Global Policy Forum

How the World Bank and the IMF Are Still Addicted
to Attaching Economic Policy Conditions to Aid

Summary

Download full report: Kicking the Habit: How the World Bank and the IMF Are Still Addicted to Attaching Economic Policy Conditions to Aid

If the world is to make poverty history, governments in poor countries have to have anti-poverty plans. And these plans must be supported by aid from rich countries. Of course, this aid should come with some terms attached. Rich countries have the right to expect their aid to be clearly accounted for. They – and citizens of poor countries – are also entitled to expect this aid to be used to fight poverty.

What rich countries are not entitled to do is use their aid to push economic policy reforms such as privatization and liberalization on poor countries. But this is exactly what the World Bank and the IMF continue to do, with the tacit support of their rich-country shareholders. Economic policy conditionality stops aid working. It undermines national decision-making, vital for successful development. It can lead to unpredictable ‘stop-start' aid flows. And it can mean poor countries have to implement policies based on dogma and ideology rather than on evidence.

Over the last five years there has been a growing international consensus that economic policy conditionality does not work. 'Policy conditionality…is both an infringement on sovereignty and ineffective‘ noted the Africa Commission in 2005. The European Commission and the British and Norwegian governments have developed policies to end the tying of their aid to privatization and liberalization conditions.

Even the World Bank and the IMF, historically the chief proponents of economic policy conditionality, agreed to use it far more sparingly and only when two important safeguards were met. Economic policy conditions had firstly to be ‘country-owned', and secondly to be based on analysis of the impact of the policy on poor people prior to their application.

However, the evidence to date shows that the World Bank and the IMF have failed to kick the habit. A recent World Bank report assessing its own progress on reforming conditionality reveals that one in four of World Bank policy conditions in 2006 push economic reforms. A 2006 study by the Norwegian government of IMF conditionality revealed that 26 out of 40 poor countries still have privatization and liberalization conditions attached to their IMF loans. There have been some improvements in enhancing country ownership of reform with the advent of nationally-created poverty plans. But, when the World Bank surveyed poor-country government staff in 2005, 50 per cent still felt that 'the Bank introduced elements that were not part of the country program'. Finally, both institutions are not systematically assessing the impact of economic policy reforms on the poor.

This paper shows just how conditionality hurts. It looks at Mali, where far from leading to economic growth and poverty reduction, conditions have hiked electricity prices and are likely to hurt cotton farmers as well as delaying aid flows and undermining country ownership of policies. The World Bank and the IMF made their budget aid conditional on the privatization of Malian electricity and on the liberalization and privatization of the Malian cotton sector. Cotton privatization continues to be a condition of their lending today.

In 2005, President Amadou Toumani Touré of the Republic of Mali noted at an opening speech of a Development Cooperation Forum in Washington: ‘True partnership supposes autonomy of beneficiary countries in requesting aid and in determining its objectives… Often programs are imposed on us, and we are told it is our program…People who have never seen cotton come to give us lessons on cotton… No one can respect the conditionalities of certain donors. They are so complicated that they themselves have difficulty getting us to understand them. This is not a partnership. This is a master relating to his student.'

Mali is extremely poor and chronically under-aided. 90 per cent of Mali's population lives on less than two dollars a day (this country has the highest percentage of such people in the world), yet it receives less than half the amount of aid per person than its neighbour, Senegal, which is less poor. Despite this, the World Bank has deliberately prevented the Malian government from accessing more aid on the grounds of its failure to privatise its cotton industry. Mali currently receives at least $72m less than it could. This money could be used to pay the salaries of 5,000 teachers for the next ten years, in a country where only 17 per cent of women between 15 and 24 are literate.

Such conditions have at best failed to deliver for the poor and at worst have destroyed poor peoples' livelihoods. Private ownership of the Malian electricity company has only provided a minimal expansion in coverage and instead has resulted in dramatic price increases. Liberalization of the cotton sector has exposed Malian cotton farmers to the heavily distorted world cotton market price. Prices have been in severe decline as a result of huge rich-country subsidies to their own farmers. The result: three million Malian farmers saw a 20 per cent drop in the price they received for their cotton in 2005. According to an unpublished study by the World Bank, seen by Oxfam, this is likely to increase poverty by 4.6 per cent across the country.

Donors should stop attaching detailed economic policy conditions to their aid. They are entitled to require financial accountability and progress towards mutually agreed broad poverty reduction goals or outcomes as conditions of their aid - but nothing more. Moving to linking aid to broad poverty reduction goals or as it is more commonly referred to, ‘outcome-based conditionality', would stop donors from pushing specific policies and unnecessarily involving themselves in the internal affairs of developing countries.

In addition, government progress would be assessed according to results on the ground and there would be ongoing opportunities to change policies according to what has worked. Finally, ensuring that outcome-based conditions are transparently produced and reviewed means that parliamentarians and citizen in recipient countries can better hold their own governments to account.

Recommendations

World Bank

The World Bank should:
• Stop attaching any economic policy conditions (prior actions and benchmarks) to its aid
• Move to outcome-based conditionality, linking aid to a few mutually agreed poverty reduction targets, based on the Millennium Development Goals or national poverty targets
• Ensure that all country analytical work is driven by recipient governments' agendas, is made public, and examines a wide range of policy options, assessing each in the light of its poverty impact.

IMF

The IMF should:
• In countries where macro-economic stability is still an issue, limit its quantitative targets (e.g. fiscal deficit, sector wage bill and inflation targets) to a minimum, and ensure they are backed up by independent analysis and broad agreement that this is the best option for poverty reduction. Analysis should be based around different economic scenarios and should be vocal about the need for increased aid volume and predictability.

Donors

Donors should:
• Invest at least 50 per cent of their aid in long-term (five years and more) predictable budget and sector support
• Move to using outcome-based conditionality, linking aid to a few mutually agreed Millennium Development Goals or national poverty reduction targets
• Ensure that aid and debt cancellation are formally de-linked from IMF and World Bank programs and rather based on the implementation of mutually agreed poverty reduction goals co-ordinated across the major donors
• Assist Southern governments in developing their own capacity to analyse policy-reform options.

Developing-country governments

Developing-country governments should:
• Ensure transparent and accountable budget and expenditure processes and involve parliaments and civil society in all national decision-making and setting of poverty reduction goals
• Increase capacity to collect poverty data and analyse the impact of different policy options on poor people.