Governance and Sustainability

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Governanceand Sustainability

Internationalfinancial institutions such as the International Monetary Fund (IMF)and the World Bank have stabilised global economies since the GreatDepression in the 1930s (The World Bank, 2016). Other donorinstitutions such as the European Commission have also contributedtowards tolerable levels of equilibrium. In particular, developingcountries have reaped the most benefits from long-term developmentfinance. The World Bank and IMF have reshaped the economies ofdeveloping countries through the deployment of economic policy termsand conditions (The World Bank, 2016). These conditions have been setto influence the economic development of developing nations. In thisregard, aid-recipient nations are eligible for long-term developmentfinance only if they adopt a set of conditionalities. The World Bankassumes the role of determining the particular economic reforms to beattained by each aid-recipient nation.

Previousdebates on the topic have focused on the seeming effectiveness ofconditionalities. They have also centered on the popularity ofeconomic reforms and the implications for democracy. The deploymentof conditionalities has been questioned by both aid-recipient nationsand Non-Governmental Organizations (NGOs). This paper aims to portrayhow conditionalities are used by financial institutions to fostertheir market-fundamentalist agenda. In this manner, the paper seeksto expose the fallacy in the stated purpose of reducing poverty indeveloping countries. Imposing economic policy reforms causes plentyof damage to poor nations since it leads to unequal economicdevelopment (Action Aid International, 2006). Therefore, it isimportant to conduct further research on the issue ofconditionalities in an endeavor to alleviate the inequality.

Thebackground will discuss the stated objectives and aims of variousstakeholders such as the financial institutions, aid-recipientcountries, and NGOs. The body of the paper will present an in-depthdiscussion of the interactions and conflicts between donor agenciesand recipient nations. It will also outline the various ethical andmoral arguments presented by the issue of conditionalities. Also,this section will reveal the power relationships triggered by theinteractions between financial institutions, NGOs, and thegovernments of developing countries. The report will utilizedocumented case studies from both emerging and developed economies tovalidate the presented arguments. The conclusion will providerecommendations proceeding from the arguments presented in thereport. This section will also predict future discussions on thetopic of conditionalities. The report will utilize extensive researchto document the most significant issues in the perspective of donororganisations, developing countries, and NGOs.

Background

Despitethe incidence of unequal economic development courtesy ofconditionalities, financial institutions have retained their lendingpractices. The deployment of conditionalities has elicited plenty ofdiscontent from various stakeholders. Civil societies have decriedthe undermining of national sovereignties. Financial institutionshave been blamed for imposing reforms in recipient economies so as tobelittle their self-determination (Action Aid International, 2006).Donor organisations exploit the pertinent need for developmentfinance to foster their agenda. Some developed nations have alsocriticized financial institutions for interfering with domesticpolicies and procedures. These nations show concern for the manner inwhich their funds are appropriated by the World Bank and IMF.Developed nations with massive GDPs customarily make contributions tofinancial institutions (Action Aid International, 2006). Thesecapital inputs are made with the intention of helping emergingnations to finance their development agenda. Therefore, theimposition of unfair economic conditionalities by financialinstitutions undermines trust and good faith.

Individualcitizens in developing countries also question the motives of theWorld Bank, IMF, and other donor institutions. They claim that suchinstitutions are solely concerned with influencing local markets toreflect their worldview. Some local enterprises have been pushed outof business due to the implementation of external economic reforms.Financial analysts have ridiculed the relevance and applicability ofthe imposed conditionalities. Different countries experience variedeconomic circumstances. Besides, the natural resources available todeveloping nations hardly match up to developed countries. Sincelocal conditions vary, it would be impractical to enact generaleconomic policy reforms (Action Aid International, 2006). Also, it isquite impossible for external institutions to have better insightinto the economic affairs of any country.

Furthermore,every nation has a unique development agenda geared towards tacklinglocal challenges. Therefore, implementing conditionalities imposed byforeign institutions derails economic growth and development.Developed countries have the liberty to pursue their economicdevelopment agenda without interference from external sources. At thevery least, emerging economies demand the same courtesy. This meansthat financial institutions should work at complementing the effortsof local governments as opposed to subverting them (Action AidInternational, 2006). On the other hand, financial institutions suchas the World Bank and IMF cite the merits of good governance as a keymotivating factor.

Powerfulfinancial institutions hold that economic growth is practicallyimpossible without seeking to engender structures of good governance.They also cite bad governance as one of the primary causes of povertyand other economic imbalances. Donor institutions are convinced thatbad governance is to blame for all underdevelopment and mismanagementprevalent in developing countries (Reinhart, 2015). In this regard,international financial institutions continually cite good governanceas a conditionality for receiving development finance. Consequently,governance issues have become the centerpiece of the developmentagenda.

Bilateraldonors such as US Agency for International Development (USAID) alsoprovide aid packages with ‘good governance’ conditionalities.Other bilateral donors include the Swedish International DevelopmentCooperation Agency (SIDA) and the British Department forInternational Development (DFID). Multilateral financial institutionshave suspended and even canceled the aid packages extended tocountries with a perceived record of ‘poor governance.` Apart fromthe IMF and the World Bank, other financial institutions in thiscategory include the United Nations Development Programme (UNDP) andOECD. Countries such as Zimbabwe, Liberia, Sierra Leone, Haiti,Cameroon, and Fiji have had suspended debt packages (Action AidInternational, 2006). Some transnational corporations have ceasedoperations in countries such as Malaysia and Burma due to seeming‘poor governance’ (Action Aid International, 2006).

Discussionof conflicts, interactions, andmoral and ethical arguments relating to the various stakeholders,including power relationships

Theissue of conditionality has drawn together various stakeholders andled to many moral and ethical arguments. However, it is important toconsider the discussion in segments so as to capture the wholepicture. In this regard, it would help to consider the unique aspectsof governance and conditionality. The Asian Development Bankoriginally adopted the `governance` conditionality in 1995 (Knack,2000). Besides, bilateral donors have formed special units to enhancetheir governance-related agenda. In this regard, they spend largesums of money to sponsor governance-related initiatives and programs.Nevertheless, international financial institutions continue to setthe governance agenda pursued by bilateral donors. Some privateinstitutions such as the Open Society actively promote governance anddemocracy-related programs in sections of Eastern and Central Europe(Action Aid International, 2006). This shows the prevalence of goodgovernance both as a conditionality and as an objective ofdevelopment finance aid.

Nevertheless,good governance implies different things to different organisations.All states, institutions, community organisations, and NGOs claim toadhere to practices of good governance. For example, the World Bankdefines good governance as the manner in which ruling authoritiesexercise power in managing a country’s economic resources.Therefore, good governance is characterised by the competentmanagement of development (The World Bank, 2016). On the other hand,the IMF includes the regulatory framework of a country as part of itsgovernance. Consequently, poor governance creates an enablingenvironment where corrupt practices abound. This is because greaterscope and incentives are provided for corruption (Reinhart, 2015).The consequences of poor governance can be seen in hampered welfareand economic activity. Bilateral donors such as the USAID define goodgovernance as a measure of economic freedom and private sectorinvolvement in the local economy. What may be construed as good orbad governance in one country may be rendered as standard practice inother areas (Santiso, 2002, 15). For example, money laundering, taxevasion, and insider trading are tolerated in certain regions.

Asmentioned, international financial institutions maintain thatsustainability can only be achieved through good governance. In thisregard, good governance structures have been defined by severalcharacteristics. Firstly, the rule of law must protect propertyrights. The regulatory framework must ensure appropriate checks andbalances (Afrodad, 2007). The government is also expected to beeffective in delivering public services and enacting high-qualitypolicies. Civil liberties need to be maintained through a guaranteeof personal rights and freedoms. Good governance is also synonymouswith political and social stability. The government should desistfrom interfering with the functions of the judiciary (Bull et al.,2006). Curbing corruption is another characteristic of goodgovernance.

Nevertheless,good governance practices should not be limited to state structuresand institutions. This is because there are several formal andinformal elements that play significant roles in the decision-makingprocesses. In this regard, non-state elements of the civil societyand financial markets are weighed in consideration of governanceissues. In the same vein, corporate institutions, religious groups,trade unions, NGOs, multilateral trade bodies, media, bilateral donororganisations, and multilateral financial institutions should alsoadhere to the standards of corporate governance (Santiso, 2001, 156).The World Bank and the IMF need to redefine corporate governance inthese organisations if individual countries are to succeed inadhering to conditionalities.

Theglobalisation of corporate organisations requires publicaccountability so as to rate good governance. Reliable statisticsestimate that over 60,000 transnational corporations operate overeight million subsidiaries in foreign nations (Foster, 2003). Thesecorporations have assumed control of many services and industriespreviously managed by national governments. Consequently,capital-intensive industries are no longer the preserve ofgovernments. However, for the most part, these transnationalcorporations have been exempt from shouldering their obligations tothe public (Foster, 2003). This proves that international financialinstitutions are hardly justified in setting economic policy reformsas conditionalities for developing countries.

Acase in point occurred in India where over 5,000 people were killeddue to an accident at Union Carbide’s factory in 1984. This exampledemonstrates the need for accountability on the part of TNCs (Foster,2003). Besides, the revenues of some TNCs such as Exxon Mobil faroutweigh the GDPs of several host countries. Also, many TNCs colludeto swindle local governments of foreign exchange and tax revenuethrough manipulative pricing strategies and trade cartels. Despitethe mechanisms laid by the Securities and Exchange Commission (SEC),many American corporations have deliberately violated the code ofethics. Numerous restatements of earnings by corporations also showthe underlying fraudulent practices (Christian Aid, 2006). Therefore,corruption is rampant in the private sectors widely promoted by theWorld Bank and IMF.

Conditionality

Attemptingto define conditionality reveals the power relationships that existamong several institutions. For example, the IMF and the World Bankbear fundamental differences despite their common goals, objectives,and practices. The World Bank has traditionally had Americanleadership. Therefore, the American agenda permeates through theprograms and policies set by the World Bank (Toussaint, 2006). On theother hand, the IMF customarily has European leadership. This causesthe IMF to foster not only the agenda of individual Europeansuperpowers but also the Euro bloc as a whole (Reinhart, 2015).International Financial Institutions also have different perspectivesof conditionality. In any case, a condition must be legally bindingso as to be classified as a conditionality.

TheWorld Bank sets a variety of conditions for countries to fulfillbefore receiving foreign aid. For example, countries must maintain anadequate framework of macroeconomic policies. The recipient nationmust also implement the program in a manner deemed satisfactory bythe IFI (Action Aid International, 2006). Besides, a countryimplements other policies and actions critical to the success of theprogram.

Basedon this definition, conditionalities exist in various forms. Prioractions refer to policies that a developing country agrees toimplement before the IFI approves a loan. Floating conditions referto the periodic actions that a nation is required to implement duringthe disbursement of loan tranches. Policy conditionalities demand theimplementation of particular policies that facilitate the success ofprescribed development goals. Process conditionalities focus on theproper management of allocated funds (Christian Aid, 2006). Fiduciaryconditionalities ensure public accountability of funds. On the otherhand, outcome conditionalities are concerned with measurable,realistic outcomes such as reduction of poverty and GDP growth(Christian Aid, 2006). This latter conditionality gives littleimportance to the type of policies adopted and implemented so as toachieve expected outcomes.

Outcomeconditionalities reveal some power relationships that exist amongdonor organisations. For example, some NGOs such as OxfamInternational favor the use of output-based conditionalities. Eurodadis another prime example of an NGO that gives prominence to theapplicability and relevance of output-based conditionalities(Eurodad, 2007). Some bilateral donor agencies such as the BritishDFID have also argued the merits of outcome conditionalities. In thisregard, outcomes should be the primary means of evaluating progressand efficient use of funds. Using outcomes would afford countries thedignity of choosing their preferred economic policies based onlocally-existing conditions (DFID, 2005). Eurodad has also haddisagreements with the World Bank on the extent of conditionalitiesin current specifications. Eurodad claims over 70% of World Bankloans still include conditionalities (Eurodad, 2007). On the otherhand, the World Bank argues that the figure is below 30% (Eurodad,2007).

Consequently,the World Bank has come under increased pressure to shift tooutcome-based conditionality as the primary means of evaluatingaccountability. The World Bank would need to outline mutually agreedtargets of poverty reduction with recipient countries. Theseobjectives could be derived from Millennium Development Goals(Christian Aid, 2006). Interactions and conflicts among donors haveled to some unfavorable outcomes. As mentioned, Eurodad and DFID havecolluded in the clamor for output-based conditionalities.Nevertheless, output-based conditionalities present various potentialpitfalls. Developing countries would risk stringent penalties if theyfailed to achieve predetermined results for whatever reason. Forexample, a state is powerless in the event a drop in commodity pricesfrustrated particular outcomes. It may also be difficult to evaluatechanges in performance whenever policy implementation is interrupted(Christian Aid, 2006). The ascension of a new government to powercould potentially hinder the continuous implementation strategies. Insome instances, it may be impossible to track the realization ofoutcomes due to inexistent or inaccurate data.

Granted,these power relationships have led to some advantages. For example,in 2004, the World Bank bowed to the enormous pressure exerted byboth developed and developing nations. The bank sensed the need toengender goodwill among its member states. The strength ofinternational financial institutions is ultimately dependent on theirnumbers. Member states have some control over the developmentprograms initiated by the institutions. Besides, developed nationshave increased influence on policy courtesy of their superiorcontributions. Therefore, failing to heed the requirements of somenations could be tantamount to self-destruction. In this regard, theWorld Bank undertook a comprehensive examination of itsconditionality-based lending procedures. Subsequently, theinstitution adopted several best practices in place ofconditionalities. Such practices include harmonization, transparency,ownership, criticality, predictability, and customization. Severalofficials of the World Bank have also made public statements to theeffect that the IFI no longer applied economic conditionalities.

Nevertheless,the institution uses other economic policy stipulations such asliberalization and privatization to control its lending of long-termdevelopment finance (Bull et al., 2006). Liberalisation refers tostrategies aimed at reducing government regulations in economic andsocial policies. Economic liberalisation can take different forms.For example, price liberalization seeks to reduce governmentinterference by allowing market conditions to dictate prices ofcommodities (Bull et al., 2006). Some developing nations remainopposed to letting prices float freely. The IMF pursues tradeliberalization so as to reduce the barriers to trade through liftingsubsidies and eliminating tariffs (Reinhart, 2015). State-ownedmonopolies are also restructured so as to encourage the participationof the private sector. On the other hand, privatization demands thepartial or total ceding of responsibility and property from thegovernment to the private sector businesses and individuals.

Granted,international economic aid has been fundamental in reducing povertyand promoting economic development in emerging economies. In thisregard, developed nations are expected to provide long-termdevelopment finance. Besides, cancellation of bad debts is afundamental action that serves to relieve the enormous pressure borneby recipient nations (Bull et al., 2006). Wealthy nations embracethis responsibility since they played a significant role in thehistorical inequality between the rich and the poor countries.International financial institutions such as the World Bank and theIMF are mandated to offer such relief to deserving countries. Inparticular, the World Bank focuses its development agenda onimpoverished and war-ravaged nations (The World Bank, 2016). It iscritical for financial institutions to seek to ensure accountabilityof allocated funds. Particular conditions need to be enacted firstbefore the provision of financial aid. In this manner, fiduciaryconditionality contributes to financial accountability.

Nevertheless,international financial institutions should not exploit the high needfor aid in developing countries. The World Bank and the IMF shouldnot stipulate the implementation of particular economic policies as aprecondition for releasing aid. The conditionalities imposed by donorinstitutions undermine the sovereignty of developing nations. Thesecountries are forced to adopt policies that have little localapproval and application. Besides, countries are more likely toimplement a policy if they conceive it, rather than when it isforcibly imposed on them (Randal, German, and Ewing, 2002).Developing countries have the sovereign right to plan, design, andimplement whatever policies they deem worthy.

CaseStudies

The Poverty Reduction Strategy Papers(PRSP) system used by the World Bank has also failed to enhancecountry ownership of policies. This is because the policies writtenby recipient countries are subject to the approval of the IMF and theWorld Bank. The PRSPs must also incorporate policies such asliberalisation and deregulation. Economic conditionalities alsorender financial aid unpredictable and unreliable (Christian Aid,2006). Development finance can either be suspended or canceledwhenever developing nations fail to implement particular economicconditionalities (Devarajan, Dollar, and Holgren, 2001).Consequently, developing countries cannot make conclusive plans asthey seek to address their most pertinent needs. Although the WorldBank expresses satisfaction at the progress on the predictability ofaid, recent examples paint a different picture.

Forexample, Mali is recognised as one of the poorest nations worldwide.However, the country has made outstanding strides in having ademocratically-elected government after decades of civil unrest andwidespread anarchy (Oxfam International, 2006). Besides, the countryhas also formulated a detailed poverty plan to raise the profile ofits citizens. Also, Mali has commendable financial accountability andmacroeconomic stability. However, the country receives unpredictableaid that is less than that received by wealthier nations such asSenegal. International financial institutions have marginalized Malidue to its perceived inability to privatize its electricity supplyand liberalize the cotton sector. Burundi also experiencedpostponement of debt relief due to its perceived unwillingness toderegulate and privatize its coffee industry (Oxfam International,2006). International financial institutions cared less that coffeewas its main earner of export revenues.

Asmentioned, economic conditionalities are highly ineffective inpromoting good governance. This is because aid conditionalitiespresume on the indispensability of fiscal austerity, market reform,and macroeconomic principles. Also, aid conditionalities are not onlyone-sided but also disregard local conditions. Countries such as theUnited Kingdom and Norway have been the most vocal critics of thedeployment of aid conditionalities by donor institutions (DFID,2005). The World Bank demanded the liberalisation of the agriculturesector in Malawi. The institution also required the privatisation ofthe national agricultural parastatal. Consequently, thousands ofMalawi residents died from famine in 2002 (Sjaastad et al., 2007).The World Bank used these conditionalities to invalidate thesovereign decisions of Malawi and thereby place vulnerable citizensat the precipice of a food crisis.

In2005, Mozambique resisted the attempts of the World Bank to privatiseits national power company regardless of present alternative plansfor management. Faced with enormous pressure from Scandinaviancountries, the World Bank relaxed its insistence on the privatisationof the electricity sector (Bull, 2007). The privatisation of theelectricity sector in Nicaragua also failed to deliver any of thestated objectives since the country lacked ownership of theinitiative. The IMF and the World Bank used privatisation as aneconomic conditionality before debt relief was issued to the country.Nevertheless, electricity generation and coverage showed nosignificant improvements (Action Aid International, 2006). The WorldBank also marshaled Zambia into devaluing its currency and abolishingtariffs and other restrictions on imports. The bank also stipulatedthe privatization of Zambia’s national bank along withliberalisation of interest rates as aid conditionalities.Consequently, household incomes plummeted as poverty levelsskyrocketed (Saasa, 2006). The World Bank caused similar outcomes inits insistence on privatisation in Bangladesh. The energy sectorprivatisation failed to improve the management and financialsituation of the country. In fact, provision of energy deterioratedin many areas (Bull et al., 2006). These case studies show thefutility of aid conditionalities.

Conclusionand Recommendations

Indeed,financial aid should not be provided to developing nations dependenton conditionalities. Powerful financial institutions believe thateconomic prosperity is unattainable without seeking to implement goodgovernance. They also hold that bad governance is responsible forenhanced poverty, corruption, mismanagement, and underdevelopment indeveloping countries (Reinhart, 2015). In this regard, internationalfinancial institutions have suspended aid packages to countries witha perceived record of ‘poor governance` (Action Aid International,2006). Good governance structures have been defined by variousparameters. The recipient country must demonstrate a willingness tocurb corruption and protect civilian rights and freedoms (Afrodad,2007). However, good governance practices should be extended totransnational corporations since they are heavily involved in thedecision-making processes.

TheWorld Bank has set various conditions for countries to fulfill beforereceiving development aid. For example, nations must implement theproject in a satisfactory manner while maintaining a competentframework of macroeconomic policies (Action Aid International, 2006).Various types of conditionalities have been formulated. Prior actionsrefer to policies that an emerging economy agrees to enact before aloan is approved. Floating conditions are a series of moving targetsthat a country is expected to achieve in a progressive manner.Process conditionalities are set to ensure transparency whilefiduciary conditionalities engender accountability (Christian Aid,2006).

Onthe other hand, outcome conditionalities are concerned with theachievement of desired outcomes rather than the implementation ofparticular policies (Christian Aid, 2006). This latter conditionalityhas been embraced by NGOs such as Oxfam International and Eurodad(Eurodad, 2007). Nevertheless, developing countries run the risk oflosing aid if external circumstances cause them to fail to attainpredetermined outcomes. Therefore, aid conditionalities should not beused to manipulate developing countries. Conditionalities are highlyinappropriate since they undermine sovereignty and democracy. Theyare also ineffective since they give little consideration to localconditions. Besides, developing nations benefit more from ownedrather than suggested economic policies and programs. Usingconditionalities renders aid as unpredictable and thereforeineligible for planning purposes.

Wepropose several recommendations for further research and adoption byinternational networks of contributors. Firstly, the contributorsshould undertake an intensive study on the governance ofinternational financial institutions. This will help to highlight thedouble standards in IFIs. Second, PRSPs should be used to examinedevelopment finance cooperation given structural conditionalities andgovernance reforms. Third, a critical examination of one-sidedeconomic policies should be done so as to provide developing nationswith autonomy to pursue their preferred economic policies. Fourth,TNCs should be forced to adhere to the practices of good governance.Fifth, the contributors need to examine other ways of highlightingthe impracticality of using conditionalities as a means of ensuringgood governance.

References

Action Aid International, 2006. “What progress? A shadow review ofWorld Bank conditionality.”

Afrodad, 2007. “The Impact of Economic Reform Programmes on SocialServices: The Case of Malawi.”

Bull, B. et al., 2006. The World Bank’s and the IMF’s use ofConditionality to Encourage Privatization and Liberalization: CurrentIssues and Practices. A report prepared for the NorwegianMinistry of Foreign Affairs as a background for the OsloConditionality Conference.

Bull, B., 2007. Analysis of the reports Conditionality inDevelopment Policy Lending. Center for Development and theEnvironment: University of Oslo.

Christian Aid, 2006. Challenging conditions: A new strategy forreform at the World Bank and IMF.

Department for International Development. Foreign and CommonwealthOffice, 2005. Partnerships for poverty reduction: rethinkingconditionality. A UK policy paper. HM Treasury.

Eurodad (2007). Untying the knots: How the World Bank is failingto deliver real change on conditionality.

Randal, J., German. T. and Ewing, D. 2002. The Reality of Aid:Focus on Conditionality and Ownership. Manila: IBON.

Santiso, C., 2002. Good Governance and Aid Effectiveness: The WorldBank and Conditionality. The Georgetown Public Policy Review,7 (1), pp.1-23.

Santiso, C., 2001. International Cooperation for Democracy and GoodGovernance. European Journal of Development Research, 13 (1),pp.154-180.

Devarajan, S., Dollar, D. and Holgren, T. 2001. Aid and Reform inAfrica: Lessons from Ten Case Studies. World Bank: Washington DC.

Foster, J., 2003. Crisis time: repossessing democratic space:governance and promotion of rights in international cooperation andaid. Available at &ltwww.realityofaid.org&gt[Accessed 28 March 2016].

Knack, S., 2000. Aid Dependence and the Quality of Governance: ACross-Country Empirical Analysis. PolicyResearch Working Paper,2396. World Bank: Washington DC.

Oxfam International, 2006. Kicking the Habit: How the World Bank andthe IMF are still addicted to attaching economic policy conditions toaid. Oxfam Briefing Paper, 96.

Reinhart, C. M., 2015. The International Monetary Fund: 70 yearsof reinvention. Cambridge, Mass.: National Bureau of EconomicResearch.

Saasa, O. S., 2006. “Use of Conditionality to EncouragePrivatization and Liberalization: Case study of Zambia.”

Sjaastad, E. et al., 2007. “Privatization and Liberalization in theagricultural sector: An Examination of Processes and Outcomes inThree African Cases.” Report No. 39. Norwegian University of LifeSciences.

The World Bank, 2016. Available at &lthttps://www.worldbank.org/&gt[Accessed 28 March 2016].

Toussaint, E., 2006. “The influence of the United States on theWorld Bank.” Available at&lthttp://www.cadtm.org/spip.php?article2194&gt[Accessed 28 March 2016].

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