AN ANALYSIS OF IMF CONDITIONALITY

IMF conditionality was introduced in the 1950s as a means to restore members´ balance-of-payments viability, to ensure that Fund resources would not be wasted and to ensure that the institution would be able to recover the loans it extended to member countries. For several decades, until the early eighties, Fund Conditionality centred on the monetary, fiscal and exchange policies of members. Over the last 20 years, while the resources of the Fund declined as a proportion of world trade, the number of Fund programmes increased steadily, and conditionality underwent substantial changes, expanding the scope of conditionality into fields that previously had been largely outside its purview. As the number of conditions increased, the rate of member country´s compliance with Fund supported programmes declined, and reviewing and streamlining conditionality became inevitable. Experience and the Fund´s own studies show that programme success is closely related to ownership, and that ownership cannot be externally imposed. It must result from internal analysis and discussion, leading to the conviction by domestic actors that compliance with the programme is conducive to the attainment of their own objectives. Conditionality can neither substitute nor offset a lack of ownership. This paper reviews the origins and purpose of conditionality, as well as its nature and evolution over time. It looks into the reasons for increased conditionality during the 1980s and 1990s and reviews the recent IMF debate on conditionality and on the proposed changes in Fund practices. It distinguishes between short-term imbalances that result from excess demand and structural disequilibria and the new type of financial crises associated with short-term capital movements, asking whether different problems call for different conditionality. The paper also discusses how the economic and social costs of adjustment may be minimized and whether Fund resources are sufficient to enable it to comply with its mandate.

The Bretton Woods institutions: governance without legitamacy?

Sixty years after their creation, the Bretton Woods institutions face a crisis of legitimacy that impairs their credibility and effectiveness. At the root of this crisis lies the unrepresentative nature of their structure of governance, which places control of the institutions in the hands of a small group of industrial countries. These countries consider the developing countries and economies in transition, as minor partners, despite their accounting for half of the world’s output in real terms,1 most of the world’s population and encompassing the most dynamic economies and the largest holders of international reserves 2. Over time, the effects of the unrepresentative nature of the governance of the BWI s have become aggravated by two trends: Firstly, a growing division among member countries, on the one hand industrial country creditors who do not borrow from the institutions but largely determine their policies and make the rules and on the other, developing country debtors or potential debtors, subject to policies and rules made by others. The second trend is the rapid increase in the economic size and importance of developing countries, particularly emerging market countries in the world economy. This trend, has made the governance structure of the institutions, which reflects the political accommodation reached at the end of WWII, increasingly obsolete. The first part of the paper will review the existing governance structure of the institutions, the foundations on which it rests, the main formal proposal to reform quotas and a number of important shortcomings and major issues that were not addressed by their proposal. The second part takes a different approach. Although in their self-interest, the major industrial countries could be expected to favor policies that contribute to the long term success of the institutions, the good performance of the world economy, and the stability of the international monetary and financial system, the policies they pursued in the institutions have often been determined by short term expediency. A brief review of the performance of the institutions in recent times, conducted in the light of their purposes and responsibilities, shows that, despite some conspicuous successes, their limited effectiveness in the pursuit of their objectives has not only not enhanced their legitimacy, but often contributed to their loss of credibility

International Coercion, Emulation and Policy Diffusion: Market-Oriented Infrastructure Reforms, 1977-1999

Why do some countries adopt market-oriented reforms such as deregulation, privatization and liberalization of competition in their infrastructure industries while others do not? Why did the pace of adoption accelerate in the 1990s? Building on neo-institutional theory in sociology, we argue that the domestic adoption of market-oriented reforms is strongly influenced by international pressures of coercion and emulation. We find robust support for these arguments with an event-history analysis of the determinants of reform in the telecommunications and electricity sectors of as many as 205 countries and territories between 1977 and 1999. Our results also suggest that the coercive effect of multilateral lending from the IMF, the World Bank or Regional Development Banks is increasing over time, a finding that is consistent with anecdotal evidence that multilateral organizations have broadened the scope of the “conditionality” terms specifying market-oriented reforms imposed on borrowing countries. We discuss the possibility that, by pressuring countries into policy reform, cross-national coercion and emulation may not produce ideal outcomes.http://deepblue.lib.umich.edu/bitstream/2027.42/40099/3/wp713.pd

WIDER Advisory Group on International Economic Issues

(A research and training centre of the United Nations University

The social dimension of globalization: A review of the literature

With globalization affecting so many inter-connected areas, it is difficult to grasp its full impact. This literature review of over 120 sources considers the impact of globalization on wages and taxes, poverty, inequality, insecurity, child labour, gender, and migration. Opening with some stylized facts concerning globalization in 1985-2002, the authors then highlight recent findings on these areas, reporting on controversies and on emerging consensus where it exists. There follows a review of national and international policy responses designed to make globalization more sustainable and equitable and to deliver decent jobs, security and a voice in decision-making

An Analysis of IMF Conditionality

Conditionality is the most controversial aspect of the IMF's policies. It has been said to be intrusive and coercive and considered to disregard effects on growth, employment and income distribution. In the 1990s, following a sharp increase in the number of conditions required by programs, Fund conditionality became increasingly ineffective. The paper reviews the nature and purpose of conditionality; its origin and evolution over time. It considers whether conditionality is required to safeguard the resources of the Fund. It looks into the reasons for the increase in structural conditionality, relates the increase in conditionality with the marked fall in the rate of compliance with Fund programs and with the relative decline in Fund resources. The paper notes the revision of conditionality recently undertaken at the instance of the Managing Director and considers progress on that front. Finally, certain difficult political questions arising from conditionality are posed and some suggestions presented for increasing country ownership of programs, the key to making conditionality more acceptable and effective

A Critique of the Cooper Report on the Adequacy of the IMF Quota Formulas

At the request of the Managing Director of the IMF, a group of experts, chaired by Professor Richard Cooper of Harvard University prepared a report on the adequacy of quota formulas, including proposals for changes. The paper reviews the recommendations of the Quota Formula Review Group and finds that the Report failed to address such key issues as the size of the Fund or overall adequacy of quotas, and the question of basic votes and the distribution of voting power. It questions the reasons for the rejection of PPP-based GDP in the proposed formula for quota determination and considers that this introduces a bias against developing countries; the exclusion of short-term capital movements in the measurement of countries external vulnerability also appears questionable

Las instituciones de Bretton Woods: ¿gobierno sin legitimidad?

SIXTY YEARS AFTER THEIR INCEPTION, THE INSTITUTIONS OF BRETTON WOODS ARE GOING THROUGH A CRISIS OF LEGITIMACY THAT DAMAGES BOTH THEIR CREDIBILITY AND THEIR EFFECTIVENESS. THE ROOT OF THIS CRISIS IS THE NON-REPRESENTATIVE NATURE OF THEIR STRUCTURE OF GOVERNMENT, WHICH PLACES THE CONTROL OF THE INSTITUTIONS IN THE HANDS OF A SMALL GROUP OF INDUSTRIALIZED COUNTRIES THAT CONSIDER DEVELOPING COUNTRIES AND THE ECONOMIES IN TRANSITION AS JUNIOR PARTNERS DESPITE THE FACT THAT THEY REPRESENT IN REAL TERMS MORE THAN HALF THE WORLD'S OUTPUT AND THE MAJORITY OF ITS POPULATION AND INCLUDE THE MOST DYNAMIC ECONOMIES AND THE MAIN HOLDERS OF INTERNATIO­NAL RESERVES. WITH TIME, THE EFFECTS OF THE BRETTON WOODS INSTITUTIONS' NON-REPRESENTATIVE NATURE HAVE BEEN AGGRAVATED BY TWO TRENDS. IN THE FIRST PLACE, A GROWING DIVIDE BETWEEN MEMBER COUNTRIES: ON THE ONE HAND ARE THE INDUSTRIALIZED, CREDITOR COUNTRIES, WHICH ARE NOT BORROWERS BUT DO DECIDE FOR THE MOST PART POLICY AND NORMS, AND, ON THE OTHER HAND, THE DEVELOPING COUNTRIES, CURRENT OR POTENTIAL DEBTORS SUBJECT TO THE POLICIES AND NORMS FORMULATED BY OTHERS. THE SECOND TREND IS THE RAPID INCREASE IN BOTH THE SIZE AND IMPOR­TANCE OF THE ECONOMIES OF THE DEVELOPING COUNTRIES, PARTICULARLY THOSE WITH EMERGING MARKETS, IN THE WORLD ECONOMY. THIS TREND HAS MEANT THAT THE INSTITUTIONS' STRUCTURE OF GOVERNMENT, WHICH REFLECTS THE POLITICAL AGREEMENT REACHED AT THE END OF WORLD WAR II, IS BECOMING MORE AND MORE OBSOLETE