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Contributions from
the Column
Focus
The EU’s performance-driven aid
There is no substitute for ownership
Reviewing conditionality
“We will not accept aid at any terms”
Relationships matter, procedures do not
07/2005
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Credibility instead of procedures
The World Bank and IMF want to revise their conditionality guidelines in September 2005. They suggest processes fostering developing countries’ ownership while easing conditionalities at the same time. From a civil society perspective, that is no substitute for a more just North/South policy. The NGOs have their own proposals.
[ By Peter Lanzet ]
“I'm gonna make him an offer he can't refuse”, says Marlon Brando as mafia boss Don Vito Corleone in the film “The Godfather”. A similar cynicism shapes the financial relationships between multilateral donors and developing countries. This is particularly evident in the case of multilateral institutions and developing countries. Sure, bilateral donors also tie their funding to conditions. But they leave the harsh, macroeconomic and political conditionalities to the IMF, the World Bank or the regional banks.
The provision of grants and loans is tied to reforms in economic and social policy or the political structures of the recipient country. Conditionalities can relate to various policy areas, for example, conditions for strict budget discipline or instructions to observe human rights.
In developing countries, politicians and citizens alike consider these kinds of conditions to be importunate, unrealistic, counterproductive, prescriptive and imposing. Protagonists of conditionality frequently overlook this aspect. Comparing conditionalities with the agreements between a bank and its borrower is greatly understating the situation.
Faustian contract
Since the 1980s, developing countries have been called upon to enter into contracts which, in retrospect, seem Faustian. In order to receive funds for development and to stabilise their currency, they had to fulfil macroeconomic conditions (open their markets, privatise state-owned enterprises, practise strict budgetary discipline). The World Bank and IMF assured them that in the long run, competition and strengthened markets would generate so much economic growth that the poor would also benefit from the jobs that would be created and from the redistribution of additional tax revenue. In reality, however, the result was unemployment and price increases. Tax revenues from trade dropped by a third. The level of debt grew exponentially. Last year, the World Economic Outlook of the IMF estimated economic growth in the countries of Sub-Sahara Africa since 1986 oscillate between 1.9 and 3.5 percent. However, to achieve the Millennium Development Goals, 7 percent are required.
Critical non-governmental organisations (NGOs) oppose the conditionalities to liberalise, privatise and severely limit fiscal development expenditure. They condemn the attempt to control a country’s economic and financial policy down to the smallest detail by means of loan conditions (detailed information can be find on the Structural Adjustment Participatory Review Initiative Network’s website http://www.saprin.org). Protests flared up time and time again when water supply companies, electricity providers or other public utilities were to be privatised.
Meanwhile, a new thoughtfulness entered some donor governments. For example, the British Department for International Development calls into question conditions such as trade liberalisation and privatisation (DfID, 2004). It doubts that macroeconomic conditionalities have helped to reduce poverty. A similar perception – albeit much less conspicuous – can also be read between the lines of a German Development Ministry paper on the Post Washington Consensus (German Development Ministry, 2004).
From earlier attempts to reform conditionality we already know: pushing macroeconomic reforms on developing country governments by means of conditions have little success. In half the cases, the conditions had to be waived and less ambitious conditions were drawn up. Sometimes these were not kept to either. Three quarters of the expanded structural adjustment programmes had to be abandoned or extended considerably, mainly because of non-compliance with the IMF’s political conditions (Christian Aid, 2004). Attempts to remedy possible democratic deficiencies of a country by levering funding conditionalities did not work.
The strong emphasis on the developing countries’ own efforts within the framework of North/South development cooperation already forms the basis for some regulatory frameworks and international agreements. Most importantly in this respect are the Poverty Reduction Strategy Papers (PRSPs), which were part of the debt relief initiative of the Cologne Summit in 1999. The Millennium Declaration of September 2000 provides for fair burden sharing between North and South. The Declaration commits industrial and developing countries to achieve specific goals until 2015. For example, developing countries shall halve the number of starving people, while the industrialised countries shall remove trade barriers. In 2002, the International Conference on Financing for Development made mutual accountability the basic principle of the Monterrey Consensus.
Interest-guided policy
Multilateral financial institutions justify conditionalities by referring to their rules of procedures and fiduciary obligations. From the IMF’s point of view, conditionalities bring about clarity. The debtor country knows what is expected. It also knows that by fulfilling the conditions, it will receive the next remittance. This image however, is countered by the interest-guided reality of the practice of the Multilateral Finance Institutions. If the debtor country is politically important for the G 7 countries, or if its economy is sizable and it is at risk of becoming insolvent, IMF and the World Bank adapt the conditions. Substantial loans are allocated to large countries with poor governance and a reputation for appalling human rights practices. Time and again the allocation practice of the IMF and the World Bank is based on geo-political grounds (think, for example, of decisions concerning Russia, Turkey or Iraq). “Defensive lending”, i.e. granting new loans to repay the old ones, is common practice. In any case, the interests of the multilateral institutions are safeguarded; the objectives of poverty reduction or currency stability are fading into the background.
The executive directors of IMF and the World Bank make the decisions regarding the allocation of funds and the allocation guidelines. The developing countries have hardly any influence. This credibility gap, which negatively influences the relationship between North and South, is rooted in the structures of global governance. IMF and the World Bank are now at their wits’ end over the conditionalities. Yet, to date, they have failed to connect the debates on reforming the structures of the Bretton Woods institutions and the reform of conditionalities. They are not prepared to acknowledge any credibility gap, nor do they admit that it creates problems in their business relationships. New, credible relationships can only be built by reforming World Bank and IMF, giving them legitimacy. Only then will developing countries be able to receive funds from a system, which they do not perceive per se as structurally disadvantageous to them. This will strengthen their accountability.
Modifying guidelines
As a result of earlier evaluation processes, both the World Bank and IMF have now begun to modify their guidelines on conditions. The World Bank now attaches conditions to only 20 percent of its loans. The number of conditions per loan has also been reduced. The number of conditionalities for institutional reforms or expenditure management of government funds increased compared to conditions, on privatisation for instance. Under the stewardship of Horst Köhler, its former managing director, the IMF gave up the attempt to use detailed conditions to micro- manage the policies of individual countries. It now focuses its conditionalities to monetary, fiscal and financial sector policies.
Moreover, conditionalities are now used on a more selective basis. Governments with good governance that achieve agreed goals and convincingly combat corruption receive more funds and need to observe fewer conditionalities than others. As a means of allocating funds, however, selectivity should be assessed with caution. Special needs situations, such as in failed states or with populations that are particularly negatively affected by economic shocks, may find themselves completely without support.
In 2004, the EU evaluated their budget support to 20 ACP countries (countries that have signed the Lomé Convention) in Africa. Conditions were attached in a reduced manner. According to its own statement, the EU has had made relatively good experiences with this new instrument (European Commission, 2005). The funds are allocated within the framework of the Cotonou Agreement.
Donor and recipient countries now want to develop ways of creating mutual accountability. Total ownership of the projects and plans by the developing countries should form the key element of this commitment. Ownership was assigned a central role at the Paris High Level Forum on Aid Effectiveness at the end of February 2005. More than 90 countries and 25 multilateral organisations, in the presence of 17 NGOs, adopted the “Paris Declaration on Aid Effectiveness”.
They want to achieve twelve results by 2010, among other things, acknowledge the leading role of developing countries. They should take over the management in planning and implementing national strategies, and coordinate the donors for this purpose. Furthermore, the donors want to align their cooperation with the existing country systems through increased budget support. In addition, they want to implement more analyses and programmes with one another and with the existing staffs in the developing countries.
In future, the World Bank’s internal instrument to assess the quality and capacity of policies and institutions, “Country Policy and Institutional Assessement” (CPIA), will be used more widely to rate low income countries. This in itself is a very controversial instrument. Moreover, there is the danger that too many competing instruments will be implemented at the same time.
NGO demands
NGOs over time, have accompanied the cycles towards the reform of conditionality with their own studies and demands (Christian Aid, 2003; World Vision, 2004). Key points in the NGO debate are:
– The term “conditionality” revokes too many painful experiences. The NGOs therefore want to replace it with “responsible lending”. Yet this is more then rewording. It implies that creditors are also responsible for debt crises. In return, however, debtor governments also have to act responsibly.
– A demand to be fulfilled in any case is that creditors as well as debtors have to comply with international regulatory frameworks. Did the loans that have just been granted to build the Nam-Theun II dam in Laos meet the World Commission on Dams criteria? Are the conventions of the International Labour Organisation (ILO) on the protection of indigenous peoples or core labour standards, or the OECD investment criteria fully implemented, or are they, in an opportunistic fashion, bent to fit?
– In the future, macroeconomic projects or development projects are designed to a considerable extent by the governments of developing countries. They should get parliament and civil society actors intensively involved. Planning processes require sufficient time and adequate funds. The groups affected are no longer objects of compensation regulations. They are subject of the planning process right from the start.
From a NGO point of view, country assessment processes should not be conducted by the World Bank and IMF because they lack the necessary legitimacy. Credible institutions (such as UN organisations) should perform assessment or certification tasks. Macroeconomic conditionalities must be derived from the PRSPs, while the conditions to privatise must cease. Loans and grants should, in the first instance, benefit the furthering of income and wealth, as well as health and the education of the poorer sections of the population.
Conditionalities should regulate issues of fiduciary responsibility, standards of accountability, the management of public finances, budget transparency, et cetera. Selectivity and outcome-oriented conditions could prove to be useful in individual cases.
Multilateral institutions that allocate loans and grants must have credible structures. Developing countries, including the poorest, need a considerably higher number of seats and votes in the Bretton Woods institutions. No fiduciary management of public funds can be expected from governments whose acquisition and retention of power is illegitimate. In developing countries, fair elections and the constitutional participation of parliament and civil society will strengthen the credibility of governments.
Conclusion
In the current re-evaluation of conditionalities, solutions are being developed at procedural level. This is a step in the right direction. It is good to have the developing countries managing the processes. More budget support makes sense, more harmonisation is especially important. However, none of this has a substantial impact on the credibility gap in the relationships between North and South. But this gap plays a central role in the use of foreign funds. Conditionalities will only lose their reputation as an instrument of structural discrimination of the South once they become part of the responsible funding of globally legitimised institutions. Mutual accountability requires an altogether credible system, not a partly credible one. Only then can it fully develop.
Peter Lanzet
works as a specialist for multilateral financial institutes at the Church Development Service (EED) in Bonn.
peter.lanzet@eed.de
Literature:
BMZ, 2004:
Post-Washington-Konsensus – Einige Überlegungen (Post Washington Consensus – Some Considerations), Berlin 2004. BMZ-Diskurs 003/2004. Summary in E+Z/D+C, 2004:8/9, pp. 336f
Christian Aid, 2003:
The Perestroika of Aid? New Perspectives on Conditionality, London
DFID, 2005: Partnerships for poverty reduction: rethinking conditionality. London
European Commission, DG Development, 2005:
European Commission Budget
Support: An Innovative Approach to Conditionality. Brussels
Paris Declaration on Aid Effectiveness:
http://www1.worldbank.org/harmonization/Paris/FINALPARISDECLARATION.pdf
World Vision, 2004: One step forward, two steps back. Monrovia
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