Social services

Analysis

Social principles: an update

14 June 2000 | Briefings


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When the social principles were proposed by Gordon Brown at the 1998 AGM of the Bank and IMF it was envisaged that they would apply to all countries and would be monitored as the other codes on Fiscal Transparency, Monetary Policy and Corporate Governance will be. The Development Committee charged the World Bank with the task of drawing up the principles.

A draft report prepared by the Bank was considered by the Development Committee in April when it was agreed that the process would be split into two-tracks: the principles themselves will be developed through the UN system, focusing on the Copenhagen+5 summit; and the Bank will take responsibility for implementing them, principally through its lending. The Bank is currently drawing up examples of best practice, this report will be discussed by the Development Committee at the Autumn meetings of the Bank and Fund.

Developing V developed countries

“The code is not going to apply to developed countries even if there is surveillance” (WB staff member)

Whilst it was intended that the principles should apply to all countries it is now clear that they will only be applied to developing countries. The Bank reasons that this is because developed countries have accepted the principles already and have strong social institutions therefore it would be a waste of time. They also argue that it would be a waste of scarce Bank resources to monitor their application in developed countries, which could be more effectively used in developing countries.

The developing countries are very concerned that the social principles will create an additional layer of IFI conditionality. They are also arguing against some of the principles, such as core labour standards, on the grounds that this is disguised northern protectionism. Developing country governments are also concerned that additional resources will not be provided to help them implement the principles and they are wary of “participatory” approaches.

Monitoring V conditionality

The UK and the Development Committee have stressed that the social principles should not create more conditionality. However, the Bank has no monitoring mechanism, therefore, the only way that it can hold governments accountable for applying the principles is through its lending programmes and the conditionality it attaches to them.

Gordon Brown has proposed that a monitoring unit should be established to monitor all 4 codes and that the results of this monitoring could be published as part of the IMF‘s Article 4 reports. However, neither the Interim or Development Committee statements nor the G7 statement mentioned such a mechanism. The message from UK Treasury staff is that if a monitoring unit is established it will not monitor the social code. Clare Short has stated that “the issue of monitoring will require further work over the coming months”.

Conditionality for macroeconomic policy

“Macroeconomic, trade and financial policies have major social effects – on employment, consumption and distribution. Economic growth should be explicitly poverty reducing…There should be explicit assessment of any trade-offs affecting the poor in the design of all macroeconomic and financial policy reforms-particularly in time of crisis.” Report to the Development Committee on an Approach to Developing Principles and good Practices of Social Policy, p5.

The rationale behind the social principles was that they should help ensure that countries have good social systems to protect people from the impacts of financial crises, but also to ensure that the social implications of macroeconomic programmes are systematically taken into consideration. To this end, it was intended that they should apply to the World Bank and IMF who should adhere to them when designing macroeconomic reforms.

The UK, the Development Committee and the G7 are keen to propose that the Bank and IMF should build the principles into their lending programmes, “the principles should be drawn upon by the Bank, Fund and country in devising adjustment programmes. The principles would set the framework for their dialogue on social policy.” Clare Short. However, there has been no explicit call by global policy leaders for the Bank and Fund to use the principles as a framework for dialogue on all aspects of macroeconomic policy. Instead, the emphasis appears to be on paying more attention to social development by providing more money to social projects and protecting social spending. For example, “we urged strengthened collaboration between the World Bank and IMF on public expenditure work which analyzes the impacts of fiscal choices.” Statement of G7 Finance Ministers and Central Bank Governors, April 26, 1999, Washington D. C.

The Bank’s paper on the social principles states that “in crisis situations, priority should be given to promoting equity and social cohesion – while fostering economic recovery” (p5) and “especially in crisis settings, there will be close liaison with the International Monetary Fund – given the powerful linkages between the design of macroeconomic policy response and social outcomes” (p6). However, the position of the Bank is that it has been clearly agreed that the IMF is ultimately responsible for macroeconomic policy and the Bank can only offer advice.

The Fund’s response to the social impacts of the financial crisis (and to the findings of the external evaluation of ESAF, which found that its macroeconomic policies have had significant negative impacts on certain groups of the population) has been to argue for improved safety-nets. There is no sign of willingness on the part of the IMF to reassess the policies they prescribe to ensure a more equitable and sustainable growth path. Therefore, even if social impact assessments are undertaken it is likely that the results will be used to design more effective safety-nets (which will be designed and funded by the Bank), rather than to rethink policies.

Crisis response

The principles are being designed with a long-term perspective in mind, on the assumption that as governments build good social and welfare systems the social impacts of financial crises will be diminished. Given that most countries will take years to develop these, the principles should pay more attention to how to provide effective safety-nets (in addition to designing more socially benign macroeconomic policies in response to a crisis). The experiences in Indonesia and Brazil suggest that the World Bank’s safety-net programmes have had a questionable impact. In the case of Brazil, the Bank’s loans have been used for debt repayment and increasing reserves rather than directly supporting social programmes. In Indonesia, corruption and poor administration has resulted in much of the money “disappearing” whilst the rest has either not been disbursed or not benefitted the most needy.

No consideration of environmental issues

“Also, and especially in rural areas, income and livelihoods are sensitive to access to sustainable natural resources. For these people, the overall pattern of growth and direct public action in favor of sustainable development are generally more important than specific labor policies.” Report to the Development Committee on an Approach to Developing Principles and good Practices of Social Policy, p4.

The linkages between society and the environment for sustainable development have been clearly made and are particularly apparent in a crisis situation when the need to earn foreign exchange and households’ coping mechanisms can put severe strains on the environment. In the same way that responses to short-term financial pressures should not have long-term impacts on society, neither should they have a negative impact on environmental resources. However, no attention is paid to this issue in the social principles.

Possible lobbying points

1. Before programmes are implemented, the IMF and Bank should be required to carry out and publish social and environmental impact assessments of their macroeconomic and structural policy prescriptions. Where significant, negative impacts are suspected, they should be required to rethink policy prescriptions.

2. A crisis reponse team should be established, involving both financial and social people from the Fund, Bank and UN, who would be tasked with ensuring that policy packages developed quickly in a crisis situation respect the social principles.

3. Social and welfare institutions do not generate substantial financial returns, particularly in the short to medium term. Additional bilateral grants should be provided to help governments develop the necessary institutions and make necessary investments rather than World Bank IDA loans.

4. Rather than using conditionality to force compliance with the principles, it would be preferable to establish an effective monitoring mechanism, perhaps located in the UN, which would report annually on countries’ progress.

5. It is important that the UN institutions are involved in the process for operationalising the principles, including developing models of best practice. Particularly since the Bank and UN institutions often have different perspectives and priorities for the provision of social services and who should provide them.

6. An external evaluation of the World Bank’s efforts to support Asian governments with providing safety-nets in response to the a crisis should be undertaken. The lessons drawn could help to inform best practice methods for applying safety-nets.

7. The evaluation by IMF staff of its policy response in Asia was extremely weak and failed to look at the impacts. An external evaluation is needed. In particular it should examine the social impacts. This would be helpful for feeding into the process for operationalising the social principles.

8. The IMF and Bank claim that a lack of data impedes assessment of the macroeconomic implications of adjustment programmes and the quick development of effective safety-net programmes. The social principles note that “the gathering of economic and financial data needs to be matched with equally prompt and regular collection of data for social indicators” (p6). A Social Data Standard should be developed to compliment the IMF‘s economic and financial data standards which all IMF-member countries should comply with.

Angela Wood, May 1999.