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How international financial institutions and donors influence economic policies in developing countries

Added 05 Oct 2016
This briefing analyses compliance with the ownership principle by the International Monetary Fund (IMF), the World Bank Group and the European Commission (EC).

The ownership principle is the idea that developing country governments – with the contribution of their parliaments, local authorities and civil society organisations (CSOs) – should define their own economic policies according to their development strategy. It also analyses the different channels through which international financial institutions (IFIs) and the EC influence economic policy-making in developing countries, impacting the ownership of their development strategies.

The list of channels analysed as part of this briefing is not exhaustive. It focuses on what Eurodad considers to be the most powerful channels of influence. The evidence presented is based exclusively on a review of the literature on this topic.

The following outlines the main characteristics of EU and IFI channels of influence on economic policy-making in developing countries, classified by institutions:

World Bank conditionality
• World Bank’s Development Policy Lending are loans or grants that are accompanied with conditions that take the form of prior actions, triggers and benchmarks.
• The Bank offers support in priority countries that have a positive assessment in terms of economic policies. Despite the Bank’s willingness to improve ownership,
countries are consequently incentivised to adopt the World Bank’s preferred policies to receive funding.
• The current trend shows an increase of prior actions touching economic policies.

World Bank research
• The World Bank is one of the most important providers of research in development economics.
• Through its research activities, the Bank is in a position to justify its policy recommendations and the conditions attached to its loans. The World Bank’s researchers are influential among policy-makers themselves.
• The Bank’s research is often criticised – including by the last major external review – for their technical flaws and for being biased.
• Despite country-specific analysis, the Bank tends to advocate one-size-fits-all solutions.

World Bank and IMF Financial Sector Assessment Program (FSAP)
• FSAP is a joint IMF-World Bank programme analysing countries’ financial sectors to identify vulnerabilities that could trigger a crisis.
• Governments tend to implement the resulting recommendations with little debate.
• FSA assessments also have an important impact on the financial markets.

IMF’s conditionality
• IMF loans are in theory provided to countries facing balance of payment problems. They are accompanied by conditions that take the form of prior actions, quantitative performance criteria, indicative targets and structural benchmarks.
• In practice, it is very difficult for recipient countries to refuse the implementation of IMF’s policy prescriptions in the context of an IMF loan.
• Conditions increasingly touch sensitive economic policies (privatisations, economic deregulation, tax reform etc.). The number of such conditions per loan is also increasing.

IMF surveillance
• IMF surveillance activities, such as Article IV missions and reports, monitor the implementation of policies by the Fund’s members and encourage them to adopt certain economic policies.
• Surveillance activities are particularly influential in low-income countries and small emerging economies. They also receive a lot of media attention.

IMF Technical Assistance
• This is an IMF instrument that helps its members to design economic policies and manage their finances more effectively.
• The IMF reformed its Technical Assistance to give more space to local ownership. However, requests are prioritised through filters that favour countries with economic policies approved by the Fund.
• An independent evaluation of IMF’s Technical Assistance would be useful to assess how much local ownership is respected.

IMF programmes and aid allocation
• Bilateral and multilateral donors tend to favour countries with IMF programmes.
• IMF assessments are also used by donors to make aid allocation decisions, especially in low-income countries, where they often lack information on the country’s situation.
• Aid recipients have a great incentive to keep a good track record with the IMF to secure other funding sources.

IMF programmes and Paris Club debt relief
The Paris Club is an informal club of creditor governments meeting to provide debt relief on a case-by-case basis. Among the eligibility criteria, there is the need to have a track record of implementing IMF-sponsored reforms. Additionally, countries need to have an IMF programme and no arrears with the Fund.

European Commission Budget Support
• The IMF and the World Bank have often been at the centre of criticisms made against conditionality policies. This briefing analyses EC Budget Support to compare its mechanisms with those of the IMF and the World Bank.
• EC Budget Support is a mechanism providing direct financial transfers to partner countries’ budgets. It accounts for approximately 25% of EU development aid.
• There are different eligibility criteria and different specific conditions for a programme or successive disbursements to be approved.
• Although EC Budget Support was designed to reinforce ownership, case studies show that EC Budget Support sometimes incentivises trade and economic liberalisation in recipient countries, even when those reforms are contradicting local development strategies.

European Union Macro Financial Assistance (EUMFA)
• EUMFA is a financial aid package that is provided to non-EU countries facing a balance of payments crisis.
• There are some general eligibility criteria and some specific conditions.
• Those conditions impose the adoption of specific economic policies with little consultation of local actors.