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TWN Info Service on Finance and Development (Nov07/05)

13 November 2007


WORLD BANK STILL PUSHING ECONOMIC POLICY CONDITIONS

The World Bank has made only limited progress in reducing the number of economic policy conditions, such as privatisation and trade liberalisation, attached to its financing but is instead reclassifying and bundling together conditions in order to downplay use of such conditionalities, a study has found.

A report released last Friday by the European Network on Debt and Development (Eurodad) concludes that in spite of Bank’s claims to the contrary, the number of controversial economic policy conditions contained in grants and loans to low-income countries remain, at best, unchanged or at worse, increased slightly in the two years since the Bank’s implementation of its Good Practice Principles (GPP) on conditionality.

The following is an article on the Eurodad report, “Untying the Knots: How the World Bank is Failing to Deliver Real Change on Conditionality”  which concludes that more than two thirds of Bank loans and grants still have economic policy reforms attached to them as conditions. This article was published in the SUNS #6363, Monday, 12 November 2007.

This article is reproduced here with the permission of the SUNS.  Reproduction or recirculation requires permission of SUNS (sunstwn@bluewin.ch).

With best wishes
Martin Khor
TWN


World Bank Still Pushing Economic Policy Conditions
By Celine Tan, Warwick, 9 November 2007

The World Bank has made only limited progress in reducing the number of economic policy conditions, such as privatisation and trade liberalisation, attached to its financing but is instead reclassifying and bundling together conditions in order to downplay use of such conditionalities, a study has found.

A report released today by the European Network on Debt and Development (Eurodad) concludes that in spite of Bank’s claims to the contrary, the number of controversial economic policy conditions contained in grants and loans to low-income countries remain, at best, unchanged or at worse, increased slightly in the two years since the Bank’s implementation of its Good Practice Principles (GPP) on conditionality.

Based on an extensive survey and analysis of grant and loan conditionalities in 16 countries, the report, “Untying the Knots: How the World Bank is Failing to Deliver Real Change on Conditionality”, finds that “more than two thirds of Bank loans and grants (71%) still have sensitive policy reforms attached to them as conditions”. These include conditionalities requiring countries to undertake structural reforms in areas such as “price liberalisation, privatisation, public enterprise restructuring, commodity price regulation and subsidies, trade reforms and tariff reductions”.

Eurodad says that this “highlights serious concerns with the Bank’s implementation of the Good Practice Principles”, introduced two years ago to streamline and reform the use of conditionalities in light of mounting criticism of such conditionalities.

The study contradicts World Bank data which suggests that the average number of conditions in its financing has fallen from 46 per loan prior to the GPP to 37 per loan today. Instead, it highlights that this reduction is largely due to a reduction in the number of non-legally binding conditions (from 33 per loan to 24 today) while legally binding conditions remain unchanged at 13 per loan.

Further, the study found that the Bank’s classification system and practice of bundling conditionalities distorts the organisation’s figures on conditionalities, enabling it to downplay the continued usage of economic policy conditions.

The former enables the Bank to impose economic policy conditionality, such as privatisation, under the guise of other forms of more benign conditionality, such as public sector governance, while the latter enables the Bank to statistically reduce its number of actual conditions while imposing the same degree of structural reform in borrowing countries.

According to Eurodad, the Bank has been “bundling” numerous required policy actions into a single condition in loans so that the resulting conditionality figures are overly optimistic.

For example, figures for Uganda, a country with the highest number of conditionalities in 2005, shows a sharp decrease in conditions attached to loans in 2006 but this was a result of the Bank’s practice of counting several policy reforms - sometimes as many as 11 - into a single conditionality. Consequently, while the Bank claims that Uganda’s Poverty Reduction Strategy Credit (PRSC) V contained only 11 conditions, when unbundled, the figure was closer to 38 conditions.

On a sample of 1,341 Bank conditions, the Eurodad study found that almost 7% of the conditions “contained multiple policy actions” which if counted as separate conditions, increases the overall number of conditions by 12%, an increase that is not reflected in the Bank’s calculations or classifications.

“Therefore, although on the surface it appears that the World Bank has made considerable progress on reducing the number of legally and non-legally binding conditions, this progress is, on closer analysis, not nearly as significant”, says Eurodad.

The Bank defines legally binding conditions as conditions with the power to suspend finance, including prior actions and tranche release conditions, while non-legally binding conditions refers to conditions such as benchmarks, which do not necessarily carry a financial penalty for non-compliance.

The Eurodad study counted both types of conditionality in their study as it felt that such conditions continue to “influence recipient countries’ decisions and are used as a guide to assess performance of a loan throughout the year”.

It also categorised conditions as economic policy conditions if these conditions were “related to financial and private sector development, economic management, privatisation and privatisation-related activities, public enterprise reform, liberalisation, trade and other issues related to trade like the removal of non-trade barriers, regulatory reform, exchange rate changes, customs, debt management and fiscal policy”.

In this respect, the study found that the Bank was wrongly downsizing the number of conditions it classifies as economic policy conditions. Eurodad’s analysis found that almost 10% of all conditions which the Bank had not classified as economic policy conditions were, upon closer inspection, economic policy conditionalities.

The report highlights the increasing use of public sector governance conditions as a means of inserting economic policy conditions through the back door: “More than half of the conditions Eurodad classified as economic policy conditions had been categorised by the Bank as public sector reform”, with many of them enabling “the legal and policy environment for privatisation”.

As a result, Eurodad argues that privatisation has now been “re-branded as public sector reform” as opposed to economic policy reform. These public sector reforms include reforms to public procurement policy or regulations guiding the purchase of goods and services at every level of government. These conditions which have an economic impact have been classed as public sector conditions under the guise of governance reforms.

For example, Bangladesh’s Development Support Credit II contains a condition requiring the “corporatisation of at least one urban distribution company” which was classified as a public sector governance reform condition, and a condition related to the privatisation of tertiary healthcare classified under “human development”.

Meanwhile, conditions requiring the governments to implement policies to secure private sector participation in the delivery of public services in both Burkina Faso and Vietnam have also been classified as public sector governance conditions by the Bank.

According to the report, “If these conditions are taken into account, then Eurodad found that on average 11 conditions per loan were economic policy conditions - almost double the number that the Bank claims. As a percentage of overall conditions, Eurodad found that economic policy conditions constitute a quarter of all World Bank conditions”.

Based on Eurodad’s classification of loan conditions, the report found that economic policy conditions have risen from constituting 20% of all conditions pre-GPP to 25% post-GPP. The majority of economic policy conditions related to privatisation, with 12 out of 16 countries studied having to undertake privatisation-related reforms in exchange for financing from the World Bank.

Bank staff are supposed to be guided by the five principles outlined in the GPP - ownership, harmonisation, customisation, criticality, transparency and predictability - when designing conditions for Bank financing.

However, the Eurodad study noted that “interviews with World Bank staff in Washington and in country offices show that most Bank’s personnel are still unaware of the principles or lack the incentives to translate the change of policy into a change of practice”, with staff saying that they were following largely a “business as usual” approach with only small changes as a result of the GPP.

In addition, the report argues that “the small print behind the GPPs reveals that they represent much less of a departure from previous Bank policy than might first appear”.

For example, the principle of “ownership” does not necessarily mean that “countries should choose their own development strategies and the policies which flow from them” but that its sufficient to demonstrate compliance with the GPP if there is acceptance by country authorities of “a given set of policies” even if they were designed by donors.

Transparency and predictability’ also focuses on internal Bank-government negotiations rather than transparency to citizens and parliaments “that true accountability would require”, notes Eurodad.

The report also highlights a number of case studies in which countries have had to or are going to have to undertake significant privatisation reforms with potentially disastrous effects on economic and human development.

In Afghanistan, the Bank is backing a policy which will lead to the privatisation of more than 50 state-owned enterprises, ranging from energy, mining, transport, construction and textiles, constituting the bulk of the country’s home-grown enterprises, over the next two years. Twenty-one enterprises are being privatised this year alone.

According to Eurodad, “the enterprises slated for privatisation currently employ around 25,000 people” and the government agency responsible for such privatisations “estimates that at least 15,000 [people] will be made redundant as companies are either liquidated or have their assets sold to private bidders”.

Eurodad expresses concern over the potential social and political impacts of such a rushed privatisation process as despite donor promises for workforce retraining, there remains little alternative employment for retrenched workers, many of whom support up to ten family members.

“The severance and retraining fund for ex-workers, financed by the World Bank, is woefully inadequate to cover the cost of so many redundancies. The average wage for a public sector employee in Afghanistan is $40 a month ($480 a year), slightly higher than the national average of $30. If the privatisations are to cause 14,5000 job losses, then nearly $70 million would be needed to compensate these workers for one year, far below what is currently on offer: $2 million,” says the report.

The Eurodad study covers all grants and loans to 16 countries - Armenia, Bangladesh, Benin, Burkina Faso, Georgia, Ghana, Madagascar, Mali, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Vietnam - by the World Bank’s concessional lending arm, the International Development Association (IDA) between October 2005 and July 2007. The majority of the loans surveyed were PRSCs and programmatic support loans.

The findings were based on an analysis of conditions found in the World Bank’s ALCID database, the database used by Bank staff to monitor use of conditionality, and which was made accessible to Eurodad, the first time that has been made available to a civil society organisation.

The report of the study has been released in conjunction with the second meeting of the IDA deputies on the 15th replenishment of IDA to be held in Dublin, Ireland next week. Eurodad and other NGOs are calling for the IDA donors to take into account the Bank’s practice on conditionality in negotiations for contributions to the facility.

They are asking for governments to make their contributions contingent upon the Bank’s commitment to end its use of economic policy conditionality, especially in controversial areas such as privatisation and trade liberalisation, and to strengthen its implementation of the GPP.

In a letter to their governments, European NGOs said: “We are writing to urge you to make your contribution to the IDA process contingent on the World Bank ending its use of economic policy conditionality and its support for fossil fuel development. This call is part of a pan-European World Bank Europe’ Campaign, involving more than 70 Non-Governmental Organisations (NGOs) across the continent. So far, almost 10,000 members of the public have taken action as part of the campaign”.

The Bank is currently under pressure to secure firm financial commitments to IDA over this replenishment period as it is facing a financing shortfall due to foregone debt re-flows as a result of the Multilateral Debt Relief Initiative (MDRI) and budgetary constraints in major donor countries.

The IDA needs to meet its target of $39 billion to cover its estimated financing needs under the IDA-15 commitment period (2009-2011), including meeting lost credit re-flows under the MDRI amounting to $6.7 billion over the next ten years. So far, donor contributions have fallen short of the Bank’s estimates with firm donor commitments for the MDRI alone standing only at $3.8 billion, leaving a gap of $2.9 billion.

Last month, Bank president Robert Zoellick announced a $3.5 billion pledge to the IDA from the World Bank, to be contributed equally by the International Bank for Reconstruction and Development (IBRD) which lends to middle-income countries and the International Finance Corporation (IFC), the Bank’s private sector arm. The Bank is hoping that this pledge demonstrates leadership by example by spurring other donor countries to increase their commitments to IDA.

The Eurodad report may be found at:

http://www.eurodad.org/whatsnew/reports.aspx?id=1804

 


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