- The Washington Times - Friday, June 14, 2002

Leave it to the Europeans to find fault with a U.S. proposal to give money away to the Third World. Today and tomorrow, at a meeting of the Group of Seven countries in Halifax, Canada, Treasury Secretary Paul O'Neill will be advocating a trailblazing proposal to use some multi-lateral aid dollars for grants, rather than loans, to poor countries. This plan, which the White House first floated last year in Genoa, makes abundant sense. For some countries, paying back aid loans with their attendant interest has been painful in the extreme. Rather than crying for highly indebted countries like Argentina to pay off their debt, the White House wants to prevent debt burdens from getting out of control.

In anticipation of the G7 meeting of finance ministers, U.S. and European officials have reportedly met behind the scenes to negotiate a compromise on approaches to aid. Originally, the White House had suggested that 40 percent of the aid disbursed by the International Development Association, an arm of the World Bank, be in the form of grants. The proposal would allow policymakers to measure the effectiveness of the grants without overhauling lending policies overnight. But since the overall foreign aid-dollar figures would naturally be lower for grants than for loans, Europeans have been highly skeptical.

Still, European officials appear to accept that grants can be used for some aid programs, such as assistance in combating HIV-AIDS in which case the world's poorest countries will get about 18 to 20 percent of their aid money in the form of grants, according to the Financial Times. The White House, meanwhile, is poised to accept this compromise. "It looks like we're on the verge of an agreement," said John Taylor, treasury international undersecretary.

The British government has taken a lead in opposing the increased use of grants in multilateral funding. British policymakers seem to have forgotten how onerous debt burdens have been for the developing world. Poor countries often spend more on servicing foreign debt than they do on health care or education, even when they have had debt forgiven in the past. The congressionally chartered Meltzer Commission, which made recommendations for foreign lending in March 2000, articulated the virtues of grant-giving succinctly: "Without loans, there is no debt and no future debt problem." The commission said these grants should be audited to ensure proper use.

The United States and Europe certainly have a stake in the development of poor countries. For this very reason, the G7 industrialized nations should craft effective aid policy that won't mire Third World countries in escalating debt. The White House has pioneered a bold policy of foreign aid reform, and Europe would be wise to follow.

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