IN DEPTH: 60 years of serving the poor?

In the diamond anniversary year of the World Bank and the IMF, World Vision's Simon Duffy reflects on the history of two institutions that New Zealand taxpayers help to fund.

In late 1944 the world was tentatively poking its collective nose out of a European foxhole and sniffing the scent of peace. Coming to terms with the wreckage of Europe, world leaders sat around a table in a place called Bretton Woods, and drew up plans for a new financial architecture that would help rebuild countries devastated by poverty and war.

Two new financial institutions were created that were intended to bring new stability and be a guard against the periodic crises that had rocked economies of the past. The International Monetary Fund (IMF) would guard against financial crises by bringing balance to international currency markets. It would foster economic growth employment, and provide temporary financial assistance to countries in crisis. The World Bank Group is actually five separate organisations, which broadly have the goal of making grants and low-interest loans available for development and poverty reduction.

Sixty years on, as the Boards of the IMF and World Bank held their annual 'Spring Meetings' in late April, despite significant advances in many (mostly Asian) countries, poverty remains rife. And far from being seen as economic saviours, the two institutions bear the brunt of criticism from the 'anti-globalisation' movement, and have a wide reputation as the enemies of the poor.

Explanations for the perceived failure of these institutions are varied. Some argue that they simply don’t understand development issues - which would be a concern if it were true, as they employ many of the most promising economists the world has to offer. Others point to structural inequities, which give the US veto power on both boards. The G8 countries together hold close to 50% of voting power, while sub-Saharan Africa collectively wields less than 5%.

Some blame myopic free-market fundamentalism that fails to accept that variations from their core economic models might be legitimate, and has trouble with the concept that political realities might impact on the viability of a reform package. Others argue that repeated failures to achieve poverty reduction results are not the institutions’ fault at all - they are merely scapegoats, tirelessly toiling in the face of corruption, inept governments and warmongering citizenry.

There may be elements of truth in all of these explanations, but much of the discontent surrounding the institutions relates to their insistence that countries must conform to a rigid programme of reform if they are to receive assistance. On the face of it this sounds like good sense - there is just no point pouring money into a black hole, and donor governments and their taxpayers need accountability. But the reality has often been very damaging for some of the world’s poorest communities.

These reform programmes were once known as 'Structural Adjustment', a term that has since fallen out of favour. It is now more common to hear about 'conditionalities', referring to conditions that must be met for funds to be dispersed. Reform packages invariably prescribe a diet of neo-liberal staples such as civil service reform, privatisation of state assets, taxation reform, removing trade barriers and slashing government expenditure. Expenditure cutbacks include social expenditure such as welfare, health, and education, as well as spending on rural development and basic infrastructure.

Structural Adjustment had its heyday in the 1980s and 1990s, but failed to result in the anticipated free-market utopia. As in the developed world, reform produced skyrocketing unemployment in the short term as Jurassic bureaucracies began to shed their fat, and hardship as social spending cuts hit home. Unlike the developed world, the prerequisites for a thriving market that would utilise a thumb-twiddling labour force - such as skilled, educated, and healthy workers, investment capital, the rule of law, and transport, communications and energy infrastructure - were either partially or completely lacking. The consequences, whatever the economic model predicted, tended to be dire.

Facing political turmoil at home in response to highly unpopular policies, developing country governments backed down from reform programmes. This allowed the IMF and World Bank to claim that failure was due to incomplete implementation, rather than poor programme design. They concluded that what was lacking was 'ownership'. Governments were not sufficiently committed to reforms because they didn't really understand them.

Today, ‘ownership’ has become a catch-cry for both institutions, as their own research has found that unless governments show high levels of commitment to and understanding of reform programmes, they are unlikely to succeed.

Unfortunately, the institutions’ concept of ownership is very limited. Rather than engaging with governments, parliaments, business, civil society and the public in recipient countries, to develop reform programmes that all can accept and work with, the institutions’ efforts have been directed at convincing governments that their own policies are right.

Essentially, the institutions have been trying to ‘create’ ownership of schemes that bear all the hallmarks of old fashioned Structural Adjustment, but have not been willing to release any ownership themselves.

Poverty Reduction Strategy Papers are a case in point. PRSP’s were heralded as a revolution in the way the IMF and the World Bank provided assistance to the poorest states, designated as Least Developed Counties (LDCs). Rather than impose a reform plan, LDCs would come up with their own plans for poverty reduction, which the institutions would help to finance through debt relief and new money.

So far so good. But PRSPs have to be signed off by the board of the IMF. If the Board isn’t happy, the institutions won’t provide any finance. Obviously, countries are not going to come up with anything radical, or anything that contradicts the narrow economic thinking of the institutions. Secondly, PRSPs have been created under tight time constraints, so that consultations have typically been either nonexistent or meaningless. Some PRSPs have not even been debated openly by parliaments. Finally, economic policy advice has been provided almost exclusively by IMF and World Bank economists. Few low-income country governments have sufficient economic analysis capacity to challenge their advice. Even where that capacity does exist, a PRSP that contradicts advice is not likely to get Board approval.

Not surprisingly, PRSPs have largely failed to achieve the goal of effective country ownership, according to a new World Vision report released in April for the Spring Meetings, entitled ‘One step forward, two steps back’. The report demonstrates how conditionalities, accompanied by the very real threat of closing the funding pipeline, have been used as a substitute for genuine ownership of reforms. It argues that conditionality is inherently contradictory to ownership, and is not an effective substitute for genuine commitment from governments to carry out reforms that have wide support.

The report challenges the World Bank and IMF to take a broader view of ownership, and to broaden the range of economic policy options they are willing to consider. Their unwillingness to do this up to the present has been a major impediment to their ability to become the force for development and poverty reduction that they claim to be. ‘They must recognise that their prescriptive policies have not lead to the development they advertised. Nor has their introduction of PRSPs actually led to a change of ownership of development policies. Instead, it has produced a new form of obedience….’ (p. 4)

Until the institutions are willing to sit up and take notice of these and similar criticisms, it is likely that they will continue to be viewed as enemies of development, and not the engine room of poverty reduction that they reputedly aspire to be.

Download the full report here