An alternative to increasing the overall volume of Bank and Fund lending is to lend more money to fewer countries. The Bank has shifted towards this approach, motivated by Dollar and Burnside's (1997) finding that aid resources are only effective in a "sound" policy environment43; and, as noted earlier, the recent independent review of the ESAF has recommended a similar shift on the Fund side, proposing that increased ESAF lending to "post-stabilisation" countries should be financed by restricting ESAF loans to countries that demonstrate a commitment to a "good policy environment".
This approach raises a number of inter-related issues. Firstly, World Bank and IMF lending are of central importance to the overall financing available to developing countries, both directly and (especially in the Fund's case) as a catalyst for other sources of official and commercial financing. This means that those countries excluded under the selectivity approach would face severe financial and, in turn, social consequences44. This threat could give the Bank and Fund greater power to dictate economic policies to developing country governments.
Secondly, there is a risk that exclusion under the selectivity approach would affect the poorest developing countries disproportionately, since their very poverty and lack of resources limit their ability to pursue "sound" policies (eg by contributing to conflict, weakening administrative capacity, etc).
Thirdly, the Bank and the Fund may be very inflexible in their interpretation of what constitute "sound" policies. Historically, the Bank has shown a marked tendency to prefer promoting the free-market policies it believes in, rather than investigating their actual economic effectiveness or the merits of alternative policies on an objective basis45, or observing the preferences of national governments, however strong their democratic credentials. The former is again particularly important for low-income countries, where the evidence of the appropriateness and effectiveness of the Bank's preferred policies is weakest. If the Bank is to adopt the selectivity approach, it will be important that objectivity, flexibility and the values and interests of national populations should prevail over ideology. Otherwise, it would simply be another method of imposing conditionality. (For a discussion of the failure of conditionality and alternative proposals see Bretton Woods Project, 1998, forthcoming).
Finally, both the Bank and the Fund may well find in practice that their ability to be selective in their lending is in practice constrained by the need to carry on providing loans to heavily indebted countries (both low- and middle-income), to enable them to continue servicing the debts they are already owed - that is, by the need for defensive lending (Caufield, 1996, pp 320-22). Historically, the Bank in particular has generally sought to keep making net transfers to its borrowing member countries (that is, to provide more in new loans than is due in debt-service), so as to maintain the incentive for borrowers to continue servicing their debts. If the selective approach were adopted, some countries would face the prospect of continuing outward net transfers to the Bank over a prolonged period, and would therefore have little incentive to go on servicing their existing Bank debts; and the Bank might well face a growing arrears problem as a result. This in turn would require part of IBRD net income to be allocated to loan loss provisions, reducing either the reserves (and thus the level of future lending) or else the resources available for other uses of net income (as outlined above).
In short, there may be a case for greater selectivity in Fund and Bank lending but there must be serous doubts about the criteria which they currently envisage. A broad debate should take place before this move is finalised, as others may feel that other factors, such as a government’s commitment to poverty reduction and the existence of a poverty reduction strategy or democratic governance structures are more appropriate than the macroeconomic ones.