Essay: Conditionality is an abortive instrument

INTRODUCTION (250) – 255

Conditionality is an abortive instrument that disrupts economic development in developing countries economies. Since its inception, Keynes argued against use of loan conditionality based on rights of nation’s sovereignty (Buira 2003) . Its continued, weak, trickle-back effects on economic growth, democracy and living standards have augmented the conditionality discourse. More recently, Dreher & Vaubel’s (2008) analysis criticizes effectiveness of (number of) conditionality on selected policy targets: monetary growth, government budget deficit, current account balance, change in international reserves and government spending In their conclusion the number of conditions does not matter for economic policy outcomes.

As the conditionality debate presents a broader economic discourse; in all, conditionality is recognised as having a necessary dual role in helping recipient countries regain financial credibility while ensuring the revolving nature of Fund’s loans – a view that is challenged in Evrensel (2002) and Dreher (2008). Despite minimal programme full implementation, Fund borrowers have continued to repay their loans (Mussa & Savastano 1999; Wood 2004- a view that further undermines “revolving fund” validity.

This paper details specific criticism of the Poverty Reduction Strategy Papers (PRSPs) over the past decade and the advancement of economic development. Centrally, as presented, the implementation of PRSPs is contextually flawed. The final section draws preferred policy implications.

CONDITIONALITY: THE CONCEPTS AND FRAMEWORK (300)

According to the Bretton Woods project, PRSPs set out a poverty analysis of a country and define the national strategy designed to augment a country’s macroeconomic, structural and social policies to reduce poverty and also promote growth – under the poverty reduction and growth facility (PRGF) programme of the IMF

In his recent treatise, Rowen (2009)challenges the Fund’s commitment to ease poverty when public spending is shackled in short-term financial sector variables within macroeconomic policies. In fact, his view is supported by Radelet and Sachs(cited in Dreher 2008) who notes that structural conditionality has been administered in wrong cases and dosages resulting in detrimental economic effects. However, Evrensel (2002)and Conway (2003)seem to disagree with these views highlighting that the Fund cannot impose conditionality per se citing cases when some program countries enter a new program in an exacerbated macroeconomic condition than the previous program signalling existence of moral hazard (Table 1).

Table1: Temporal inter-program analysis

Source: Evrensel (2002)

1. Policy variables are expressed as percentage of GDP except for the inflation rate.
2. , denote 10%, 5%, and 1% level of significance, respectively.

Studies reviewed so far have alluded to the “neo-liberal” paradigm of market economic principles while endorsing good governance (to mitigate moral hazard) within conditionality and levering trade liberalisation; price liberalisation and privatisation (Bird & Rowland 2003; Seed Europe 2008).Nevertheless, this strategy has not escaped criticism from governments, societies and academics; notably it has resulted in multi-nationals extracting profits from borrowing countries while vulnerable citizens bear the risk of unemployment and objectable social costs such as water privatisation and public revolts in Bolivia

In all, the overall system of conditionality “knowledge production”, undermined in Fischer (1997) and Dreher (2008) but partially sustained in Mussa & Savastano (1999) as “superficial similarities”, discredits the blue print and toolkit solution approach for the “same-diverse” problem. The Sri Lankan experience – that reinforced neoliberal policy reforms at the expense of welfarism – questions attendant policies and measures in the conditionality discourse that bind governments to behaviours and rationalities while demoting country policy ownership, poverty reduction, inequality and national rights (Crawford 1997 ; Dunham & Jayasuriya 2000 ; Ofstad 2002.

CONDITIONALITY: EFFECT ON ECONOMIC DEVELOPMENT (1,600)

In theory, building on Structural Adjustment Programmes (SAPs) censure, the PRSP’s tipping point was to present a country-driven, results-oriented, partnership-oriented and comprehensive policy that would encompasses the long-term perspective for poverty reduction (Christiansen & Hovland, 2003) while upholding conditionality as a commitment model (Dreher 2008).

a) Macroeconomic policies: monetary, fiscal and exchange rate policies

At the onset, Gottschalk (2005) questions the flexibility of PRSPs macro-economic policy framework towards external shocks. This view is also supported in Stewart & Wang’s (2003) review of Bolivia, Malawi and Uganda’s fiscal and monetary policies having been constricted to fiscal balance and price stability consequently paying minimal attention to sharp economic fluctuations arising from external shocks (Table 2)

Table 2: Checklist of reforms contained in PRSPs

Source: Stewart & Wang 2003 & Gottschalk 2005

However, Dreher (2008) justifies the rigidity of macroeconomic policies sighting that if PRSPs should be results-oriented conditionality, it may be irrelevant to allow for external shocks as durable adjustments. Nevertheless, we find that PRSP countries have been significantly vulnerable to external shocks due to their restrictive economic structures and considerable reliance on few primary export earnings – as was the case for:

1. Uganda’s agricultural sector decline in GDP contribution over the years 2006 (24.1%); 2007 (22.3%); 2008 (21.2%) and 2009 (23.7%) (Uganda Bureau of Statistics 2009); and
2. Zambia’s decline in projected real GDP growth for 2009 from 6% to 4% due to a plunge in world copper prices (CEPR 2009).

In fact, Boughton (2003) cited in Dreher (2008) advocates for the specification of PRSPs conditions on outcomes when conditionality is within the control of the borrowing country and outcomes are measurable within a reasonable time limit.

Intricately tied within PRSP has been current account liberalisation. Agreeably, a viable balance of payments does not imply elimination of a current account deficit – but rather a deficit that can be financed by net capital inflows without curtailing a country’s development agenda (Figure 1).

Solid lines and darker bars represent “actuals”, while dashed lines and lighter bars refer to “projections”. All projections for 2009 and 2010 are taken from 2009 program documents. For fiscal deficits, projections for 2007 and 2008 are taken from low income country program documents of 2007 and 2008, respectively.

Obviously not all imbalances are the result of excess demand. Polak in a review of his model (cited in Fine and Hailu 2000) expresses uncertainty about the degree to which the model can be extended over time or to other policy objectives related with structural adjustments. Supportively, Buira (2003) also challenges the adaptability of the model to new structural investments and time lag required for development citing instances where structural financing has been pegged to:

1. privatization revenue which is non-sustainable in the long run for developing countries and even costly to the poor e.g. the privatization of cotton in Mali and Cameroon Airlines in Cameroon (Molina & Pereira 2008)and
2. foreign capital inflows that are influenced by speculators appetites for profit and their often-incorrect interpretation of national or international events.[5]

Further, in their review of 41 borrowing countries’ specifications, Weisbort et al (2009) also criticize the existence of pro-cyclical fiscal and monetary policies (in 15 countries) which would greatly exacerbate a country’s economic slowdown given an economic downturn e.g. pro-cyclical spending cuts implemented for government budgets negatively affected by oil price increases in 2008 while yet the inflation was temporary. Most notable has also been the “double standards” where developing countries such as China with sufficient reserves as the high-income countries face a much more binding foreign exchange constraint (Zattler 2005:272).

Whereas counter-cyclical policies would be ideal for developing countries (evident from the relaxation of original pro-cyclical conditions for Hungary, Latvia and Haiti) unfortunately, large asymmetry in country’s domestic market also expose economies to either foreign exchange risks, maturity mismatches and macroeconomic rigidity – thereby ensnaring country’s economic growth.

b) governance reforms

Reflectively, the “buy-in” to a country’s PRSP programme has been technocratic and influenced by few strategically positioned government officials. In fact, Christiansen’s (2003) review of Bolivia and Uganda highlighted indirect, minimal and constrained government input into the development of PRSPs while Booth (2005) notes that there has been no fundamental change within political interactions and poverty alleviation “promises”. Bird (2003) also argues that conditionality asymmetry imposes on the developing countries policies that favour developed economies. In all, Stewart & Wang (2003) and Gottschalk (2005:4) note minimal real difference with the PRSP and previous adjustment packages while IFIs programmes are largely unaffected by the PRSP process. Irrefutably, PRSPs have not demonstrated significant empowerment of poor countries.

c) poverty and trade liberalisation

A majority of PRSPs are built on the premise that increased private sector participation is the most effective mechanism to alleviate poverty. Most notable has been the lack of alternative poverty reduction approaches. In addition, the pro-poor, broad-based projection of economic growth assumes equitable distribution or increase in government spending to the poor (Stewart & Wang 2003). However, Brazil’s successive conditional “neo-liberal” agreements have had a regressive effect on the country’s economy – strategic economic sectors (such as telecommunications and banking) have now been allocated to MNCs and created structural unemployment, near-half reduction in minimum wage, decreased standards of living and constant deflation (Christian Aid 2006; Santiso nd.).

Further, trade liberalisation in developing countries that lack basic infrastructure to support trade is but an attempt for developed countries to gain concessions for large businesses that unilaterally individual industrialized countries would be unable to obtain. For instance trade liberalisation for Haiti (Christian Aid 2006:4) resulted decreased incomes for over 830,000 poor people, over populated slum areas as they faced significant “supply side” constraints and were unable to compete with imports in an open market place.

Overall, borrowing countries have neither shown significant increase in economic growth nor reduction of debt (Figure 2). In addition reduction in government expenditures has resulted in countries neglected social measures of poverty income distribution (Boockman & Dreher 2002). For instance, Serbia’s public sector workers envisage a frozen pensions and salaries if the country’s ($4.1 billion) loan from the IMF is to remain on track (BWP 2010)

CONDITIONALITY: WHAT WOULD BE PREFERRED (600)

Differing with White & Morrissey (1997:503); and assuming policy conditionality is enforceable and effective in promoting reforms while outcomes are desirable and measurable; conditionality may have a positive role to play in the advancement of economic development. From the above discussion, the principle of PRSPs does not lack legitimizing arguments, but has been exposed to criticism as to the way it is applied and its ultimate effectiveness in achieving its intended objectives. Notably, PRSPs are expected to provide an integrated approach including the participation of the poor in the nation’s development strategy (Gottschalk 2005).

Nevertheless several factors have been highlighted to influence the degree to which PRSPs are implementing and sustaining economic development by allocating resources and providing incentives within the economic system. It is also worth noting that preferred conditionality is country-context specific and solutions are always partial: pegged on prioritization of country’s urgent needs and overall economic development.

a) Country ownership

Firstly, until the Fund devolves from the idea that it can disburse condition money to solely further its own strategic goals it shall be almost futile to implement conditions within borrowing countries. Without doubt, Government players implement policies when it is conducive and politically “right” (Uvin 1993) . However, using selective cases examples, a carrot of aid and the stick of sanctions approach may possibly persuade a government to endorse condition money.

In addition, the overly acclaimed “country-driven participatory process” in Stewart & Wang (2003) and Dijkstra (2005:445) should be clearly defined (is it ownership or empowerment or both) as a means to improving implementation, efficiency, equity and as a process that increases participation of Government and stakeholders as an important end in itself. Thereby, halting the decline in PRSP development involvement as has been the case for Uganda’s stakeholder participation in the 2001 and 2004 subsequent PEAP reviews (Morrisey et al 2004) and Bolivia’s and Nicaragua’s PRSP process (Dijkstra 2005).

In all, as highlighted in the Paris declaration debate, political change in aid recipient countries is most important to ensure legitimacy of PRSPs. Agreeably, while conditionality has presented dysfunctional democracy (Collier 1999:319) cited in (Santiso nd.) high levels of aid dependency within political governments such as Kenya, Zimbabwe, Nicaragua has resulted in regressive democratic accountability; objectable practices such as rent seeking and corruption; implementation of inefficient policies and created perverse incentives for political governments’ increased accountability to foreign donors at the expense of domestic tax revenues (Santiso nd.:18).

b) Aid alignment

Although a crucial part of donor aid alignment effort is compromised by a destructive mix of risk-avoidance and political correctness by the donor, developing countries also need to develop an adequate domestic policy response in alignment to aid received. The policy options available to them include: choosing an exchange rate regime that, together with capital account regulation, provides room for anti-cyclical monetary and financial policies; strengthening anti-cyclical prudential regulation and supervision; improving the debt profiles of both the private and the public sector; and applying adequate anti-cyclical fiscal policies (Teunissen 2000).

Notwithstanding the fact that PRSP countries usually have larger economic shocks as a proportion of GDP than industrial countries, their social safety nets are also less developed. Country authorities should consider strengthening social protection for the vulnerable (Moghadam 2009).

c) Incentives for change

Firstly, both donors and country authorities should take-on greater accountability for their own incentive structures. While highlighting the demerits of self interest toward PRSPs’ effectiveness, Santiso (nd) also identifies the need for development partnerships between donors and recipients thereby fostering economic development within conditional money for instance the Strategic Partnership with Africa (SAP).

Notable, while PRSP was presented as a country and results oriented conditionality, it now more appears as“process conditionality” with minimal ownership and significant micro-management of the process by the donor. Foster et al (1999) as cited in Booth (2005) advocates for “process conditionality” where specific policy measures have failed.