Hangover of Cold War taints ADB generosity

PUBLISHED : Monday, 03 May, 1999, 12:00am
UPDATED : Monday, 03 May, 1999, 12:00am

The Asian Development Bank says it is running out of money and urgently needs to top up its coffers if it is to continue its mission of good deeds.

The International Monetary Fund and the World Bank are feeling the pinch of recent bad times too. World Bank president James Wolfensohn recently had to rebuff mainland pleas for easy lending terms.

But if these institutions are to get more money they should also be subject to a review of their role. There are three points on which such a review should focus.

The first, and this particularly applies to the ADB, is that the interests of the lenders can work to the disadvantage of the borrowers.

The countries which fund the ADB, principally Japan, do so in their domestic currencies and loans are then made in these currencies. They are generally strong currencies, which means that interest rates are generally low and this helps both the borrower and the ADB if it has offered further concessions on these low rates.

But such concessionary lending tends to go to projects which have only local currency revenues. Is an Indonesian irrigation project well served if it must repay in strong yen from weak rupiah revenues or the Indonesian Government if it must make up the difference? The currency shortfall can outweigh the interest rate benefit by a wide margin.

In addition, this lending is often tied to purchases of capital equipment from the countries which have made the contributions to the ADB.

Japan is not entirely altruistic in its leadership of the bank. Is it really Japanese pumps that Indonesian irrigation projects need? The second point is that the non-concessionary lending of these development agencies, national bailout packages for instance, can distort market-led direction of where sorely needed resources should go.

Indonesia needs money. It has squandered what it had. But are the people who were responsible for a good deal of the squandering the best people to handle the rescue from the resultant problems.

Remember here that development banks get their money for this sort of lending not through subscriptions from donor countries but by bidding for it on the market along with everyone else who wants to borrow money. And the market will not give special terms to a development bank unless it gets special guarantees in return.

Why crowd out the market then? If it is commercial terms we're talking, it just so happens that commercial banks in Asia have long proved that they can do as good a job as any development bank of finding commercial risks and funding them.

And if they don't think it is commercial without a sovereign guarantee then why not give them that guarantee directly instead of the roundabout way through a multilateral agency? Governments don't like it because these agencies are a softer touch than commercial banks, but that's their tough luck.

Most of all, let's not confuse this sort of lending with real aid work.

If it's aid we're talking then let Oxfam handle it. There, for you, is a lean and truly focused organisation that knows how to get just the right projects going in remote poverty-stricken communities.

The third point is that the World Bank and, to a lesser extent, the ADB, are Cold War creations that served the purpose, inducing wavering countries to stay out of the Soviet camp.

This may be a cynical assessment, but it fits the facts and your correspondent's e-mail says that some World Bank staffers think so too.

The Cold War is over, but its detritus is left. It consists of a legacy of economic mismanagement in countries like Indonesia by politicians whom the World Bank supported because at a senior level the World Bank wanted them on their side. Starry-eyed juniors just had to put up with it.

The financial crisis from which Indonesia now suffers is in part the result. This alone is sufficient reason for a serious rethink.