10:57 AM Mar 24, 1997

IFIS CAUTIONED ON NEW AGENDAS, CONDITIONALITIES

Geneva 24 Mar (Chakravarthi Raghavan) -- Despite increased private flows, a large number of developing countries, particularly the poorer ones, still depend on multilateral financing, but the new 'conditionalities' relating to governance and environment have created tensions in borrowing countries and contributed to stagnation in demand for lending by the World Bank and the International Development Association (IDA), the Bank's soft-lending affiliate.

Two research papers for the Group of 24 (Third World Group in the Bretton Woods Institutions), published in Volume VIII of UNCTAD's "International Monetary and Financial Issues for the 1990s", deal with the burgeoning new agendas of the International Financial Institutions (IFIs) and the accompanying conditionalities and the risks of IFIs embroiled in domestic politics of countries.

The two papers in the volume are by Davesh Kapur of the Brookings Institution and Aziz Ali Mohammed, special advisor to the State Bank of Pakistan, raise these questions and caution these institutions over the backlash in borrowing countries.

Kapur points out that the burgeoning new agenda is related to the periodic replenishments of concessional windows of these institutions, but gradually expanding to cover normal IBRD loans too, as well as the lobbying of Northern NGOs with their funding governments and NGOs from the South looking for leverage against their own governments.

The borrowing countries, he says, are yet to grapple with the reality of increasing trade offs between accepting 'soft' loans from IFIs and the fact that increasingly this comes with more and more string attached.

The new conditionalities, he says, have raised the transaction costs of borrowing from the multilateral development banks (MDBs) and raise "potential moral hazard problems", due to the asymmetry in the burden of risk: "Borrower governments will have face the political and financial risks while the IFIs will remain largely insulated from them."

Kapur notes that, contrary to later interpretations, the World Bank's policy-influencing role predated its structural adjustment lending, though the latter anchored the Bank's advice to the BOP problems of borrowers and had explicit and detailed conditionalities.

But from an initial emphasis on fiscal and trade policies, and on productive sectors especially agriculture, the scope of activities attached to adjustment lending expanded steadily, with particular attention to institutional issues of development and public sector management.

Rationalized in terms of "economic efficiency criteria", and initially restricted to narrow economic sphere, increasingly the Bank's conception of "economic sphere" began to broaden and nibble at the boundaries of the social and political domain.

At the end of the 1980s, a combination of long-term trends and immediate political events converged into a reorientation and further expansion of the Bank's agenda. By 1989, in its study of Africa, the Bank explicitly related sub-Saharan Africa's predicament to a "crisis of governance" - an issue which African experts who had been consulted, had urged the Bank to address. And the Bank's new agenda came to be increasingly influenced by NGOs both in borrowing and donor countries, and especially the latter reflecting the power of single-issue politics in richer countries.

A second stimulus to the expanding agenda came from criticism of the Bank's record on poverty and environment. Though ostensibly separate, the two coalesced in minds of some of the Bank's most vocal critics who argued the Bank's SAPs shortchanged the poor, by crowding out lending for poverty-oriented projects, while conditionalities focused excessively on public expenditures, resulting in cuts on social spending.

The Bank changed tack, first by instituting projects with social safety net features and then by ratcheting up lending for social sectors. This last, coupled with a perceived need to address composition of public expenditure to address fungibility issues, took the Bank into the deeper waters of public expenditure reviews.

The environmental critique of the Bank's operations -- initially fuelled by several well-publicised problems related to projects in Indonesia and Brazil, and later India -- quickly expanded from narrow ecological concerns to "human rights" of forcibly relocated people, and to questions about the development priorities of the Bank and its borrowers. Gradually, the agenda expanded from assessments of environmental impact of individual projects to country-level 'national environmental action plans' (NEAPs), and then to broader issues overlapping those under the 'governance' rubric -- such as beneficiary 'participation', 'transparency' and 'accountability'.

There can be little doubt that in many borrowing countries, senior officials have been pressuring their counterparts in the IFIs, privately, to be tougher in their conditionality approaches so as to enhance their own bargaining strength in constraining the machinations of their political masters.

Also, local NGOs and intellectuals, frustrated by the frequently perverse policies and practices of their governments, have increasingly sought external allies to leverage their cause.

As a result of the impact of the profound changes in Eastern Europe and the collapse of the Soviet Union, which seemed to vindicate the superiority of liberal-market system, as well as other forces including the increasing globalization in trade and capital flows, decline of political parties and rise of NGOs, chinks began to appear in the hitherto secure concept of "sovereign immunity".

This was felt almost immediately in the creation of the European Bank for Reconstruction and Development (EBRD) set up for transforming the economic system of Eastern and Central European countries, which stipulated as the basic condition for borrowing countries their commitment to "fundamental principles of multiparty democracy, rule of law, respect for human rights and market economics."

At the World Bank, IDA-9 replenishment was linked to country assistance strategies (CAS) for IDA countries to be discussed by Bank Governors, instituting environment impact assessments, and the Bank's Board having a greater say in tranche releases of SAP loans.

As this new agenda emerged "concerted protests by borrowing Executive Directors in IFIs have been rare", Kapur notes. While this may reflect a realization that "much of the new agenda is theatre", it also reflects beliefs of finance ministries in the functionality of these changes as well as regional variances in receptivity.

For many countries, the principal forum where an increasing number of political issues is raised by donors is at meetings of the World Bank chaired donor consultative group meetings.

As a result of IDA-9 replenishment conditions, formal methods and processes for environmental impact were put in place; but the decline of Bank lending for traditional investment projects in agriculture, infrastructure and industry meant new environmental requirements apply to less than half of Bank lending.

NEAPs were instituted first for IDA-recipients, and subsequently for some IBRD countries (such as Brazil, Mexico and Indonesia). Now NEAPs have been undertaken for many IBRD countries.

Governance conditionality, and linking aid to political and economic reforms came first for Kenya in 1990 at the consultative group meeting of donors. Since then, various facets of the governance issue have emerged as integral part of the agenda of official finance, especially concessional finance. But donors have been divided reflecting the confusion and contradiction between stated principles and commercial and strategic interests.

"The swiftness with which the term 'governance' has captured centre-stage in the economic development lexicon," Kapur comments, "is in part due to the remarkable properties of the term. It has a 'motherhood' quality to it -- no one could ever be gainst 'good governance'; it is elastic and could be stretched to include yet more additions to the agenda."

The articulation of the governance issues by IFIs was formalized in two World Bank reports (of 1991) and to keep their actions in this area within the bounds of their statutes, the IFIs have tended to view them in instrument terms -- "as the grease that enables engine of development to work more smoothly, thereby allowing their interventions to be more effective.

Concerned that the Bank's involvement not cross its mandate, the Bank's legal counsel has attempted to limit the concern with governance to the "contribution it makes with social and economic development, and not with the form of a political regime". As a result, the Bank has tried to maintain that in the area of human rights its Articles mandate it to focus on economic, social and cultural rights, and not on political and civil human rights.

Part of the governance agenda is directed at the issue of corruption, with the IFIs attributing government corruption largely to competition for scarce State resources. This complemented the efficiency rationale in the advice for a shift in the boundary between the public and private sector, and in favour of the latter. Reflecting this belief, lending conditionality emphasized state enterprise reform and deregulation in the 1980s, adding civil service reform (often leading to retrenchment) and privatization.

But despite much rhetoric, the emphasis on privatization is a phenomenon only of the 1990s. Its occurrence to a greater extent in Latin America than Africa reflected more beliefs of governments than differences in pressures applied by IFIs.

The IFI's interest in participation was initially prompted not by governance agenda per se, but the soul searching that followed major reviews of their portfolios, in particular the 1992 Wappenhans Report. Its justification in terms of development-effectiveness and better portfolio management was soon complimented by two other factors: participation as a worthwhile goal in itself and its repercussions on the aid climate, given the strong attachment to it of some donors.

As a result requirements were put in place to ensure affected groups are consulted. New information disclosure policies were also instituted as a condition for concessional funding and, more recently, in the creation of a independent inspection panel at the Bank.

"The 'participation' aspect of the governance agenda has been strongly pushed by Northern NGOs. While it is likely to result in better outcomes for the Bank's investment projects, it has most certainly empowered Northern NGOs' considerably in IFI decision-making."

While throughout its history, the Bank has always paid attention to government budgets, greater attention began to be paid, because of fungibility issues, to budgets in relation to structural lending. As a result, public expenditure reviews have emerged as an integral part of the Bank's analytical arsenal.

And once productive expenditures began to be scrutinized, it was just a matter of time before the concerns spilled over to military expenditures.

The Bank's legal counsel has however made it clear that the determination of an appropriate level of military expenditure for a member country is typically based on security and political considerations and thus falling outside the Bank's legally authorized power, let alone its competence. But the counsel also made clear that there were several spheres where the institution could pursue the allocation of public expenditure for non-productive purposes -- risk-management analysis, research, adjustment lending operations and the Bank's involvement in public expenditure.

The Bank has been pressing the issue through country dialogues and IDA allocations. The Bank and the Fund have begun to share the data on both military debt and military expenditure and, through public expenditure reviews (PERs) they have begun jointly to address the issue indirectly. Bank conditionality mandates increases in development expenditures, with the expectation that, along with Fund ceilings on budgets, the military expenditures would be squeezed.

In an era of shrinking development aid, Kapur says, the "new" lending conditions are here to stay, given the strength of pressures within IFIs from non-borrowing members, and also groups within borrowing countries.

A troubling aspect of the new agenda and associated conditionalities, Kapur says, is that despite attempts (notably by the legal counsel) to limit intrusion of IFIs into issues of domestic politics, the new agenda is inexorably dragging the IFIs in. In many countries the World Bank has begun to engage parliamentarians in the policy debate. This approach carries the risk that politicians could be tempted to associate the IFIs with the Government, leaving them exposed if matters don't work out.

The expanding agenda is resulting in goal congestion - conflicting with the IFIs message of the 1980s that to function more efficiently, governments need to restrict their burgeoning agendas. There is also the danger that the evangelical fervour for the "new" agendas and conditions may be crowding out core economic analytical strengths and economic conditionalities.

For the borrowers, the new agenda has substantially increased the transaction costs of borrowing from the MDBs. This is an important reason why, despite the financial attractiveness of IBRD loans,demand for its has been stagnating while demand for and supply of private capital has dramatically escalated. And since larger borrowers can easily fend off many of the conditionalities, the IFIs may emerge as more discriminatory than they already are.

In taking on political issues, the IFIs have taken aspects of a politician's garb - where smooth, well-articulated and confident positions reflecting the perceived demands of pressure groups overwhelm issues of substance that matter more for the borrowers.

Taken as a package, the 'model' driving the agenda is a liberal democratic one. Even if it is accepted, the institutional underpinnings of liberal democratic States have taken centuries to evolve. That patience is no longer apparent as IFIs want concrete results within a few years - a time scale order of magnitude faster than institutional changes in the rich countries.