Lies And Exaggerations.

• Author: SALOP, JOANNE

The Meltzer Commission report runs roughshod over the facts.

In recent articles in this magazine,(1) Adam Lerrick, senior advisor to Chairman Allan Meltzer of the International Financial Institution Advisory Commission, has been sharply critical of the World Bank, arguing that our lending is misdirected, our performance deteriorating, and our financial costs exorbitant. These are very serious charges indeed.

The good news is that they are not true. The reality of what we do, how effectively, and at what cost is quite different. Lerrick's findings derive from selective use of facts -- many from an earlier era -- and faulty analysis. Nor do they support his core conclusions that we should terminate lending, switch to grants, and bypass local authorities in providing social and infrastructure services.

But far more serious than the breaches of logic would be the consequences of implementing Lerrick's recommendations. They would undermine our ability to help the nearly 3 billion people in developing countries who subsist on less than $2 a day. This at a time when our performance is improving, reflecting the major changes that the Bank has implemented over the past five years.

Does this mean that all is perfect within the World Bank? That we can't do better? Absolutely not. We are midway through a dynamic reform program designed to improve the Bank's internal performance and external impact -- and though there has been much progress, there is still an unfinished agenda.

In looking to the next phase of reform, it is timely to step back and consider important strategic issues such as our role in emerging market economies, our instruments, and the division of labor with the International Monetary Fund, the multilateral development banks (MDBs), and other partners. But it is best to do that reflection, and have that debate, with the facts in hand. Hence, this note to set the record straight.

DO WE LEND TO THE WRONG COUNTRIES?

Lerrick's arguments about Bank lending are misleading. Take the charge that the Bank inappropriately channels the majority of its flows to several large developing countries. Yes, the eleven countries Lerrick cites received about 70 percent of new International Bank for Reconstruction and Development (IBRD) commitments during the 1993-99 period. But these eleven countries are home to over half the world's people, and to almost 80 percent of the people -- and of the poor people -- who live in IBRD countries (Figure 1). It should hardly be surprising that much of IBRD lending during the 1990s was in such countries: that is where the bulk of the global development challenge lies.

[Figure 1 ILLUSTRATION OMITTED]

Lerrick also makes much of the declining share of IBRD lending to non-rated countries -- from 41 percent in 1993 to 1 percent in 1999 -- suggesting that at best Bank lending is not needed, and at worst it crowds out private providers. But what drove this shift was the fact that many previously non-rated borrowers began to enter the capital markets for the first time during this period, and therefore obtained "high-yield" ratings (Figure 2, pictured on the next page). Thus a better measure for assessing the changing balance of IBRD lending is the share going to countries with investment-grade ratings; this share remained broadly constant at about 30 percent throughout the 1990s.

[Figure 2 ILLUSTRATION OMITTED]

To be sure, countries' migration from "non-rated" to "high-yield" ratings points in a healthy direction that will ultimately have implications for the Bank's relationship with these borrowers. But it does not mean they no longer need support from the Bank during a transition period. Having a rating -- especially a high-yield rating -- does not ensure full access to the...