On July 17, 2001, President Bush gave a speech at World Bank headquarters in which he called for that institution as well as the regional development banks (African, Asian, and Inter-American Development Banks) to "dramatically increase the share of their funding provided as grants rather than loans to the poorest countries. Specifically I propose that up to 50 percent of the funds provided by the development banks to the poorest countries be provided as grants for education, health, nutrition, water supply, sanitation and other human needs."

For several months, Treasury Secretary Paul O'Neill has mentioned the shift to grants as a possibility in speeches and interviews. Bush's speech indicates that it is now official policy, and that his Administration will push for it at the international financial institutions. His remarks were made two days before he left for the G-7 Summit in Italy, presumably to spark discussion in that forum. Indeed, the proposal attracted immediate controversy, with the British government complaining that the plan would increase the cost of providing capital to low-income countries.

The argument from the U.K. mirrors that of the World Bank itself: if countries don't make payments on the money they get, there will be fewer dollars to recycle into new loans. This argument would only make sense if we were to assume that countries receiving the loans would dramatically improve their economic standing, so that the money they re-pay would indeed be moving from a country that could spare the money and going to a more impoverished country. As things stand, there is little reason to expect that the group of most impoverished countries will be substantially different in future years from what it is now, so taking repayments from Zambia to make new loans to Mali is just a matter of reshuffling money between roughly-equally distressed economies, and would have to be balanced by taking repayments from another country, perhaps Mali, and recycling them into new loans for Zambia.

The idea of making all financial assistance to impoverished countries in the form of grants is a sound one. The arguments the Bush Administration make for the shift are reasonable: a government can hardly be expected to pay back loans made for healthcare or education, which don't directly result in hard-currency returns which can be used for repayments. To retain a system in which constant debt rescheduling and relief are required is not only expensive and time-consuming in itself, but a willful distortion of what loans are. We find ourselves actually quoting President Bush in approving terms: "Debt relief is really a short-term fix. The proposal today doesn't merely drop the debt, it helps stop the debt."

Debt relief as it is done now under the IMF/World Bank debt scheme called the "HIPC Initiative" is indeed ineffective, partly because it covers only a small portion of a country's debt. All the countries in the HIPC program are still contracting significant new debt through new loans.

The Bush proposal is a good first step toward moving away from the cycle of debt-and-loans; Bush's modest claim that it "helps stops the debt" is accurate. As the biggest donor to the Bank (and the IMF), the U.S. has unparalleled influence at the institutions, and the fact that the President himself announced this proposal at an event at the World Bank suggests that the Administration is serious about pushing it forward. This represents a more serious confrontation with business-as-usual at the international financial institutions than anything the Clinton Administration did between 1993 and 2000.

But there are reasons to suspect that this proposal is not as good as it first sounds. The Bush Administration does not choose to highlight that the primary purpose of the continuing debt treadmill is not to get money back from debtor countries but to coerce them into implementing economic policies that favor corporate and investor interests in the North Ñ the structural adjustment programs (SAPs) that have so devastated most of the countries of the South. It is entirely possible that the grants would still be conditioned on SAPs – for example, countries might only qualify for grants after adhering to a SAP or committing to a new one. This would negate most of the potential benefits of Bush's proposal, since structural adjustment conditions are, in our view, the most damaging aspect of new loans. And, like loans, grants could be disbursed in installments, so that the threat of holding up a second or third installment would compel governments to abide by the lender's conditions.nt>