United States and Europe debate grants vs. loans

MONTERREY, Mexico -- After years of watching economies crash and burn, world leaders are rethinking their lending policies to the developing world.

The debate at the U.N. Conference on Financing for Development has divided the Western world. The United States wants to replace loans with direct handouts. European countries and lending institutions worry the grant system would dry up the existing pool of funds that currently is replenished as countries repay loans.

Last week, President Bush pledged $5 billion more in foreign aid and suggested the money be given away in the form of grants to countries with relatively stable financial and political systems.

"Many have rallied to the idea of dropping the debt. I say let's rally to the idea of stopping the debt," he said. U2 singer Bono, who has argued against saddling poor nations with debt, stood by his side.

Aid levels boosted

European leaders, who pledged last week to increase aid levels by $20 billion by 2006, argue the move could eventually drain World Bank coffers at a time when development aid levels are already declining in real terms.

"We may not be able to do as much for the least-developed countries," EU Development Commissioner Poul Nielson said Tuesday on the sidelines of the conference, being held in the northern Mexican city of Monterrey. "The role of the bank is a bank."

The World Bank says more than 95 percent of all loans are repaid, allowing it to continue to hand out credit to needy countries. Europe also says poor countries are more careful with loans than with handouts.

There are 171 nations at the Monterrey conference, as well as the International Monetary Fund, the World Bank, business leaders and non-governmental organizations. Together they are discussing how to prevent economic collapses and debt problems in the developing world, and how to use dwindling aid resources more efficiently.

Struggling nations

"For literally decades, the debate has been like a bad marriage stuck around what the developed countries should pay," said Mark Malloch Brown, administrator of the U.N. Development Program. "It's been like the alimony payment or the child support payment. The deadbeat dads of the donor system have just not been putting their money forward."

Officials at the summit already have a case in point. Argentina still is struggle to overcome an economic crisis that caused it default on international debt. That, in turn, led the international community to suspend $22 billion in aid.

Argentine President Eduardo Duhalde arrives Wednesday in Monterrey, partly to lobby the IMF and World Bank for at least $23 billion in additional aid to bolster the shaky banking system and help the country stage a recovery from a recession brought on by the 1999 devaluation of the Brazilian real.

Bush has said he wants 40 percent of all World Bank funds for poor nations to be distributed in the form of grants instead of loans they won't be able to repay.

It hasn't been decided how the $5 billion in grants that he has pledged for fiscal years 2004-06 will be given out, or if the World Bank will play a role. Bank officials have expressed concern that too many grants could cause future shortages.

"You end up shortchanging the poor in the future," said World Bank spokeswoman Caroline Anstey.