World Bank, IMF: Helping peace or creating conditions for war?

5 April 2004 | Briefings

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

The proportion of conflict-related World Bank activities and financing has increased significantly in recent years to represent over a fifth of total current Bank lending. While this is undoubtedly part of the Bank’s original remit, some observers have questioned its motives for stepping up work in this area. In a new report on Afghanistan (see box), 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”. She says International Financial Institutions (IFIs) 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 in some Bank documents is more evocative of a commercial strategy than of development assistance: “new products for a new era”.

The politics of reconstruction

The arrival of the Fund and 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 a country’s economy and act as a Trojan Horse for private interests located in the most powerful countries. An important contribution to the debate on who benefits from reconstruction would be the publication of figures about what 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 interests. Should multilateral poverty reduction resources be spent to rebuild a country shattered by US and British bombs without an international mandate?

The deepest concern of many civil society groups is 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. The Bank, in its role as government financier and donor coordination takes up powerful positions. A Bank study, Breaking the Conflict Trap argues that “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.”

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. Amy Chua of Yale Law School says war in Sierra Leone in the 1990s was the result of factors that include the presence of a 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”. Canadian researcher Michel Chossudovsky blames World Bank and IMF policies for exacerbating tensions that led to the Rwandan genocide.

Afghanistan: IFIs rushing to re-engagement?

A report by Anne Carlin for US-based NGO Bank Information Center looks at IFI involvement in Afghanistan. The report shows how after a 23-year absence the World Bank, Asian Development Bank and IMF re-engaged in 2001. They immediately sat at the Afghan government planning table and after six 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 administered by the World Bank and “skimmed off the top before the remaining funds were made available to the Afghan government”.

IFI 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.”

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 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.

Rush to Reengagement in Afghanistan: The IFI’s Post Conflict Agenda, by Anne Carlin, BIC, December 2003

Open University course director Joe Hanlon entitled his review of a recent Bank report – Breaking the Conflict Trap– “World Bank admits its policies caused war”. He pointed out that the report argues it would be “particularly helpful” to prevent war if the poorest countries could “diversify out of dependence on primary commodity exports”, while the Bank has played a role in de-industrialisation and pushing countries into dependence on a few commodities.

Most observers however agree it would be misleading to lay the blame for any given conflict solely on Bank and Fund policies. Chris Cramer and John Weeks from the School of Oriental and African Studies caution against “isolating an individual policy mechanism, or even a package of policies”. Looking at sub-saharan Africa, they find no clear evidence of any regular empirical relationship between IMF policies and conflict. They make an important distinction: IMF policies might not directly create conflict, but IMF conditionality in sub-saharan Africa has been statistically associated with lower growth over decades and this is 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”.

They point out that macroeconomic policy should accommodate growth, and monetary policy should be used to foster investment. The Bank should prioritise rebuilding infrastructure (despite IMF reluctance because of deficit fears), industrial and trade policies should be based on technological change and improving skills. Cramer and Weeks also denounce the ‘new political economy’ that underpins the Bank’s good governance agenda. Tony Addison argues that fast post-war growth must be encouraged and achieved to broaden the domestic tax base. However, donors should be prepared to finance the fiscal deficit for at least the first five years of peace.

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 transitional government and gives more time to build capacity of the public sector to implement the reforms.

Others argue, however, that delaying reform is risky and political signals of a break with the past must be given. Reform of tax collection and the creation of a transparent public expenditure management system is vital, especially in resource-rich countries such as Angola. Another priority is a moratorium on sales of assets such as land, forests and fisheries. Addison points out that privatisation tends to be prioritised by donors because it is easy to execute and ‘progress’ is easy to demonstrate. But privatisation has often been carried out in a non-transparent way (as in the case of Mozambican banks) and can benefit war criminals.

Appropriate instruments?

The Bank has recently stated that it should not only finance reconstruction but also actively contribute to reduce the probability of conflict. Any World Bank project or programme can in theory have consequences on conflicts. This is true of projects involving forced displacement for example, and for projects in extractive industries. The recent Extractive Industries Review recommends explicitly that the Bank refrain from supporting projects in areas at high risk of armed conflict.

To become ‘conflict-sensitive’, the Bank would have to systematically assess the risks of violent conflict likely to be created by, or have an impact on an operation. Similarly Fund programme design and surveillance could incorporate an evaluation of the risks of conflict when discussing trade-offs between policy choices.

In practice this is difficult for various reasons. The Bank’s mandate explicitly prohibits any activity of a political nature. Assessing the risk of conflict would force the Fund and the Bank to make judgments on questions of power distribution. The Bank would also have to determine whether it can fund a project according to regional, geo-strategic 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 without taking all the various risks into account.

At the moment the Bank has a Conflict Analysis Framework that staff can use on a voluntary basis, and has recently started discussions on how to make Poverty Reduction Strategy Papers conflict-sensitive. The Bank has also developed a framework for engaging in countries with “very weak policies, institutions and governance – including those emerging from conflict”. This is the so-called Low Income Countries Under Stress (LICUS) initiative where the Bank emphasizes two or three key reforms that are easy to implement and yield quick results.

Getting the Bank’s analysis right is one thing. But unless the right incentives and capacity are put in place it may matter little. Systematic conflict risk assessments for the various arms of the Bank would mean additional hurdles for project approval, which might be resisted by governments and staff alike. Consultants hired for such assessments tend to tell the Bank what it wants to hear, as many powerful incentives are in competition. Independent analysis would be more appropriate.

The example of Afghanistan shows that aid can hardly have its expected effects in transition from conflict if a country remains insecure. Should, however, the World Bank play a role in making countries more secure? While its policy states that it cannot directly support disarmament of combatants, the Bank supports demobilisation and reintegration programmes, as well as landmine clearing.

Paradoxically, the Bank’s apparent move to go ‘back to basics’ is raising new questions around its mandate and capacity. Systematic conflict risk assessments in Bank and IMF programme design are not easy to design or implement. Nor is overturning the economic orthodoxy which can contribute to social unrest and block efforts to rebuild after a conflict.