billion in 2002-2004 -- meaning that borrows are paying down principal on their loans faster than the bank is lending.
- The interest subsidy embedded in Bank loans --12 percent per annum in 1999 -- has shrunk to less than 2 percent on average as emerging nations have gained increasingly greater access to private capital; the difference is no longer enough to persuade finance ministers to realign their economic priorities with the social agendas of the Bank's rich members.
- Developing economies were to be nourished only until they had gained the financial credentials to attract private capital on their own; today, for the 27 borrowers receiving 90 percent of its loans, the Bank represents less than 1 percent of the net flows of $200 billion that the capital markets provide each year, but the Bank will not let go.
As Lerrick explains, the Bank is no longer in a world short of capital. World Bank lending is clouding the landscape and wasting resources. All that the Bank provides in a world of sophisticated financial markets is the subsidy that fills the gap between the real cost and what recipients are willing to pay. The Bank must accept that it is in the development business, not the banking business, says Lerrick.
Source: Adam Lerrick, "Why is the World Bank Still Lending?" Americas, Wall Street Journal, October 28, 2005.
For WSJ text (subscription required):
For free AEI version:
Browse more articles on International Issues