Order Code IB96008
Issue Brief for Congress
Received through the CRS Web
Multilateral Development Banks:
Issues for the 107th Congress
Updated May 23, 2002
Jonathan E. Sanford
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Introduction
U.S. Participation in the Multilateral Banks
Bush Administration Policy Towards the IFIs
Some Remaining Questions
Congressional Action
Authorization Legislation, 2002
Asian Development Fund/IFAD
International Development Association
Appropriations
Fiscal 2002 Appropriations
Fiscal 2003 Appropriations
Current MDB Issues
Reforming the IFIs
MDBs and Developing Country Debt
MDBs and Poverty
Access to MDB Information

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Multilateral Development Banks: Issues for the 107th Congress
SUMMARY
The U.S. is a member of five multilateral
demands on the MDBs at the same time it is
development banks (MDBs): the World Bank,
cutting funding.
Inter-American Development Bank (IDB),
Asian Development Bank (ADB), African
In March 2000, a new debate began
Development Bank (AFDB), and European
about the future of the international financial
Bank for Reconstruction and Development
institutions (IFIs).A congressionally appointed
(EBRD). It also belongs to two related orga-
commission advocated major reductions in
nizations, the North American Development
IMF functions and the MDBs. The U.S.
Bank (NADB) and the International Fund for
Treasury Secretary proposed that the IMF and
Agricultural Development (IFAD).
MDBs focus their activities, so as to avoid
supplanting the private sector, but he said they
As a group, the MDBs are the largest
still had a major role to play in the world
source of development aid for middle- and
economy. Congress passed language in the
low-income countries. They lent or invested
FY2001 appropriation act recommending
nearly $40 billion in 2000, four-fifths of it at
changes in the IMF and MDBs.
market-related terms and the rest on
concessional terms. The World Bank ac-
The MDBs have taken several initiatives
counted for half of all MDB aid and 62% of
to help middle- and low-income countries deal
all MDB concessional aid in 1997.
with their foreign debt problems. The MDBs
have traditionally made poverty alleviation
In the World Bank and most regional
their first priority goal, though some critics
MDBs, the U.S., European Union, and Japan
say they should target more of their aid for
control over half of the vote. U.S. participa-
direct poverty alleviation programs and for
tion in the MDBs is managed by the Treasury
encouraging private sector growth. The IMF
Department. Congress has substantial influ-
and MDBs have also increased substantially
ence over the direction and focus of U.S.
their transparency and the amount of informa-
policy. The MDB market-based loan windows
tion they provide to the public on their opera-
have quasi-permanent funding authority. By
tions. Many believe this will make them more
contrast, the concessional loan windows
effective. Critics say that more data should be
require periodic contributions by donor coun-
available. Some borrowers believe they are
tries in order to continue operations.
being forced to reveal too much. Countries
may bar the MDBs from releasing information
In 2000, Congress appropriated $1.14
about themselves.
billion to fund U.S. participation in the MDBs
in FY2001. The Administration had requested
In 2000, it approved a $600 million U.S.
$1.43 billion. Prominent in the appropriation
contribution to the World Bank’s program to
were $775 million for IDA and $100 million
help forgive debt owed by Heavily Indebted
for the African Development Fund. Congress
Poor Countries (HIPCs) and permission for
has made deep cuts in funding for MDBs.
the IMF to use profits from prior gold sales for
Total arrears in U.S. payments to MDB pro-
the HIPC program. In November 2001, a bill
grams increased to $577 million in FY2001.
authorizing new U.S. contributions to the
Other donor countries are deeply concerned,
ADF and IFAD was reported by the House
particularly as the U.S. is making more policy
Financial Services Committee.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
On May 1, 2002, the House approved H.R. 2604, authorizing new U.S. contributions
to the Asian Development Fund and International Fund for Agricultural Development. This
was the first time since 1989 and the second time since 1980 that the House approved by
regular order a bill authorizing new U.S. contributions to international financial institutions.
All other authorizations since 1980 have been included as riders in appropriations or
reconciliation bills or other similar multipurpose legislation. On May 1-2, representatives
from the IDA donor countries met in London to discuss terms for the upcoming 13th
replenishment (IDA 13). They again were unable to find common ground on the question
whether IDA should institute a major grant program. President Bush has proposed the idea
but Britain and other major European countries are strongly opposed.
BACKGROUND AND ANALYSIS
Introduction
For 50 years, the MDBs have been major forums for economic cooperation and key
vehicles through which the United States and other countries have channeled development
aid. The cost of U.S. participation in them has been controversial. The Banks have also
come under substantial criticism – from many different perspectives – for presumed
weaknesses or errors in their policies and operations. In recent years, there has been much
discussion in public and official circles about possible changes in the architecture of the
international financial system, particularly the relationship between the MDBs and the
International Monetary Fund (IMF). For information on specific issues, see: CRS Report
RL30786, World Bank Lending: Issues Raised by China’s Qinghai Resettlement Project,
CRS Report RL30467, IMF and World Bank Activities in Russia and Asia: Some Conflicting
Perspectives, and CRS Report 98-303, International Financial Institutions and Population
Programs: a Survey of Current Activity.
U.S. Participation in the Multilateral Banks
The MDBs are autonomous international agencies that finance development programs
in poor countries using money borrowed in world capital markets or contributed by
developed country governments. Run by their own managements and staffs of international
civil servants, they are supervised by boards of executive directors and boards of governors
selected by member country governments. Voting shares are weighted on the basis of
countries’ contributions. The IMF is a monetary institution, not a development bank. Still,
in recent decades it has lent mainly to developing countries and its policies often affect
economic conditions in borrower countries.
The United States belongs to the World Bank and four regional banks: the African
Development Bank (AFDB), Asian Development Bank (ADB), European Bank for
Reconstruction and Development (EBRD), and Inter-American Development Bank (IDB).
It also belongs to two other institutions, the North American Development Bank (NADB)
and the International Fund for Agricultural Development (IFAD). In 1999, they lent or
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invested over $50 billion – 82% on market-based terms and the rest on concessional terms
(low interest rates, long repayment periods) to the poorest countries. The World Bank
provided 58% of the total and 77%of the concessional funds.
Member countries monitor activities of the MDBs on two levels: through boards of
governors (which usually meet annually) and executive boards (which are in continuous
session). Funds cannot be raised and loans and policies cannot be approved without consent
of MDB executive boards. For additional background information on the MDBs, see CRS
Report RS20793, Multilateral Development Banks: Basic Background.
The President has the ultimate authority under U.S. law to direct U.S. policy and
instruct the U.S. representatives at the MDBs. This authority has been delegated to the
Secretary of the Treasury. The Assistant Secretary of the Treasury for International Affairs
manages day-to-day U.S. participation with the help of a professional staff of 20 individuals.
With the advice and consent of the Senate, the President names individuals to represent the
United States on the executive boards of each MDBs. Though it has final say on U.S. policy,
Treasury coordinates U.S. participation in the MDBs through two interagency committees.
The Working Group on Multilateral Assistance (WGMA) reviews all prospective MDB
loans and policy documents on an ongoing basis. The National Advisory Council on
International Monetary and Financial Policies (NAC) has some formal responsibilities for
coordinating U.S. policy towards the IFIs. It is also responsible for issuing an annual report
discussing U.S. policy and the recent activities of the IFIs.
Congress has a major role in the formulation of U.S. policy towards the IFIs. Congress
must give its consent by law before the United States may agree to participate in any new IFI
funding agreements. The Senate has advise and consent authority over all persons nominated
to major policy-making roles in the executive branch. On many occasions, Congress has
enacted legislation specifying what U.S. policy shall be in the IFIs and how the U.S.
executive directors at these institutions shall vote and the objectives they shall pursue.
Congress has also frequently made specific suggestions to the Administration through Sense
of Congress resolutions or language in committee reports accompanying legislation
suggesting specific goals and priorities the United States ought to emphasize in the IFIs.
This is sometimes called “governing without passing laws.” For additional information on
the procedures governing U.S. participation in the MDBs, see CRS Report RS20791,
Multilateral Development Banks: Procedures for U.S. Participation. For information about
U.S. contributions and the procedures for U.S. financial involvement in the MDBs, see CRS
Report RS20792, Multilateral Development Banks: U.S. Contributions FY1990-2001.
The United States has substantial influence within the MDBs. In most cases, it is the
largest single contributor, with the largest vote of any member country. However, no country
has a veto and a majority vote of the executive board is required before an MDB can approve
a loan or adopt a new policy or operating procedure. The U.S. Japan, Canada, and European
Union comprise a near or actual de facto majority of the vote in all but two of the MDBs.
Bush Administration Policy Towards the IFIs
The broad outlines of the current Bush Administration’s policies towards the
international financial institutions (IFIs) are beginning to take shape. Earlier, there was some
doubt about the Administration’s level of support for the IFIs, given negative comments that
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Secretary O’Neill, Deputy Secretary Dam, and Undersecretary Taylor had made prior to
assuming office. Dam and Taylor had come close, in some of their earlier writings, to
advocating the abolishment of the IMF. As noted below, the Administration’s statements
have left some questions unanswered. It is also not clear how the Administration intends to
implement its policies.
On July 17, 2001, President Bush proposed that the World Bank should allocate half
the funds it provides to low-income countries on grants rather than loans. This would total
about $2 billion annually. Mr. Bush said that World Bank should use the new grant program
to fund increased levels of assistance for health, education, clean water, and similar activities.
None of the other donor countries support the proposal for 50% IDA grants. Several
(Britain, in particular) oppose it outright. Many seem to support the idea that perhaps 10%
of IDA’s future aid might be grants. The Administration believes that a high level of IDA
grants will enhance productivity, ease the debt burden on poor countries, and allow closer
monitoring of program implementation and tighter measurement of results. Critics say that
the plan would “defund” the World Bank’s concessional loan program, raise confusion with
other international grant-aid programs, and diminish the value of the IDA program.
On December 17, the Administration told other donor countries that it was willing to
raise the U.S. payment to IDA by up to 18% if the Bank adopted certain unspecified steps
to improve performance. Few donors are willing to raise their contributions accordingly.
Many worry that a grant program will undercut the long-term viability of IDA and they are
concerned that the Administration’s efforts to achieve unspecified changes in Bank
operations will have (whatever the Administration’s claims) a negative impact on the poor.
On May 1-2, 2002, the IDA donor countries reached agreement on procedures for improving
Bank operational accountability. They were unable to reach agreement, however, on the
issue of IDA grants. Until agreement is reached on this remaining issue, the Administration
will be unable to submit authorization legislation for IDA 13 to Congress. For further
discussion of this issue, see CRS Report RL31136,World Bank: IDA Loans or IDA Grants?,
substantially updated on February 8, 2002. For an analysis of future costs of the grant
proposal (and of the HIPC proposal as well), see CRS Report RL31418, World Bank:
Funding IDA’s Assistance Program, updated May 21, 2002.
Functionally, the difference between a one-half grant program and the current IDA
arrangement is not great. For the first 10 years (because IDA loans have a 10-year grace
period), there is de facto no difference between an IDA grant or loan. Thereafter, then full
effects (and costs) of a grant program would be phased in over the next 3 decades. A grant
program would have no impact on current debt levels of poor countries and would provide
them little help in servicing their debt. On the other hand, it would not increase their debt
burden. If countries grow and develop, they should be readily able to pay the low cost of
IDA loans. On the other hand, if they remain stagnant, additional loans will be difficult to
service. In practical terms, the real issue in the IDA loan/grant debate is not financial and
has little to do with long-term IDA operations. Rather, it seems to be a test of wills between
the United States and other donors as regards their relative influence in the World Bank.
Testifying before the House Foreign Operations Appropriations Subcommittee in May
2001, Secretary O’Neill observed that the MDBs have “an important role to play in
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increasing productivity and thus improving the standard of living of people around the
world.” He said that the MDBs could do a better job than they are doing now.
Secretary O’Neill said the United States would pursue a reform agenda in the MDBs.
The first priority, he said, was to raise the standard of living of people throughout the world.
Increased productivity was the key, he said, and he claimed that poverty was explained by
low productivity. The World Bank’s current activities are too diffuse, he argued. He said
it should concentrate on raising per capita income and productivity. He mentioned education
as well as increased capital and better technology. He stressed that more economic
liberalization was needed in developing countries, along with lower taxes and sensible
regulation. Also important, he said, were the rule of law and good governance. He said the
Administration would seek to make the MDBs more transparent in their operations.
O’Neill said the Bank should focus on helping countries that lack access to private
capital markets and that many countries’ needs can be met more suitably through private
markets. He also said the MDBs should have a differentiated pricing policy for their loans,
in order to “achieve better prioritization of lending” to middle income countries and more
incentive for them to rely on private markets.
Some Remaining Questions
Most observers agree that there will be some settlement of the disagreement among the
IDA donor countries regarding the issue of IDA loans or grants. However, many are
concerned that the controversy may complicate future congressional consideration of the
upcoming IDA 13 authorization bill and on future U.S. relations the European countries.
In a broader sense, it is unclear how Secretary O’Neill’s emphasis on the need for
increased productivity comports with President Bush’s emphasis on the need for increased
IDA assistance for education, health, and clean water. In the long run, improvements in
health and education will enhance country productivity. But in the more medium term,
programs to improve the efficiency of transport and other infrastructure and reform of
country economic policy and procedures will have a more immediate effect in that regard.
Many activities targeted towards the immediate alleviation of poverty involve neither
education and health activities nor improvements in infrastructure and country policy. It is
not clear how the policy views announced by President Bush and Secretary O’Neill accord
with the existing policies and priorities of the IFIs. Critics worry that emphasis on
productivity and growth may lead to initiatives which diminish the MDBs’ current emphasis
on poverty alleviation. They also ask whether he is signaling, through his stress on
macroeconomic and financial issues, that the IMF should pay less attention in the future on
long-term structural reform and poverty reduction in its loan programs.
The executive boards of the MDBs have stated often, in recent years, their belief that
poverty alleviation should be the principal goal of the development banks. During their first
three decades, the MDBs subscribed to the view that rapid economic growth was the most
effective antidote to poverty. A large portion of their lending then went to fund
transportation, power, and other activities which sought to enhance productivity levels and
spur growth. Later studies found, however, that poor people often did not benefit much from
economic growth. Levels of national per capita income increased but in many countries –
particularly in those with strong initial differences – income disparities also grew and many
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rural people and people lacking modern skills participated only marginally in the growth
process. Studies found that their involvement could be enhanced by programs targeting their
needs. In recent decades, the MDBs have put increased emphasis on health and education
programs, safety-net programs, poverty-alleviation programs and other activities which
directly address the specific needs of rural and low-income people.
Some analysts worry that a renewed emphasis on growth and productivity may lead the
MDBs back towards more emphasis on infrastructure and heavy capital investment, at the
expense of lending for human capital development and poverty alleviation. Alternatively,
many believe that shifting a major share of the banks’ concessional assistance towards health,
education, and other programs will have a detrimental immediate effect on anti-poverty
concerns. The Administration may want to be more clear in future testimony as to whether
the new emphasis on growth and productivity and on education and health would be a
supplement to or a replacement for existing MDB programs which target assistance to low-
income groups and inaccessible rural areas. Specifically, the Administration might want to
clarify whether it believes resources should be shifted from anti-poverty programs into these
other areas or whether additional contributions should be sought to fund increased activity
in those areas.
The Meltzer Commission recommended in 2000 that the World Bank stop lending to
countries that have access to private capital markets. Many if not most middle-income
countries have been able to borrow some money internationally from private sources. It is
unclear, from the Secretary’s comments about greater reliance on private markets, whether
he believes that these countries should see their access to MDB loans reduced or eliminated.
In April 2001, O’Neill and other G-7 finance ministers approved a statement by the World
Bank/IMF Development Committee calling for more MDB lending to middle income
countries. The Committee noted that most of the world’s poor people live in these countries.
The IMF, said Secretary O’Neill, should focus more on the prevention of international
financial crises rather than principally fighting them after they appear. Nevertheless, despite
earlier comments to the contrary, the Administration has supported the IMF’s recent loans
to Argentina and Turkey. He said that the IMF should charge more for its loans. He also
said that the IMF should also provide less support for poor policy decisions by countries. It
is not clear from the testimony how these goals might be achieved. The IMF can be a strong
source of economic advice for member countries. However, it cannot make countries adopt
reforms or implement policies they do not accept – especially when they defer applying for
loans. The recent Asian financial crisis shows that, if (as in Thailand) the IMF tells countries
urgently and privately that they need to adopt major policy changes, it may not be sufficiently
persuasive. On the other hand, if the IMF publicizes its concerns about conditions in an
unstable country, it can precipitate the very crisis that all wish to avoid. The Administration
might want to clarify, in further statements, the steps the IMF should take to head off
potential financial crises.
Secretary O’Neill told the House Financial Services Committee in 2001 that the IMF
has been “involved in a much too wide set of policies in borrowing countries.” The IMF has
gone beyond its core expertise in macroeconomic issues to address issues outside its
principal area of responsibility. It should sharpen and shorten the list of conditions it
attaches to its loans. It is not clear from Secretary O’Neill’s remarks which issues he
believes the IMF should avoid. Still, many analysts agree with O’Neill’s basic point. The
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IMF is preparing new guidelines narrowing the focus of conditionality and requiring that
more changes be adopted by countries before they can qualify for IMF loans.
Nevertheless, critics worry that issues such as good governance, corruption, or military
spending might no longer be addressed by the IMF. Others wonder if the United States
would stop supporting IMF efforts to effect structural reform in borrower countries. Many
of these reforms address issues which are not, strictly speaking, macroeconomic and they
often take several years to implement. Some structural reforms aim to strengthen in
institutions responsible for implementing a country’s macroeconomic policies. Others seek
to improve the efficiency, flexibility, and rate of growth of a borrower country’s economy.

In 2001, the IMF published four major studies (available on its web page) on
conditionality and structural reform. It says that often, without broad reforms, a country
may have difficulty implementing the macroeconomic measures needed to stabilize its
economy. Most structural reforms are complex. The IMF has found that successful
implementation of these reforms requires “ownership” on the part of the borrower country.
Broad domestic support must be built favoring basic changes in government operations,
national pension systems, privatization, or reform of a country’s financial infrastructure.
Without such ownership, the IMF believes, most reforms will not last beyond the terminal
date of the IMF loan. Most of the structural reforms required by IMF loan agreements are
actually funded and supervised by the multilateral banks and other donor agencies. The
IMF’s annual reviews provide an opportunity for donors to examine country progress and an
incentive for countries to move forward with their plans. Even when the country’s
macroeconomic performance has been adequate, the IMF may suspend disbursements if it
believes there has not been sufficient progress on the structural reforms. These structural
issues often take the IMF far afield of its original short-term macroeconomic mandate.
Many analysts believe that, if the United States persuaded the IMF to focus only on
macroeconomic and financial issues and to ignore broader structural concerns, the IMF’s
capacity to pursue its “core” responsibilities might be constrained. Likewise, they say, an
important tool for coordinating policy between the IMF and the MDBs might be lost. The
Administration may want to clarify, in future testimony before Congress, whether it believes
the IMF should no longer pay attention to non-economic issues, such as governance and
corruption. It may also want to clarify whether it believes the IMF should stop requiring its
borrowers to implement structural reforms as a condition for access to IMF resources.
Congressional Action
Authorization Legislation, 2002
Asian Development Fund/IFAD. On May 1, 2002, the House approved by voice
vote H.R. 2604, authorizing new $412 million U.S. contribution (over 4 years) to the Asian
Development Fund (ADF) and $30 million (over 2 years) to the International Fund for
Agricultural Development (IFAD). This was the second time since 1980 that either chamber
has approved by regular order (in a regular authorization bill) legislation authorizing new
U.S. contributions to the IMF or multilateral banks. Since 1980, all other IMF and MDB
authorization measures have been included in complex omnibus measures, reconciliation
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bills, or foreign operations appropriations bills. In many instances, the authorization
measures were placed in these bills in ways which made amendment or deletion very difficult
(because of the rules governing their consideration). Some people believe that the House
action on the ADF/IFAD authorization bill signals that the base of congressional support for
IFI measures has broadened. Others believe that the upcoming congressional action on the
IDA 13 authorization bill will be a more true measure for the level of congressional support.
The Administration reports that the new ADF funding plan includes several provisions
which respond to prior congressional concerns. The ADF will allocate resources in the
future on the basis of country performance, stressing fiscal performance, good governance,
and anti-corruption measures. A plan to strengthen support for core labor standards has been
approved. An agreement has been signed with the World Bank to improve coordination and
minimize overlap and duplication. U.S. relations with the other ADF donors are somewhat
strained, however. The United States was successful during the ADF negotiations in its
efforts to achieve several important changes in ADF policies and procedures. At the same
time, however, the U.S. is seriously in arrears in its contributions to the last ADF
replenishment. While the other donors have largely completed their payments, the United
States has yet to pay $128 million of the $300 pledged towards the last replenishment.
successfully for the adoption of several changes in ADF policy and procedures
As approved by the House, H.R. 2604 includes a number of policy initiatives requiring
the Administration to seek a broad range of policy or procedural changes in IFAD and the
regional development banks. These include initiatives concerning transparency, user fees,
HIV/AIDS, projects that include dams, international terrorism, privatization of government-
held industries, opposition to reducing minimum wages below internationally recognized
poverty levels, and arsenic in drinking water in South Asia. None of these can be
implemented without the broad consent of most other member country governments. In
some instances, it appears that other countries do not support as stated the goals of the
legislation. In other instances, it appears that some policy changes sought in H.R. 2604 have
already been approved by some of the regional banks. The Administration must report
periodically on the steps take and success achieved in pursuit of these goals.
It might be noted that Section 588 of the fiscal 2002 foreign operations appropriations
act authorizes the United States to contribute $30 million to the fifth replenishment of IFAD,
the same purpose of language in H.R. 2406. That bill contains several policy initiatives,
however, which are not in the earlier legislation.
International Development Association. As noted earlier, negotiations are still
pending on a plan for a new replenishment (IDA 13) of the International Development
Association, the World Bank’s concessional assistance facility. The Administration has
proposed that half the assistance which IDA provides to very poor countries should be grants.
Other donors strongly disagree. A fifth meeting of the prospective donor countries has likely
to be held in the next few weeks to resolve the remaining issues and approve a new
replenishment plan. The new funding plan would reportedly total about $22.6 billion, of
which about $12.5 billion would come from new donor contributions and most of the rest
would come from money received as repayments for earlier IDA loans. According to World
Bank documents, IDA is scheduled to receive about $5.1 billion in loan repayments during
the three years (2003-2005) of the new replenishment plan.
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Table 1. Appropriations for Multilateral Development Banks
(Budget authority; millions of paid-in U.S. dollars)
FY2000
FY2001
FY2002
FY2003
Final
Final
Final
Request
World Bank Group
Intl Bank for Reconstruction and
Development (IBRD)
—
–
–
–
Global Environment Facility
35.8
108.0
100.5
177.8
Intl Development Assoc (IDA)
775.0
775.0
792.4
874.4
Intl Finance Corp (IFC)
—
–
–
–
Multilateral Investment Guarantee
Agency (MIGA)
4.0
10.0
5.0
3.6
Intl Fund for Agric Development
na 5.0
20.0
15.0
Regional Development Banks
African Development Bank
4.1
6.1
5.1
5.1
African Development Fund
128.0
100.0
100.0
118.1
Asian Development Bank
13.7
–
–
–
Asian Development Fund
77.0
72.0
98.0
147.4
European Bank (EBRD)
35.8
35.8
35.8
35.8
Inter-American Development Bank
Ordinary Capital
25.6
–
–
–
IDB Fund for Special Ops (FSO)
–
–
–
–
Inter-American Investment Corp
16.0
25.0
18.0
30.4
Multilateral Investment Fund
–
10.0
–
29.6
N. American Development Bank
–
–
–
–
TOTAL, all MDBs
1,115.0
1,146.9
1,174.8
1,437.2
Total arrears if bill passed thus
451.3
498.6
533.9
na
Appropriations
Fiscal 2002 Appropriations.
On July 24, 2001, the House approved a bill (H.R.
2506) which appropriates $1,169.4 million for MDB programs in FY2002. This is about $40
million less than the Administration’s request. (See Table 1.) On September 4, the Senate
Appropriations Committee reported its version of this bill, appropriating $1,178 million for
MDB programs. The Administration did not request any funds for FY2002 to help clear the
$499 million in overdue payments (arrears) to the MDBs. In addition to the arrears noted
earlier from the ADF, the United States is behind $204 million to the Global Environment
Facility (GEF) and $88 million to the Multilateral Investment Fund. The FY2002 bill
continued the policy requirements for HIPC, which Congress approved for FY2001 (see
below). The House approved the conference report on H.R. 2506 on December 19 (357-66),
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while the Senate adopted it by voice vote on December 20. The President signed it into law
on January 10, 2002 (P.L. 107-115).
Fiscal 2003 Appropriations. In January 2002, the Bush Administration requested
(as part of its budget submission) that Congress appropriate $1,437.2 billion for MDB
programs for FY2003. This is the largest appropriations request for MDBs since at least
FY2000. It includes an increase in U.S. contributions to the IDA. It includes substantial
funding for the ADF and GEF, to help reduce the large arrears in payments the U.S. has
accrued for those programs. It also includes enough funding for the MIF -- the small
program attached to the IDB which provides grants for microenterprise, small business, job
training, and other similar programs – to cover the U.S. arrears and prevent other countries
from withdrawing their contribution pledges. Without a U.S. payment to retire arrears, the
program would possibly be forced to close. Most countries would blame the United States
for that situation. This might have negative effects for U.S. leadership in other IFIs.
On House Foreign Operations Appropriations Subcommittee held hearings on the
Administration’s FY2003 MDB budget request on April 24, 2002.
Current MDB Issues
Reforming the IFIs
Since the Asian Financial Crisis began in 1997, major discussions have been underway
in the IFIs and among their major member countries about possible changes in the basic
architecture of the international financial system. This includes possible shifts in the policies
and priorities of the IFIs, the relationships among them, and the relationships between the
IFIs and the private sector. The IFIs have adopted a number of policy changes aimed at
improving their operations. The IMF in particular has adopted a series of voluntary
guidelines which seek to help countries improve the stability of their financial and monetary
systems and the effectiveness of their policies. The IFIs have adopted procedures which
provide more information to the public on their policies and on conditions in their member
countries. However, few major alterations have occurred in the basic structure or function
of the IFIs. A broad consensus of the membership is necessary to effect basic change. The
leading member countries disagree about the kinds of change which might be needed.
Since at least 1998, leading Members of Congress have tried through legislation to
effect fundamental changes in the structure and the policies of the IFIs. Several strong
recommendations were included in the 1998 legislation approving U.S. participation in the
most recent increase in IMF quota resources and in the fiscal 2001 foreign operations
appropriations act. It is important to note, in this regard, that the United States cannot make
the IFIs adopt changes in their policies and procedures. The United States does not have the
votes to make the IFIs take action and (except for the IMF) it does not have enough votes to
block IFI funding plans from going into effect over its objection. Change in the IFIs must
be accomplished by persuading other countries that the U.S. proposals are good ideas that
they also should support. If the G-7 countries agree on a proposal they have (or can
influence) enough votes to put it into effect. However, most other G-7 countries do not agree
with many of the initiatives in recent U.S. legislation or U.S. policy initiatives.
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The 1998 IMF legislation created a congressionally-appointed commission to review
and make recommendations regarding change in the basic structure of the IFIs. The
commission (headed by Professor Alan Meltzer) released its recommendation in March
2000. The Clinton Administration agreed with some of the Meltzer Commission’s
proposals and it opposed others. The Commission said countries should qualify in advance
by adopting major reforms in their financial reporting, financial institutions, and government
budgetary practices. The Administration said countries should be able to borrow, even if
they do not meet these standards beforehand, and the IMF should use its conditionality to
bring about needed reforms. The Commission said the IMF should charge penalty rates of
interest, above existing market rates. The Administration said this would be
counterproductive. In 2001, Treasury Secretary O’Neill filed a report with Congress that
was also strongly critical of the Meltzer Commission’s policy recommendations for the IFIs.
The Meltzer Commission said the World Bank should lend only to the poorest countries
and it should stop lending to countries which have access to private capital. It should also
devolve most of its loan functions to the regional MDBs, becoming a grant-making
institution focused on global public goods. The Clinton Administration said the World Bank
should still make loans to countries which have some access to private capital but it should
take care that its loans not supplant the private sector. It said the Bank should focus
primarily on poverty alleviation, social programs, and institutional or policy reform. Both the
Administration and commission agreed that the IFIs should forgive substantial amounts of
debt owed them by the poorest countries. They also agreed that the United States and other
donors should substantially increase their contributions for MDB concessional aid. The Bush
Administration’s views were discussed at the beginning of this issue brief.
The FY2001 appropriations act included several provisions which required the IFIs to
consider possible reforms (see below). However, they did not require that the IFIs must
implement these reforms before the U.S. could contribute any money (as was proposed –but
ultimately not enacted– in 1998). Rather, they say the Secretary of the Treasury must
advocate certain reforms in the IFIs and report to Congress any steps they have taken towards
achieving those goals. Congress did not adopt any language in the FY2002 appropriations
act seeking major reforms in the IFIs.

Section 588 of the FY2002 law said that 10% of the money appropriated for each IFI
shall be withheld and not contributed until the Secretary of the Treasury certifies that it has
adopted certain procurement and management reforms. These include procedures for
requiring annual independent audits of all new investment loans, for requiring independent
audits of the central banks of all countries which borrow from the IMF, for assessing the
risks of corruption in borrower countries before they get new loans, for establishing new
transparency and anti-corruption procedures in borrower countries, and for creating a new
fraud and corruption investigative unit in each IFI. The Secretary must report on steps the
IMF has taken to achieve these goals.
The Act directed the Secretary to seek stronger procedures in the MDBs improving their
loan monitoring procedures in order to limit corruption in borrower countries, to strengthen
governance and reduce bribery and corruption in those countries, and to punish any corrupt
practices by MDB staff. It required GAO to report annually regarding the adequacy of IFI
audit procedures. It directed the U.S. representatives at the IFIs to oppose any loans for
primary education or primary healthcare if the projects imposed user fees on people receiving
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assistance from them. It also said that the Secretary of the Treasury should seek agreement
with other countries that any new aid which IDA provides to countries receiving HIPC debt
relief (see below) should be provided through grants rather than new concessional loans.
Section 801 said the MDBs should adopt a series of new rules or guidelines. In
particular, the banks should require that all new lending to a country would cease if it used
loan funds for purposes other than those originally intended. The MDBs should adopt new
procedures to prevent their loans from supplanting private financing. The banks should not
disburse money if a borrower country has not adopted the specific policy reforms mandated
by a loan agreement. The MDBs should also adopt new standards for measuring the progress
countries are making towards graduation from eligibility for concessional loans. The new
law said that the World Bank should adopt policies aimed at minimizing the number of
projects that would displace a population involuntarily or would be detrimental to the people
or culture of the people to which the displaced population would be moved. It also said that
the IMF should adopt policies which would vigorously promote open markets and trade
liberalization in its borrower countries.
Section 804 said that it would be the policy of the United States to work for the
adoption of reforms requiring the IMF to lend mainly for short-term BOP finance. Medium-
term loans should be available only in certain circumstances and the IMF should charge a
premium on most of its loans in order to discourage use and encourage countries to rely more
on private sector finance.
Most countries seem willing to consider proposals for reform on their merits, but few
appear willing to acquiesce to unilateral demands. If the United States had tried to made the
implementation of reforms a prior condition to any U.S. payment, other major IFI member
countries would have likely objected. In 2001, for example, Senators Gramm and Helms
sought to make U.S. contributions to HIPC conditional on the IFIs adopting major changes
in their policies and procedures. Congress ultimately chose not to adopt that language.
Many analysts doubt that the goals of their initiative would have been realized even if it had
been adopted into U.S. law. Few countries seem willing to accept broad permanent changes
in the IFIs simply in order to get a modest one-year HIPC contribution from the United
States. Major reform in the IFIs will come only when there is a broad consensus on the part
of most countries that particular changes are more desirable than the status quo. Many of
the proposals currently being considered in the United States and other countries are not
mutually compatible. A major challenge facing the United States in future years will be the
development of such a consensus in support of policy changes which the Administration and
Congress will support and other countries will find acceptable.
MDBs and Developing Country Debt
Many of the poorest MDB borrowers have had serious difficulty servicing their
international debts in recent years. Estimates suggest that the 41 most heavily indebted poor
countries (HIPCs) pay only about 40% of their annual debt service obligations. As a whole,
the total foreign debt of the HIPC countries was nearly 122% the size of their combined
Gross National Product (GNP). For many countries, the share is even higher. Over half this
debt was owed to bilateral lenders and 35% was owed to MDBs. The MDBs are the only
lenders who are being paid (and the only ones making new loans). In 1998, for instance,
$1.8 billion, or half of HIPC country repayment of principal went to multilateral creditors.
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Only $0.8 billion was paid to bilateral lenders. The HIPC countries are more than $15 billion
in arrears to their creditors for unpaid interest due on their long-term debt.
During the height of the international debt crisis in the 1980s, the United States and
other major countries used the MDBs as principal vehicles for helping debtor countries. The
major concern at the time focused on heavily-indebted middle-income countries, who owed
most of their debt to private lenders. Many analysts feared that the stability of the world
financial system was at risk. In 1985, then-Treasury Secretary Baker said the IMF, World
Bank, and IDB should lend $20 billion over several years (along with $20 billion more from
commercial lenders) to help the 17 largest middle-income debtors cope with their problems.
In 1989, then-Treasury Secretary Brady said the MDBs and IMF should help middle-income
countries finance voluntary debt-reduction plans involving commercial creditors. Between
1989 and 1994, the World Bank and other multilateral agencies lent $7.9 billion to 12
middle-income countries, helping them negotiate a $63 billion forgiveness of the $193
billion owed to these lenders. Similarly, the IDA Debt Reduction Facility helped 7
low-income countries extinguish through debt buy-back schemes (at about 14 cents to the
dollar) $815 million owed to commercial creditors. IDA has also made loans (via its “Fifth
Dimension” program) to help poor countries finance payments for old IBRD-rate loans.
In October 1996, the World Bank and IMF approved a plan offering debt relief to
heavily-indebted poor countries (HIPC). It aims to reduce the debt burden of these countries
to “sustainable” levels — i.e., a debt load equal to 200-250% the value of a country’s annual
exports — in two stages. First, the MDBs would be ready to forgive up to 90% of the debt
owed them by HIPC countries and they asked bilateral and commercial creditors to provide
the same. (Bilateral creditors said that 80% was the most they would do; private creditors
have not volunteered to participate.) Meanwhile, the debtor country would pursue a 3-year
program of economic policy reform. Second, at the end of that period, the Bank and Fund
determine if the country’s debt burden was “sustainable.” If not, it would be declared
eligible for HIPC terms, and after a period of up to 3 more years, the Bank would retire
enough debt owed it to bring the country’s debt burden to a manageable level. The Bank
would reimburse itself for the retired debt with money set aside from its annual net income
or contributed by individual donor countries.
Critics argued that the plan’s criteria for eligibility are too restrictive and the period of
time it took to qualify for possible debt relief was too long. In June 2000, at the Cologne
Economic Summit, G-7 leaders agreed that HIPC should be expanded and the time period
shortened. At the World Bank annual meeting in October, Bank member countries agreed
that the HIPC program should seek to qualify 20 countries for debt relief by the end of the
year. The United States insisted that standards should not be weakened and countries should
still be required to undertake major market-oriented economic reforms in order to qualify.
World Bank officials estimate that the G-7 initiative would double — to $4 billion — Bank
expenses and represent a commitment they could not meet out of existing resources. Some
critics assert, however, that the Bank could provide more debt relief if it were willing to use
IDA loan resources for this purpose. (For more information on the HIPC program, see CRS
Report RL30214, Debt Reduction: Initiatives for the Most Heavily Indebted Poor Countries.)
In 1999, the President sought $50 million for a U.S. contribution to the World Bank’s
program to help Heavily Indebted Poor Countries (HIPCs). HIPC is a multilateral
arrangement providing debt relief for nations that maintain strong economic performance
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records. Although the Bank and Fund will finance their own participation in HIPC, some
MDBs, such as the African Bank and Fund must have help from the HIPC trust fund if they
were to extend debt relief to their debtors.
In 2000, the Administration asked Congress to authorize a $600 million contribution
to the HIPC trust fund and to appropriate funds for FY2000, FY2001, FY2002, and FY2003.
The Senate Foreign Relations Committee included this authorization in its bill, S. 2382,
which also included authority for the U.S. representative at the IMF to vote for a resolution
allowing the IMF to use for HIPC the “profits” realized last year when it sold 5 million
ounces of gold. Authority to use income from an earlier sale of 9 million ounces was
approved in 1999. Congress included authority for the HIPC trust fund contribution and use
of the gold proceeds in the final FY2001 foreign operations appropriations act. It
appropriated (in Title II) $225 million for contribution to the HIPC trust fund in FY2001 and
(in Title VI) a supplemental $210 million for contribution in FY2000. In the FY 2002
foreign operations appropriations act, Congress appropriated another $224 million for HIPC.
The money for HIPC carries several conditions. The Secretary of the Treasury may not
disburse funds to HIPC for the benefit of any country that engages in a consistent pattern of
human rights violations or in international military or civil conflicts which would undermine
its ability to develop and institute effective measures for poverty-alleviation. The two acts
said that the Secretary may not disburse any money to HIPC for the benefit of Sudan or
Burma unless democratically elected governments has taken office in these countries. The
two laws specified that U.S. funds for HIPC debt relief could only be used for assistance to
countries which agree not to accept market-rate loans from any IFIs that received debt relief
funds from the HIPC trust fund. The 2002 act specified that U.S. contributions to the HIPC
trust fund could only be used to pay off loans owed to the IDB, AFDB, AFDF, and Central
American Bank for Economic Integration (CABEI). Countries could only receive U.S. funds
through the HIPC trust fund if they agreed not to accept any market-rate loans from IFIs that
accorded them HIPC debt relief for two years and only if they documented their commitment
to direct the budgetary resources that would have been otherwise used for international debt
payments towards programs to alleviate poverty and promote economic growth.
Unlike most other IFI accounts, the HIPC trust fund does not mix together the money
contributed by donor countries. Rather, the funds from each donor are held separately and
can only be used with the donor’s permission. Therefore, despite contrary precedents in all
other IFI accounts, the United States can control the way its contributions to HIPC are used.
MDBs and Poverty
Initially, the MDBs’ main strategy for the alleviation of poverty emphasized the
efficient use of resources to promote growth and raise income levels in borrower countries.
During the 1970s and 1980s, the MDBs put increased emphasis on projects designed to target
benefits directly to needy persons. In the past decade, however, more emphasis is again
being given activities that promote growth. In 1991, the World Bank adopted a two-part
strategy aimed at eliminating the worst forms of poverty in developing countries by the year
2000. Part one stressed the need for increased growth. The Bank would encourage countries
to adopt incentives and policies that encourage broad-based economic growth and it would
finance the construction of infrastructure and other necessary facilities. Part two said that
growth must be supplemented with clearly defined poverty-alleviation programs, to ensure
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that the poor both gained from and contributed to growth. The Bank said the volume and
composition of its lending would be linked to the borrowers’ own efforts to reduce poverty.
In 1993, the Bank announced plans for cutting in half in the next 20 years the share of the
world’s population facing hunger. It also said it would put more emphasis (via
microenterprise lending) on activities designed to meet the credit needs of poor borrowers
who are normally not considered creditworthy. The Bank has acted to expand its support for
microenterprise. The World Bank annual report for 1994 (the first issued after the 1993
announcement) did not mention the goal of cutting the level of world hunger in half and the
issue has not been raised in subsequent annual reports.
There is considerable debate whether the MDBs are doing enough to fight poverty.
Today, the controversy seems to focus less on whether they are funding enough anti- poverty
projects and more on whether the gains from these loans are offset by the possible injury
done to the poor by MDB adjustment programs. Many critics say U.S. contributions should
be cut as long as the MDBs continue to promote adjustment and as long as they continue to
support top-down decision-making procedures that give average citizens in borrower
countries little say in the policy process.
The growth and poverty effects of economic reform are complex issues. Among the
strongest critics are non-governmental organizations (NGOs), which argue that adjustment
programs encourage borrower countries to change policies and reduce spending on programs
that benefit needy people. A coalition of NGOs announced plans in 1994 (the Fifty Years
is Enough campaign) to seek cuts in U.S. contributions to the World Bank until it altered its
approach to policy reform and put more emphasis on poverty alleviation. Proponents of
economic reform argue that countries in economic trouble may have few real alternatives but
to reform their policies and to change the structure of their economies. They say that, over
the long run, poor people can be hurt more by inflation and other effects of bad economic
policy than they are by the effects of policy reform. They say the burden of adjustment
actually falls most heavily on the middle class and government employees, not the poor. The
MDBs have increased their funding for “safety-net” programs to help mitigate any negative
effects their economic reform programs may have on the poor during the transition process.
Congress has passed several laws directing the USEDs to urge the banks to put more
emphasis on poverty alleviation. In 1989, for example, it directed the U.S. representatives
at the MDBs to propose that poverty alleviation be made a key goal of MDB operations. It
also said the banks should help their borrowers develop national strategies aimed at
eliminating the causes of poverty and they should give preference in their lending to
countries undertaking effective action in that regard. In 1990, Congress directed the USEDs
to encourage more lending for population, health, and nutrition programs in borrower
countries. MDB and U.S. officials say the banks have been responsive to these congressional
concerns. The House Banking subcommittee included a number of initiatives to promote
poverty alleviation in its 1997 authorization legislation (H.R. 1488).
Access to MDB Information
In 1989, Congress enacted legislation (the Pelosi Amendment) directing the Secretary
of the Treasury to seek MDB policy changes giving member country governments and
private citizens more access to information on MDB operations. It also said the MDBs
should adopt procedures requiring that environmental impact assessments (EIA) be done on
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all projects that might negatively affect the environment. It said the USEDs could not vote
for any MDB loans for which EIA studies were not available to them and to the public at
least 120 days in advance of the vote. The MDBs have all since adopted EIA and
information access policies acceptable to the U.S. government.
The IFIs now publish much information about their activities, making their operations
more transparent. See [http://www.worldbank.org]; [http://www.ifc.org];
[http://www.miga.org]; [http://www.iadb.org]; [http://www.afdb.org]; [http://www.adb.org];
[http://www.ebrd.org]; and [http://www.imf.org]. Critics want the MDBs to release more
information, including the full text of proposed loan plans before they are approved by MDB
executive boards and transcripts or detailed minutes of board deliberations. The IFIs believe
that they need a certain amount of privacy and discretion in order to do their work and broker
necessary agreements on sensitive issues. The IFIs Articles of Agreement say that
information about a country’s internal conditions may be released only with its consent.
Ironically, recipient country governments are often the greatest barrier to release of the types
of information sought by critics. Increasingly, the IFIs are making countries’ exercise of this
right more obvious rather than taking the blame for non-disclosure themselves. Many people
believe that this may prompt more countries to release information about their economy and
the content of their IFI loan programs, particularly those countries wanting more access to
private capital.
As noted earlier, the House Financial Services Committee has proposed legislation
requiring the United States to seek increased transparency on the part of the regional MDBs
and the IFAD. Similar legislation was adopted in 1988 (with little permanent effect) for the
IMF. As in 1998, the new language would not require the MDBs to adopt expanded
measures for accountability, but would require the U.S. to actively seek the adoption of such
measures. Proponents believe that greater openness will help make the IFIs accountable to
the public, so their actions cannot be hidden behind a screen until it is too late for civil
society and the persons affected to have any impact on MDB decisions about loans or policy.
Others argue, however, efforts to make the meetings and documents of the international
agencies public in this manner will simply drive the decision making process into other
rooms. They say that decisions would be made and debates would be scripted beforehand
by the major players. Executive directors who are not in the room would be left out of the
real decisional process. The international agencies would be then less accountable, not more,
even though the final action took place in the full light of public view. Also, critics note, any
efforts towards greater transparency will need to be balanced against the rights countries have
under the Articles to block the unwanted release of information (including information in
MDB documents) about their internal affairs.
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