New discussion paper shows how IFIs and donors continue to influence economic policies in developing countries

12 October 2016 by Tiago Stichelmans

CC - Flickr - Kate Russell

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 World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(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 Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. 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 Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

– 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



8 rue Jonfosse
4000 - Liège- Belgique

00324 60 97 96 80