The signs carried by demonstrators in Washington last week indiscriminately condemned all the main international economic institutions. Like the demonstrators, the institutions are a mixture of good and bad, right and wrong. Their judgments are mainly well intentioned, but often mistaken. And both the demonstrators and the institutions suffer from a common Washington affliction, a firm conviction that they act on behalf of those whom they claim to assist.

Most of the demonstrators oppose the "Washington consensus", the long list of conditions that countries must accept in exchange for financial aid. They are right to do so. Many of the conditions are intrusive and of little value. Much research at the World Bank, and elsewhere, shows that foreign aid fosters development only if officials in recipient countries are willing to promote and sustain reforms. But the required conditions are often ignored and given lip service - Russia is a case in point. And aid is often used to finance monetary, tax and regulatory policies that restrict growth. Even worse, it has helped support the Mobutus, Suhartos and Marcoses of this world.

While the demonstrators are right to challenge the Washington consensus, they neither speak with one voice nor offer valid alternatives. The overwhelming impression is that the groups organising the demonstrations are as eager as the International Monetary Fund or the World Bank to impose specific policies on aid recipients - policies that most developing countries reject. Both labour unions and environmental activists promote such policies to secure their own interests at the expense of people in developing countries.

While the media focus was on the streets, the main action for reform has come from the US Congress. It created a commission, which I chaired, to propose changes and is now considering legislation that would require the IMF to adopt the commission's main, bipartisan recommendations.

Lawrence Summers, the US Treasury secretary, followed the commission's report by suggesting four core principles for reform of the IMF: clear delineation of responsibilities between the IMF and the development banks; more focus on short-term liquidity lending; establishment of preconditions to strengthen local incentives to forestall crises; and dissemination of more, and more timely, information to markets. The IMF has now accepted some of these principles.

Mr Summers' proposals, although insufficient, echo the commission's view on how to help the world's poorest countries. He assigns to the development banks the responsibility for assisting these countries and for addressing problems such as disease and pollution.

The commission recommended two additional types of programme to help poor countries: the substitution of subsidised grants for loans to alleviate the worst symptoms of poverty, and the provision of subsidised loans to support institutional reforms. Whatever some demonstrators may claim, open markets, property rights, and individual incentives are necessary for successful development.

Unlike the IMF, the World Bank opposes the commission's proposals. The Bank's management has made several erroneous claims: that the proposals would reduce aid to the poorest countries; that the Bank's programmes in the poorest countries would be financed through reduced lending to middle-income countries; and that private investors would not fund improvements in social services.

Some of these claims are shocking because they are based on a misunderstanding of the Bank's own activities. The Bank does not profit from loans to middle-income countries, for all it charges is the cost of borrowing. As for private sector funding, Bank officials seem to ignore the obvious: private lenders do give loans to countries if the countries issue guarantees of repayment of the sort given to the Bank. It is, then, up to the governments of recipient countries to decide whether private money is to flow into social programmes.

Moreover, substituting grants for loans would not reduce the Bank's resources. Adam Lerrick, one of the commission's staff members, has shown that a properly run grants programme would finance more aid to the poorest countries than a loan-based scheme.

The World Bank is an overstaffed, ineffective, bureaucratic institution. Including its subsidiaries, it has about 12,000 employees, mostly dedicated professionals who are committed to development and poverty relief. Yet the Bank's record is fairly poor. By its own admission, half its projects are unsuccessful, and the failure rate is even higher in the poorest countries.

The Bank's management must stop its current public relations flim-flam and start improving its effectiveness in reducing poverty. If the demonstrators help achieve that, their efforts will have been worthwhile. 

Allan H. Meltzer is a professor of political economy, Carnegie Mellon University, and visiting scholar, American Enterprise Institute.