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IMF-World Bank: Search for legitimacy

C. P. Chandrasekhar
Jayati Ghosh

In an effort to regain lost legitimacy, the World Bank and the IMF have over the last few years been in a perpetual state of internal reform. The September meetings of the Bank and the Fund provided one more occasion to report on this process of change. In the first of a series of assessments of the actual nature of change, if any, C. P. Chandrasekhar and Jayati Ghosh examine the recent approval of new guidelines for IMF conditionality.

IF THE internal documents and statements from their own spokesmen are to be believed, we are witnessing the emergence of "new" and "improved" versions of the World Bank and IMF. As part of that process, analysed at length in a number of documents including one on "The IMF in a Process of Change", the annual meetings of the Fund and the Bank held in Washington at the end of September 2002 approved new guidelines relating to the conditionality that should accompany balance of payments and development support from the IMF. Together with the Comprehensive Development Framework (CDF) and Poverty Reduction Strategy Paper (PRSP) approaches that have been experimented with by the World Bank and the IMF over the last three years, this is seen as heralding a major change in the approach and mode of functioning of the Bretton Woods institutions.

As Mr Horst Kohler, the Managing Director of the IMF put it prior to the annual meetings, "After a long and constructive debate over two years now, which has drawn widely on public comment, including civil society, the Fund has amended its guidelines on conditionality. These guidelines, which form the framework of IMF lending to its members, had been last changed in 1979. Three key principles have guided the amendment: first, country ownership of reform programmes; second, streamlined and focussed programme-related conditions; and (third) effective co-ordination with other multilateral institutions, in particular with the World Bank...A second area in which significant progress has been made is in our support of low-income countries. A review of the PRSP/PRGF (Poverty Reduction Strategy Papers/Poverty Reduction and Growth Facility) process earlier this year was encouraging. Consistent with the Monterrey consensus, the PRSP approach has created a participatory process, which brings together member country policymakers, multilateral and bilateral donors (for better co-ordination of donors), and civil society in a country-owned and results-based approach to sustainable development and poverty reduction."

The process of reviewing the IMF's approach to conditionality was initiated in 2000 and received the formal backing of its Board of Governors in its September 2000 meeting at Prague. The process, besides being supported as usual by a number of working papers prepared within the Fund, required inputs from civil society and public fora held in several countries. According to the IMF, the resulting change in guidelines has been motivated by the "recognition of the importance of several interrelated principles for successful design and implementation of Fund-supported programmes. Chief among these are national ownership of reform programmes, parsimony in the application of programme-related conditions, tailoring of programmes to the member's circumstances, effective co-ordination with other multilateral institutions, and clarity in the specification of conditions."

In the IMFs' view, national ownership refers to a willing assumption of responsibility for a programme of policies by country officials who in practice have the responsibility to formulate and carry out those policies. But inasmuch as conditionality requires the country concerned to adopt a set of development policies that the Fund and the Bank consider to be most appropriate, given its circumstances, there is an obvious contradiction between the notions of conditionality and ownership as the terms themselves suggest. The only circumstance when this need not be true is if there is consensus among the Fund, the Bank, the government and civil society, about what is the appropriate package of policies to be adopted by a particular country at a particular point in its history.

The reason why Fund-Bank conditionality has not been acceptable in the past is that there has been no such consensus. Despite such disagreement, government's have adopted versions of such policies because of the influence of the Bretton Woods institutions whose strength derived from their direct and indirect control over the flow of foreign finances. Their direct control stemmed from the fact that the Fund and the Bank themselves were important multilateral donors with substantial budgets.

Their indirect control was explained by the influence that Fund-Bank perceptions of a country's strategy can have on the access of that country to private foreign financial resources.

Further, the strength of these institutions does not derive from their control over financial resources alone. It also comes from the substantial and growing disagreement among those who in the past have been critical of Fund-Bank policies and advanced alternatives to them. In some contexts, these differences have been especially sharp between the government and the media on the one hand, which have increasingly swerved in favour of the policies recommended by the Bretton Woods institutions, and the rest of civil society, especially democratic mass organisations and grass-root NGOs, who increasingly see the growth strategy being advocated by the Bretton Woods institutions and backed by Third World elites as being inequalising as well as unsustainable.

The change in perception of government's and the media can no means be attributed to the success of Bretton Woods-style adjustment in different contexts. In fact, evidence of the failure of such policies to deliver results in terms of improved growth and welfare have accumulated over the years. The success is more due to the ability of these institutions to use their financial strength to convert sections of the elite in developing countries to their point of view. One way in which this has been done is to finance a huge propaganda war, with unlimited funds for research and dissemination of views supportive of the Bank-Fund position.

In his "Challenge of Inclusion" address to the annual meetings of the IMF and the World Bank in September 1997, Mr James D. Wolfensohn quite candidly declared: "The quality of all our work is being enhanced by the progress we have made toward becoming a Knowledge Bank. We have created Networks to share knowledge across all regions and all major sectors of development. My goal is to make the World Bank the first port of call when people need knowledge about development. By the year 2000, we will have in place a global communications system with computer links, videoconferencing, and interactive classrooms, affording our clients all around the world full access to our information bases - the end of geography as we at the Bank have known it."

Besides successfully launching this propaganda war, the Fund and the Bank have been able to transform governments that were initially hostile to their presence and their policies, into willing collaborators. The process through which this happened in some contexts is discussed in the accompanying article.

All of this notwithstanding, the challenge to the legitimacy of the Bretton Woods institutions has persisted. With the centrally planned economies having run into difficulties more than two decades back, when the Cold War also ended, the ideological wave in favour of the market as against the planning principle has indeed weakened. During those years IMF-Bank style structural adjustment strategies have been widely experimented with and the results show that they render developing countries vulnerable to slow growth and periodic crises. That lesson has been driven home with much force by the periodic financial crises that have occurred after the shocking collapse of the East Asian miracle countries in 1997. These factors together with the disappointment with the present form of corporate-led globalisation, which is seen as deflationary and inequalising, have helped foster a strong anti-globalisation movement, which has among its principal targets the IMF and the World Bank.

Faced with these challenges to their legitimacy, the IMF and the World Bank have now decided to absolve themselves of sole authorship both for economic policy packages they typically recommend and for the specific form in which those polices are sought to be implemented in individual countries seeking their support. This is being sought to be achieved by getting governments to declare that these types of policies are the best to adopt in the circumstances their countries are in, and claim ownership by requiring these governments to build consensus around these policies through consultations with different segments of civil society. What is more, if such consensus is indeed garnered, there is strong social sanction for and a substantial degree of social monitoring of the implementation of such policies. It is because of this that the Fund has declared that unless it is convinced of ownership or that a member is sufficiently committed to successful implementation, approval of the use of its resources can be withheld.

What is to ensure that the policies for which social sanction is obtained by governments is the best from the IMF's point of view? Clearly, if the policies being recommended by governments do not tally with those considered acceptable by the IMF, these would be dismissed as inappropriate and a reflection either of the play of "politics" rather than technocratic economics or of incompetence. For this reason the IMF and the Bank include for themselves an important role in the consultation process to be adopted by the government. Thus the Staff Statement on the principles underlying the new guidelines on conditionality state:

"Promotion of ownership depends in part on effective and inclusive processes of programme development in which the authorities and the staff are both fully engaged. Therefore, in responding to a member's request for access to Fund resources, it is expected that the initial response by the staff will be to ascertain, through dialogue, how the authorities intend to adjust policies. Based on those intentions, the staff will endeavour to reach understandings with the authorities on a mutually acceptable means of achieving the programme goals, while paying due regard to the domestic social and political objectives, the economic priorities, and the circumstances of the member, including the causes of the balance of payments problem and the member's capacity to implement reforms in the necessary timeframe. Particularly in cases where the member's administrative capacity is weak, the staff will stand ready to advise the authorities on a range of available policy options and implementation plans, and to provide technical assistance as appropriate, so as to enable them to make informed choices. (emphasis added)"

The difficulty which faces the Fund and the Bank is that of ensuring that once a mutually acceptable package is worked out with the authorities, a larger consensus is obtained, since that becomes the new basis for these organisations to pursue their respective mandates. The other elements of the new guidelines are geared to realising this. As mentioned earlier, besides ownership, a second requirement of the new guidelines on conditionality is parsimony. Parsimony is taken to mean that conditions associated with Fund-Bank programmes should be kept to the minimum necessary to realise well-formulated goals and monitor their implementation.

The conditionality guidelines make clear that the macroeconomic goals of Fund-supported programmes are "to solve the member's balance of payments problem without recourse to measures destructive of national or international prosperity; and to achieve medium-term external viability while fostering sustainable economic growth". The latter implies that growth should be durable and equitable, with reasonable price stability. And in Poverty Reduction and Growth Facility (PRGF)-supported programmes, the growth objective is linked to the pursuit of higher living standards and a reduction of poverty. The implication is clear. There are some minimum requirements set by the fund in terms of programme characteristics and goals. Once these are incorporated, the programme can be fleshed out in whatever manner required to generate the consensus.

In fact, the guidelines go even further to help the new consensus approach. It allows for the tailoring of the programme in keeping with the circumstances of members. Tailoring would involve decisions regarding the appropriate mix of adjustment and financing needed to deal with a particular balance of payments problem, and the timing according to which the decisions would have to be implemented. While the nature of Fund-Bank analyses of problems facing underdeveloped countries will yield some common prescriptions, which must be implemented fairly as between members, the new guidelines allow for some leeway regarding the timing and intensity of these policy responses.

There are clearly two developments which have motivated this feature of the new approach to conditionality. To start with, the IMF wants to allow a little bit of flexibility in negotiations to ensure that ownership based on widespread consultations is realised. Moreover, the IMF clearly wants to avoid the errors it committed in South-East Asia where, though the crisis did not arise because of excess spending based on deficit budgets by the government, it insisted on a cutback in expenditures and the generation of a large surplus on the budget at a time when the economy was experiencing deflation. Faced with criticism, the IMF had to revise its conditions there, but not before its legitimacy was eroded to some degree.

The point to note is that while these adjustments are being made regarding the formulation and imposition of conditionality, the wide-ranging objectives, other than purely balance of payments objectives, that IMF conditionality has come to incorporate is not to be given up. The new guidelines state that Fund-supported programmes would be fundamentally directed at two sets of macroeconomic goals: a) solving a member's balance of payments problem without recourse to measures destructive of national or international prosperity; and b) achieving medium-term external viability while fostering sustainable economic growth.

However, in pursuit of these goals the Fund is expected to set performance criteria and indicative targets as well as recommend structural measures. These would apply not just in the Fund's core areas of responsibility (macroeconomic stabilisation; monetary, fiscal, and exchange rate policies, including the underlying institutional arrangements and closely related structural measures; and financial system issues related to the functioning of both domestic and international financial markets). It could extend to non-core areas, so long as adequate explanation for such extension is provided.

In any case, since a major feature of the "new" strategy of the Bank and the Fund is closer collaboration, and in almost all cases of adjustment, both the Bank and the Fund are involved in the provision of support, a range of measures that are not covered in Fund programmes can be incorporated into Bank conditionality, in whose case as well "ownership" is an important new feature.

Once the requirements of the Bank and the Fund are combined, it should be clear that the strategy would have as its medium term goals the realisation of the following: an open trade regime based on unilateral liberalisation; a high degree of currency convertibility; greater autonomy for the central bank and a greater reliance on monetary rather than fiscal measures in economic policy; a substantially liberalised financial sector; the abolition or substantial curtailment of deficit financing based on strict limits on government spending and appropriate user charges for provision of public services; incentives provided through the taxation route for private savings and investment; and removal or substantial dilution of any regulatory measures aimed at influencing private decision with regard to investment, production and pricing. In sum, the change which now appears to be touching the IMF and the World Bank does not involve any rethink on the nature of the strategy they advocate.

Rather, the emphasis is to change the manner in which these policies are introduced into developing countries, so as to ensure that even when they have extremely adverse growth and distributional consequences and increase vulnerability, they do no erode the legitimacy of the IMF and the World Bank.

Underlying principles

WHAT is to ensure that the policies for which social sanction is obtained by governments is the best from the IMF's point of view?

Clearly, if the policies being recommended by governments do not tally with those considered acceptable by the IMF, these would be dismissed as inappropriate and a reflection either of the play of "politics" rather than technocratic economics or of incompetence.

For this reason the IMF and the Bank include for themselves an important role in the consultation process to be adopted by the government.

Thus the Staff Statement on the principles underlying the new guidelines on conditionality state:

"Promotion of ownership depends in part on effective and inclusive processes of programme development in which the authorities and the staff are both fully engaged. Therefore, in responding to a member's request for access to Fund resources, it is expected that the initial response by the staff will be to ascertain, through dialogue, how the authorities intend to adjust policies.

"Based on those intentions, the staff will endeavour to reach understandings with the authorities on a mutually acceptable means of achieving the programme goals, while paying due regard to the domestic social and political objectives, the economic priorities, and the circumstances of the member, including the causes of the balance of payments problem and the member's capacity to implement reforms in the necessary timeframe.

"Particularly in cases where the member's administrative capacity is weak, the staff will stand ready to advise the authorities on a range of available policy options and implementation plans, and to provide technical assistance as appropriate, so as to enable them to make informed choices. (emphasis added)"

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