IMF and World Bank’s Influence on Economic Policy Making in Developing Countries

16 April 2016 | Minutes

14 April 2016, 2:00PM – 3:30PM

Under the title “IMF and World Bank’s Influence on Economic Policy Making in Developing Countries”, Eurodad hosted a session at the Civil Society Forum at the Spring meetings. The session aimed to provide analysis and context on the respect of local and democratic ownership by the donors’ community, with views from civil society and the IMF.


Sargon Nissan, Bretton Woods Project (Moderator)
Tiago Stichelmans, Eurodad
Patricia Miranda, Finance for Development Officer, Latindadd-Fundacion Jubileo
Peter Bakvis, Director of the International Trade Union Confederation/Global Unions DC office
Chris Lane, Chief of Developing Countries Division, Strategy, Policy Review Department, IMF

Tiago Stichelmans:

In 2005, many countries signed a declaration to improve aid effectiveness. One of the principals of that agreement was country ownership, meaning that governments, csos and stakeholders within countries should be the ones defining their own development strategies, rather than donors. Donors should support those efforts. Now in 2016, ten years have passed since then and we at Eurodad have evaluated this ownership aspect.

Broadly, we identified the following two channels of influence.

  1. Conditionality
    1. Of course it is perfectly acceptable that donors set conditions in terms of good management of resources, or that relate to internationally agreed human rights principles. What is not acceptable are imposing conditions on structural economic reforms. The World Bank’s main lending facility has eligibility criteria, which are up to the World Bank to decide. That is problematic because the Board ‘s voting powers lie with developed countries, not those receiving the loans.
    2. The IMF works with a letter of intent written by the government receiving the programme. This letter requires prior actions, quantitative performance criteria, and structural benchmarks to be approved. The first two are not particularly controversial. However, structural benchmarks do contain a lot of sensitive structural economic reforms, often including privatisation, labour reform, etc., however the IMF does not consider this as conditions because they are not legally binding. However countries have strong reasons to do include measures in their letter of intent that IMF recommends, mainly, to maintain good relationships with the IMF.
  2. Research and surveillance
    1. In terms of research, the World Bank is very influential. Its data is used widely across the world on a variety of development themes. But perhaps we should ask ourselves if there is not a conflict of interest when a country is lending money from the Bank while the Bank is also providing and collecting the data related to the loan. The data coming out of the Bank is especially influential with policy makers.
    2. Article IV surveillance at the IMF was independently evaluated by the Independent Evaluation Office which showed that surveillance is very influential in low income countries and emerging economies, however much less so in developed countries. Through this function the IMF therefore also influences economic policies but only in low income countries.

To summarise, after ten years of the ownership principle being internationally accepted, there are still major problems in it being respected. If we want to look forward we should look at how we can better practice the ownership principle.

Peter Bakvis:

I will look at the issue of country ownership more specifically using the case of Tunisia. Tunisia entered into an IMF programme in June 2013 and ended in December 2015. Negotiations have restarted now. The main focus of the previous programme was fiscal consolidation and came with many conditions. One of the main goals of the programme was to reduce energy subsidies, which was not a success. Retail fuel prices actually did not decrease, still ending up 30 per cent above international levels.

The IMF programme was supposed to introduce a social safety net to compensate the poor, but that was a failure. Actual social spending was 14 per cent below the indicative target the IMF set. As a result, a lot of vulnerable people did not get access to benefits they were entitled to. Means testing that was carried out for targeted healthcare and cash transfer programmes was in contrast with recent declarations of the World Bank president in favour of universal health and universal social protection and Sustainable Development Goal 3.8. Targeting only smaller groups of the poorest people as the IMF programme did is going in the opposite direction of that. This underspending of social protection is one of the reasons why the deficit floor was successfully reached meeting the conditions of the programme. So only at the expense of social spending could the programme be successful.

Labour unions also lost ground, which is something included in many IMF programmes, not just in Tunisia. Programmes still often include frozen minimum wages, easier dismissals, reduced unemployment benefits, weakening collective bargaining and the expansion of short term contracts. These measures increase inequality and so to conclude we should certainly be concerned about conditions that have had very controversial result and lack ownership, because of negative effects of these policies, particularly in fragile situations like Tunisia.

Patricia Miranda:

Latin America has suffered greatly from structural reforms imposed by the IMF, including social expenditure cuts, reforms to pension system, and tax increases. In Bolivia for example, introducing a new tax even led to president having to resign. The structural reforms had major political costs.

The most crucial period for Latin America was in the 80’s and 90’s, where important lessons could be learned. In Latin America, this decade is also called the lost decade. We had a debt crisis in the 80’s, which we dealt with through structural adjustment programmes. The problem with these policies was that they were focused on debt servicing and reducing the deficit, not considering impacts on the poorest. As a result, poverty increased from 40 to 50 percent and we had higher degrees of inequality. This is widely considered a consequence of the structural reforms of the IMF. In terms of results, we had a period of smallest economic growth.

After that period, we entered a new context, it was a slow recovery, but then we had new progressive governments and a new wave of high demand of commodities. This was a period of increase in income, increased social protection, achievement of the first millennium development goal, and large achievements in education and health. For these reasons many countries in the region have a negative relationship with the IMF.

What we did not do as a region was take advantage of this better situation and change our economic infrastructure, so now we will suffer again with the commodity price fall. We will therefore still have to take some renewed measures now, perhaps with the IMF, perhaps not, but either way the IMF is in a much more difficult position in Latin American because of its past. Whatever happens in future, it should be clear that the lesson learned from Latin America’s lost decade is that any measures taken from now on should take social impacts into account.

Chris Lane:

This is an important topic so I am happy to be here, especially now when good policies matter more than ever in the current financial climate where easy finance is over for developing countries. I would argue the IMF actually has three channels of influence.

Channels of Influence of the IMF:

  1. The first is technical assistance training and capacity building, where the Fund lends its expertise to countries who ask for such assistance. We cannot do it where it is not asked of us, but we could do more to publish reports on the advice we provide in this role, however it often depends the country allowing us to publish that information.
  2. The Fund also conducts surveillance reports annually on each of its member states, analysing and providing recommendations for macroeconomic growth and stability. These can be multilateral for different regions, cross-cutting on specific themes, and most importantly bilateral, where each country gets assessed individually. These ‘Article IV’ reports used to be quite ‘boiler plate’, providing standard advice. Most recently however they are becoming more interesting, including aspect of inequality for example in pilot review such as for Ethiopia, Malawi and Colombia.
  3. Finally, the IMF exerts its influence through lending programmes. Out of 70 low income countries, about 20 have some type of financial engagement with the Fund because they have a balance of payment problem. We have another 7 countries that have non-financial programmes but have conditionalities. In those cases its about governments asking the IMF for a conditionality framework so they can implement reforms and signal to donors and markets that they are meeting IMF standards. Some governments therefore find our conditionalities very useful. Even in the most extreme case of conditionality, Cote d’Ivoire, which had an IMF programme with 86 conditions, the prime ministers was actually a former deputy director of the Fund. In that case it was the government who very much pushed the IMF to provide more conditions to signal to the world they had changed an economic corner coming out of conflict and fragility. In terms of country-ownership therefore even a case that seems like the IMF has imposed an extreme amount of conditions upon a country, it was actually government driven.

Greater openness and transparency is important. It holds the IMF accountable. We are therefore happy to report 92 per cent of our members publish their surveillance report, 97 per cent of countries with programmes publish the programme related documents, and 100 per cent of those with concessional lending publish their loan information.

In terms of country ownership of policy conditions, it is important to understand how the IMF sees ownership. We see it as reaching an understanding with the government that is mutually acceptable, taking into account economic priorities, the political economy, the specific context a country is in, and the member’s capacity to actually implement reforms. One example of strong programme ownership is Grenada, which started a new programme with the IMF in 2014. The programme implementation was closely monitored by an independent group, which concluded implementation was strong owing to good country ownership.

Sargon Nissan:

The message is loud and clear that the IMF accepts the case that country ownership is a prerequisite for following a successful economic path.

Question and Answers:

Salma, from Egypt, IEPR: I have noticed through last 5 to 6 years huge changes in the positive sense in the publications of the IMF, with a whole body of literature talking about inequality, minimum wage and fiscal policy. The literature is going in a different direction than the Washington consensus, but this change is not reflected in policy at all. Can the panel comment on that discrepancy?

SN: We are well aware of the recent research of the IMF which does not get reflected on the ground. The Bretton Woods Project actually recently published a paper just on this issue specifically in the MENA region, reflecting how IMF rhetoric may have changed to become more inclusive while policies have remained the same before and after the Arab Spring.

TS: I agree completely with your assessment that the research does not match the policies of the IMF, just take the example of Greece. The IMF has been recommending rigorous tax reform which does not match its latest research. Such reforms are actually damaging to growth and stability. Every time we have met with the IMF on this topic we have not heard a convincing answer on this.

PB: The Fund has been working on these emerging issues like inequality maybe for five years now, in which it is making the macro argument for inequality. It also has looked at minimum wages for example. All of which are interesting contributions, but so far we are yet to see that translated in operational policy. Surveillance pilots on these topics are very limited so far, with inequality being covered in the surveillance of 11 countries. The step that is missing is the translation into actual policies and directives to staff to put this good work into practice.

PM: I also agree on the missing link between research and policy on inequality. The IMF is a very powerful institution and a point of reference for macroeconomic policy. In Latin America we are at risk of increasing our debt, but how will we assess and deal with that? The only reference and source of policy options we have is the IMF.

CL: Programmes in Iceland, Portugal, Latvia, Cyprus and Ireland are over and completed. These were all difficult cases but they are closed now and deemed very successful. Mistakes may have been made but we feel by and large the programmes have gone well. We are trying to mainstream these non-traditional issues. They are important because they can be critical to macro performance and the pilot surveillance work is part of that. About moving this work further into policy, the Managing Director has recently said that maybe we should move some of this work into our lending programmes. We would be quite interested to learn what the NGO community thinks about what the best approach is in Egypt, which has large fuel and food subsidies that have to go. What are your ideas about the best, most equitable and fair approach to doing that while impacting the poor the least?

Participant from Ethiopia: You mentioned the Ethiopian inequality surveillance pilot. How can the IMF try to promote equality in a country like Ethiopia where there is no civil society community, no human rights community? The government has made it impossible for human rights NGOs to work there. So how meaningful can any ownership really be if power is in the hands of the very few and corrupt?

Nicolas Lusiani, CESR: Has the idea that has been gaining momentum recently, about using countercyclical policies during crises, reached the policy teams of the IMF to seriously think about?

CL: On the countercyclical question, having such a policy means you can let the deficit increase in bad times. But that implies you have someone who can supply you with financing. Most low income countries are relying on small markets and donor financing in a way developed countries don’t have to deal with. So budget constraints become much more binding for low income countries in downturns, so that’s why they should hold higher economic buffers. As we go into this commodity price decline, unfortunately most low income countries did not provide for buffers and therefore are in trouble again. Therefore, we do promote countercyclical policies but it is just much more difficult to do that in low income countries.

CL: On Ethiopia, our counterparts are governments. We only deal with legitimate governments, meaning where a majority of the board recognises it has legitimacy. Ethiopia is viewed as having a legitimate government so we engage with them. Our paper on inequality looked specifically at what would happen if banks operate more freely and don’t have to lend via development banks. We found it increased growth but also increased inequality. It concluded it was still a good thing to do but only if you implement compensating measures like cash transfers etc. to help mitigate the inequality effect.

PB: Our colleague from Ethiopia brings up a very important issue; How to interpret country ownership? In the context of Tunisia, the IMF was dealing with a very repressed society and a government that did not even attempt to have a dialogue with its people on reforms. In fact, the government specifically told the IMF not to talk to its people who could have painted a much more realistic picture of what was happening on the ground in Tunisia. Understanding the IMF has a different understanding of what country ownership means than most people, it should still try to go beyond the government of the day. I am not sure we are seeing a positive evolution on this. In the 15 years I have been working on this, an interesting opening came years ago with the poverty reduction programme, with contained an obligation for governments to consult with civil society in order to get access to debt relief or concessional lending. That created an interesting opening, including for trade unions, to complain and have their voices heard. That programme does not exist any more. While Horst Köhler was managing director of the IMF, he told a big trade union delegation in Belarus he would speak with them, whether their government him to or not, and he did. But in recent times, the Fund often says that governments don’t want them to consult with local unions or civil society. I wish I could say things were evolving more positively on this matter.

CL: On civil society consultation, at least in the 80 low income countries I work on, every mission has consulted with civil society organisations. I do not feel this has been rolled back, we actually do a lot more consultations than we used to and we do them earlier in the process now so it can have more impact.

SN: I think the lesson we can take from these final discussions is that the Fund’s recent work with non-traditional issues such as gender and inequality has emerged thanks to the IMF being able to hear and listen to evidence from a wider group of stakeholders. Perhaps it is worth concluding that the obligation of civil society, including labour unions, is significant in terms of engaging with the Fund to scrutinise surveillance, lending and technical assistance. It is only with this greater scrutiny and openness that the IMF can more systematically take impacts on people’s daily lives into account.