Principle of Conditionality as Applied by The IMF and The World Bank - Research Paper Example

Principle of conditionality as applied by the IMF and the World Bank Introduction The development of economies worldwide has been related with a series of factors; the ability of the states to administer their sources and proceed to strategic alliances has been proved to be of critical importance for the stabilization of their political, social and economic conditions. However, not all countries have equal potentials to keep stable their economy – a factor affecting also the political and social conditions of states internationally. Current paper focuses on the examination and the evaluation of the principle of conditionality in regard with the International Monetary Fund (IMF) and the World Bank. Both these organizations use the principle of conditionality in order to define the terms of their participation in specific funding schemes – referring to the funding of states as members of the international community. It is proved that IMF and the World Bank tend to respond to the needs of states for funding – in order for specific projects to be completed. However, it has been made clear that the terms and the conditions of this cooperation may differentiate each time in accordance with a series of factors: local culture and ethics can influence the response of the public to the measures required; therefore, the targets set by a particular funding project may not be achieved; on the other hand, the performance of such projects is difficult to be predicted – being related with many different political, social and economic factors and events. The principle of conditionality helps the IMF and the World Bank to secure their claim against the borrower; however, the above principle cannot operate towards the opposite direction: even if countries manage to overcome a specific crisis – in the context of which the repayment of the loan is delayed; on the contrary, individuals cannot rely on this principle in order to protect their rights. 2. The principle of conditionality in the context of IMF and the World Bank 2a. Conditionality – definition, general context In order to identify and evaluate the role of conditionality as part of the policies used by the IMF and the World Bank, it would be necessary to refer to the characteristics and the framework of conditionality – as they have been identified in the literature developed in the particular field. Paloni and Zanardi (2006, 268) examined the concept of conditionality. It was noted that ‘effective conditionality is an instrument of mutual accountability; rather than imposing a position on the borrower, the Bank and its partners commit themselves to lend under certain jointly determined conditions’ (Branson and Hanna, in Paloni and Zanardi, 2006, 268). From a similar point of view, Darrow (2006) mentioned that ‘in basic terms, conditionality is a portmanteau word that encompasses all the policies that the Fund wishes a member to follow so that it can resolve its problem consistently with the Articles’ (Darrow, 2006, p.45). In the above definitions it is not made clear whether the elements of conditionality are likely to be changed under the influence of specific factors – or the time – or whether they are likely to keep their current form. As noted previously, the principle of conditionality refers to a contractual agreement and aims to secure the interests of the lender; in this context, the principle of conditionality may be related with the policy – based lending; Gilbert et al. (2005) note that ‘the premise of adjustment lending is that the country needs to undertake reforms, but either these will be costly, or there will be a lead time before which the beneficial results come through’ (Gilbert et al., 2005, p.24). At a next level, Gilbert et al. (2000) refer to the importance of the support for the success of such projects; this support may have two different elements ‘the incidental benefit of reducing payment pressures and the allowance for the development of a debt services’ (Gilbert et al., 2000, p.24). Therefore, the principle of conditionality can be explained using different theoretical frameworks. Moreover, the culture of the organization/ authority, which is involved in a relevant plan, has a critical importance for the successful alignment of lending agreements with the ethics and concepts of the international law. 2b. Historical development and characteristics of conditionality The development of the concept of conditionality was completed at 1980s and 1990s; today, conditionality responds to specific needs; this issue is highlighted in the study of Paloni and Zanardi (2006); the above paper emphasizes on the role of conditionality as a tool for facing the problems related with a particular market but also a tool to identify the potentials of a firm/ individual to increase its profitability. In accordance with Paloni and Zanardi (2006) ‘the debt crisis market a profound change in the use of conditionality’ (Paloni and Zanardi, 2006, A major characteristic of the conditionality in the context of the above period is the fact that this concept is difficult to be fully developed; on the other hand, the principle of conditionality can react differently in various sectors; specific measures need to be developed so that the initiatives taken in the context of conditionality to be aligned with the market trends and the business needs. Regarding this issue, Braithwaite et al. (2000) noted that ‘conditionality is the principle that access to and use of a lender’s funds is linked to the borrower agreeing to meet certain requirements set out by the lender’ (Braithwaite et al., 2000, p. 125); in other words, conditionality is used in order to ensure that the borrower will respond to the obligations result from the relevant agreement – as noted above, the specific principle cannot be used towards the opposite direction – referring to the obligation of the lender to respond to his conventional responsibilities. 2c. Differentiations of conditionality Through the years, it has been made clear that the traditional forms of conditionality would not be appropriate for meeting the market’s trends - taking into consideration the fact that new forms of projects have been developed in the context of states – most commonly these projects refer to infrastructure but they can also refer to the promotion of specific educational or cultural schemes; in accordance with Gould (2005, p.2) ‘a new form of ‘processual’ conditionality built into the ‘partnership’ concept’ has affected relations between creditor, state and civic (non-state) actors’; alternative forms of conditionality would be also suggested in case that different aims and targets need to be achieved. An example is the outcome-based conditionality – the principle of conditionality that is related to the achievement of a particular target – and the actions-based conditionality – a term used in order to show that the use of the principle of conditionality in a specific case is related with the development of a series of actions (the framework of which is usually defined in advance) (IMF, 2004, 236). Other forms of conditionality – as highlighted in the literature – have been the ‘positive conditionality’ which refers to ‘the reception of benefits after the fulfillment of requirements’ (Wichmann, 2007, p.28) and the negative conditionality, i.e. ‘the reduction or suspension of certain benefits when certain requirements are not being met’ (Wichmann, 2007, p.28); the type of conditionality chosen each time depends on the targets set by the developers of a particular funding project, the resources available for the realization of this project, the prospects for success – in accordance with the performance of similar projects internationally. On the other hand, the hierarchy of priorities in regard to a specific funding project is of significant importance for the choice of the type of conditionality involved in the specific project (Fierro, 2003, p.75). It is also possible that the principle of conditionality is asked to play a different role – than the one indicated by its form – in case that the conditions in the international community are characterized by strong turbulences or if the leaders of the organization (of the public or the private sector) involved in the particular project change their strategic priorities in regard to the participation of their organization in a specific funding scheme. At the next level, the criteria used for the choice of the appropriate type of the principle of conditionality may be differentiated across countries in the international community under the influence of ethics and practices of their region – the use of the principle of conditionality by members of the European Union would be evaluated in accordance with the above terms (Arts et al., 2004, p.51). The context of the use of the principle of conditionality by the IMF is described in a study published by the above organization; in that study it is noted that the principle of conditionality means that the person who will be asked to evaluate a particular funding program should make clear whether ‘the program is consistent with the Fund’s provisions and policies and that it will be carried out’ (IMF, 2004, p.52); no other requirements are set by IMF (2004) in regard to the successful application of the principle of conditionality; however, through the above comment another issue appears; the evaluation whether the terms of the principle of conditionality – as described above – have been met belongs to a specific individual; the role and the position of the specific individual is not explained clearly; it can be assumed that the particular person works for IMF and can base his view in regard to a specific funding scheme on his own perceptions – there are no standards set in relation to the above activity. This fact can lead to the limitation of the credibility of a funding project’s evaluation; from another point of view, the comments of IMF (2004) on the principle of conditionality can lead to the assumption that the power of the above organization to set the rules and the criteria of the evaluation of states’ funding scheme is absolute –i.e. it is not open to doubts. The level at which such an operational scheme can be considered as aligned with the current principles of the international law needs to be carefully reviewed. 2d. Conditionality in the context of IMF and the World Bank The World Bank and the IMF are likely to use conditionality in order to set the terms of their intervention in a specific funding program; the use of the principle of conditionality in this case ensures that the interests of these organizations will be adequately protected – the borrower also will satisfy his needs in the context of the relevant agreement. The framework in which conditionality operates is depended on the characteristics of the party which asks for the use of the specific principle; in this context, when conditionality is mentioned in agreements developed between the International Monetary Fund and the state, it focuses on the protection of the Fund’s interests – referring to the funds offered for the stabilization of a country’s economy; the above issue is highlighted in the study of IMF (2004); in the specific study, the principle of conditionality is related to the ‘Fund’s concern with macroeconomic policy design and implementation’ (IMF, 2004, p.55). In the case of the World Bank, conditionality has a similar role; in accordance with Braithwaite et al. (2000) the use of conditionality by the World Bank serves specific targets; more specifically, organizations of such type, like the world bank, are likely to use the principle of conditionality in order to ‘create welfare gains where the private lending market cannot because the market has no means of enforcing policy prescriptions’ (Braithwaite et al., 2000, p.126). It is made clear from the above that IMF and World Bank may have different plans in regard to the promotion of the scheme of conditionality; for the IMF the return of the funds funded is the major issue; as for the World bank, this organization uses the conditionality in order to improve its performance in the long term. In other words, the practices used by the World Bank in regard to the application of the principle of conditionality have similarities to those practices used by the organizations operating in the public sector; on the contrary, IMF proceed to contractual agreements that are similar with those developed in the private sector – where profit is the priority when commercial plans are to be developed. Under current market conditions, the choice of the best solution can be quite difficult; however, projects that guarantee long term success are likely to be aligned with the principle of conditionality. The World Bank made an extensive use of the principle of conditionality in the period between 1990 and 2002 when the highest percentage of adjustment loans (about 452 loans) were approved (Koeberle, 2005, p.72); most of these loans were repaid on time – in the context of their terms. By referring to the above fact Koeberle (2005) notes that ‘a common criticism of traditional conditionality has limited validity’ (Koeberle, 2005, p.72). Another issue highlighted through the above study is the fact that traditional conditionality might not be appropriate for the contractual agreements referring to the funding of states; perhaps, alternative forms of conditionality, like those presented below, could be used instead in order to secure the protection of the interests of the borrower. The use of the principle of conditionality has not negatively influenced the financial support of developing countries by IMF and the World Bank; on the contrary, it seems that the level of the external funding of these countries has been increased from the year 2004 onwards (see Table 1, Appendix). The above fact is also proved in the graph included in the Table 2 of the Appendix; through this graph it is explained that the increase of the capital flows towards the developing countries has been continuous from the year 1970 up today. 3. Conclusion The success of projects developed by governments internationally is related to specific criteria; usually, under hostile market conditions, the ability of governments to develop their strategic plans is limited; in this case, the support of international organizations is available; however, the terms of such cooperation should be carefully reviewed – identifying and evaluating the benefits and the disadvantages of the relevant decision. The World Bank and the International Monetary Fund are organizations known for their involvement in the development of projects of states in the international community. In the case of states, the terms of loans cannot be the same like in the individuals; the most important reason is the fact that lending contracts in which the borrower is an individual are secured through a specific property – there are cases of personal loans that are not secured; however, in the case of the state, the delay in the repayment of the loan could lead to the loss of control over an asset belonging to the state; in other words, this is an issue of control of the assets and the wealth of a state. The use of the principle of conditionality – as explained above – ensures that the lender has the right to ask for the money owned at the end of a specific time period. The effectiveness of the above principle is high – under the terms that its appropriate form is chosen in the context described above. This study indicates that an emergent need exists for the development of a scheme – or principle – that will ensure the protection of the borrower’s rights. IMF and the World Bank have developed appropriate frameworks in order to achieve the highest possible benefits through the principle of conditionality – the performance of which in any case cannot be standardized. References/ Bibliography Arts, K., Dickson, A., 2004. EU development cooperation: from model to symbol. Manchester University Press Braithwaite, J., Drahos, P., 2000. Global business regulation. Cambridge University Press Buira, A., 2005. The IMF and the World Bank at sixty. Anthem Press Buira, A., 2003. Challenges to the World Bank and IMF: developing country perspectives. Anthem Press C.P. Chandrasekhar, C.P., Global Liquidity and Financial Flows to Developing Countries: New trends in emerging markets and their implications. G24 Working Paper Darrow, M., 2006. Between light and shadow: the World Bank, the International Monetary Fund and international human rights law. Hart Publishing Fierro, E., 2003. The EUs approach to human rights conditionality in practice Volume 76 of International studies in human rights. Martinus Nijhoff Publishers Gilbert, C., Vines, D., 2000. The World Bank: structure and policies. Cambridge University Press Gould, J., 2005. The new conditionality: the politics of poverty reduction strategies. Zed Books Great Britain: Department for International Development, 2007. Department for International Development annual report 2007. The Stationery Office Great Britain: Parliament: House of Commons: International Development Committee, 2008. DFID and the World Bank: sixth report of session 2007-08, Vol. 1: Report, together with formal minutes. The Stationery Office International Monetary Fund, 2004. Selected decisions and selected documents of the International Monetary Fund, Volume 28. International Monetary Fund Koeberle, S., 2005. 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LIT Verlag Münster Appendix Table 1- External financing in developing countries for the years 1997-2006 (source: Chandrasekhar, p.6) Table 2 – Capital flows to developing countries for the years 1970-2001 (source: Schmukler, 2004, p.42) Read More