How conducive are WB and IMF conditionalities to growth?
In a recent interview with The Daily Star on internal management as key to economic health in Bangladesh, a reputed economist of the country commented that it made sense on the part of the government functionaries to waste less time on dealing with the IMF, and other international funding agencies, and more on finding solutions to the problems faced. However, a little reflection will show that it is "dealing with the problems faced" in these countries that the donor agencies are concerned about, and conditionalities for aid/loan disbursement are a way of ensuring that the solutions to these problems come through better internal management such that the real value/costs of resources is reflected. In view of the confusion often created in the minds of the common people, a short review of the functions of donor agencies, particularly the World Bank and IMF is placed here.
The World Bank, the name commonly used to denote the International Bank for Reconstruction and Development (IBRD), was established at the close of the Second World War to serve as a pivotal institution to lend money to the then undeveloped and under-developed nations. The World Bank loans have been provided at discounted interest rates for supporting projects in the LDCs or 'developing countries' that over the years have dealt with education, health, infrastructure development, nutrition, poverty-focused rural strategies, environmental protection, and more recently, specific issues like fighting HIV/AIDS etc.
For all latest news, follow The Daily Star's Google News channel. The IMF comes to the assistance of countries hit by unmanageable balance of payment problems. According to Mosley (2000) of Sheffield University, the poor and developing countries have a restricted production base due to which they cannot come out of the balance of payment trap. Recognising this, the Fund has brought in medium-term lending instruments, and associated those with, additional conditions of a more structural and micro-economic nature. The policy conditions attached to such loans typically require cuts in public expenditure and in central bank borrowing, sometimes also devaluation.
A common characteristic of poor countries is their relatively weak political capacity to deal with external shocks. This is because of absence of consensus behind the measures needed to come out of these shocks. While the ruling party in a country agrees to go by the IMF conditionalities to get a loan that will help tide over an economic problem, the opposition protests the proposals in the name of "unacceptable" conditionalities.
Lloyd and Wiessman (2001) of the Multinational Monitor reviewed loan documents between the IMF and World Bank and 26 countries. The review shows that the institutions' loan conditionalities generally include civil service downsising; privatisation of government-owned enterprises; promotion of labour flexibility and pension reforms.
According to them, perhaps the most consistent theme in the IMF/World Bank structural adjustment loans is that the size of government should be reduced. The initiative for government downsising is premised on the notion that the private sector generally performs more efficiently than the government sector. The range of IMF and Bank-supported or mandated privatisations is staggering. In Argentina, according to the World Bank, "virtually all public services and federally owned enterprises" have been privatised. In Malawi, a massive privatisation effort has included the "outsourcing, privatisation or liquidation of specific services and agencies of four of the largest ministries. In Uruguay, ports and roads have been privatised.
What are the effects of conditionalities on developing countries? A few cross-country illustrations may help. In 1989, the World Bank initiated a major attempt to improve forest management in Cameroon by tying forest policy reforms to structural adjustment lending. The first round of negotiations between the World Bank and the government of Cameroon culminated in the 1994 Forest Law, which introduced far reaching changes in the way that forest concessions were allocated, taxed, and managed. The law also included provisions that, for the first time in Central Africa, granted local communities the right to benefit financially from wood cutting in their customary forests.
In Pakistan, the World Bank financed around 15 percent of the public investment programme since 1952. These have been used for expanding and rehabilitating physical infrastructure in the areas of transportation, gas production, transmission, and distribution; and oil production and refining. According to a study by Cheema (2004), a thorough and in-depth analysis of World Bank and IMF-supported programmes in Pakistan reveals mixed results. On the one hand, these programmes, by emphasising financial discipline and reduction in budget have been helpful in bringing about macroeconomic stability in the country. On the other hand, they have also created many economic problems. He quotes critics that although WB- and IMF-supported programmes are designed to alleviate poverty, they have in fact been exacerbating the problem because fiscal discipline has reduced government spending on social development and "right-sizing" in public sector institutions has increased unemployment.
The Meltzer Commission found that 70% of the World Bank non-aid resources flowed into 11 countries that enjoyed access to private sector resource flows. The Commission recommended that the future lending by World Bank and the regional development banks like the Asian Development Bank (ADB) and Inter-American Development Bank (IADB) should be channeled into countries that do not have access to private capital flows, strictly excluding countries with per capita incomes above $4000 and concentrating in countries with per capita income less than $2500. It is also alleged that the IMF has a dogmatic approach towards privatisation, different from the way China is moving. The Chinese expanded the market economy by encouraging private investment and creating new productive capacities, and not by wholesale privatisation.
William Easterly (2005) of New York University maintains that the World Bank in low-income countries is now suffering from a really bad case of "mission creep". By "mission creep" he means that when the interventions tried by the World Bank were unsatisfactory, it tried a more ambitious set of interventions to make up for the failure of the previous intervention. To reverse the trend, he argues, the first step is to introduce some sort of accountability for achieving results in low-income countries.
Another strong criticism of the Bank and other donors prescriptions is their replicability across countries -- the "one size fits all" attitude. So they have to do a better job of recognising that not all developing countries are alike, and to differentiate the strategies that are used within developing countries.
In conclusion it may be said that while the World Bank, IMF and other donor agencies' efforts are aimed at improving long-term growth in developing countries through support for better economic management, they will have to go beyond the giving-more-aid-to-better-performing-countries attitude and deliver aid differently to countries that have different kinds of circumstances.