O'Neill Again Criticizes World Bank
"O'Neill questioned the bank's long-standing practice of giving loans to the world's poorest countries on very easy terms, with virtually no interest"
By Paul Blustein
Washington Post Staff Writer
Thursday, June 28, 2001; Page E01
Treasury Secretary Paul H. O'Neill yesterday delivered his strongest broadside yet at the World Bank, prompting World Bank officials to take the unusual step of firing back at the man who represents the bank's dominant member country.
In a speech to the Economic Club of Detroit, O'Neill used biting language in describing the results of the $470 billion the World Bank has lent since its creation in the 1940s. Most of that money has been used to finance projects such as roads, health clinics and nutrition programs in developing countries.
"Visit some of the poorest nations in the world, and you will see that we have too little to show for it," O'Neill said, noting that $225 billion of loans had been made in the past decade. "It's time for a new approach to eliminating poverty," he said, according to a text of his speech released in Washington.
The Treasury chief's comments marked the clearest sign to date that the Bush administration may be spoiling for a fight with the the 183-nation World Bank and its president, James D. Wolfensohn. As the bank's largest shareholder, the United States has substantial influence over its policies, so a disagreement between the bank's hierarchy and the U.S. Treasury could mean considerable turbulence for the international lender.
O'Neill questioned the bank's long-standing practice of giving loans to the world's poorest countries on very easy terms, with virtually no interest. He urged that such aid be provided in the form of grants, echoing a proposal made last year by a congressionally appointed commission headed by conservative economist Allan Meltzer. "We teach a bad lesson to the recipients when we confuse loans with grants because the message is: Obligations may not be real obligations," O'Neill said.
O'Neill, who is scheduled to travel to Rome next week to discuss the issue with fellow finance ministers from the Group of Seven industrial nations, also criticized the European Union's executive commission for its objections to General Electric Co.'s proposed takeover of Honeywell International Inc., which had been approved by U.S. antitrust authorities. After his speech, according to Bloomberg News, he said the commission's position "just seems off the wall" -- tougher words than from other administration officials, and indicative of the hard feelings between Washington and Brussels over the issue.
Reiterating an argument he has made previously, O'Neill said the World Bank's activities in developing countries have been "too diffuse" and should be focused on raising productivity -- that is, output per worker -- and income per capita.
That is a tacit criticism of the World Bank's approach under Wolfensohn to emphasize improving the lot of the poorest members of society. Although the bank's top officials agree that they should aim to boost growth and productivity in poor lands, they have moved toward the view that growth alone is insufficient because the benefits often fail to reach the most impoverished. So they have also stressed the importance of "empowering" poor people to influence the decisions that affect their lives.
Taking his criticism a step further, O'Neill said he wants to see the World Bank and other development banks, such as the Asian Development Bank, put more resources into education. "President Bush has made education a top priority for the U.S. economy. It should be a top priority for nations around the world," O'Neill said. "Over the past five years, education projects accounted for only 7 percent of total World Bank lending. That must change."
The World Bank has played down its differences with O'Neill in the past, but yesterday his speech drew a tart retort from Caroline Anstey, the bank's chief spokeswoman.
The Treasury chief's approach "is the Washington consensus all over again," Anstey said, referring to the view, prevalent among economists in the early 1990s, that growth-oriented policies such as balanced budgets and free markets are the key to lifting countries out of poverty. "The problem is, a lot of our shareholders and client [countries] have moved away from that approach, precisely because they believe it failed."
The bank agrees on the importance of education and "is committed to pro-poor growth," Anstey added. "But all our studies show that if you want to deliver services to the poor, you have to empower the local community. Those are issues that are sometimes seen as the soft side of development, but they're key to making development work."
O'Neill also reiterated previous criticisms of the International Monetary Fund, and questioned whether the IMF has overreacted to financial crises by providing bailouts because of fears about "contagion," in which turmoil spreads from one country to another. But his observations about the IMF were not much different from the views that its leadership has come around to accepting, and Thomas Dawson, the IMF's chief spokesman, said, "We largely agree with him."
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