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New discussion paper shows how IFIs and donors continue to influence economic policies in developing countries
by Tiago Stichelmans
12 October 2016

Eleven years ago, the international community adopted the Paris Declaration on Aid Effectiveness that led to the adoption of several principles to improve the effectiveness of international aid. Reflecting on the widely criticised fact that creditors impose often harmful and inadequate conditionality on borrowers, it notably acknowledged the need for more country ownership. The Paris Declaration defines ownership as a situation in which “partner countries exercise effective leadership over their development policies and strategies and co-ordinate development actions”. The declaration also states that donors should “base their overall support on partners’ national development strategies” and “draw conditions from these strategies”.

This idea was reinforced three years later at the conference on Aid Effectiveness held in Accra, Ghana. The Agenda for Action adopted in Accra acknowledges the critical role and responsibility of parliaments, local authorities and civil society organisations (CSOs) in ensuring ownership of development processes.

Despite those agreements by the international community, which were endorsed by the World Bank, the International Monetary Fund (IMF) and the European Commission (EC), those institutions continue to have considerable influence over economic policymaking in developing countries.

Today, Eurodad publishes a discussion paper analysing the different mechanisms through which this influence is exerted, undermining the country ownership of development strategies.

After years of criticism of conditionality policies – the imposition of economic reforms by international financial institutions to receive their funding – the IMF and the World Bank reformed their conditionality guidelines, notably to give more space to local ownership.

The discussion paper analyses the evolution of those policies and finds that:

- IMF conditionality policies continue to impose economic reforms on developing countries. Despite recent reforms, it is in practice very difficult for a recipient country to refuse the IMF’s policy prescriptions. In addition, the conditions attached to IMF loan programmes increasingly touch sensitive economic areas and the number of conditions per programme is still increasing, despite the stated intentions to streamline conditions. Eurodad’s latest edition of Conditionality Watch mapped some of the conditions attached to IMF loans disbursed over the past 4 months.
- The World Bank also attaches economic conditions to its loans and favours grants to countries that it judges favourably, measured in terms of the World Bank’s own economic agenda.
- The European Commission’s budget support, although designed to reinforce local ownership, is sometimes used to push for economic reforms that contradict the development strategy of the recipient country.
- Finally, European Union Macro Financial Assistance – a facility providing financing to non-European countries facing a balance of payment crisis – imposes the adoption of economic policies with little consultation of local actors.

On top of attaching conditionality, this discussion paper finds that there is a great variety of additional mechanisms with which donors and creditors influence economic policymaking in developing countries:

- The World Bank’s research activities have been criticised for being biased, since they influence policymakers.
- The IMF’s surveillance activities and, most notably, its Article IV reports (regular and mandatory IMF surveillance of the economic situation of all its members that contain specific recommendations) are very influential. This is the case especially in low income and small emerging economies which are dependent on attracting external finance.
- Technical assistance requests from governments to the IMF are prioritised through filters favouring countries with IMF-approved economic policies, despite a recent reform to give more space to local ownership.

Finally, this discussion paper shows that international financial institutions, and the IMF in particular, influence the decisions of donors and creditors’ decisions in relation to developing countries:

- Bilateral and multilateral donors tend to favour countries with IMF programmes.
- The Paris Club – an informal club of creditor governments – only grants debt relief to countries that possess an IMF programme and implement IMF-sponsored reforms.

This paper’s findings show that there is a significant gap between the commitments made by the EC, the IMF and the World Bank to favour local ownership of development policies, and their actual practices. The mechanisms to promote local ownership should therefore be reinforced in future, and IFIs need to reform their activities to improve aid effectiveness and deliver on their promises.

Source: Eurodad

Tiago Stichelmans