Europe questions IFIs on conditionality: whose outcome?

1 April 2008

by Nuria Molina, Eurodad

A new report shows that IMF structural conditionality did not decline in the five years after the approval of the Fund’s conditionality guidelines. With little progress at the World Bank, many wonder whether the European Commission’s new approach is what is needed.

A briefing by Eurodad, which uses the Fund’s own conditionality data, finds that IMF loans carry an average of 14 structural conditions each. These are conditions spelling out policy reforms to the structure of a borrower’s economy, such as privatisation. Sensitive policy reforms – including privatisation and liberalisation related conditions, as well as other conditions prescribing regressive taxation, or constraining the fiscal space available to recipient governments – comprise a third of the IMF structural conditions and their number has also not declined.

The Fund continues to push conditions in areas beyond its core mandate of monetary policy, public financial management and financial sector soundness. These non-core areas include state-owned enterprise reform and privatisation, social policies, civil service reform, or regulatory reform. Eurodad estimates that nine per cent of IMF structural conditions are privatisation-related, and 11 per cent are privatisation and liberalisation conditions in the banking and financial sector.

Then IMF president Horst Koehler wrote to IMF senior management in September 2000: “I am personally convinced that there is substantial scope to streamline and focus our conditionality, both to reinforce country ownership of the programmes which the Fund supports and as part of our overall efforts to focus the work of the Fund on its core areas of competence”. This call culminated in the approval of new conditionality guidelines in September 2002, which committed the IMF to the principles of ownership and criticality in its application of structural conditionality, as well as to streamlining the number of conditions (see Update 32). Over seven years later it seems that these recommendations from the top have been more honoured in the breach than in the observance. A recent Independent Evaluation Office report confirms that progress in implementing the conditionality guidelines has been limited (see Update 59).

The World Bank is not doing any better. Even if the Bank claims to have reformed its conditionality policy, Eurodad analysis published in November found that more than two thirds of loans and grants from the Bank’s International Development Association (IDA) still had sensitive policy reforms attached (see Update 58). The majority of these were privatisation-related conditions.

In light of these findings, European civil society demanded their government’s contributions to IDA were made contingent on further progress on the implementation of the Good Practice Principles on conditionality. Disappointingly, the final report of the IDA negotiations published in March welcomes “progress under the Good Practice Principles on conditionality” and management’s proposal to further review application of conditionality as part of the internal review of Development Policy Operations. There is no mention of calls from civil society and some shareholder governments for an independent review of the Bank’s use of conditionality.

Policies or outcomes?

The European Commission (EC) has introduced a new approach to conditionality, one which is garnering increasing attention across Europe and in Washington. The EC says it will emphasise conditions focussing on “outcomes” rather than on policies. This means that governments negotiating a programme with the EC can propose objectives they would like to reach, rather than commit to implementing specific policies. As long as the government makes continued progress towards these objectives the EC will continue to provide its aid money, often as budget support.

A Eurodad study launched in February compared this new EC approach with the results frameworks that have been announced in recent years by the World Bank and IMF. The report shows that the World Bank and the IMF’s treatment of the term “results” goes well beyond that of the EC, which largely looks at on the ground poverty reduction and human development improvements. The World Bank uses the term to refer to the proximate results of policy actions as well as results for people on the ground. An example for Tanzania is the requirement to improve its ranking in the World Bank’s controversial Doing Business index (see Update 60). The Commission, by contrast, focuses on results such as increasing net school enrolment rates and has, to a large extent, phased out economic policy conditions from their aid which is channelled to poor countries as budget support.

Tracing government responsibility for successes and failures in education, health and other sectors is a challenge, recognised in Commission reports and assessed in the Eurodad study. It is hard to find reliable baseline or annual data, and when shocks occur it is debatable whether the government should be blamed for slower progress. Some developing country decision-makers fear that outcome-based conditionality might make them responsible for results which are out of their hands. In this regard, the Malawian minister of finance Goodall Gondwe said “outcome indicators are not in the hands of the government and they are very difficult to achieve.”

The EC seems to lack the courage of its convictions with its new instrument. It is using it only to disburse about 2-3 per cent of its overall budget support. The rest of its finance is still linked to more traditional policy conditions. From recipient countries’ point of view little has changed. “Donors come along with new formulas every now and then, and after few years these fade away and they come with new ones…But it is always about their agendas, not necessarily ours” a Tanzanian civil society activist says . Governments still face policy conditions and now have to get used to outcome conditions as well. An EC official quoted in the Eurodad report was forced to admit that “there is now more conditionality than in the past.” This was also validated by the report’s analysis of the EC’s pilot operations in Burkina Faso and Mozambique.

Citizen groups will continue to demand a reduction in conditions but also transparency in how money is spent and information on whether it is helping countries reach the Millennium Development Goals. The EC’s attempt to break ranks with the Washington-based institutions is still tentative, but provides an opportunity to test out and debate a new approach.

The World Bank certainly seems to be on notice. At a recent launch event for the Eurodad report in Brussels, Manuela Ferro, country economics manager in the Bank’s Operations Policy and Country Services department, made a ten minute intervention and engaged in lively debate with the EC official at the table. Ferro insisted on the ‘official’ World Bank arguments for being reluctant about this new approach: the problem of attributing poverty reduction results to the action of the government, the lack of data to measure results, and the fear of leaving developing countries to their own fate if multilateral institutions withdraw their “valuable policy advice”. Surprisingly, the World Bank and some European countries, while expressing doubts about the merits of this new approach, proved to be more open than in the past.