World Bank, IMF and armed conflicts

Helping peace or creating the conditions for war?

2 February 2004 | At Issue

Recent involvement in countries such as Afghanistan and Iraq has put the World Bank and the IMF work post-conflict in the spotlight. While some believe multilateral finance is essential, others believe the Bank and the Fund are acting primarily as pawns of US diplomatic and economic interests.

Which interests are being served by World Bank and IMF operations is just one of many questions raised by observers. Others include:

  • Are WB and IMF interventions, creating or recreating the conditions for war? What are the implications of various policy choices, as well as the pace and sequencing of reform in transition from conflict?
  • Are Bank and IMF frameworks and instruments conflict-sensitive? Should they integrate explicitely geostrategic factors in their analysis when allocating assistance and designing their interventions?
  • What are the limits to the Bank’s role? Is the Bank the best-placed actor to facilitate and administer donor assistance in reconstruction?

The jury is still out on these questions, which could have serious implications for the Bank’s and the Fund’s mandates and work methods.

Meet the new boss

Back to basics or new business opportunities?

The proportion of conflict-related World Bank activities and financing has increased significantly in recent years to represent between 1/5 and 1/4 of total current Bank lending. The main rationale, supported by Bank research, is that development brings peace and that lack of development is a key determinant of conflict.

While this is undoubtedly part of the Bank’s original remit (see Inside the institutions, Update 36), some observers have questioned its motives for stepping up work in this area. In a new report on the involvement of International Financial Institutions in Afghanistan (see Box 1), Anne Carlin points out that “the World Bank, normally highly risk-adverse, is justifying the risk it assumes in today’s post conflict situation as a return to its roots”. But in fact IFIs, she says, are seeking “new lines of business” at a time when large borrowers such as India and China turn to other sources for major projects. Indeed language used in some Bank documents is more evocative of a commercial strategy than of development assistance: for example “New products for a new era” that aim to “‘position’ the Bank” (World Bank, 2002).

The politics of reconstruction

The arrival of the Fund and the Bank in Iraq was greeted by the 50 Years is Enough Network with the headline: “Meet the new boss”. Critics have voiced opposition to what they see as the Bank and the IMF taking advantage of post-conflict situations to reshape entirely a country’s economy and act as a Trojan Horse for private interests located in the most powerful countries (see Update 37). An important contribution to the debate on who benefits from reconstruction would be the publication of figures about which percentage of World Bank contracts and funds go to contractors and consultant firms from which countries. These figures are not currently available.

A related problem is the political signal sent by intervention in some countries engulfed in the so-called War on Terror. Just as post-World War II IMF and Bank operations were driven by realpolitik, the Bretton Woods institutions are now being accused by critics such as Focus on the Global South of “doing the dirty work of the Empire”. In Iraq, international institutions (and some NGOs) run the risk of being seen as providing a fig leaf for US and UK political, not just economic, interests (if not an ex-post moral or legal justification for the war). There are contradictions between the Bank President repeating how poverty breeds terrorism, and its resources for poor countries being mobilized to reconstruct a country shattered by US and British bombs without an international mandate. This -and divisions among powerful members – could explain the initial reluctance at the Bank at the prospect of getting involved early in Iraq- new business opportunity or not.

The deepest concern of many civil society groups is perhaps the influence that IFIs can achieve in a country that has to ‘start from scratch’. Groups in Sri Lanka, East Timor and Afghanistan have denounced the leverage that the Bank and the Fund have on their countries in the post-conflict context. In many countries donors tend to favour visible ‘flagship’ projects, leaving the IMF’s authority over the macro policy unchallenged. The Bank, as a supposedly neutral facilitator, gains access to influential positions. Indian economists CP Chandrasekhar and Jayati Ghosh are worried that, for example through administration of the joint donor trust fund in Afghanistan (which pays for the salary bill of government staff among other things), the Bank has been granted “substantial leverage over a resource-starved state” (2003).

Donor coordination can therefore become a double-edged sword. A study commissioned by the Bank concludes – perhaps unsurprisingly – that overall, there is a strong consensus that only the World Bank can provide the experience, drive, and diversity of knowledge required for effective leadership of international assistance to post-conflict civilian reconstruction.” However it adds: “With that consensus comes a responsibility for the Bank to listen, consult, and facilitate – qualities not traditionally associated with this institution.” (S.Schiavo Campo, 2003)

Afghanistan: IFIs rushing to re-engagement?A new report by Anne Carlin for US-based NGO Bank Information Center looks at IFI involvement in Afghanistan. This is part of a programme which aims to examine linkages between IFI operations and U.S. strategic interests in the post-9/11 period.

The report shows how after an absence of 23 years the World Bank, the Asian Development Bank and the IMF reengaged in the country in 2001. They immediately sat at the Afghan government’s planning table and after 6 weeks proposed new policies to a resource-starved government, desperate to get access to international aid to secure legitimacy.

One of the first steps taken by IFIs in Afghanistan was to ensure debt arrears to themselves were cleared. This was done through donations of bilateral donors via the Afghanistan Reconstruction Trust Fund (ARTF). The remaining debt service is covered by ARTF funds, “conveniently administered by the World Bank and skimmed off the top before the remaining funds are made available to the Afghan government”.

Once the debt question was taken care of, the IFIs could be “back in business”. Their involvement covers all major sectors, from water to health and education to governance and administration. Carlin credits the IMF for “one of the most significant achievements to date”: the introduction of a new currency, the new Afghani. But overall the reforms currently being carried out are problematic. While a stated objective is capacity-building of government, “policy reforms and capacity building are being addressed in a manner that suits donors, not Afghans”. With numerous international consulting firms hired to “fill the capacity vacuum”, “the policies are written first and staff is later, maybe, trained to follow these policies – rather than having their capacity developed to enable them to write these policies in the first place.”

In this respect Carlin cautions against the rush to rewrite a comprehensive set of policies until there is a truly representative government with broad support. Reforms under way include for example a law on private and foreign investment that “would expedite the investment process, grant tax waivers based on terms of investment, exempt some exports from taxes, and allow for tax-free repatriation of funds.” There is no guarantee that Afghans will benefit from such business activity. Private involvement in basic services provision is criticized. Health care for example will be contracted out to NGOs for three-year periods, which raises questions about the sustainability of health care delivery. Some NGOs suggest the Bank should rather support capacity-building in the government, and private delivery weakens the links between the government and communities. The report also assesses the first steps and risks associated with a crucial project, the Bank-supported National Solidarity Programme, which will fund projects selected by communities through community block grants.

Rush to Reengagement in Afghanistan. The IFIs Post Conflict Agenda, by Anne Carlin, BIC, December 2003.

Sowing the seeds of war?

Can World Bank and IMF policies and conditionality contribute to the emergence of (or lead to the resumption of) violent conflict, especially civil war? In her book The Balkan Tragedy, Susan Woodward argues that the shift to a market economy, and in particular IMF programmes, with their “socially polarizing and politically disintegrating consequences” contributed to the implosion of Yugoslavia (in Cramer and Weeks, 2002). Amy Chua of Yale Law University says war in Sierra Leone in the 1990s was the result of combined factors that include the presence of a wealthy, market-dominant Lebanese minority, and the hardships created by “what IMF negotiators called ‘bold and decisive’ free market measures”, mostly a phase-out of subsidies. “Conditions were ripe for the anarchy that followed” (Chua, 2003). Michel Chossudovsky blames World Bank and IMF policies for exacerbating tensions that led to the Rwandan genocide (Chossudovsky, 1995).

Even World Bank research is fuelling the debate. A recent report, based on research led by Paul Collier, was reviewed by journalist and researcher Joe Hanlon under the headline: “World Bank admits its policies caused war”. This referred for example to the fact that the report argues it would be “particularly helpful” in preventing war if the poorest countries could “diversify out of dependence on primary commodity exports”, while the Bank played a role in deindustrialisation and pushing countries into dependence on a few commodities.

Most observers however agree that it would be misleading to lay the blame for any given conflict solely on Bank and Fund policies. For Chris Cramer and John Weeks from the School of Oriental and African Studies, “isolating an individual policy mechanism, or even a package of policies, either as cause or cure for conflict…would represent a superficial and functionalist treatment of economic effects”. They examine factors usually associated with IMF and Bank interventions and which potentially result in violent conflict. Looking at sub-saharan Africa, they find no clear evidence of any regular empirical relationship between IMF policies and conflict. For example political instability, often associated with IMF austerity, does not necessarily lead to long-term violent conflict; indeed protests can serve in some cases as a one-off release of tension. Inequality has different meaning across countries and can “obscure the nature of conflicts by suggesting that they are primarily class phenomena”; in this regard social exclusion is perhaps a more pertinent concept.

If low growth is linked to conflicts, are IFIs good for growth?

Cramer and Weeks make an important distinction: IMF policies might not directly create conflict, but IMF policies are not good for growth. They show that IMF conditionality in sub-saharan Africa has been statistically associated with lower growth over decades – one of the variables linked with conflict. In the case of Sierra Leone, “ill-planned and inflexible stabilisation and adjustment programmes provoked an unnecessarily severe decline, which undermined the population’s limited confidence in the government to manage the economy. IMF and World Bank policies did not create regional tensions… However, the economic mismanagement associated with stabilisation and adjustment policies left the government without resources, economic or political, to manage the accumulating tensions”. Many authors (including Woodward, Hanlon and Addison) agree that tensions and conflict can be an inevitable and necessary aspect of development. The challenge is not to suppress conflicts but to ensure they do not become violent.

Policies for peace

One of the key problems is fiscal and monetary orthodoxy: “the monetary approach to balance of payments is not a model sensitive to complex structural and conjunctural forces that tend to provoke conflict” conclude Cramer and Weeks. This is also valid in reconstruction, as illustrated by the case of Mozambique (Hanlon, 1996). Macroeconomic policy should accommodate growth, and monetary policy should be used to foster investment. The Bank should prioritise rebuilding infrastructure (despite IMF reluctance), industrial and trade policies should be more based on technological change and improving skills. Cramer and Weeks also denounce as “badly flawed, ahistorical, and highly cynical in its implications” the “new political economy” that underpins the Bank’s ‘good governance’ agenda.

The question of the size of the fiscal deficit that the IMF is prepared to accept is a central debate. Conservative growth predictions can result in excessive austerity and become self-fulfilling prophecies. Addison (2004) argues that if fast post-war growth can be encouraged and achieved, this can broaden the domestic tax base. Combined with better tax collecting this can close any fiscal deficit problems from the revenue rather than the expenditure side. Therefore donors should be prepared to finance the fiscal deficit for at least the first five years of peace, as evidence shows that revenue reform can correct problems with time.

The cart before the horse?

One major question is also how fast, and in which order reforms should be undertaken – especially for particularly sensitive structural reforms.

Some observers argue that reforms should not be rushed, and should only be decided when a democratic, legitimate government is in place (see Box). This ensures that people have a say in the decisions that will affect them, and avoids creating discontent or mistrust towards a transitory government whose legitimacy is not well assured. It also, crucially, gives more time to build capacity of the public sector to implement the reforms.

Another view however (Addison, 2003a and 2003b) is that delaying reform is risky, as an inbuilt tendency to re-create the past will prevail. Some reforms can be carried out at the same time as political progress is being made (while contributing to send a signal that authorities are prioritizing povery reduction) and include capacity building. Tony Addison sees reform of public finances as crucial, to build a viable state, foster democracy and avoid recreating tensions. This includes reforming tax collection and creating a transparent system of public expenditure management with democratic oversight – especially in the case of resource-rich countries such as Angola.

Another immediate priority (if possible even during the conflict) should be to put a moratorium on sales of assets such as land, forests, fisheries etc to prevent private interests grabbing them in the confusion.

Donors often get their priorities wrong however. Addison points at the “weak underbelly” of post-conflict reforms in many countries: privatisation. This tends to be prioritised by donors because it is easy to execute with one stroke of the pen, and ‘progress’ is easy to demonstrate. But while there is usually a lot of pressure to privatise state owned companies, this has often been carried out in a non-transparent way (as in the case of Mozambican banks for example) and can benefit war criminals.

Appropriate instruments?

One of the recent changes in the Bank’s approach to conflict is the idea than it should not only finance reconstruction but also actively contribute to reduce the probability of conflict. Implementing this commitment is difficult. Any World Bank project or programme can in theory have consequences on or be affected by potential conflicts. This is perhaps especially true of projects involving forced displacement, and for projects in extractive industries, as highlighted by the recent Extractive Industries Review which recommends that the Bank should not support projects in areas involved in or at high risk of armed conflict.

In order to become ‘conflict-sensitive’, the Bank would have to systematically assess the risks of violent conflict likely to be caused by, or have an impact on an operation. Similarly, while there are various views on the direct linkages between IMF programmes and conflict, Fund programme design could incorporate an assessment of the potential impact on the risk of conflict when discussing trade-offs between policy choices.

In practice this is difficult for various reasons. The Bank’s and the Fund’s mandates officially prohibit any activity of a political nature. Assessing the risk of conflict in a member country would force the Fund and the Bank to tread a fine line, as it would mean having to deal not only with questions of social tensions but also with questions of the distribution of power. The Bank would also have to determine whether it can fund a project according to explicit regional, geostrategic factors which would take it to the limit of making openly political judgments and might create tensions among member countries. The Bank’s International Finance Corporation has been criticised recently for approving the Baku Tbilisi Ceyhan pipeline project in a very sensitive region despite the high risks involved.

At the moment the Bank’s Conflict Prevention and Reconstruction unit provides staff with a Conflict Analysis Framework that they can use on a voluntary basis (see Update 36), and has recently started reflecting with UK’s Department for International Development on how to make Poverty Reduction Strategy Papers conflict-sensitive. The Bank has also developed a specific framework for engaging in countries that have “very weak policies, institutions and governance”, including those emerging from conflict. The Bank says aid fails in these countries -dubbed Low Income Countries Under Stress, or LICUS- because they lack the capacity and willingness to undertake reforms. Therefore the Bank emphasis in these countries is on 2 or 3 key reforms easy to implement and yielding quick results. Macroeconomic reforms are usually prioritised. However the Bank’s own Policy Research Report (Collier et al, 2003) says this is not appropriate to post-conflict countries, where “priorities should be broader” and social policies are relatively more important because they yield more results in terms of growth, and they send a positive signal of the government’s intent.

The Bank’s analysis of what works in conflict-prone or conflict-affected countries is open to debate. But does it matter? In other words, what is the real impact of this analysis on Bank operations? It seems limited now, and it is likely that the uptake will be slow at best (and the impact marginal) if the right incentives and the capacity are not in place.

Systematic conflict risk assessments for the various arms of the Bank would mean additional hurdles and costs for project approval, which might be resisted by governments and staff alike. As for the myriad of assessments that form the Bank’s Economic and Sector Work, questions arise as to whether Bank staff should be carrying out conflict risk and impact assessments itself. Consultants hired for such assessments tend to tell the Bank what it wants to hear, as many powerful incentives are in competition. Independent panels composed of actors with various backgrounds and perspectives would be more appropriate. However the Bank has not proved until now it can learn significantly from research and assessments by others, but rather tends to reinvent the wheel (see Bretton Woods Project, 2003).

In the 1990s the IMF expanded the scope of its emergency assistance (which implies more flexibility in the conditions attached, as well as disbursement modalities) to include post-conflict situations. However it is unclear which framework the Fund uses to tailor its assistance to conflict-prone or conflict-affected countries – if any. The institution is already deeply divided on the issue of whether it should be carrying out poverty impact analysis of its own programmes. Integrating conflict risk into its analysis is unlikely to be high on its agenda for some time.

The World Bank, between security and development?

The example of Afghanistan shows that aid can hardly have its expected effects in transition from conflict if a country remains insecure. Should the World Bank play a role in making countries more secure? While its policy on conflict clearly states that it should not provide direct support to disarm combatants (see Update 35), the Bank supports demobilisation and reintegration programmes, as well as landmine clearing. Its activities are increasingly treading a fine line between security and development. But of course there is some level of ambiguity in the argument that security is a necessary condition for development. Chad’s President Idriss Deby used it to justify buying arms with the bonus paid by oil companies building a Bank-supported pipeline.

Learning from others

Paradoxically, the Bank’s apparent move to go ‘back to basics’ is raising new questions around its mandate, as well as its capacity. Efforts to mainstream knowledge about the causes of violent conflict, and how to avoid it are still minimal in the light of the many competing incentives faced by staff.

Systematising conflict risk assessments in Bank operations (and IMF surveillance and programme design) seems like the logical answer. It is not an easy route however and results are not guaranteed, partly because it means dealing openly with complex politics, and partly for capacity reasons.

The Bank and the Fund have rarely shown a great ability to learn from outside views, even based on solid evidence, when they do not confirm their expectations or priorities. A first step would perhaps be discussing openly and acting on the findings of the Bank’s own research, synthesized in the Collier report ‘Breaking the conflict trap’.

But the learning process can be expected to be slow at best. A key problem is that evidence on the impact of World Bank and IMF programmes in creating the conditions for war goes to the heart of economic orthodoxy. The fact that even the World Bank in some cases has criticized IMF austerity in post-conflict environments (Hanlon, 1996) would be encouraging in this respect if the new draft of the Bank’s own adjustment policy did not state that it would only get involved in a country where a sound macroeconomic framework (ie, some form of IMF involvement) is in place.

The fact that the Fund is currently reviewing the modalities of its involvement in low-income countries might provide some limited opportunities for public debate of the concept of stabilisation and the specific needs of these countries, especially when prone to or affected by violent conflict. But what is really on the table is unclear, and again the Fund is not particularly known for its ability to listen – let alone put external recommendations into practice.

February 2004

With thanks to Tony Addison and Chris Cramer for their comments

Send comments to policy@brettonwoodsproject.org


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T. Addison (2003b and 2004), personal communications

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C.P. Chandrasekhar and Jayati Ghosh (2003), The Post-War Afghan Economy

M. Chossudovsky (1995), IMF-World Bank policies and the Rwandan holocaust

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World Bank (2003), Breaking the conflict trap