Forum for the Future of Aid - Conditionality

Critical Conditions

Thu, 28 Aug 2008 18:30:52 +0100

By Nuria Molina and Javier Pereira

[ExecutiveSummary]: Faced with strong criticism for its expansive and erroneous use of conditionality, and in the wake of a financial crisis, the International Monetary Fund (IMF) approved in 2002 a set of guidelines to inform its use of structural conditionality. The Conditionality Guidelines committed the Fund to reduce the overall number of conditions attached to Fund lending and ensure that those attached respected and were drawn from nationally developed poverty plans in recognitions that developing country ownership is instrumental for successful development.
This report looks at the effectiveness of the Conditionality Guidelines in reforming IMF conditionality during the five years since the Guidelines were approved. Based on IMF figures, Eurodad examines the share of Fund structural conditions which prescribe highly sensitive and intrusive policy reforms.
This report analyses the IMF’s own figures to demonstrate that no further progress has been made since 2004, and casts serious doubts about the genuine commitment of the institution to streamlining its structural conditionality and speed up the application of their own conditionality policy. Faced with in-depth structural reforms of its own, the Fund should take this opportunity to speed up implementation of their Conditionality Guidelines and take further steps in the streamlining initiative.

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Forum on the Future of Aid: Southern CSOs put their Stamp on Aid Policy

Tue, 12 Aug 2008 15:50:42 +0100

By Bill Morton

This article underlines the importance of the meeting in establishing a Forum that is led by Southern CSOs and that is focused on influencing aid policy. It also refers to some of the presentations on ownership and conditionality that were made at the workshop.
You will find this article on page 8 of the Review Newsletter from The North-South Institute.

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Country Study, prepared for Southern Perspectives on the Reform of the International Development Architecture - Vietnam

Thu, 14 Feb 2008 10:11:42 +0000

By Nguyen Thi Thu Hang

This study shows the important role that aid has played in supporting Vietnam’s impressive growth and poverty reduction; but that its importance is decreasing relative to other sources of development finance such as FDI and remittances. It describes the Government of Vietnam’s strong ownership of the development process, examines the roles of key multilateral and bilateral donor institutions, and makes recommendations on reform that will further strengthen ownership. The paper was produced for the Southern Perspectives research project

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An IEO Evaluation of Structural Conditionality in IMF Supported Programs

Wed, 13 Feb 2008 18:29:28 +0000

IMF Independent Evaluation Office

IMF efforts since 2000 to reduce the number and scope of structural conditions in its loans have essentially had no impact, says the IMF’s internal auditor, the Independent Evaluation Office (IEO), in a report released this month. Furthermore, the report found that a third of IMF conditions still fall outside the institution’s area of expertise and in many cases include conditions that are not critical to IMF objectives. Consequently, the Report recommends further “streamlining” to get the Fund to select conditions that are ‘critical’ and within its core areas of responsibility - fiscal and monetary policy. Fund Management and the Board of Directors broadly agreed with the study’s findings, even though it essentially means reaffirming Conditionality Guidelines for the IMF already approved back in 2002.

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Influencing International Aid Policy

Wed, 13 Feb 2008 18:04:35 +0000

By Simon Burall and Ajoy Datta

This paper has been prepared as background for the strategic planning process of the Forum on the Future of Aid (FFA) which takes place in Uganda in February 2008. FFA is a space for Southern research institutes and think tanks to exchange information, research and ideas in order to increase the impact of southern-led research on international aid policy and on the reform of the international aid architecture. The paper is based on the assumption that, while Southern organisations were unable to consistently access policy debates about the reform of the international aid architecture in the past, this situation has now changed; a number of relevant international fora have been developed or opened-up over the past three to five years. This paper presents evidence for this assumption and explores ways in which Southern researchers can increase the impact of their research in the light of this. The paper is presented in four sections.

The introduction briefly highlights recent changes to the international aid system. Section two describes the fora which Southern researchers could gain access to and use to contribute to and influence policy debates. Recognising the importance of both the national and international levels for determining the impact of aid policy on partner country development, the descriptions of the fora are split into two broad sections; the paper first briefly examines fora and processes in partner countries, before examining four key international fora where aid policy and the reform of the international aid architecture are discussed. These four are: the follow up UN Conference to Financing for Development; the UN ECOSOC Development Cooperation Forum; the OECD/DAC third high-level forum on aid effectiveness in Ghana; and the OECD/DAC Global Forum on Development. Under each forum, a brief description of the process is given, the key stakeholders and decision-makers are identifi ed, and where possible any parallel civil society processes are noted. A summary of the key issues that the forum will cover is also given.

Section three of the paper then takes a step back by drawing on the large body of literature which explores how research can infl uence policy. This section highlights the messy nature of the policy making process before looking at the role of evidence in the policy process. It explores the nature of evidence and how it is viewed within the policy process, using this understanding to explore how researchers can think about the type of evidence they generate in order to increase its impact. It then highlights how important it is for researchers to build links not only with policy-makers, but also with other stakeholders. This third section then briefly describes a theory of communication and proposes that Southern researchers should consider using research in order to infl uence the terms of the aid policy and architecture reform debates rather than focusing their energies on trying to influence specifi c aid policies. It highlights the importance of researchers developing a communications strategy at the beginning of any research project and suggests a number of questions to guide the development of such a strategy. Finally, the third section proposes a matrix which researchers could use to help the process of identifi cation of which international forum/fora are most important in terms of their strategic aims. This matrix consists of a series of questions and has been partially fi lled out in order to help stimulate discussion at the FFA strategic planning process.

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Southern Voice on Conditionality and Ownership: Towards Achieving Authentic National Ownership

Wed, 13 Feb 2008 17:57:19 +0000

By Antonio Tujan

This synthesis paper brings together the various issues and perspectives raised by the six different opinion pieces
on ownership and on conditionality written by Southern experts on development cooperation and aid. This paper
also draws from current research and debate on the issue of ownership and conditionality in development cooperation and aid. Southern perspectives on the issue of ownership and conditionality are naturally inclined toward the broader concerns of power imbalances that frame and permeate development cooperation and aid. To address these broader contexts and concerns, this paper dissects the different notions of ownership from theory to practice (page 2) and then tackles the realities of ownership from a broader frame from the power dynamic of international relations to the powerless conditions of the poor in the villages to the actual practice of aid management (page 3-10). This paper then dissects the concepts and practice of conditionality leading to its thesis on eliminating conditionality (page 10-14).

In conclusion, the author states that the politics and the technicalities of aid are so complicated that Southern voices would recommend that to set things in the aid system upright, it must stand on its head. Ownership by the poor, being the ultimate objective of aid, would be a good start to address the question of ownership and conditionality. Starting with this premise, then it is clear that the crucial test of aid effectiveness is whether the poor are able to claim their human rights. This is what development effectiveness means and challenges the notion of development effectiveness in other circles such as in the UN where the fundamental benchmark of success is not necessarily the poor claiming their rights. This is not mere rhetoric but identifying and committing to a genuine standard and goal for aid reform. In the face of complexity of the aid non-system, in the challenges of aid reform considering the diffi culties of building democratic governance, equitable international systems and capacities
for development, ownership by the poor in the context of national and democratic ownership of development provides guidance for aid reform. In particular
• The Paris Declaration presents an important opportunity to implement aid reform along with commitments to scale up aid. The challenge for all development actors is how to implement the PD comprehensively and not in a technicist manner, and enrich it by developing innovations along its principles to build country ownership, including the increased involvement of all CSOs, parliaments, media and other actors.
• Authentic ownership must be constantly promoted in contradistinction to technicist erosion of ownership and must be enriched to its full concept of national and democratic ownership as the overriding principle that involves leadership in harmonization, alignment, domestic accountability, donor accountability to the country, and aid management with the human rights of the poor as the overriding concern.
• National ownership involves formulating independent development financing strategies that take advantage of the multiplicity of sources for development assistance and opportunities for development fi nance but premised on development for its people instead of labour export and fi nance liberalization.
• Conditionality should be addressed comprehensively in the process of aid reform alongside commitments under PD. Contractual and accountability obligations should be built outside the framework of conditionality but along new modalities of partnership based on national ownership as mandated by the Paris Declaration, where policy conditionalities are completely removed and contractual obligations reduced and reformed.
• Ultimately, the MDGs should be made a genuine challenge for aid effectiveness in targeting the poor in their communities, turning these into centres of empowered ownership by adopting rights-based approaches to development, improving local government accountability and strengthening recognition and roles of CSOs.

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Aid and Conditionality: the case of Bangladesh

Wed, 13 Feb 2008 17:54:27 +0000

By Iqbal Ahmed

The paper analyses the link between the roles of the latest policy changes (with regards to government spending policy as well as central bank's monetary policy) and effective utilisation of aid in Bangladesh. Doing so, this opinion piece is divided into four sections: first section examines effects of aid conditionality and domestic accountability; the next section describes the aid conditionality debate and change in policy perspective in Bangladesh; the following section highlights the donor numbers and conditionality in Bangladesh and examine the existing approach to reduce donors number and conditionality, the last section addresses the functions of national CSOs/NGOs in a development financing regime which respects national ownership. Ultimately the author argues that civil society has a decisive role in promoting the national development agenda. CSOs in Bangladesh have raised awareness among citizens around issues that affect their welfare. However, many national CSOs are said to serve the agenda of international donors and CSOs. This calls for further research on the dynamics of national CSOs and their linkages to international counterparts and donor agencies. Also the paper outlines that strengthening the fundamental relationship between government and CSOs is key. This will work better in a strong democratic and institutional framework.

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Conditionality in Latin America

Wed, 13 Feb 2008 17:49:00 +0000

By Humberto Campodonico

This paper highlights two themes: 1) lack of achievement arounc conditionality issues; and 2) how the attitude of recipient countries and their willingness to change policies is very important.The author believes that approaches such as launching the South Bank, using the international reserves of countries that promote it, could be an important step forward.The final documents of the constitution of this bank (in December 2007) are eagerly anticipated to make a definitive opinion on its objectives, loan mechanisms, duration and rates of interest, also on the conditionalities if there are any.

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The Conditionality Debate Rages on...

Wed, 13 Feb 2008 17:46:04 +0000

By Moreblessings Chidaushe

This opinion piece discusses the on-going conditionality debate from an African perspective. It begins by looking at the background of conditionalities and the widespread negative impacts. It also discusses the different opinions surrounding the imposition of conditionalities, donor multiplicity and coordination. It concludes by discussing the role of civil society in entrenching conditionalities when they act as vehicles of delivery of aid in situations where donors need to bypass governments in implementing particular projects. The piece suggests that because aid is still around for a while longer, so are conditionalities as donors are not prepared to give free aid. What would be worthwhile, especially in the context of aid effectiveness would be to negotiate suitable conditionalities based on the context of the recipient in order to negate the harmful impacts of these conditionalities.

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Southern Voices on Conditionality and Ownership: Towards Achieving Authentic National Ownership

Tue, 15 Jan 2008 17:06:38 +0000

By Antonio Tujan

Aid and Conditionality - The Case of Bangladesh

Tue, 27 Nov 2007 15:47:17 +0000

by Iqbal Ahmed

Conditionality in Latin America

Tue, 27 Nov 2007 15:45:39 +0000

By Humberto Campodonico

The Role of IMF in Policy Making in Bangladesh

Fri, 02 Nov 2007 15:52:49 +0000

Source: Unnayan Onneshan

Unnayan Onneshan organized a round table discussion on “The Role of IMF in Policy Making in Bangladesh” at CIRDAP auditorium on 20th October, 2007. Md. Iqbal Ahmed presented a paper on the issue. Ahmed showed the effect of IMF policies with empirical data and ended with questioning its role. Mr Ahmed argued that when Bangladesh needed an investment friendly environment to generate employment and output to eradicate poverty, the IMF advised the government to tightly manage demand and offered policy advice which was contradictory, which has destabilised the economy with low investment, low capital formation, low output and low employment thus leading to staglation. At the same time the IMF's advice to cut public spending has further marginalised the poor.

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Debt and Conditionality: Multilateral Debt Relief Initiative and Opportunities for Expanding Policy Space

Fri, 02 Nov 2007 15:39:25 +0000

Source: Third World Network

THE Multilateral Debt Relief Initiative (MDRI) was introduced in September 2005 to operationalise the political outcome of deliberations at the G8 summit in Gleneagles in July 2005. The MDRI is to provide 100% cancellation of eligible debt stock owed by eligible countries to four multilateral financial institutions – the International Development Association (IDA), the concessional lending arm of the World Bank, the International Monetary Fund (IMF), the African Development Fund (ADF) and the Inter-American Development Bank (IDB)1 – and is separate from but linked operationally to the enhanced Heavily Indebted Poor Countries initiative (HIPC-I).

This debt reduction is additional to the debt relief granted under the HIPC-I and taken together, it is expected that an estimated 40 eligible countries have already been or will be relieved of a significant amount of debt stock in the near future. The World Bank and the IMF estimate that both the HIPC-I and the MDRI will clear a total of close to US$90 billion in debt owed by developing countries to bilateral and multilateral creditors (Eurodad, 2006; IDA and IMF, 2006: paras 27-32). Twenty-one countries have already had their eligible debt from the IDA and the IMF written off and nine other countries are expected to complete the process in the near future. A further 10 countries have met the eligibility criteria for HIPC and are potentially eligible for MDRI relief in the future.

A critical question arising from these recent developments in debt relief is whether – aside from relieving the debt overhang of indebted countries and therefore clearing fiscal space for more productive and redistributive expenditure – the cancellation of debt, particularly from the international financial institutions (IFIs), results in greater policy autonomy for the countries concerned.

A significant constraint on national policy space in developing countries in the past two decades has been the uncompromising debt burden shouldered by these countries and the policy prescriptions which accompany country attempts to: (a) reschedule debt owed to external creditors; and (b) mobilise additional external financial resources to meet their resource gaps. Indebted countries have had to implement stringent economic conditionalities – especially those set by the World Bank and the IMF – in their bid both to renegotiate debt and to secure resources necessary for generating economic growth and financing social expenditure.

However, the recent series of debt cancellations – under both the enhanced HIPC and the MDRI – may offer eligible countries opportunities for expanding domestic policy space, enabling countries greater freedom over their macroeconomic and development policies, including options which were prohibited under the restrictive conditionalities of the Bretton Woods institutions.

This paper examines the key aspects of the MDRI and considers the opportunities this framework and completion of the enhanced HIPC initiative create for indebted countries to expand their policy space. The paper concludes that the recent upfront and irrevocable cancellation of debt of the 21 post-‘completion point’ countries and the potential debt relief for the nine ‘decision point’ countries in the near future under the enhanced HIPC initiative and the MDRI will create opportunities for greater policy space in these countries. Specifically, the debt relief will facilitate the release of countries from the economic strictures of conditionality and debt which have crippled economies in developing countries due to the damaging effect of their economic policy prescriptions.

Cancellation of debt stock has not only enabled the freeing up of fiscal resources in a number of previously heavily indebted developing countries but has also afforded opportunities for expanded policy space for countries to develop national economic policies alternative to the Washington Consensus policy prescriptions which have accompanied financing from the Bretton Woods institutions.

It will also enable the diversification of external financing sources for these countries, enabling countries to seek resources with more favourable financing terms and the decoupling of financial resources with economic policy reforms. Countries should take advantage of this increased policy autonomy to develop more appropriate policies which will generate economic growth in favour of social and economic development.

After all, the objectives of debt relief are not only about increasing revenue flows to developing countries but also freeing countries from the economic and political coercion of debt, including redressing the asymmetrical relationship between debtor and creditor nations and debtor nations and international financial institutions. This recent debt cancellation may afford developing countries the opportunity to break out of the cycle of debt and conditionality and to engender genuine ‘country ownership’ of economic policies.

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Policy Coherence: Aid, Trade and Investment

Fri, 02 Nov 2007 15:25:40 +0000

Source: North South Institute

In principle aid is used to assist low-income countries evolve an appropriate mix of policies and institutions to support their development goals. The efficiency and effectiveness of this process could be enhanced by increased coherence within and across the aid, trade, and investment policies which feature prominently in the donor-recipient relationship. Policy coherence exists when the gap between policy intent and outcome is minimized by using mutually supportive approaches in related policy areas in pursuit of a common goal. Policy coherence is naturally more complicated where national policy is significantly influenced by policy-making at the supranational level. In this case policy coherence requires harmonization through international cooperation around jointly determined and voluntarily accepted common norms and approaches.

Central to the aid relationship is a common understanding of development as societal transformation for the purpose of enhancing the abilities of all members of the society to shape their own lives. In this context, the goals of development combine income growth with poverty eradication and human development, while the “drivers” of development include macroeconomic stability, openness, good governance, quality infrastructure and strong institutions. Among these, openness and institutions are the most contentious and constitute the main sources of policy incoherence. In both cases, no general consensus has emerged regarding the best approaches, the adjustment processes and time paths for generating sustainable growth through policy and institutional reforms.

The aid relationship presumes an understanding that both sides share a common interest in achieving certain development objectives. It is characterized, however, by policy coherence issues arising from ineffective partnership and collaboration which in turn reflect donor prescription of policy and institutional reforms considered unacceptable by recipients, and unwillingness by donors to accept experimentation in these reform areas. Similarly, standard donor prescription that trade openness enhances growth and poverty reduction often clashes with recipient-country perspectives that are more nuanced because in low-income countries supply response capacity is typically limited, the adjustment process is slow and, hence, the expected efficiency gains are limited and/or delayed while up-front costs of liberalization are real and can be substantive. Finally, with regard to investment policy where donors have tended to push aid recipients towards full liberalization, the latter seem to prefer a two-track approach which promotes export-oriented foreign direct investment (FDI) through liberalization and attracts market-seeking FDI through protection.

In addition to policy coherence within each of aid, trade, and investment policy area, coherence across the three policy areas is also critical for enhancing the positive impact of development assistance. For instance, aid disbursement conditioned upon trade liberalization will lack policy coherence where the aid recipient’s economy has limited supply-response capacity or is patently unable to defray the short-run costs. Similarly, the donor provision of aid to particular low-income countries may be more or less offset when the donors simultaneously erect trade barriers against their exports. There are many examples of this conflict. For instance, distortions to agriculture in several donor countries lead to significant reduction in the real income of many aid-recipient countries.

Across the aid, trade, and investment policy areas, there is a fundamental difference in the perspectives of aid donors and recipients. The former generally expect that aid disbursement should go hand-in-hand with the liberalization of the trade and investment regimes of the aid recipients; while the latter contend that building their supply response capacity should have priority and, hence, that trade and investment policies must be coordinated and strategically linked and involve gradual, selective and differentiated liberalization.

Enhancing policy coherence and, thus, effectiveness of aid requires an appropriate mechanism for reconciling and accommodating these differences. This should encourage the aid-recipient country to articulate a consistent development program with coherent policies for dealing with identified constraints and indicating how and where external assistance is required. It should then permit donors to evaluate the program’s coherence and feasibility and, in the process, coordinate donors’ activities with the program as a basis for establishing a constructive and mutually beneficial partnership.

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