Selectivity in conditionality agendas advocated

GENEVA: The application by Multilateral Development Banks (MDBs) of conditions for promoting good government in borrowing countries is creating tensions and a backlash in borrowing governments, with some adverse effects on the MDBs, and they need to be highly selective in choosing sectors to address, and commit substantial resources to build capacity in the countries.

Aziz Ali Mohammed, special advisor to the State Bank of Pakistan and a former senior official in the International Monetary Fund, advocates this in a research paper for the G-24 (a Third World group at the Fund/Bank institutions).

Rise of new conditionalities

In his paper tracing the rise of the new conditionalities, Aziz Ali Mohammed notes that incorporation of "good government" conditions in MDB lending operations was designed to remove deficiencies in the borrowing country that were seen as retarding the development effort, and this type of conditionality attracted strong reaction from the general public and, in particular, from vested interests benefiting from such deficiencies.

Anti-government campaigns launched by interested groups are more apt to attract general support if there is an element of truth to the charge that, but for a governance condition from an external agency, the project would have moved faster or at a lower cost.

For example, participation of all "stake-holders" is a governance condition typically attached by an MDB in supporting a large construction or land resettlement project, where private land has to be acquired on payment of compensation. Generally, land values increase once a government decides to undertake a project in a particular area, and consultations with all stake-holders may unnecessarily push up cost of specific development projects.

Role of NGOs

As for bringing NGOs into the project preparation process, while they can serve a valuable countervailing social interest by empowering weaker elements, in many developing countries, NGOs can just as easily become instruments in the hands of the same elite interests opposing some government initiative or other. It is also easier to attack an MDB for giving an ear to foreign NGOs, particularly when the MDB finds it difficult to avert the foreign NGO intervention when backed by the Executive Director of donor countries.

"Often times, NGOs in industrial countries tend to be single-issue advocates and their ability to bring influence to bear on their Governments to apply conditions in bilateral aid programs is extended to MDBs when these agencies seek funding for concessional resources.

The governance conditionality advocated by foreign NGOs can raise sensitive foreign and domestic policy and security issues and create obstacles to implementation inside the borrowing country.

Such governance conditions are seen as imposing ideological or cultural preferences of advocacy groups in industrial countries, thus inviting the charge that MDBs are being made to serve as instruments of rich-country paternalism, especially in their dealings with poorer member countries depending on concessional loan windows of the MDBs.

A fundamental difficulty for MDBs in applying governance conditionality is how to reconcile their mandate with the application of conditions that push them into the political arena. Another difficulty arises on how to monitor compliance with governance conditions, since these inevitably call for subjective judgements on the part of the MDBs.

The MDB requirements for "transparency" and "participatory" proceedings carry the deeper risk of bringing unelected, and sometimes unrepresentative groups, into the decision-making processes, thereby tending to weaken further, governmental authority in countries where they are already weak.

The governance agenda

The governance agenda also raises the political costs of borrowing from MDBs and this is why demand for non- concessional loans from IBRD is stagnating, while demand for private capital is escalating.

Since large borrowers can more easily fend off such conditionalities, their application affects smaller and poorer countries with little or no access to private sources of capital and require highly concessional borrowing.

Serious implications

This resulting discriminatory treatment has two serious implications: the portfolios of MDBs tend increasingly to be skewed away from stronger towards weaker borrowers, thus affecting the credit-worthiness of the MDBs. And with governance conditions applied mostly to governments already struggling to govern, and the conditions eroding their credibility at home if they are suspected of accepting conditions strictly out of financial exigency rather than conviction about appropriateness, "this loss of credibility feeds back into the 'backlash' problem."

There is also a question of even-handedness relating to the corruption issue. While many of the causes of corruption inhere in domestic conditions, corruption in issue of contracts for supply of foreign goods and services always involve two parties.

The supplier, typically located in an industrial country, and sheltering under a "tied" aid arrangement or domestic procurement requirements of a national export credit agency. In such conditions, the application of the anti-corruption condition only on the procurement process in the borrowing country raises issues of legitimacy and fair dealing. The MDBs are seen to have little power over foreign suppliers, all of whom would have made similar allowances for payment of "marketing commissions" in their quotations.

Aziz Ali Mohammed says that a certain tension is emerging in the relationship between MDBs and borrowing governments that have to be handled carefully to achieve "good government" objectives. The MDBs should be highly selective in targeting efforts to areas that offer the promise of yielding tangible results in a reasonable period of time. Once the areas have been selected in agreement with governments, the MDBs must commit substantial resources, by way of technical and financial assistance, for capacity building and other improvements in selected sectors and allow sufficient time for results to emerge. (TWE No. 159/160, 16 April-15 May 1997)

 The above article was originally published in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.