IFIs: Major Barrier to Change in Aid System

Monday 24 November 2008, by Ahmed Swapan Mahmud

Despite the movement for democratisation across the developing world, the international financial institutions continue to bypass parliaments, a trend that is at odds with donor insistence on ‘good governance.

THE World Bank, International Monetary Fund, Asian Development Bank and other donor agencies have, for the past few decades, provided Bangladesh with loans and grants in the name of such lofty objectives as ‘poverty reduction’ and ‘international development’. However, these loans inevitably come tied with conditions which hinder the country’s economic growth and poverty reduction. The detrimental effects these conditions have had on Bangladesh are immeasurable, putting the country under increasing pressure to abide by the prescriptions imposed by the donors.

As advocates of corporate globalisation, international financial institutions and their allies work for international capitalism, exerting a heavy influence on global trade policies that mainly promote trade liberalisation and public sector privatisation. Many of the least developed countries have become a place of experimentation for trade liberalisation at the hands of international financial institutions that pressure the governments into liberalising trade policies. This causes serious devastation in public service sectors including heath, education, water, agriculture and food.

Despite the movement for democratisation across the developing world, the international financial institutions continue to bypass parliaments, a trend that is at odds with donor insistence on ‘good governance.’ The World Bank, the IMF and regional development banks attach conditions with an intention of economic reforms which they legitimise through a range of documents including poverty reduction strategy papers.

These PRSP contain conditions such as cutting social expenditures — also known as austerity — implementing user fees in basic services such as education and health, focusing economic output on direct export and resource extraction, devaluation of overvalued currencies or lifting import and export restrictions, removing price controls and state subsidies, privatisation or divestiture of all or part of state-owned enterprises, enhancing the rights of foreign investors vis-à-vis national laws, improving governance and fighting corruption. Many of these have negative consequences for the situation of the poorest people in these countries.

The IMF imposes two types of policy conditions, namely quantitative and structural. Quantitative conditions are imposed at the macroeconomic level of the poor countries, while the structural ones are for institutional and legislative policy reforms. All of them prove to be not relevant to tackling the challenges that the countries face, moreover they are unfair, undemocratic, ineffective, and inappropriate mainly because they undermine democratic accountability within countries and deprive the poor of the access to services (education, health, etc) at a low cost. Yet the influence of the IFIs to open up the domestic market is so powerful that the government cannot resist or deny their illegitimate influence and power.

Since the 1980s, the IFIs – backed by key G7 countries – have become increasingly preoccupied with the structural obstacles to growth and poverty reduction, and have sought to use loans to leverage the reforms that their Washington-based economists have deemed desirable. ‘As a result, the average number of World Bank conditions per program tripled between the early 1980’s and mid-1990’s, and by the 1990’s IMF ‘mission creep’ led to it bolstering the Bank’s efforts with its own structural conditions.

The World Bank provides most of its loans for a specific project on the basis of particular strategic policies, called structural adjustment programmes. The main conditions of SAP have been massive privatisation of industries and major utilities; the blanket application of the ‘free market policy’ which actually means a unilateral cancelling of all tariff restrictions by the country on the receiving end of the loans; withdrawal of all types of subsidies for the sake of ‘efficiency’; and drastic cuts in government spending in order to ensure so-called ‘macro-stability’ of the economy.

In many cases, in terms of policies and projects, the IFIs are directly violating the principles of the Paris Declaration. Aid is more aligned to structural adjustment policies striving for trade liberalisation and privatisation than nationally created development plans. The supremacy of donors continues to rule the day. Furthermore, by acting as the gatekeeper of aid disbursements by other countries, they act as a major hindrance to aid effectiveness reforms.

In the mid-1980s, when Bangladesh was under a military regime, structural adjustment programmes were introduced. This resulted in the disintegration of a number of industries including the Adamjee Jute Mills, which left millions of jute growers and jute mill workers in crisis and displaced 26,000 workers and their family members. The Bangladesh Petroleum Corporation has been under tremendous pressure to privatise, as well as the Chittagong Port, a move that would put the oil and gas sector of the country at the mercy of the large multinational companies (Breaking the Cycle of Neo-liberal Hegemony: How World Bank and IMF Stand Against the People,” Voice, January 2008). Similarly, the small and medium enterprise sector of the country is on the verge of collapse due to the misguided policy decisions of the IFIs.

Overall, SAP proved of no use in Bangladesh, leading the World Bank to introduce poverty reduction strategy papers. However, this was still prescribed by the WB and the IMF and agreed to by other donor agencies including the ADB. It reiterated the free market, privatisation and liberalisation conditions of SAP and the country was forced to accept and implement this PRSP as a precondition for receiving money from the donors. Like other countries, Bangladesh is bound to prepare a PRSP every three years to qualify both for concessional lending from the World Bank and IMF and for debt relief under the Heavily Indebted Poor Countries initiative.

The PRSP does not reflect the needs or the participation of the people but rather violates their fundamental right to development and a quality life. The strategies prescribed in the PRSP are not recognized by the people at large since these were imposed on the country. Civil society groups have had discussions and debate opposing the prescribed document and also criticising the government for accepting this enforcement of policy. The major reasons for opposing it were because it neither represents people’s aspirations and expectations, nor deals with the priority sectors.

The IFIs prevent democratic ownership by applying their strategies as conditional tools over the country. Furthermore, people are kept away from the whole process of the project formulation and implementation and there is no accountability of the donors for their actions. No democratic space is practiced either in policy formulation or project implementation processes.

Further issues arise. Not only is the PRSP a set of conditional lending policies imposed by the IFIs, but later other official donor agencies also agreed with the PRSP to be in place. In this way, the IFIs act as a gatekeeper putting strategies in place which other donors and recipient governments are only able to follow. The national government has little choice since it requires the aid and is forced to comply with this. However, it is noteworthy that it did this without even raising the issue in the national parliament. Clearly, the national development priorities have been undermined in the PRSP and the principles of Paris Declaration are totally ignored and sidelined by the IFIs and other donors.

This dominant position has not changed in recent times. The World Bank, ADB, DFID and Japan have prepared a joint country assistance strategy for Bangladesh for 2005-09. The CAS is aligned with the PRSP and encourages other donor agencies to collaborate at the sector level through improved coordination of implementation. By these means, the IFIs continue to dominate the other agencies and get them to implement their strategies and policies.

Nor have the IFIs reduced their influence in the face of the emergence of Sector Wide Approaches in the fields of health and primary education. They are yet to align themselves with these country procedures.

Many projects undertaken by the IFIs in Bangladesh ignored the opinions of local communities. For example, Khulna-Jessore Rehabilitation Project, which was funded by the ADB and was implemented in the south-west area of Bangladesh. The lack of consideration of local communities resulted in a project with disastrous consequences for the environment and communities’ livelihood. More than one million people have directly suffered in the area.

Though the project was not successful — as admitted by the ADB — there was no accountability for the cause of people’s suffering. Even the victims have not been compensated though the communities have been calling for this for the past few years. Donor’s supremacy and money-power nexus are imposed over the decision-making process and no accountability is practiced though there was a commitment by the donors to comply with the principles of Paris Declaration.

In June 2003, the IMF provided Bangladesh with a loan to be released in three years in three tranches, with some of the conditions being the renovation of government banks and the privatisation of the Rupali Bank. The reform of the banking sector of Bangladesh has already been initiated by the government of Bangladesh, the name of the project being ‘Industry Development and Bank Modernization’, with another one called ‘Central Bank Strengthening Project’ already in hand. The privatisation of banks could hamper the capital market as well as the economy as the government would be dependent on foreign capital for a longer period and would lose control over the economy.

Bangladesh has become a place of experimentation for trade liberalisation at the hands of international financial institutions that pressure the government into liberalising trade policies within and beyond the WTO framework. Following conditionalities stressed by WB and IMF, the National Board of Revenue decreased import taxes from 2 per cent to 1.5 per cent on 352 products. The IMF pushed for increasing revenue income and decreasing subsidies in the budget, and determined increases or decreases on product taxes. The government could not keep control over tax policies, and as a result, the price of essential commodities skyrocketed.

At the macro-economic level, the IMF has also played a major role in Bangladesh in fixing the national salary structure, reducing the interest rate of Sanchaypatras (savings schemes) and raising the exchange rate of the dollar against the local currency taka. These policies have significantly impacted upon people’s livelihoods. When investment was much needed to accelerate growth and provide key services to reduce poverty, the IMF-imposed tightening of the credit supply brought strong protest from the country’s business community. In the end, tightening the money supply and credit growth through raising interest rates failed to maintain macroeconomic stability; rather, it increased the cost of investment and thus had a negative impact on output and employment. The result, at the end of 2007, was that inflation was creeping up to double digits, but at the cost of investment, employment and GDP growth.

Also since conditionality relates not only to donor goals but also the process for achieving these goals, the people of the recipient countries are victimized in the process. For example, the de-industrialization programme and closure of the jute industry caused serious unemployment. Overall, people have had to bear the brunt of both higher inflation and reducing incomes due to IFIs’ policies and programmes.

Following IMF conditions, the developing countries’ governments are forced to impose taxes on products to increases revenue income. The Bangladeshi government had to commit to increase the price of oil and gas in order to obtain PRGF funding. The price of fuel has been increased by 60–75 per cent in the past two years in Bangladesh. The price of petrol and octane has been increased in the local market by just under 30 per cent. The price of kerosene and diesel has increased by 50–76 per cent (Global Capital vs. Local Economy: Conditionalities of the IMF and Fiscal Reform, Voice, January 2008).

The IMF is pushing to increase the price even further, which they believe is good for economic stability and GDP growth. But does that growth really help people? The price hikes of oil and gas have directly affected the livelihood of the people. Farmers and manufacturers, in particular, have been severely hit by the price hike of these core business costs. Even in the recent substantial food price increases, the IFIs are pushing to increase the prices of gas, electricity and fuels, whilst simultaneously prescribing reduced subsidies to agriculture and basic services. This ‘double whammy’ leaves farmers and people in general in desperate situations.

The goal of increased revenue is not achieved through tax control, a process detrimental to the livelihoods of the people. The IMF conditions are plunging people into misery. Revenue experts suggest that the government should take measures to protect local industries. However, Bangladesh has only experienced trouble with respect to industry and overall economy by following IMF conditions.

The IFIs represent a significant barrier to the achievement of the Paris Declaration principles and the achievement of development goals more generally. They play a very significant role in shaping the policies, strategies and priorities of the developing countries that they work with. They continue to impose policy conditions, particularly related to the liberalisation of markets and the privatisation of national companies along neo-liberal economic lines. They also impose rules on macro-economic stability, interfering in monetary policy in a way that does not allow countries to invest in their own development.

Not only do the IFIs have a direct impact on developing countries through the conditions they impose on their own aid, but they are also able to exert tremendous influence over other donors who accept their assessments and criteria for the allocation of aid. This reduces the room for manoeuvre available to recipient countries because it reduces the competition between donors and prevents them from being able to seek out alternative funding sources.

The result of this reality is that developing countries are being not just held back, but pushed back into situations of poverty and deprivation. The policies imposed have resulted in job losses, inflation, higher costs of key goods and services and reduced competitiveness on international markets. These have all impacted directly on the lives of everyday people and particularly the poorest.

Overall, the various positive noises coming from initiatives such as the Paris Declaration and IFIs own commitments can be seen to be more rhetoric than reality. The gatekeeper role of the IFIs needs to be challenged along with their undemocratic approaches to policy-making. Rather than a mere reform agenda in the current aid system, a change of paradigm is needed based on democratic ownership, full engagement of civil society, transparency, openness and accountability. Only then will the right policies come about to deliver the best opportunities out of poverty for the poorest countries and the poorest communities.

ahmed.swapan@ gmail.com

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