Global Policy Forum

By Joseph Kahn

Treasury Secretary Paul H. O'Neill said today that the World Bank had driven poor countries "into a ditch" by lending instead of donating funds to fight poverty, and he sharply criticized allies for failing to back a plan to revamp aid policies.

None of the United States' counterparts in the Group of 7 industrialized nations has endorsed a proposal by President Bush that would convert half of all development loans to grants despite months of lobbying by Washington.

Britain, France and Germany insisted at a recent negotiating session that Mr. Bush's proposal could hobble the World Bank, the main lender to poor nations.

In a well publicized speech last July, Mr. Bush called grants like these "compassionate conservatism at the international level." His argument was that it made more sense to donate money for health, education and sanitation projects than to burden poor countries with debt. Mr. Bush said he would like to see "up to 50 percent" of the World Bank's $6 billion in annual outlays for the poorest countries provided in grants, compared with about 1 percent now.

European countries have remained cool to the idea, arguing that making countries pay back the money, even over 40 years at low interest rates, instills discipline among borrowers and lenders. Some officials also say they fear that the Bush administration's proposal could undermine the World Bank by forcing it to give away its capital. European leaders have said they could support converting as much as 10 percent of the bank's loans to grants. Canada and Japan have indicated that they would back converting 16 percent. Both are far from the American goal of 50 percent.

Speaking to experts at the International Institute of Economics in Washington today, Mr. O'Neill sharply questioned the logic of Europe's position. "I say the hell with it," he said. "Somebody tell me a good reason for 10 percent."

Mr. O'Neill said the United States had indicated some flexibility in what percentage of aid should be made in the form of grants, but suggested that 10 percent was too low. "It's hard for me when I look at primary education and I look at the stage of underdevelopment for billions of people, it's hard for me to say, well, let's do post-conflict countries and let's do a little H.I.V./AIDS and keep it under 10 percent," Mr. O'Neill said.

American officials had hoped to persuade allies to remake the World Bank's antipoverty programs before Mr. Bush attends a development meeting in Monterrey, Mexico, next month. But officials involved in the talks say any overhaul will be much more modest than Mr. Bush and Mr. O'Neill once envisioned.

Mr. O'Neill expressed frustration at the difficulty of changing the World Bank, which he suggested had failed to achieve its desired goals of alleviating poverty at least in part because it contributed to a debt crisis among poor countries.

Lending agencies have "driven them into a ditch" by extending loans that borrowing nations have trouble repaying, he said, adding that heavy debt loads frighten away global investors.

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