By Glenn Somerville
ReutersFebruary 20, 2002
A feisty U.S. Treasury Secretary Paul O'Neill Wednesday defended the Bush administration's case for using grants instead of loans to help the world's poorest as more sensible in the long run.
Speaking to experts at the International Institute of Economics, O'Neill challenged Europe's position that grants should be limited to 10 percent of aid.
"Why? Do we keep it under 10 percent because the Europeans say more than 10 percent is too much? I say the hell with it ... somebody tell me a good reason for 10 percent," he said.
The Bush administration wants up to 50 percent of aid to be grants, saying it was pointless for the World Bank's International Development Association to ladle out loans to countries that can't pay them back.
The United States and Europe differ sharply on the issue. Europeans fear grants could eventually jeopardize the capital and future lending base of institutions like the World Bank.
O'Neill took the issue public this week in a letter to the editor in the Washington Post. The letter said U.S. partners in the Group of Seven wealthy nations (G7) were not matching Bush administration pledges to boost aid.
"Our G7 colleagues have not endorsed the doubling of aid flows," he wrote, "In fact, their silence speaks volumes."
LOANS WORSEN POVERTY
O'Neill, characteristically plain-spoken on the issue, said the burden of repaying more high-interest loans risked driving impoverished countries even deeper into poverty.
He said grants, monitored to assure wise use for purposes like education and infrastructure improvements, could help nations achieve credit-worthy status and draw private capital.
Achieving investment-grade status would allow a country to borrow more cheaply and be better off than a perennially poor country borrowing from international agencies.
"It's not easy to get there but it's directionally where I think we should be trying to go," O'Neill said.
He said making countries dependent upon international lending agencies often had "driven them into a ditch" from which they could never pay off their debts, making global investors avoid them.
"Governments don't pay interest charges. They're a pass-through from people that make $200 a year," O'Neill said.
"The government gets the money to pay the loans from people that earn $200 a year so it makes a difference if they've got a 25 percent interest rate because they've got too much debt."
GRANTS ISSUE TO REMAIN A THORN
The grants-versus-loans issue was on the table when finance ministers from the the Group of Seven nations -- the United States, Britain, Canada, France, Italy, Germany and Japan -- met in Ottawa, Canada, earlier this month.
O'Neill noted there had been movement away from a fixed percentage target for grants, with some agreement that grants would be especially useful for purposes like helping countries rebuild after wars or fight HIV/AIDS infections.
But he made clear he did not think 10 percent was a workable goal for grants. He said grants also should be used to foster educational training to lift literacy rates in the poorest countries .
"So 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 HIV/AIDS and keep it under 10 percent," O'Neill said.
The issue is likely to generate controversy between the United States and Europe for some time. It will be taken up again at a March 18-22 conference in Monterrey, Mexico, sponsored by the United Nations to consider ways to foster economic development.
Global financier George Soros, speaking to reporters after O'Neill's address, said there was pressure on the United States to demonstrate a commitment to contribute more, especially with President George W. Bush set to attend the Monterrey event.
"The U.S. has no strategy for Monterrey, no bottom line," he said, adding that represented a real risk. "The Bush administration should think about this so that the President does not go to Monterrey and make a fool of himself."
O'Neill, who has developed a strong interest in development issues and advocates finding ways to measure how effectively aid is used, also is to travel Africa later in the spring in company with rock star Bono to assess aid use there.
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