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TWN Info Service on Finance and Development (Nov06/02)

25 November 2006


NORWAY CONFERENCE WILL REVIEW IMF-WORLD BANK CONDITIONALITY

Pressure on the World Bank and the International Monetary Fund to change the policy conditionalities attached to their loans is expected to grow from a conference being hosted next week by the Norwegian government to discuss this issue.

The conference in Oslo on 28-29 November will bring together government officials from donor countries, academics, NGOs and international agencies to review these policy conditionalities and plan follow-up action.

Meanwhile, a study commissioned for the conference by the Norwegian government has been critical of how the Bretton Woods institutions were still pressurising borrowing countries to implement privatization and trade liberalization, in spite of rhetoric to contrary. 

The study also found that there remains a notable absence of “policy space” in many of these countries to implement economic policies contrary to those advocated by the Bank and the Fund despite the institutions’ conceptual shift towards “ownership” as a principle guiding their lending operations.

Below is a report on the upcoming conference and details of the commissioned study.

It was published in SUNS # 6148 Friday 24 November 2006

With best wishes
Martin Khor

Norway conference will review IMF-World Bank conditionality

By Celine Tan, 23 November 2006

Pressure on the World Bank and the International Monetary Fund to change the policy conditionalities attached to their loans is expected to grow from a conference being hosted next week by the Norwegian government to discuss this issue.

The conference in Oslo on 28-29 November will bring together government officials from donor countries, academics, NGOs and international agencies to review these policy conditionalities and plan follow-up action.

According to NGOs involved in the meeting, the Conference in Oslo on 28-29 November could be a “breakthrough” in the way governments of some developed countries view these conditionalities and the changes they would request the Fund and the Bank to make.

Meanwhile, a study commissioned for the conference by the Norwegian government was critical of how the Bretton Woods institutions were still pressurising borrowing countries to implement privatization and trade liberalization, in spite of rhetoric to contrary.

An information note on the conference by Norway’s Ministry of Foreign Affairs states that “there is an ongoing debate about how conditionality should be applied, and what it should comprise.  For instance, both Norway and the UK state that the World Bank should not tie its loans to privatisation and liberalisation requirements.”

The conference will discuss current conditionality practice;  the extent conditionality is needed and how it should be formulated; the process leading to conditionality and the “ownership of conditionality related to privatisation and liberalisation”.

The meeting will also aim to reach a common understanding of what constitutes necessary and sufficient conditionality and to issue a joint statement on remaining challenges related to conditionality.

The conference is hosted by Norway’s Minister of International Development Minister Erik Solheim.  Speakers will include the UK’s Undersecretary of State for International Development Gareth Thomas, Former Ugandan Finance Minister Gerald Ssendaula, senior World Bank and IMF officials, and Christian Aid policy head Charles Abugre.

The Norwegian Finance Minister Kristin Halvorsen will chair a closed-door session, on follow-up action, for 29 November for invited representatives from donor Ministries.

The session’s objective is “to reach a common understanding on what constitutes necessary  and sufficient conditionality and agree to how to follow up on IFI policy and practices.”

The conference has been prompted by the concern of the Norwegian government about the adverse effects of some of the conditionalities of the Fund and the Bank, especially those relating to privatisation and liberalisation.

This is in light of the current Norwegian government policy – contained in the Soria Moria Declaration on International Policy – that Norwegian aid should not be used to support financing programmes which are conditional on privatization or liberalization reforms undertaken by the client government.

These continuing concerns can be seen from the findings of a study commissioned by the government for use of the Conference.   The study examined the extent to which the Bank and the Fund continue to pressure borrowing governments to privatize or liberalize through loan conditionalities. 

It concluded that privatization and trade liberalization continue to feature significantly in loan conditionalities and policy advice from the both the Bank and the Fund in spite of rhetoric to contrary.

The report, entitled “The World Bank’s and the IMF’s use of Conditionality to Encourage Privatization and Liberalization: Current Issues and Practices”, found that the Bretton Woods institutions still express “strong policy preferences” in favour of privatization and trade liberalization in developing countries although there has been some changes in the prescribed modalities through which such reforms are implemented in borrowing countries.

The study also found that there remains a notable absence of “policy space” in many of these countries to implement economic policies contrary to those advocated by the Bank and the Fund despite the institutions’ conceptual shift towards “ownership” as a principle guiding their lending operations.

A review, conducted by the commissioned research team, of 40 IMF programmes under the institution’s Poverty Reduction and Growth Facility (PRGF) showed that privatization and liberalization “still figure as important elements” in PGRF loans, with 26 out of 40 programmes containing conditions which “demanded either privatization or liberalization”, with privatization being the most common. This, again, is in spite of the IMF’s recently reviewed guidelines on conditionality which proposed to limit the number of structural conditions imposed by the IMF.

Conditionalities requiring countries to privatize state-owned enterprises were contained in 23 of the 40 programmes studied while an additional 10 programmes detailed privatization plans by the borrowing government but were not explicitly included in the loans as policy conditionalities, the study found. Accordingly, the report concluded that “in only 7 of the 40 cases did privatization not figure as an important element of the PRGF”.

The review also found that there was also a shift in emphasis in the policy conditionalities relating to privatization with conditionalities increasingly focused on developing regulatory frameworks and institutions to facilitate the process of privatization in developing countries. This shift is particularly noticeable in Bank lending conditions.

This shift is consistent with the Bretton Woods institutions’ much-touted shift from “first generation reforms” – of “getting prices right” – to “second generation reforms” – of “getting institutions right” highlighted in previous studies of Bank and Fund conditionality.

On liberalization, the study found that the Bank and Fund remain strong advocates of trade liberalization, including the removal of tariffs, price deregulation and the removal of subsidies in different economic sectors.

The study concluded that despite the lack of empirical evidence demonstrating the correlation between trade liberalization and poverty reduction, trade liberalization continues to “be oversold as a poverty reduction strategy” by the two institutions and that many Bank and Fund programmes continue to be geared towards “facilitating trade liberalization and export promotion” without clear analysis of what the impacts are on domestic economies and poverty.

The findings from a review of IMF policy and practice also reveal that “the Fund sees the liberalization of trade as a goal in itself and not as a case dependent item on a menu of development policies” for the borrowing country.

The report therefore concluded that the policies of the World Bank and IMF in the area of privatization and trade liberalization continue to be particularly problematic from the perspective of the Norwegian policy on aid as the use of conditionality, especially by the Fund to pursue reform in these areas, may be inconsistent to “the intentions of the Norwegian government”.

Furthermore, the report notes that while there is “a stronger sense of national ownership” of lending programmes today, this “ownership” is often circumscribed by various factors, not least the question of whether and how the concept of “ownership” is defined and applied.

The study found that “ownership” of economic policies under Bank and Fund programmes are weakened by the limited participatory process of national stakeholders in the design of policies, even though all the countries studied are required to engage in a broad-based participatory Poverty Reduction Strategy Paper (PRSP) process as a pre-requisites of their financing from the Bank and Fund’s concessional lending facilities.

“Ownership” is also weakened by the extensive use of foreign consultants in the design of economic policies in developing countries, leading to a lack of local input and constraints on local capacity to develop national plans. This lack of “policy space” is exacerbated by the lack of analysis of policy alternatives presented to the government in question and where there has been divergent voices in national policymaking, Bank and Fund officials have “used these differences strategically to promote their own view”.

There is also a concern, highlighted by the report, of the shrinkage of policy space resulting from increased donor coordination. While noting that harmonisation is a positive step forward in aid relations, this may turn out to be “a double-edged sword for borrowing countries”. The report’s case studies of four countries – Bangladesh, Mozambique, Uganda and Zambia – found that policymakers in developing countries express concern that donors may “gang up” on governments as a result of greater coordination of donor policies on aid, leaving client governments with even less policy space.

The report and the associated conference comes at a time when some European governments are beginning to rethink their aid policies, such as their approach to policy conditionality, particularly the linking of privatization and trade liberalization reforms to development financing.

Last year, the UK government had announced it will no longer condition its bilateral aid on countries adopting measures to privatize or liberalize while this year, its Department for International Development (DFID) announced that it was withholding £50 million of its funding to the World Bank as the UK government was dissatisfied with the progress the Bank was making in tying economic policy reforms to its lending.

The Norwegian government has not only expressed similar views on conditionality, it has also expressed greater support for developing countries in the international aid architecture, including advocating for faster and deeper debt relief and  the cancellation of “illegitimate debt” as well as for more progressive aid accounting, including the decoupling of “military aid” from official development assistance.

The government has also called for greater democratisation of the Bank and Fund, including “ensuring that the voting right is not solely linked to capital contributions”.

Norway also recently proposed to cancel US$80 million in debt owed to the country by five developing countries in acknowledgement that the debt was extended irresponsibly and without due regard for the developmental needs of the recipient countries.

The Norwegian government’s Soria Moria Declaration on International Policy can be found at: http://odin.dep.no/smk/english/government/government/001001-990363/dok-bn.html

 


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