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Reforming IMF and World Bank Conditionality

Article no: EN20080716-Article-4.3-2008

Reforming IMF and World Bank Conditionality

The new century started with streamlining initiatives from the IMF and the World Bank to their conditionality, but these have not managed to deliver real change. The arguments have not changed over the last years, and opponents have become firmly entrenched in their positions. The machinery, however, seem to be coming slowly to life after the impasse. New realities and challenges, such as climate change and rising prices, together with more traditional claims are reactivating the debate, Javier Pereira observes.

The latest set of Eurodad publications on the Bretton Woods Institutions? structural conditionality (see references) show little progress in reducing the number of conditions. Yet politicians seem to have started reacting after reiterated calls from civil society organisations (CSOs). The US congress, for instance, invited Eurodad?s Nuria Molina to testify before a hearing on the WB conditionality. The Committee will write a report for the US Treasury on a list of recommendations for the World Bank on conditionality. Furthermore, one congressman suggested that the Committee had expressed interest in drafting a follow-up to the Jubilee Act, which will also include recommendations to the Bank to phase out economic policy conditionality. 

* New realities are emerging

New realties are shaping the practices of multilateral and bilateral donors. Climate change adaptation is gaining momentum within development financing and discussions on conditionality have now shifted to new grounds. Global warming will increase the frequency of natural disasters as well as the severity of cyclical extreme weather conditions. Lack of predictability will require a new flexible approach to development aid that current schemes lack. Conditionality will make even less sense in this context and the pressure for reform will continue to mount.

The current food crisis has placed developing countries under stress and civil unrest. Several agencies and countries have prompted calls to scale up development and food aid. One of the countries more severely affected is Haiti. The World Bank has reacted swiftly to this call and has already approved a US$10m grant as part of its Global Food Crisis Response Program (GFPR). The grant documents show, however, that the Bank has not moved forward in term of conditionality. Good compliance with the Bank?s EGRO II program has been a core assessment factor for this grant, as well as the fact that ?the IMF-supported PRGF (Poverty Reduction and Growth Facility) program is on-track? and that ?most structural conditionality was implemented on time?.

The IMF has just released an assessment of the impact of increasing food and oil prices on a number of countries (see reference). The impact on the balance of payments is expected to be significant, especially in the poorest countries. Macroeconomic stability and inflation will make it harder for developing countries to reduce poverty and increase food security. Despite the able analysis, the IMF report fails to suggest practical solutions and shows a complete disengagement with the reality of development countries. It shows a very narrow economic approach to the crisis and criticizes, for instance, reducing food taxes to make food cheaper without paying attention to any social reasons underpinning the measure. It is the narrow focus of the IMF and the distance between its economic analysis and reality which leads to inappropriate economic policy conditionality which in turn, fail to deliver results.

* Some donors more prone than others

Some donors seem more prone than others to explore new approaches to development. The European Commission, for instance, has taken the lead of a group of European countries who are pushing for a softer approach to conditionality. The Commission is starting to look beyond macroeconomic conditions, adopting outcome indicators which monitor the real impact of aid and development policies on the ground. Outcome-based conditionality, as this new approach is known, may not be free of flaws such as determining attribution and designing indicators, but represents an incremental step forward which can help to generate momentum for change.

Most of the attention ? and hope ? this year is focused on the High Level Forum on Aid Effectiveness in Accra in September. Aid and the role of conditionality will be discussed at a Forum amidst the advent of new realities. CSOs are not very confident about the possibility of seeing real breakthroughs in the process. Accra, however, will define the aid agenda, and we hope that it will serve as a catalyst and provide a forum for discussing the new realities of development aid and adapt current practices to the upcoming challenges.

2008 has seen how a number of issues coalesced around development aid. Let?s hope there is enough energy in the process for the ball to start rolling and deliver real development to poor countries.

Javier Pereira is working with the European Network on Debt and Development (Eurodad) in Brussels.

* Eurodad (2008) ?Critical conditions: The IMF maintains its grip on low-income governments?, Brussels
* Eurodad (2008) ?Outcome-based conditionality: too good to be true??, Brussels
* Eurodad (2007) ?Untying the knots - How the World Bank is failing to deliver real change on conditionality?, Brussels
* IMF (2008) ?Food and Fuel Prices ? Recent Developments, Macroeconomic Impact and Policy Responses?, International Monetary Fund: Washington DC

Posted: 16 July 2008

Recommended citation: Javier Pereira (2008), ?Reforming IMF and World Bank Conditionality: New realities and challenges may foster change?, World Economy & Development In Brief, Issue 4/Jul-Aug, Luxembourg (