Chapter 2 The IFIs Have Significant Responsibility for the ... · finance management (PFM); and it...

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The Reality of Aid 2008

Chapter 2The IFIs Have Significant Responsibility

for the Lack of Change

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Introduction

The second chapter of this Report looks atthe predominant role of the InternationalFinancial Institutions in maintaining aidrelationships as relationships of power. Itexamines the direct and indirectconditionalities that the IFIs still apply totheir loans and also looks at the hugelysignificant gate-keeper role, by which theIFIs exert tremendous influence overrecipient countries.

Eurodad

An article from the European Debt andDevelopment Network presents the resultsof its own research on IFI conditionality.This shows that despite contrary signalsfrom the IFIs conditionalities are still beingapplied.

The IFIs are able to strongly influencethe national Poverty Reduction StrategyPapers (PRSPs) and control the relatedlending schemes: the WB’s PovertyReduction Support Credit (PRSC) and theIMF’s Poverty Reduction Growth Facility(PRGF). This gives them great power overcountries’ paths to development.

The average number of IMF structuralconditions increased from 10 to 11 in theperiod 2002-2006. Although conditionsattached to World Bank policy loans fell froman average of 46 to 37, up to 7% of theconditions where classified as ‘bundled-conditions’. Unbundling these increases thetotal number of conditions by 12%. Researchalso shows that the number of (binding andnon-binding) conditions has risen on average

from 48 per loan to 67 per loan between 2002and 2005.

Furthermore, the significance of theconditions imposed lies in their subject matter.Of all WB conditions for poor countries, 20%are economic policy conditions. Over half ofthese (11%) impose some sort of privatizationand trade liberalization, which end up limitingpoor people’s access to vital services. Some43% of all IMF structural conditions focus oneconomic policy reforms and half of those areprivatization-related.

A major problem is that the IFI’s adviceis usually replicated by donor countries whosee them as yardsticks against which tomeasure developing countries. Accordingly,many donors link their disbursements to therequirement of being ‘on-track’ with theIMF programme. There have been disastrousresults of withholding aid when countries gooff-track with the IMF programme, such aswhen Malawi experienced a severe foodcrisis.

Indonesia

A second article from the NGO INFID presentshow structural adjustment requirementsattached to programme aid by IFIs have hadhuge impacts on the social and economiclivelihood of the majority of the poorpopulation of the country. It argues that IMFpolicies have created a debt trap from whichthere is little chance of escape.

The article highlights the mostcontroversial loan in the history of Indonesia,which was the specific funds deposited by

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the IMF in the Indonesian Central Bank tosecure its foreign exchange reserve. Not onlywere these funds of no use to Indonesia, thecountry also had to repay the funds withinterest and observe the long list ofconditionalities attached.

The true power of the IMF over Indonesiawas revealed by the fact that when Indonesiadecided to end the IMF programme in 2003,the donors decided that Indonesia was nolonger eligible for debt rescheduling throughthe Paris Club. Countries such as Indonesiaare all but forced to accept the misdiagnosesand failed prescriptions of the IFIs or loseaccess to other donors. This gatekeeper roleof the IFIs is one of the major obstacles tosuccessful aid policies.

Bangladesh

Another article from the Bangladeshi NGOVOICE highlights yet further the significanceof the signaling role of IFIs. It argues thatthe WB and IMF have spread their wingswell beyond their original mandate in takingsuch a central and controlling positionwithin the international aid system.

The sad reality is that governance ofthe WB and IMF is severely skewed towardsrich countries that dominate decision-making in these institutions and thus loanscome tied with conditions which do moreto serve donor interests than those of acountry such as Bangladesh.

The IFIs continue to impose policyconditions, particularly related to theliberalization of markets and theprivatization of national companies alongneo-liberal economic lines. They alsoimpose rules on macro-economic stability,interfering in monetary policy in a way thatdoes not allow countries to invest in theirown development.

The article argues strongly thatBangladesh has suffered through theimplementation of IFI conditions. Thepolicies imposed have resulted in job losses,inflation, higher costs of key goods andservices and reduced competitiveness on

international markets. These have allimpacted directly on the lives of everydaypeople and particularly the poorest.However, the country’s room for maneuveris strictly limited because other donorsaccept the IFI assessments and the criteriafor the allocation of aid.

Furthermore, even where things clearlygo wrong, such as in the presented exampleof the Khulna-Jessore Rehabilitation Project(KJDRP) there is no accountability of donorsfor the cause of people’s suffering.

Pakistan

An article from the Pakistani NGO PILER looksat the negative effects of IFI-funded projectsin its country. Flawed projects emerge fromthe faulty development paradigm put forwardby the IFIs which believes that investment inmajor infrastructure projects will generateeconomic growth that will then seep into localcommunities and reduce poverty. Thequestion of accountability at local level isomitted at very outset, because the gains aremeasured at the macro-economic levelThe article argues that mega-infrastructureprojects have served to detach people fromtheir historical entitlements to naturalresources. The social disruption, loss oflivelihood and environmental degradationassociated with these projects push localcommunities into poverty and deprivation.Furthermore, the IFIs seem to beunconcerned by the concomitant violation ofrights such as to food, development andshelter, considering them to be merely‘transitory costs’.

This paper looks deeply into the case ofa World-Bank-financed project - the Left BankOutfall Drain (LBOD) in the Sindh province ofPakistan. This demonstrates how the WorldBank failed to take into account the needs oflocal communities and ended up uprootingthem from their means of survival, violatingtheir fundamental rights. It also shows howthe WB failed to take responsibility for itsactions.

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Nepal

This paper from the Nepal Policy Instituteargues that whilst the rhetoric around aidpolicies is strong on ethical symbolism, thereality is dictated by the interests andcalculations of global financial capital,represented by the IFIs and private globalcorporations.

The problem for poor countries like Nepalis that they will be punished heavily botheconomically and politically if they fail tocomply with the global corporate agenda ofdevelopment. But no punishment orenforcement measures are allowed in theevent of violations of UN human rights andenvironmental treaty obligations in the pursuitof such corporate-led development.

By controlling the purse strings ofinternational aid, the IFIs were able to havesuch control over politics in Nepal that noteven strongly left-wing elected parties couldstand up and implement the policies theywanted. This reality not only hindereddevelopment, but also encouraged politicalinsurgency.

There are major problems with the IFI-supported contract frameworks including FIDIC(Federation Internationale des Industries etConsultants) and BOOT (Build, Operate, Ownand Transfer). Whilst the former almost alwaysleaves recipients liable for unexpectedoverspends, the latter often takes awaycommunities’ sovereign rights to their ownnatural resources for the duration of thecontract, receiving an out-of-date andexpensive to run system at the end.

Recent elections in Nepal have re-elected a left-wing government. The paperwonders whether this time the IFIs will allowthe country’s own political choices todetermine its development agenda, taking ahuman-rights based approach.

The Netherlands

Finally the Netherlands considers to whatextent the EU represents a better model of

multilateral aid for the future. It arguesthat, whilst still being far from perfect, itgoes some way to providing the kind of aidthat is needed, particularly through the useof budget support.

The Commission provides the main shareof its budget support on the condition that acountry meets three general eligibilitycriteria: it should have a poverty reductionplan; it should work towards improving publicfinance management (PFM); and it should aimfor macro-economic stability. The remainderof the funds are disbursed according to thecountry’s performance against specificindictors on health care, education, and PFM.

In a study of the EC’s general budgetsupport agreements with 11 different Africancountries, over half of the performanceindicators call for direct improvements in poorpeople’s health and education, in particularfor girls and women. By moving away fromspecific economic policy conditions, andinstead often focusing on gender-specificoutcomes in health care and education, theCommission sets a positive example to otherproviders of budget support.

Evidence suggests that the EC’s budgetsupport does change poor people’s lives.Government spending on education hasincreased by nearly a third (31 per cent) ineight of the African countries that receivesome of the largest amounts of theCommission’s general budget support. In allbut one country, this has resulted in anincrease in the number of children enrolledin primary school.

The paper recognises that the Commissionis not exclusively responsible for the positiveresults, but the evidence does show thatwhere it provides large amounts of budgetsupport, headway is being made in reducingpoverty. Furthermore, the EC’s conditions cansometimes be deemed somewhat intrusive. InEthiopia, for instance, the EC required theintroduction of a competition law, applicationfor accession to the World Trade Organisation,and revision of urban land lease laws.

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Conclusions

Whilst the previous chapter looked at howpower relations still dominate the delivery ofaid, this chapter argues that the IFIs are theworst offenders. They give loans withoutadequately considering or consulting the localcommunities most directly affected. They alsocontinue to apply serious economic policyconditionalities to aid. Both of these factorsoften have devastating consequences on thelivelihoods of the poorest people.

Furthermore, through their gate-keeperrole, the IFIs often prevent recipientgovernments from accessing funds from

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alternative sources as many donor countriesaccept the IFIs’ assessments and criteria. Inthe context of current aid practices,harmonization of donors is only serving tostrengthen this influence. Poor countries oftenfind themselves with little choice but to followthe conditions applied.

Of all the multilateral donors, the EuropeanCommission shows the most promise as beingready to apply good principles in allowingrecipient countries to plan their owndevelopment strategies through the use ofbudget support. Even here, however, muchprogres is still needed towards optimizing thebenefits of aid for developing countries.

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The Impact of IFI Conditionalityon the Development Aid System

Javier PereiraEuropean Network on Debt and Development (EURODAD)

Introduction

Among the International FinancialInstitutions (IFIs), the InternationalMonetary Fund (IMF) and the World Bank(WB) are the most well known. Their historycan be traced back to the Bretton Woodsagreement and, through the years, theyhave attained and maintained a leading rolein the global economy. This status askeepers and champions of the globaleconomic order has, by extension, madethem two of the most influential players inthe field of development and they rule overaid flows with the golden sceptre ofconditionality.

Despite both internal (Guidelines onConditionality and General Good PracticePrinciples) and external (The ParisDeclaration) initiatives, they are failing tohand over their power. Perversely, as moreand more countries increase their budgetsupport to developing countries, theyreinforce the WB and the IMF’s strongholdby buying-in to their conditionalities.

The main instrument through whichboth the IFIs influence development is thePoverty Reduction Strategy Paper (PRSP)and related lending schemes. This initiative,endorsed by the Executive Boards of theWorld Bank and IMF in September 1999,articulates the High Indebted PoorCountries (HIPC) debt relief initiative andlaid the foundation for two lendingschemes: the WB’s Poverty Reduction

Support Credit (PRSC) and the IMF’s PovertyReduction Growth Facility (PRGF). The IMFand the WB thus play a double role asdonors and advocates of developmentpolicies.

In 2005, both the WB and the IMFsigned the Paris Declaration on AidEffectiveness, committing as donors toincreasing recipient countries’ ownership ofdevelopment aid and aligning andharmonizing aid flows under recipientcountries’ leadership. Furthermore, thePRSP was intended to address the criticismsaimed at the WB’s Structural AdjustmentPrograms of the 1990s. By definition, a PRSPshould be “country-driven, comprehensivein scope, partnership-oriented, andparticipatory”,1

However, criticism remains high anddoubts persist about the real extent ofPRSP ownership and participation byrecipient countries. If IFI conditions aresupposed to be aligned to national PRSPs,loans have been usually granted understringent conditionality, pursuing objectivesnot always shared by recipient countries’governments. Ghana’s last PRSC, signed in2005, contained the striking number of 197conditions.2

The following sections analyse whyconditionality plays such a central role inthe WB and IMF’s development aid. Theyalso discuss whether the Paris Declarationhas had any impact on the practices ofthese two IFIs from the perspective of

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recipient countries and in light of theirexperiences.

IMF Conditionality

Following the introduction of the PRSPscheme, both the IMF and WB have beenthe target of severe criticism as aconsequence of conditionality practices.The IMF was the first organization to reactto criticisms about conditionality and inSeptember 2002, it published its Guidelineson Conditionality.3 The WB took a littlelonger to react, publishing its Review ofWorld Bank Conditionality,4 conductedbetween November 2004 and July 2005 andcontaining the Good Practice Principles onConditionality (GPPs) in September 2005.

Both these internal initiatives are inline with the commitments made in theParis Declaration and any outcomes ofthese ‘new approaches’ should have beenreinforced by the international agreement.Enough time has elapsed to allow for resultsto be observed. Unfortunately, however,NGO research reveals that even the mostpositive appraisal can only claim piecemealprogress.

Six years after the Guidelines onConditionality and three after the ParisDeclaration, the IMF shows a not altogethersurprising lack of results. Research carriedout by Eurodad on 20 developing countriesshows that the average number of IMFstructural conditions increased from 10 to11 between 2002 - when the IMF issued itsnew staff guidelines to reduce the numberof conditions it imposes - and 2006.5

Moreover, the evaluation of the IMFconditionality carried out in 2007 by theIndependent Evaluation Office (IEO) of theIMF concluded that “the streamlininginitiative did not reduce the volume ofconditionality”.6 The latest data madeavailable to Eurodad by the IMF, coveringthe first half of 2007, shows that this trendhas not changed.

On average, half of all IMF structuralconditions imposed on poor countries via

the PRGF are binding conditions. The IMFimposes policy reforms that have to beacted upon prior to receiving funds andothers that must be enacted within oneyear of receiving the funds. The proportionof binding conditions has stayed relativelysteady over time.

Furthermore, the PRGF agreementssigned in 2007 still meddle with extremelysensitive issues, most of them far from theIMF’s field of expertise. Some 43% of all IMFstructural conditions focus on economicpolicy reforms and half of those areprivatization-related. The large majority ofprivatization conditions are focused aroundbanking. Nine out of the 11 poor countries(including Bangladesh, Benin, Ethiopia,Mozambique and Tanzania), facingprivatization-related conditions from the IMFhad some form of banking privatisationimposed upon them, whilst the energysector was the second most commontarget.

In Nicaragua, conditions still push forthe reform of the country’s pension fundsystem. This system is still in tatters afterthe attempted privatization heralded by theWB and the Inter-American DevelopmentBank, which was halted because thegovernment could not cover the expensesand guarantee the pension to its citizens atthe same time.7 The IMF also continues topush for the reform of the cotton sector inBurkina Faso with the privatisation of thepublic company SOFITEX (Société de FibresTextiles).

WB Conditionality

Current Eurodad research appears to showa slightly better picture of WBconditionality.8 Comparisons between thenumber of conditions before and after theGPPs – the research compares the numberof conditions attached to the PRSCs before2005 and those in the period 2005-2007 -confirm that the average number ofconditions attached to World Bank policyloans has been reduced from 46 to 37.

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However, up to 7% of the conditionswhere classified as ‘bundled-conditions’ –general conditions whose fulfilment requiresa number of reforms and policy actions;unbundling these increases the totalnumber of conditions by 12%. More thanfifty conditions were attached to each ofthe current World Bank grants for 14 out ofthe 20 low-income countries studied andthree had more than 100 conditions. Theresearch shows that the number of (bindingand non-binding) conditions has risen onaverage from 48 per loan to 67 per loanbetween 2002 and 2005.

In addition, the World Bank iscontinuing to impose a significant number ofcontroversial economic policy conditions onlow income countries through itsdevelopment lending. Eurodad assessed that15 out of the 20 poor countries haveprivatization-related conditions as part oftheir World Bank lending. These coversectors of the economy such as agriculture,banking, and water. Of all WB conditions forpoor countries, 20% are economic policyconditions. Over half of these (11%) imposesome sort of privatization and tradeliberalization, which end up limiting poorpeople’s access to vital services.

The number of conditions varies wildlyfrom one country to another. Rwanda, forinstance, faced 144 conditions in the PRSCapproved in 2006, including the privatizationof Rwandatel, Rwandex, the Nshili-Kivu teaplantation and the rice factories ofRwamagana, Gikonko and Bugurama. Similarstringent conditions have been applied toAfghanistan, a post-conflict ‘fragile state’with less than 10% of workers in the formaleconomy, where more than 50 state-ownedenterprises will be privatised and, accordingto government estimates, 14,500 jobs lost.

The research reveals that although thenumber of conditions which call for directprivatisation has marginally declined, therehas been a massive increase in the numberof conditions that push for reformsassociated with facilitating privatisation,such as regulatory reforms, restructuring ofcertain sectors and corporate reform. The

number of ‘privatisation-associated reforms’have almost doubled between previous andcurrent loans across the 20 countriesassessed.

The Bank’s new guidelines fordevelopment policy lending employ theconcept of ‘criticality’. This is meant toconfine the Bank to setting conditions thatare deemed critical for the implementationand expected results of a country program.However, there is a high prevalence ofmicro-management conditions in World Banklending, and an inability by WB staff to makerational judgments as to what should orshould not constitute a condition indevelopment finance.

The Paris Declarationand Current Conditionality Practices

Since the introduction of the PRSP, 58countries have approved this instrument.However, although an evaluation carried outby the World Bank9 shows that it is startingto introduce more conditions drawn fromthe PRSP, this section explains that PRSPshave not been able to introduce realchanges.

In the Paris Declaration, donorscommitted to “draw conditions, whenever itis possible, from a partner’s nationaldevelopment strategy…”10 In practice, whatis happening all too often is that a PRSP anda national development strategy (NDS) arebecoming one and the same. 11 InAfghanistan, for instance: “The Interim NDSwill be submitted to the Boards of the WorldBank and the IMF in the expectation that itwill also meet the benchmarks of an InterimPoverty Reduction Strategy process,developed by the World Bank and IMF in1999.”12

Rather than independently designednational development strategies informingthe PRSPs, it is obvious that the IMF and theWB have a strong say on the NDSs. The WBand IMF claim that the PRSPs are owned byrecipient country governments, but theactions of these two behemoths contradict,

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once more, their statements of good will.During the drafting of the second PRSP forNiger, fifteen Nigerien representatives wereflown to Washington DC where they metWorld Bank, UNDP, EC, Belgian and IMFofficials. After this meeting a Senegaleseconsultant was hired and sent to Nigerwhere he finished drafting the PRSP. 13 Thisexample gives an idea of the realmanoeuvre-space recipient governmentshave when designing these strategies.

Furthermore, researchers suggest thatallies closer to the US receive fewerconditions in their IMF loans.14 Thisindicates that conditionality is too oftenused as a political tool rather than aninstrument to furthering reforms which aredeemed necessary to ensure povertyreduction.

It is obvious that recipient countrygovernments barely own their developmentaid strategies. The mechanism that allowsfor the IMF and the WB to dominatedevelopment aid processes is sadlysummarised by the Head of the NationalTreasury Research Service of Niger: “weneed the money; therefore we acceptperformance indicators even if we don’tthink we will be able to meet them. Thesenegotiations are by their nature unequal aswe need the money.”15 The IFI’s hegemonywill not be broken until the role of bothinstitutions as an international reference ischallenged and a more coherent and pro-poor system introduced.

Furthermore, beyond the waning roleof recipient countries’ governments withrespect to the IFIs, the lack of democraticownership outside of government is a keyissue in developing countries. InMozambique, neither PARPA I nor PARPA II –the local name for Mozambique’s PRSPs -were subject to approval by Parliament.16

Similarly, the Honduran parliament has alsobeen bypassed with regards to developmentstrategies.17

Additionally, the resulting PRSPs usuallyhave vaguely-defined objectives and areinadequate for donors to monitor budgetsupport. Accordingly, when donors want to

provide budget support they form, togetherwith the national government, a ‘BudgetSupport Group’. This group drafts aPerformance Assessment Framework (PAF),which sets out a number of benchmarkstheoretically to oversee budget supportflows in line with the objectives of thePRSP. Unfortunately, however, the PAF is notthe result of a dialogue with the recipientcountry’s government, but of a unilateralprocess led by donors. As the UKDepartment for International Development’sHead of Operations in Sierra Leona pointsout: “initially the donors do a draft to agreeon the conditions, and then these aretaken to the government and discussed”.18

If democratically-elected parliamentsplay such a feeble role, the power grantedto civil society organisations in this processis even less. The problem is such that eventhe OECD has to remind donors that:“Parliaments, civil society organisations andthe wider public, as well as politicalinstitutions at the sub-national level, areimportant ‘owners’ of developmentstrategies and policies, and drivers ofchange. Genuine ownership requirespolitical leverage and space as well as alegal-institutional framework that ensuresthat citizens – including the poor and themost marginalised women and men – are ableto engage in decision-making processes andhold their governments accountable.”19

The Real Weight of Conditionality

Conditionality is the most important tool theWB and IMF have to push reform.Furthermore, the IMF remains extremelyinfluential despite being a minor donor –several of the IMF’s three-year PRGFs signedin 2005 and 2006 provide a relatively smallamount of funding: US$ 10m in Niger; US$38.2m in Ghana; US$ 9.2m in Burkina Faso;and US$ 9.1m in Benin.20 There are severalfactors which explain the weight of WB andIMF’s conditions in development aid.

Firstly, the WB and the IMF play acentral role in the global and economic

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systems and their advice is usuallyreplicated by donor countries who seethem as yardsticks against which to measuredeveloping countries. Accordingly, manydonors link their disbursements to therequirement of being ‘on-track’ with theIMF programme. Recent Eurodad researchconfirms that this is the case, for example,in Nicaragua21 and Sierra Leone22, wherethis requirement has caused severeproblems as a result of donors freezingpredicted disbursements. WB and IMFconditionality allows for the existence of aself-perpetuating vicious circle. The realsignificance of conditionality rests in thepower of cutting not only money flowsdirectly from these two institutions, butalso from other donors.

Another issue which helps tostrengthen the grip of the WB and IMF ondevelopment aid is cross-conditionality. Thisword describes the phenomenon of findingone condition duplicated in both the WB’sPRSC and the IMF’s PRGF. The practice ofcross-conditionality increases the pressureexerted by conditionality and is,furthermore, usually applied to pushthrough the most sensitive reforms, such asthe privatisation of public companies. This isthe case, for instance, of IFI conditionsrequiring the privatization of the RupaliBank in Bangladesh, the Bank of Ethiopia,the Inter-Bank of Mali and Nicaragua’stelecommunication company Enitel.23

The Paris Declaration was intended toaddress these problems and to cede torecipient countries the driver’s seat ofdevelopment aid by promoting theprinciples of ownership; alignment;harmonisation; mutual accountability; andmanaging for results. Nonetheless, theunfortunate truth is that, by backingbudget support, the Paris Declaration helpsto close the circle in the sense that moreand more donors will buy-in to this aidmodality. This strengthens the link toconditions agreed in processes, such as thePAF, where recipient governments have verylittle say.

In 2002, Malawi endured a severe foodcrisis, during which it went off-track withthe IMF programme. Subsequently, allbudget support to Malawi was suspended,aggravating the humanitarian and economiccrisis, creating a sort of catch-22situation.24 The power of the WB and theIMF to impose conditions and promotechanges is founded on the possibility of thistype of crisis. To solve this problem it is notonly necessary to increase recipientcountries’ real ownership, but also toprovide funds through longer termagreements which cannot be immediatelybroken when the conditions imposed by theWB and the IMF are not met.

One of the most remarkable failures ofIMF and WB policies has been waterprivatisation in developing countries. InBolivia, the privatization of the companyAguas del Tunari ended with the famous‘War of Water’ after the prices rocketedand service standards dropped.25 Following asimilar case in Tanzania, last January theBritish company Biwater was ordered by aLondon tribunal, acting in accordance withinternational law, to pay £3m to DAWASA, aTanzanian water utility, after it was foundthat the service had deteriorated under itsmanagement.26 The privatisation of waterutilities as demanded by the IFIs hasexperienced similar problems in othercountries such as Puerto Rico and thePhilippines, proving this problem to bewidespread.

On the positive side, the Biwater caserepresents a breakthrough as it has openedthe way to hold companies accountable fortheir wrongdoings in developing countries.Unfortunately, the chain of responsibilitydoes not reach the upper links, and theultimate perpetrators do not bear anyburden other than their own conscience.When one tries to carry out research onthe IFIs positions on these issues, thesilence is shocking.

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Conclusions

There is no doubt that policy conditionalityaffects recipient countries’ policies farbeyond simply ensuring fiduciaryaccountability and that neither the WB northe IMF are undertaking reforms at thepace that is needed. Up to now, they havefailed to fulfil the commitments made in theParis Declaration and their ownconditionality guidelines, impactingnegatively on development and the lives ofpeople.

A key issue in tackling conditionality isthat it still seems reasonable to expect thatthere should be mechanisms in place tomonitor how aid flows are being used andto stop aid being delivered incorrectly. Theproblem with the WB and the IMF’sconditionality is that it is used as a tool toforce changes, which are frequently highlysensitive, in recipient countries, sometimespursuing developed countries’ interests.

A possible solution would be to lookagain at the real meaning of the word‘monitor’ and focus conditions on the

output side of development policies,instead of on the input side. The EuropeanCommission has recently started to use anapproach based on this principle. Outcome-based conditionality, as it is called, links aidto development results or outcomes andleaves recipient governments free todecide the way to achieve them. This is amuch more desirable option to policyconditionality,27 even though it is not freefrom problems; indicators are difficult todesign and adjust and predictabilityproblems still persist if long-termcommitments are not applied.

Now is the right moment for change;this year the WB and the IMF will be closelyscrutinized in Accra and both need tospeed up reform to live up to the Pariscommitments. Renovation is not alwayseasy, but the reforms needed do not callfor a revolution, just political will.Unfortunately, the WB and the IMF haveshown very little willingness in the recentpast to transform their current approachesto conditionality For the time being, thepower remains in their hands.

Notes

1 World Bank. Retrieved from http://go.worldbank.org/E2L02BFAQ0

2 EURODAD. (2006). World Bank and IMFconditionality: A development injustice.

3 International Monetary Fund. (2002). Guidelines onconditionality. Retrieved from http://www.imf.org/External/np/pdr/cond/2002/eng/guid/092302.pdf

4 World Bank. (2005). Review of World Bankconditionality. Retrieved from http://siteresources.worldbank.org/PROJECTS/Resources/40940-1114615847489/webConditionalitysept05.pdf

5 See footnote 2.

6 Independent Evaluation Office. (2007). An IEOevaluation of structural conditionality in IMF-supported programs.

7 Antón P., & J. A. (2007). La reforma de la seguridadsocial en Nicaragua: Una propuesta de pensión nocontributiva. In Cuadernos PROLAM/USP 6(1). pp.37- 66.

8 EURODAD. (2007). Untying the knots: How theWorld Bank is failing to deliver real change onconditionality. Eurodad.

9 World Bank. (2007). Conditionality in developmentpolicy lending.

10 The Paris Declaration on aid effectiveness. (2005).Retrieved from http://www.oecd.org/document/18/0,3343,en_2649_3236398_35401554_1_1_1_1,00.html

11 See footnote 8, para. 16.

12 Afghanistan Development Forum. (2005). Nationaldevelopment strategy for Afghanistan: Frequentlyasked questions. Retrieved from http://www.adf.gov.af/2005/resources/NDS-FAQ%5B1%5D.pdf

13 EURODAD. (2008). Turning the tables: Why donorsneed to change the way they provide developmentaid.

14 Drehar, A. & Jensen, N. (2005). Independent actoror agent? An empirical analysis of the impact of US

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interests on IMF Conditions. Swiss FederalInstitute of Technology, Zurich. Working papers n.118.

15 RODADDHD. (2008). Quelle efficacité de l’aide audéveloppement au Niger? Etude indépendante pourune approche citoyenne de l’APD.

16 IPAM. (2008). Mozambique: An independent analysisof ownership and accountability in thedevelopment aid system.

17 TROCAIRE. (2008). Avances de Honduras enarmonización de la Cooperación Internacionaldespués de la Declaración de Paris: Una evaluacióndesde la perspectiva de sociedad civil.

18 See footnote 5.

19 OECD. (2008). Development co-operation report2007.

20 International Monetary Fund Country Information.Retrieved from http://www.imf.org/external/country/index.htm

21 TROCAIRE and CAFOD. (2008). Consideraciones sobrela efectividad de la cooperación externa oficial.

22 EURODAD. (2008). Old habits die hard: Aid andaccountability in Sierra Leone.

23 See footnote 2

24 OXFAM. (In press). For all campaign case study:Malawi.

25 Foro Boliviano sobre Medio Ambiente y Desarrollo(FOBOMADE). (2005). El proceso de privatización delagua en Bolivia. Retrieved from http://www.fobomade.org.bo/agua/priv_agua.pdf

26 Seager, A. (2008, January 11). Tanzania wins £3mdamages from Biwater subsidiary. The Guardian.

27 EURODAD. (2008). Outcome-based conditionality:Too good to be true?

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Multilateral Aid and Conditionalities:1

The Case of IndonesiaDon K. Marut

International NGO Forum on Indonesian Development (INFID)

Despite amounting to a relatively smallamount of Indonesia’s overall economy,foreign aid has had a significant impact onthe country’s domestic economic andpolitical situation. This has happenedthrough the conditionality imposed on loansby the IMF and which has been reinforcedby the wider donor community under theleadership of the World Bank.

Since 1966/7 Indonesia has receivedforeign aid (loans and grants) from twentycountries and thirteen multilateralagencies. Nevertheless, most of the donorcountries and multilateral agencies toIndonesia have been organised in one“consortium”. From 1967 to 1991 thisconsortium was the Inter-GovernmentalGroup on Indonesia (IGGI), chaired by theNetherlands. This was replaced by theConsultative Group on Indonesia (CGI) from1992 to 2007, chaired by the World Bank.From 2005, CGI was officially chaired byIndonesia but in practice was chaired anddirected by the World Bank.2

The IMF was not a member of IGGI orCGI, but it was always represented in themeetings and its presence in Indonesia hashad strong implications for the country andthe donor community. Not only has the IMFimposed policy conditions on the fundsprovided, but bilateral and multilateraldonors have referred to the IMF beforemaking loan agreements with Indonesia.3

Structural adjustment requirementsattached to programme aid by IFIs have hadhuge impacts on the social and economic

livelihood of the majority of the poorpopulation of Indonesia. The liberalisationand privatisation of state-owned companiesand public services have influenced bothstate revenues and the costs paid by thepoor for services.

Composition of Foreign Aidto Indonesia

The majority of Indonesia’s foreign debtsare bilateral with official developmentassistance making up the largest portion,via both concessional and commercialloans. Japan is the biggest bilateral donor,accounting for about 70% of the totalbilateral aid to Indonesia. Bilateral aidmainly funds projects which arepredominantly used to support physical andinstitutional infrastructure.

Multilateral aid is more heavily focusedon programmes aimed at supporting crisesin the balance of payments or statebudget. In line with the policies of the IFIs,policy conditionalities are attached to thisaid.

As the Table 1 shows, the AsianDevelopment Bank (ADB) and the WorldBank (through the IBRD) are the two majormultilateral donors to Indonesia. The loansfrom the ADB have increased steadily and,in 2006, it became the biggest multilateraldonor. IDA constitutes a relatively smallportion of overall multilateral aid as doesfunds from the IDB (Islamic Development

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Table 1. Multilateral Sources of Loans (Million US$)

Bank), although both have become moreimportant in providing loans to Indonesia.

In 1971, programme aid was 2.5% of GDPcompared to only 0.5% of GDP allocated forproject aid. The oil boom in 1974 thatcontributed to increasing state revenues,and stabilising the Indonesian economyreduced the percentage of programme aid.At this time, the World Bank started toengage more in supporting physicalprojects and the technical assistance group

working in the National Planning Board andthe Ministry of Finance.

For more than ten years (1974-1985)programme aid to Indonesia was notsignificant. However, the sharp decline inthe world oil price in 1982 that caused acrisis in the balance of payment attractedprogramme aid to Indonesia once againthrough IMF/World Bank structuraladjustment loans. In 1983, the IMF approvedSDR260 million under Compensatory

Figure 1. Multilateral Loans (%)

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Financing Facility (CFF). Indonesia receivedSDR463 million from IMF in 1987 under theCFF to compensate for the decline inexports. In the same year, Indonesiaobtained $300 million from the World Bankunder the Trade Adjustment ProgrammeLoan.4

Impact of World Bank Loans

Though programme aid is less than projectaid and not very visible, its influence on theIndonesian economic and political systemshas been significant. Programme loans weremeant to rescue the country from crisis,particularly related to balance of paymentsand the state budget. However, throughprogramme aid, World Bank staff haveworked as if they are part of the Indonesianbureaucracy, freely influencing the policiesof the national government. The Indonesianbureaucracy has become so open to theWorld Bank that none of its policies areimmune to influence.5

Aid from the World Bank group startedin 1968, through IDA soft loans. The firstIBRD loan to Indonesia was made in 1974when the country had started to catch upwith development momentum. The WorldBank provided Trade Adjustment Loans in1987. When Indonesia was hit by the 1998economic crisis, the World Bank providedUSD 26.5m of International DevelopmentAssociation (IDA) aid and tied it to theprivatisation and liberalisation of publicservices, including the cut of subsidies insocial sectors.

It is interesting to observe that whilstthe IFC (a family member of the World Bank)has been making a fortune purchasing thecheap shares of the public services andprivatised companies, poor Indonesians havepaid a high price for the soft IDA loans.

After increasing critiques of therelevance of the World Bank in Indonesia,the Bank is now enthusiastically promotingits new Community Driven Developmentproject. This consists of two projectcomponents: Kecamatan DevelopmentProject (KDP) for rural areas and UrbanEmpowerment Project for urban areas and isseen, by World Bank staff, as a bait for newloans for Indonesia to meet the main missionof alleviating poverty.

Scott Guggenheim’s paper on KDP hasbeen treated by World Bank staff inIndonesia as the main reference on thesuccess of the project6. In fact, the projecthas made poor people responsible forpoverty alleviation in terms that mean thepoor themselves will repay the debts in thefuture.

A 2004 BAPPENAS study7 raises thequestion of whether the loans beingattracted are really for the benefit of therecipient country. The suggestion is madethat, since more loans mean more overheadcosts and project work for the donoragencies, the staff of these agencies arekeen to encourage more loans to increasetheir job security rather than in theinterests of the recipient country.

Table 2: The World Bank Adjustment Loans to Indonesia

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Impact of IMF Loans

The most controversial loan in the historyof Indonesia, however, was the specificfunds deposited by the IMF in theIndonesian Central Bank to secure itsforeign exchange reserve. These fundswere of no use to Indonesia, since theywere deposited when the Central Bank hadenough reserves already. Nevertheless, thecountry not only had to repay the fundswith interest, but also had to observe thelong list of conditions stipulated in thesigned Letter of Intent and Memoranda ofEconomic Policy Monitoring. In this sense,the IMF deposits can be seen as a ‘Trojanhorse’ used by the IMF to control thepolicies of Indonesia along the neo-liberallines preferred by the developed countriesand multinational corporations whoseinterests are represented in the IMF.

Rizal Ramli, the Coordinating Minister ofEconomic Affairs in 1997, warned that“involving the IMF in Indonesia’s recoveryprogramme would inevitably plunge thecountry into a deeper economic crisis”8.Nevertheless, from 1997 to 2005, the IMFand Indonesia signed 20 Letters of Intent(LoI) and Memoranda of Economic andFinancial Policies (MEFP) on policy measuresand other conditionalities to beimplemented by Indonesia. While the

People’s Assembly Council (MajelisPermusyawaratan Rakyat – MPR)9 decidedthe general guidelines to solve the crisiswithout dependence on foreign creditors,the government was not able to resist thepressures from the IMF and the donors’community.

On 5 November 1997, Indonesia and theIMF signed a three-year stand-byarrangement (SBA) aimed at restoringmarket confidence. However, the fiscalausterity, tight monetary policy, floatingexchange rate regime and bank closuresprescribed by the IMFbrought a banking crisis, which causedsocial unrest and uncertainty in the wholeeconomy, deepening the crisis.

Following the Stand-by Arrangement(SBA), the inter-bank interest rate sky-rocketed from 20 to 300 percent, causing abanking crisis. The closure of 16 banks, asrecommended by the IMF in November 1997,caused capital outflow of USD 5 billion. Thisput further pressure on the IndonesianRupiah provoking corporate bankruptcy andthe loss of thousands of jobs.

To solve these problems, the IMF andIndonesian authorities signed the firstExtended Fund Facility (EFF) of SDR 5.3billion, imposing stricter structural measureson fiscal and monetary policies as well asbanking and corporate restructuring. In

Table 3. The IMF Stabilisation Loans to Indonesia

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February 2000, when the first EFF expired,the government signed the second EFFinvolving a commitment of SDR 3.6 billionfrom IMF. The second EFF was accompaniedby a long list of conditionalities, includingstricter measures on privatisation and legalreforms.

The IMF recommended the conversionof private debts into public debts. Thegovernment’s domestic debts increased byup to US$ 65 billion. At the same timeIndonesia’s public foreign debts increasedfrom US$ 54 billion to US$ 74 billion, and theinternational private debts decreased fromUS$ 82 billion to US$ 67 billion, some ofwhich had been converted into foreignpublic debts. As a consequence of thefinancial crisis and IMF policies, Indonesia’sdebt doubled over a period of just fouryears.

Each semester IMF staff monitored theimplementation of the structural reformsrequired by the conditions of the LoI andthe MEFP. The surprising thing is thatreports from the IMF did not influence themarket at all; rather the reaction wentcontrary to the reports. When the IMFreported that the Indonesianmacroeconomy was becoming more stable,the exchange rate of the Rupiah weakened;and when the IMF reported that thereshould be stricter measures for reform, the

capital inflow from foreign investors tendedto increase.

What is more, the IMF funds thatprovoked these conditions were not evenused. The net foreign reserves of Indonesia,which were about US$ 24 billion at the timewhen IMF and Indonesia signed the first EFF,were at a very healthy level, and there wasno need for additional reserves to securethe balance of payments. Since Indonesiatook the floating exchange rate regime, theCentral Bank did not need to intervene inthe exchange market on regular basis andtherefore additional reserves were notnecessary.10

Whilst Indonesia did not need to usethe IMF money, it still ended up bearing theinterest costs. In 2002 Indonesia paid US$2.3 billion to the IMF, consisting of US$ 1.8billion in principal and US$ 500 million ininterest payment11. On average the cost ofthis idle fund (fees and interest) was about3.5 percent. IMF policies put unsustainablepressure on the government budget. Forthe 2002 fiscal year, debt servicing wasestimated to total USD13 billion (IDR 130trillion) including domestic and internationalpayments. These payments amount to morethan three times the total public sectorwage bill including the military, and eighttimes the education budget.

Table 4: Disbursement and Repayment of IMF Loans (SDR)

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Table 5: International Financial Rescue Package for Indonesia

Impact of IFIs on Other Donors

The programme loans during the crisisperiod - including the conditionalitiesdetailed in the Letters of Intent - wereused as references by both the multilateraldonors and the bilateral donors.12 Donorsunited in putting pressure on Indonesia toimplement IMF’s policy prescriptions andconditions by making the disbursement ofboth programme and project loansdependent on whether the government ofIndonesia had implemented the conditions.The unity of the donors was made possiblebecause of the presence of regularmeetings of the CGI, where the governmentof Indonesia had to provide reports to thedonors, in addition to the regularmonitoring from the IMF.

Programme aid reached its peak duringthe crisis period, when the multilateraldonors came with a rescue package. Thecommitments of this “bail out” packagefrom IMF were matched by commitmentsfrom the World Bank and the ADB and theGovernment of Indonesia itself. This firstline totalled USD 23 billion. It was followed

by a second line totalling USD 20 billion frombilateral donors (see table below).

The main reason for involving otherdonors in the rescue package was tomaintain and prop up market confidence byshowing that the donors collectively wereready to help Indonesia financially with alarge amount of money (US$ 43 billion). Thesecond line was only to be issued after thefirst line was fully exhausted. In reality, thesecond line was never utilised.13 The rescuepackage itself did not rescue the economyof Indonesia, but it was used as aninstrument to impose the policyprescriptions of the “WashingtonConsensus” on Indonesia.

Loans from the World Bank, AsianDevelopment Bank and other donors do notneed to be tied to IMF conditionality.Nevertheless, when Indonesia decided toend the IMF programme in 2003, the donorsdecided that Indonesia was no longereligible for debt rescheduling through theParis Club.14 So IMF’s programme packagewas needed and used by the foreigncreditors, such as the World Bank, to profitfrom the crisis.

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Conclusions

The data and facts of multilateral aid showthat most of them have been wasteful, withno clear advantage for Indonesia.Furthermore, they have been used bycreditors and donors to dictate policiesthat should be left to the nationalgovernment. Programme loans frommultilateral agencies were used to justifythe presence of the agencies and their staffin Indonesia rather than for promotingcapacities of the government staff. Thegood governance that is promoted now inIndonesia is a result of the democratisationprocesses rather than the results of theworks of the consultants paid by theprogramme loans.

Foreign debt amounts to less than 3% ofthe annual state budget, meaning its overallcontribution to Indonesian economicdevelopment is limited. The majordeterminant is, in fact, domestic financialcapacity. Nevertheless, the foreign debtbecomes problematic and burdensomewhen the maturity of the debts isaccumulated, putting pressure on the statebudget in later years.

Most importantly, however, therelatively small amount of foreign aid causedheavy foreign intervention in Indonesia’seconomic and political system. Thecoordinated pressures from the donors/creditors through IGGI/CGI tied Indonesia toconditions imposed by the IMF and made itdifficult for Indonesia to get rid of the debttrap. Furthermore, the fact that the staffmembers of the donor agencies are driven

by self-seeking behaviour, while they areworking together with Indonesian officials inthe offices of the Central Government ofIndonesia, explains why the policy measuresfrom Indonesian government are not morepro-poor, pro-job and pro welfare ofIndonesians.

The programme loan from the IMF wasthe most striking example of wasteful andharmful loans in Indonesian history, and canbecome a case study of how anInternational Organisation undermined statesovereignty and ignored democraticprocesses in a country. The IMF policiescreated a debt trap from which there waslittle chance of escape. The IMF forcedIndonesia to accept its misdiagnosis andfailed prescriptions, including theconversion of private debt to public debts,or the transfer of the debts of the privatecorporations to the debts of the poorIndonesians.15

The World Bank has been rathersuccessful at maintaining its image as adonor institution in Indonesia. When thecountry was burdened with structuraladjustment programmes in the 1980s andthe implementation of the policyconditionalities (privatisation andliberalisation) after the 1997/98 crisis, theWorld Bank could deny responsibility for thefailure of policy reforms. However, whilstthe IMF was the only institution to bepublicly blamed, it was the World Bank thatorchestrated the implementation of the IMFpolicy conditionalities through its leadershipof the CGI.

Notes

1 Paper for the North-South CSOs consultation on aideffectiveness. (2007, November 15-18). Nairobi,Kenya.

2 Kwik Kian Gie was the Coordinating Minister ofEconomic Affairs (2000 – 2003) and Minister ofNational Planning (BAPPENAS) in 2003 – 2004. Paperprepared by Kwik Kian Gie to be presented in theCGI Meeting in 2002 was “edited” by the WorldBank. Kwik complained that the content of the

paper was changed and did not reflect his view andthe GOI’s but the World Bank’s.

3 BAPPENAS study. (2004). (BAPPENAS is the NationalDevelopment Planning Ministry).

4 Chowdhury, A. & Sugema, I. (2005). How significantand effective has foreign aid to Indonesia been?Center for International Economic Studies (CIES)Discussion Paper No. 0505. University of Adelaide,Australia, p. 15.

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5 A documentary video presented during the farewellparty of the Country Director of the World Bank,Andrew Steer, in March 2007, described clearlyhow the World Bank has been integrated in theIndonesian Economic Team (the CoordinatingMinistry of Economic Affairs, Ministry of Finance,Ministry of Trade and the Ministry of NationalPlanning). The documentary video could trigger thequestion of the independence of the Indonesianeconomic team, and to certain extent, the questionwhether Indonesia is still sovereign in making itseconomic policies.

6 Scott Guggenheim, “Crises and Contradictions:Understanding the Origins of a CommunityDevelopment Project in Indonesia“, paper 2003downloaded from www.worldbank.org. The Projectwas started with a local-level institutions study(LLI), which came out with rhetorical conclusionsthat re-justify the intervention of the World Bankin Indonesia’s development which in fact – as thestudy from BAPPENAS revealed – is only to securethe jobs of the World Bank staff in Indonesia. (ScottGuggenheim is the Director of the World Bank’sDecentralisation Support Facility (DSF)).

7 BAPPENAS. (2004). op.cit.

8 Ramli, R. (2004). The IMF’s Indonesian myths.

9 MPR is like a Congress in US democratic system,consisting of the House of Representatives and theSenate.

10 Ibid.

11 Ramli, R. (2002), p. 13.

12 In 1998, the Fund postponed loan disbursementthree times: March, May and November. Thisautomatically affected the disbursement of loansfrom the WB, ADB and some bilateral lenders.

13 Chowdhury, A. & Sugema, I. (2005). loc.cit.

14 BAPPENAS. (2004). The existence and roles of theconsultative group for Indonesia (CGI). Summary, p.9.

15 Ibid. In 1999 The IMF admitted its errors inIndonesia in its internal reports. Despite stoppingfurther errors, IMF and the donors kept pushingthe implementation of IMF’s conditionalities.

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IFIs - The Major Barrier to Changein the Aid System

Ahmed Swapan MahmudVoices for Interactive Choice and Empowerment (VOICE)

Introduction

The IFIs sit at the heart of the global aidarchitecture. The World Bank is a majorsource of finance for developing countriesand the IMF has a crucial function in“signaling” which countries receive morefunding from both official and privatesources. These roles confer incrediblepower to these two institutions that havespread their wings well beyond theiroriginal mandates. The governance of theWorld Bank and IMF is severely skewedtowards the rich countries that dominatedecision-making in these institutions.

The World Bank (WB), InternationalMonetary Fund (IMF), Asian DevelopmentBank (ADB) and other donor agencies have,for the past few decades, providedBangladesh with loans and grants in thename of such lofty pretexts as ‘povertyreduction’ and ‘international development’.However, these loans inevitably come tiedwith conditions which hinder the country’seconomic growth and poverty reduction.The detrimental effects these conditionshave had on Bangladesh are immeasurable,putting the country under increasingpressure to abide by the prescriptionsimposed by the donors.

IFIs and Conditionality

As advocates of corporate globalization, IFIsand their allies work for international

capitalism, exerting a heavy influence onglobal trade policies that mainly promotetrade liberalization and public sectorprivatization. Many of the least developedcountries (LDCs) have become a place ofexperimentation for trade liberalization atthe hands of international financialinstitutions (IFIs) who pressure thegovernment into liberalizing trade policies.This causes serious devastation in publicservice sectors including health, education,water, agriculture and food.

Despite the movement fordemocratization across the developingworld, International Financial Institutions(IFIs) have continued to bypass parliaments,a trend at odds with donor insistence on‘good governance.’ The WB, IMF andRegional Development banks attachconditions with an intention of economicreforms which they legitimize through arange of documents including PovertyReduction Strategy Papers (PRSPs).

PRSPs contain conditions such ascutting social expenditures - also known asausterity - implementing user fees in basicservices such as education and health,focusing economic output on direct exportand resource extraction, devaluation ofovervalued currencies or lifting import andexport restrictions, removing price controlsand state subsidies, privatization ordivestiture of all or part of state-ownedenterprises, enhancing the rights of foreigninvestors vis-a-vis national laws, improving

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governance and fighting corruption. Manyof these have negative consequences forthe situation of the poorest people in thesecountries.

IMF imposes two types of policyconditions, namely quantitative andstructural. Quantitative conditions areimposed at the macroeconomic level of thepoor countries, while the structural onesare for institutional and legislative policyreforms. All of them prove to be notrelevant to tackling the challenges that thecountries face, unfair, undemocratic,ineffective, and inappropriate mainlybecause they undermine democraticaccountability within countries and deprivethe poor of access to services (education,health, etc) at a low cost. Yet the influenceof IFIs to open up the domestic market is sopowerful that the government cannot resistor deny their illegitimate influence andpower.

Since the 1980s, IFIs – backed by key G7shareholders – have become increasinglypreoccupied with the structural obstaclesto growth and poverty reduction, and havesought to use loans to leverage the reformsthat their Washington-based economistshave deemed desirable. As a result, theaverage number of World Bank conditionsper program tripled between the early1980s and mid-1990s, and by the 1990s IMF‘mission creep’ led to its bolstering theBank’s efforts with its own structuralconditions.1

The World Bank provides most of itsloans for a specific project on the basis ofparticular strategic policies, calledStructural Adjustment Programmes (SAPs).The main conditions of SAPs have been:massive privatization of industries and majorutilities; the blanket application of the ‘freemarket policy’ which actually means aunilateral canceling of all tariff restrictionsby the country on the receiving end of theloans; withdrawal of all types of subsidiesfor the sake of ‘efficiency’; and drastic cutsin government spending in order to ensureso-called ‘macro-stability’ of the economy.

The Dominant Position of the IFIs

In many cases, in terms of policies andprojects, IFIs are directly violating theprinciples of the Paris Declaration. Aid ismore aligned to structural adjustmentpolicies striving for trade liberalization andprivatization than nationally createddevelopment plans. The supremacy ofdonors continues to rule the day.Furthermore, by acting as the gatekeeperof aid disbursements by other countries,they act as a major hindrance to aideffectiveness reforms.

In the mid-eighties, when Bangladeshwas under a military regime, StructuralAdjustment Programmes (SAPs) wereintroduced. The main conditions of theseSAPs were: massive privatization ofindustries and major utilities; the blanketapplication of the ‘free market policy’which actually means a unilateral cancelingof all tariff restrictions; withdrawal of alltypes of subsidies; and drastic cuts ingovernment social spending to ensuremacro-economic ‘stability’.

This resulted in the disintegration of anumber of industries including the AdamjiJute Mills, which left millions of jutegrowers and jute mill workers in crisis anddisplaced 26 thousand workers and theirfamily members. The Bangladesh PetroleumCorporation (BPC) has been undertremendous pressure to privatize, as well asthe Chittagong Port, a move that would putthe oil and gas sector of the country at themercy of the large multinational companies.2

Similarly, the small and medium enterprisesof the country are on the verge of collapsedue to the misguided policy decisions of theIFIs.

Overall the SAPs proved of no use inBangladesh, leading the World Bank tointroduce Poverty Reduction StrategyPapers (PRSPs). However, this was stillprescribed by the WB and IMF and agreedto by other donor agencies including theADB. It reiterated the free market,privatization and liberalization conditions of

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the SAPs, and the country was forced toaccept and implement this PRSP as aprecondition for receiving money from thedonors. Like other countries, Bangladesh isbound to prepare a PRSP every three yearsto qualify both for concessional lendingfrom the World Bank and IMF and for debtrelief under the Heavily Indebted PoorCountries (HIPC) initiative.

The PRSP does not reflect the needsor the participation of the people butrather violates their fundamental right todevelopment and a quality life. Thestrategies prescribed in the PRSP are notrecognized by the people at large sincethese were imposed on the country. Civilsociety groups have had discussions anddebate opposing the prescribed documentand also criticizing the government foraccepting enforcement of this policy. Themajor reasons for opposing it were becauseit neither represents people’s aspirationsand expectations, nor deals with thepriority sectors.

The IFIs prevent democratic ownershipby applying their strategies as conditionaltools over the country. Furthermore,people are kept away from the wholeprocess of the project formulation andimplementation and there is noaccountability of the donors for theiractions. No democratic consultation ispracticed either in policy formulation orproject implementation processes.

Further issues arise. Not only is thePRSP a set of conditional lending policiesimposed by the IFIs, but later other officialdonor agencies also agreed with the PRSPto be in place. In this way, the IFIs act as agatekeeper putting strategies in placewhich other donors and recipientgovernments are only able to follow. Thenational government has little choice sinceit requires the aid and is forced to complywith this. However, it is noteworthy that itdid this without even raising the issue inthe national parliament. Clearly, thenational development priorities have beenundermined in the PRSP and the principles

of the Paris Declaration are totally ignoredand sidelined by the IFIs and other donors.

This dominant position has not changedin recent times. The World Bank, ADB, DFIDand Japan have prepared a joint CountryAssistance Strategy (CAS) for Bangladesh for2005-09. The CAS is aligned with the PRSPand encourages other donor agencies tocollaborate at the sector level throughimproved coordination of implementation.By these means, the IFIs continue todominate the other agencies and to getthem to implement their strategies andpolicies.

Nor have the IFIs reduced theirinfluence in the face of the emergence ofSector Wide Approaches (SWAPs) in thefields of health and primary education. Theyare yet to align themselves with thesecountry procedures.

Impact of IFI Policies

Many projects undertaken by the IFIs inBangladesh ignored the opinions of localcommunities. For example, Khulna-JessoreDrainage Rehabilitation Project (KJDRP),which was funded by the ADB and wasimplemented in the Southwest area ofBangladesh. The lack of consideration forlocal communities resulted in a project withdisastrous consequences for theenvironment and communities’ livelihood.More than one million people have directlysuffered in the area.

Though the project was not successful- as admitted by the ADB - there was noaccountability for causing the people’ssuffering. The victims have not beencompensated, though the communities havebeen calling for this for the past few years.Donor’s supremacy and the money-powernexus are imposed over the decision-makingprocess and no accountability is practicedthough there was a commitment by thedonors to comply with the principles of theParis Declaration.

In June 2003, the IMF providedBangladesh with a loan to be released in

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three years in three installments, with someof the conditions being the renovation ofgovernment banks and the privatization ofthe Rupali Bank. The reform of the bankingsector of Bangladesh has already beeninitiated by the Government of Bangladesh,the name of the project being ‘IndustryDevelopment and Bank Modernization’, withanother one called ‘Central BankStrengthening Project’ already in hand. Theprivatization of banks could hamper thecapital market as well as the economy asthe government would be dependent onforeign capital for a longer period andwould lose control over the economy.

Bangladesh has become a place ofexperimentation for trade liberalization atthe hands of international financialinstitutions (IFIs) which pressure thegovernment into liberalizing trade policieswithin and beyond the WTO framework.Following conditionalities stressed by WBand IMF, the National Board of Revenue(NBR) decreased import taxes from 2% to1.5% on 352 products. The IMF pushed forincreasing revenue income and decreasingsubsidies in the budget, and determinedincreases or decreases on product taxes.The government could not keep controlover tax policies, and as a result, the priceof essential commodities skyrocketed.

At the macro-economic level, the IMFhas also played a major role in Bangladesh infixing the national salary structure,reducing the interest rate of Sanchay Patras(savings scheme) and raising the exchangerate of the dollar against the local currencytaka. These policies have significantlyimpacted upon people’s livelihoods. Wheninvestment was much needed to accelerategrowth and provide key services to reducepoverty, the IMF-imposed tightening of thecredit supply brought strong protest fromthe country’s business community. In theend, tightening the money supply andcredit growth through raising interest ratesfailed to maintain macroeconomic stability;rather, it increased the cost of investmentand thus had a negative impact on outputand employment. The result, at the end of

2007, was that inflation was creeping up todouble digits, but at the cost of investment,employment and GDP growth.

Also since conditionality relates notonly to donor goals but also the process forachieving these goals, the people of therecipient countries are victimized in theprocess. For example, the de-industrialization programme and closure ofthe jute industry caused seriousunemployment. Overall, people have had tobear the brunt of both higher inflation andreducing incomes due to IFIs policies andprogrammes.

Following IMF conditions, thedeveloping countries’ governments areforced to impose taxes on products toincreases its revenue income. TheBangladeshi government had to commit toincrease the price of oil and gas in order toobtain PRGF funding. The price of fuel hasincreased by 60%-75% in the past two yearsin Bangladesh. The price of petrol andoctane has increased in the local market byjust under 30%. The price of kerosene anddiesel has increased by 50%-76%.3

The IMF is pushing to increase theprice even further, which they believe isgood for economic stability and GDPgrowth. But does that growth really helppeople? The price hikes of oil and gas havedirectly affected the livelihood of thepeople. Farmers and manufacturers, inparticular, have been severely hit by theprice hike of these core business costs.Even in the recent substantial food priceincreases, the IFIs are pushing to increasethe prices of gas, electricity and fuels,whilst simultaneously prescribing reducedsubsidies to agriculture and basic services.This ‘double whammy’ leaves farmers andpeople in general in desperate situations.

The goal of increased revenue is notachieved through tax control, a processdetrimental to the livelihoods of the people.The IMF conditions are plunging people intomisery. Revenue experts suggest that thegovernment should take measures toprotect local industries. However,Bangladesh has only experienced trouble

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with respect to industry and overalleconomy by following IMF conditions.

The Asian Development Bankin Bangladesh

International Financial Institutions stressquite explicitly the necessity of costrecovery and commercial profitability ofwater services. They also promote ‘reforms’of the water sector and introduce ‘public-private participation’ or ‘increased privatesector involvement’ that essentially resultsin the gradual withdrawal of the state fromthe domain of the utility sector. To makethings a little more complicated, the marketfor water is highly subsidised and especiallyso in crowded cities, which offer the mostpotentially lucrative markets, the policyregime is not favourable to commodify orcommercialise water and there is afundamental question of whether the poorshould pay for their water.

‘Bangladesh has cumulatively receivedover US $ 8 billion in aid from the AsianDevelopment Bank (ADB), ostensiblyearmarked for the ‘public sector’.Unfortunately, much of this money is usedto finance projects supporting privatesector growth and trade liberalisation. Infact, one of the ADB’s key operationalobjectives in its South Asia regionalCooperation Strategy is explicitly stated as“promoting private sector cooperation.” Inother words, by “addressing policyconstraints,” the ADB proposes to open upBangladesh’s industries and expose them tothe vagaries of the global corporateeconomy.

The ADB’s Dhaka Water Supply andSewerage Authority (DWASA) Projectenvisages eventual privatisation of thewater distribution system. The ADB’s massive$838 million Dhaka Water Supply Project isalso underway, which it notes will requiresubstantial private investment.

The World Bank has also confirmed itscommitment to support the water sector inBangladesh and noted that the sector

requires about $8 billion dollars’ worth ofinvestment over the next 20 years. Anobvious means, and presumably the onepreferred by both the agencies, to financethe water projects would be privateinvestment gradually pushing the watersector towards privatisation.4

The ADB’s recommendations for thefuture operational strategy are set out in itswater sector ‘Roadmap’ of November 2003.It notes that Bangladesh had prepared a‘sound’ National Water Policy, which was infact funded by the World Bank andconformed to the set of prescriptions thatlending agency must have provided, as wellas a draft 25-year National WaterManagement Plan. Implementation of thisdraft management plan ‘also needs to beinitiated with continuous strengthening forstrategic sector development’, notes theroadmap.

The Asian Development Bank hails twospecific initiatives regarding Bangladesh andboth involve non-state actors. Itspublications highlight a particular initiativeof organisations that have established 126locations where they buy water at thesubsidised rates and sell it to the slumdwellers at four times the government rate,making a neat 300 per cent profit. This canonly be seen as a precursor to wholesalewater privatisation since the privateoperators would find it easier to increasewater tariffs.

ADB has also tagged a lot ofprescriptions onto its aid, providing a policyprescription to restructure and downsizepublic sector organizations in order tocreate space for foreign private sector. Itencourages Foreign Direct Investment as ameans to provide an inflow of foreigncurrency, arguing that this would ensureremarkable development of the energysector and would contribute to developother sectors as well. At their behest,blocks of the gas sector were awarded tothe Multinational Corporations. As a resultof these contracts, Bangladesh becameobliged to purchase its own gas at triple theprice of local companies and in foreign

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currency. The national exploration agencyhas been kept idle. The budget deficit andnegative effect on foreign exchangereserves increased due to the obligations toforeign companies.

The results of these steps have beendisastrous for the economy and the people:

1. the price of gas and power hascontinuously increased

2. the cost of production at everylevel has increased, resulting in afall in competitiveness ofBangladeshi products

3. hard-earned foreign currency isbeing used to purchase gas andelectricity which could be boughtwith local currency at a muchcheaper rate

4. dismantling of local production skilland exploration establishment

5. huge financial losses of stateagencies

6. common property becomes privateproperty being used to maximizecorporate profit

7. public non-renewable resourceslike natural gas becomes hugeliability.

Conclusion

The International Financial Institutionsrepresent a significant barrier to theachievement of the Paris Declarationprinciples and the achievement ofdevelopment goals more generally. They playa very significant role in shaping thepolicies, strategies and priorities of thedeveloping countries that they work with.They continue to impose policy conditions,particularly related to the liberalization ofmarkets and the privatization of national

companies along neo-liberal economic lines.They also impose rules on macro-economicstability, interfering in monetary policy in away that does not allow countries to investin their own development.

Not only do the IFIs have a directimpact on developing countries through theconditions they impose on their own aid,but they are also able to exert tremendousinfluence over other donors who accepttheir assessments and criteria for theallocation of aid. This reduces the room formanoeuvre available to recipient countriesbecause it reduces the competitionbetween donors and prevents them frombeing able to seek out alternative fundingsources.

The result of this reality is thatdeveloping countries are not just held back,but also pushed back into situations ofpoverty and deprivation. The policiesimposed have resulted in job losses,inflation, higher costs of key goods andservices and reduced competitiveness oninternational markets. These have allimpacted directly on the lives of everydaypeople and particularly the poorest.

Overall, the various positive noisescoming from initiatives such as the ParisDeclaration and IFIs own commitments canbe seen to be more rhetoric than reality.The gatekeeper role of the IFIs needs to bechallenged along with their undemocraticapproaches to policy-making. Rather than amere reform agenda in the current aidsystem, a change of paradigm is neededbased on democratic ownership, fullengagement of civil society, transparency,openness and accountability. Only then willthe right policies come about to deliver thebest opportunities out of poverty for thepoorest countries and the poorestcommunities.

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Ahmed, T. (2008). Water for sale, Dhaka WASAprivatization. In Voice 2008.

Asian Development Bank. (2004). Enhancing the fightagainst poverty in Asia and the Pacific: The povertyreduction strategy of the Asian Development Bank.

Asian Development Bank. (2007). ADB: Achieving resultstogether, 25 years with the Bangladesh ResidentMission.Politics of aid: Conditionalities and challenges. (2005). InVoice 2005.

Bangladesh Ministry of Finance. (2006). Flow of externalresources into Bangladesh. Economic Relation Division,Government of Bangladesh.

Bangladesh Ministry of Planning and Finance. (2007).Bangladesh economic review. Government ofBangladesh.

Barakat, A. (2003). Political economy of foreign aid.

Breaking the cycle of neo-liberal hegemony: How bankand fund stand against people. (2008). In Voice 2008.

CDP. (2006). People’s voice on IFI.

CPD & UPL. ( ). Revisiting foreign aid: A review ofBangladesh’s development. Dhaka.

Economic Relations Division. (2006). HarmonizationAction Plan.

Global capital vs local economy: Conditionalities of theIMF and Fiscal Reform. (2008, January). In Voice 2008.

Hossain, J. & Roy, K. (2006). Deserting the Sundarbans:Local people’s perspectives on ADB-GEF-Netherlandsfunded SBCP. Njera Kori and Unnayan Onneshan.

International Steering Group. (2007, September). FromParis 2005 to Accra 2008: Will aid become moreaccountable and effective?

Mah, P. (2008). The ADB in Bangladesh: A look back or aleap backward? A critical appraisal of the ADB’s achievingresults together: 25 years with the Bangladesh ResidentMission. In Voice 2008.

Muhammad, A. (2008). Projects of mass destruction(PMD) and Asian Development Bank.In Voice 2008.

NGO Forum on ADB (2006). Development Debacles.

OECD & WB. ( ). Bangladesh: Aid at a glance.

OECD. (2005). The Paris Declaration.

People’s forum on ADB. Retrieved from http://www.asianpeoplesforum.net/

Reality Check. (2007, January). The Paris Declaration:Towards enhanced aid effectiveness?

Reality of Aid Network. ( ). Concept paper and issuepaper.

Revealing PSI: People’s resistance against policyconditionalities of the IMF. (2008). In Voice 2008.

The Bank Information Centre. ( ). Unpacking the ADB:A guide to the Asian Development Bank.

The Bank Information Centre. (2007). ADB beginsevaluation of controversial Khulna-Jessore project.

Tujan, A. (2008). Southern voices on conditionality andownership: Towards achieving authentic nationalownership.

UNDP Human Development Report, 2006-2007.

Notes

1 www.dfid.gov.uk

2 Breaking the cycle of neo-liberal hegemony: HowWorld Bank and IMF stand against the people.(2008, January). In Voice 2008.

3 Global capital vs local economy: Conditionalities ofthe IMF and Fiscal Reform. (2008, January). InVoice 2008.

4 Ahmed, T. (2008). Water for sale, Dhaka WASAprivatization. In Voice 2008.

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The World Bank in Pakistan:See No Suffering, Hear No Cries,

Speak No TruthMustafa Talpur, with support from A. Ercelan and M. Nauman

Pakistan Institute of Labor Education & Research (PILER)

Introduction

There is a wide power gap between theWorld Bank and local communities. Thedecisions made from a distance bypowerful institutions are beyond thecontrol of local communities. In thiscontext, investments in mega infrastructureprojects from donors such as the WorldBank have served to detach people fromtheir historical entitlements to naturalresources. The social disruption, loss oflivelihood and environmental degradationassociated with these projects push localcommunities into poverty and deprivation.The concomitant violation of rights such asto food, development and shelter isconsidered a ‘transitory cost’ in the Bank’sterminology.

Water infrastructure projects fundedby IFIs have not only generated hugeeconomic waste, but also causedirreparable damage to the environment andlivelihoods. The World-Bank-financedTarbela Dam and link canals project in theearly 1970s reduced fresh water flow tolower riparian zones, especially the IndusDelta. Previously prosperous deltaiccommunities were forced to migrate.Ecological costs have included seaintrusion, loss of mangrove cover and thedisappearance of flora and fauna species.The prevalence of massive poverty in the

area is a direct consequence of upstreamstructures funded by the World Bank.

Similarly, the Asian Development Bankfinanced the Chashma Right Bank Canalproject, which massively disturbed theecological and livelihood pattern of thearea. Flooding caused by alterations in thecourse of water flows force communities tomigrate and negatively impact on the long-term potential of ecosystem functioning andsustainable development, pushing peopleinto vicious cycles of deprivation. Suchinfrastructure projects are instrumental inextending state and capital control overnatural resources through dispossession andlimiting people’s choices and autonomy.

The reason these projects come aboutis the dominance of a faulty developmentparadigm and inadequate accountability.Projects are implemented under the flawedeconomic belief that investment in majorinfrastructure projects will generateeconomic growth that will then seep intolocal communities and reduce poverty. Thequestion of accountability at local level isomitted at very outset, because the gainsare measured at the macro-economic level.The past sixty years have witnessed donorsin competition with one another to pourmoney into such flawed projects, ignoringthe fact that previous projects based oneconomic growth ideology had basicallyrobbed natural resources from poor people

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and created situations of extremedeprivation.

Poor communities bear the brunt ofthese projects and yet they are kept awayfrom decision-making processes at all thelevels. In developing countries that lacksufficient democracy, the state authoritiesare unaccountable to the people.Furthermore, the international donorinstitutions enjoy immunity from domesticlaws and there is no mechanism ofinternational law to hold them accountable.Thus, violations of human rights gounchecked and accountability remains anillusion. Nevertheless, indigenous people allaround the world have fought around issuesof accountability, transparency andgovernance in powerful institutions like theWorld Bank, particularly since the lastdecade of the previous century.

This paper looks deeply into the case ofa World-Bank-financed project - the LeftBank Outfall Drain (LBOD) in the Sindhprovince of Pakistan - which demonstrateshow the World Bank violated people’sfundamental rights, uprooting them fromtheir means of survival in southern Pakistan.It also shows how the WB failed to takeresponsibility for its actions after inspectionpanel findings.

Left Bank Outfall Drain Project

Background

The Left Bank Outfall Drainage (LBOD)project was initiated in 1984. The projectaimed to provide a drainage facility forirrigated agriculture in three districtscovering about 516,000 hectares throughthe construction of a network of surfacedrains, installation drainage tube wells andthe Chotiari reservoir.1 The initial estimatedproject cost was US $ 635 million. The costwas agreed upon by seven external co-financiers: IDA; ADB; Saudi Fund forDevelopment (SF); Canadian InternationalDevelopment Agency (CIDA); Overseas

Development Administration (ODA-UK); SwissDevelopment Corporation (SDC); and theOPEC Fund for Development. The IDA andADB were the major donors, contributing US$150.0 and $122.0 million, respectively. Theearly environmental assessments indicatedpositive effects for the project. It wasconsidered that drainage would improve theproductive capacity of farmland and thequality of vegetation, whilst reducingmalaria.

The problems

The implementation of the project wasdisastrous and both the World Bank and ADBhave accepted that their performance atthe preparation and appraisal stages wasnot satisfactory. The work of the LBODproject could not be finished to theestimated cost and time and remainingworks were included in the NationalDrainage Program (NDP) launched in 1998and co-financed by ADB, the World Bank,and the Japan Bank for InternationalCooperation. The total cost of the LBOD atproject completion was estimated to be US$1021.0 million by the World Bank, $385.3million or 60% higher than the appraisalestimate.

Even more seriously, the project designwas too focused on physical andengineering aspects, with insufficientemphasis on social, financial,communication, and environmentalaspects.2.The consequences for localcommunities have been devastating:

• The project has made communitiesso vulnerable that in any monsoonrainy season the upcoming drainageeffluent could displace them.

• In the 2003 rains, flooding,breaches and sea intrusion causedthe deaths of more than 50 people,thousands of houses were damagedand thousands of acres ofagriculture crops were destroyed.

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The total estimated cost of lossesduring the 2003 flood was Rs.1, 287million.

• The drainage network has badlyaffected the environment of theIndus Delta. There is now no freshwater available to maintain theecological value of the delta, whichis essential for coastal forests andmarine life. In the absence of freshwater, the disposal of toxicdrainage effluent has contributedto the destruction of the remainingnatural resources.

• Agricultural land is increasinglyencroached by seawaterchanneled through the project

infrastructure and entire grazingareas have been lost.

• The ground water - which is aunique drinking source - hasbecome badly polluted causingsevere impact on human health.

• Important wetlands ecosystems(including two Ramsar sites) havebeen destroyed with severe loss ofhabitats and fish. These Dhands(wetlands) provided livelihoodresources to forty villages offishermen having a population of 12-15,000 living around these waterbodies.

• After the loss of other sources oflivelihood, pressure on scarceforests has increased.

• The project has badly affected theindigenous Mallah community. Theflooding and devastation thatensued during the 1999 cycloneand 2003 monsoon changed theeconomic base of these people.Both these shocks wereinterconnected with the operationof LBOD and aggravated by theoverflowing and breaches ofinfrastructure installed by theproject.

A large number of people who eitherowned land or were happy with fishing,agriculture or livestock rearing have beenimpoverished. Local communities whichwere heavily dependent on naturalresources for their livelihood have beenrobbed of the very means of survival anddenied the right to life, livelihood anddevelopment. These effects and costs werenot included in the cost-benefit analysis ofthis infrastructure project.

The project design and implementationsuffered from major defects, many of which

Damage Caused By Project-InducedFlooding In 2003

Type of damage or loss NumberHuman life3 56No. of villages affected 506No. of households affected 21,134No. of people affected 126,804

Crops (acres)Rice 49,330Sugar cane 13,699Others 10,530Total crop acres 73,559

Livestock (numbers)Buffalo/Cows 885Goat/Sheep 2,623Others 157Total loss of livestock 3,665

Source: District Administration BadinPakistan.

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contributed directly to the displacementsand dispossession experiences during theextreme events of 1999 and 2003. Theconstruction of a tidal link invited seaintrusion and the tidal link canalsubsequently collapsed. The Choleri weirwas a flawed engineering structure. Itssubsequent collapse caused sea water toflow into and degrade wetlands. TheChotiari reservoir and related irrigationinfrastructure was always unfeasible asthere was no water to fill it. The tube wellsand drains were dysfunctional. The projectwasted money, took longer to implementthan anticipated and cost more thanplanned.

Flawed accountability

When looking for the explanation of whysuch a bad project was able to come about,one sees quickly that the lack ofaccountability to the people most affectedby it is a key issue. Since the projectdesigners, donors and national governmentdid not consult the people most likely to beaffected by the project and there was noinformation sharing with the people, theywere not made aware of all the issues andproblems that needed to be tackled. Theyundervalued the importance of thewetlands to the environment and people’slivelihood and totally failed to adequatelyconsider the sustainability of the project’smanagement.

The idea to dispose of drainage effluentthrough the southern coastal belt inPakistan by connecting a drain with anactive sea tide was never discussed withcoastal communities. Historical routeswhere rivers use to drain into the sea werebypassed and an artificial drain in the formof a tidal link was created, cutting throughcoastal lagoons. Local wisdom would havebeen enough to avoid future disaster, but itwas not sought. Where local communitiesbecame aware of what was happening andraised their voice against ill-planning andthe future threat to their lives andlivelihoods, they were ignored.

Violation of Human Rightsby the Project

The project clearly violated human rights,for which the Government of Pakistan andmulti-lateral donors must be consideredresponsible.

All these violations of the fundamentalrights of people came in the name ofdevelopment and development cooperation.The blind eye of international capital and itscollaboration with local non-democraticelite structures forced people from theirancestral land and destroyed or removedtheir access to other resources. This caseindicates the serious lack of accountabilitymechanisms in place to make aid work forthe poor or at the very least not make themmore vulnerable to shocks.

The only accountability mechanismavailable was to approach a World BankInspection panel. The owners of resourceswhose rights were massively violated did justthis, raising their concerns and complaints.The investigation of the panel membersbacked up many of the communities’ claims,thus endorsing the community’s view of howirresponsibly the Bank played havoc withthe livelihood of people.

The panel found:

1. Technical flaws in design

• The alignment of the main disposaldrain was technically andenvironmentally risky. Remotesensing data confirmed doubtsexpressed by the local people.

• A more appropriate technicaloption would have been to followthe natural route (knownhistorically to the communities) andlink the LBOD with Shakoor Dhand.

• Significant technical mistakes weremade during the design of the Tidal

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Human Rights Obligation

Article 3 of Universal Declaration ofHuman Rights which says “Everyone hasthe right to life, liberty and security ofperson”

Article 1 of the Declaration on the Rightto Development “The right todevelopment is an inalienable humanright by virtue of which every humanperson and all peoples are entitled toparticipate in, contribute to, and enjoyeconomic, social, cultural and politicaldevelopment…”

The Covenant of Economic, Social andCultural Rights, which calls on StatesParties to take appropriate steps to“improve methods of production,conservation and distribution of food bymaking full use of technical andscientific knowledge, by disseminatingknowledge of the principles of nutritionand by developing or reforming agrariansystems in such a way as to achieve themost efficient development andutilization of natural resources”;

Right to Safe Drinking Water, GeneralComment 15 on the right to watermentions that “The human right towater entitles everyone to sufficient,safe, acceptable, physically accessibleand affordable water for personal anddomestic uses.”

Ramsar Convention

Violation

56 people were killed in the 2003 floodsand many more are at risk of flood andhunger.

The project not only excluded people inits development, but the infrastructurecreated caused people to migrate andlose control over their natural resourcesand means of livelihood and developing.

The project induced displacement, lossof crops, fishing and agricultural land.Malnutrition is very common in the areaas local communities, after losingcontrol over productive resources, areunable to meet their food requirements.The local communities’ capacity to livehealthy lives has been reduced whilsttheir vulnerability to disease -particularly amongst children - hasincreased.

The project caused flooding and thepollution of surface as well as groundwater resources used for drinking.

Project structures have completelydamaged two Ramsar sites i.e. Narreriand Jhubo lagoon

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link embankments and the CholeriWeir. Tidal link structures werecritical to the performance of thesystem but the design hadsubstantial inherent risk. Theunderestimation of risk and lack ofappropriate technical measurescontributed to the suffering oflocal people in lower Badin.

• Designers did not evaluate thelikelihood that, under prevailingmetrological conditions, highsurface water run-off fromupstream areas would coincide withhigh water levels in the Arabian Seacausing flooding.

• The construction of the Tidal Linkand embankments cut off anddiverted the surface flow andconsequently destroyed grazingareas in the area of Runn of Kutch.

The overall morphology of theregion is being changed.

• The outlets of low-lying drainslinked to the LBOD such as theSeerani drain are now under theinfluence of tidal movement. At hightide, water flows back into thesedrains causing salinization ofgroundwater and of adjoining land.

2. Social Problems

• Fifty-four breaches in theembankments occurred at differentlocations, bringing devastation andloss of life to adjacentcommunities.

• The LBOD system, combined withthe partial destruction of the TidalLink, has heightened the risks to

Rio Declaration on Environment andDevelopment, including:

Principle 1: Human beings areat the center of concerns forsustainable development. Theyare entitled to a healthy andproductive life in harmony withnature.Principle 3: The right todevelopment must be fulfilledso as to equitably meetdevelopmental andenvironmental needs of presentand future generations.Principle4: In order to achievesustainable development,environmental protection shallconstitute an integral part ofthe development process andcannot be considered inisolation from it.

The project was too focused on physicalinfrastructure, with people never beingat the center of the development logic.

An environmental management plan wasnot properly prepared and implemented.The project caused severe damage tothe natural environment and reducedthe future development potential ofcommunities.

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local people from flooding. Thesituation is particularly bad whenheavy rainfall inland and high tidesand storm sea coincide. Floodsduring rains in 2003 led to the lossof many lives.

• The Bank failed to identifyemerging risks during appraisal thatLBOD/Tidal link problems couldlead to significant harm and evendisplacement of local people, eventhough the project had plans tocomplete and expand LBOD.

• The Bank failed to take thenecessary actions under OD 4.30 toidentify and prepare for thepossibility of such displacement,and the extent to which it hasoccurred.

3. Environmental problems

• Tidal link failure led to major harmto the Dhands ecosystem, wildlifeand fisheries, upon which manypeople depend for their livelihood.

• Although it is difficult to separateimpacts of the LBOD system fromthose of investments financedunder the NDP project, theevidence indicates that the two, incombination, have contributed tosignificant adverse impacts on theinternationally recognized wetlandsites.

• Under the NDP project, neitherthe potential environmental northe potential social impacts of theproject in the area of concern toRequesters were considered in ameaningful way until the submissionof the Request.

• Increased salinity has affected largetracts of agriculture land.

• Saline intrusion up the Indus Deltahas harmed agriculture, includingdamage to 1.5 million acres offarmland in Thatta and Badin,causing dislocation and extensiveeconomic losses.

• The water supply has been reducedand contaminated (by salinedrainage and biocides), inHyderabad, Karachi, Thatta andBadin.

• The 1993 DSEA analysis ofalternatives rapidly became out oftouch with the situation on theground. Most importantly, theanalysis underestimated thepotential negative environmentaleffects in southern Sindh of relyingupon and expanding the LBOD.

• There was a failure to develop and,in particular, to implementadequately an EnvironmentalManagement Plan for the project.

• The project focused on ensuringthe evacuation of LBOD effluents,and paid little attention to impactson, or means to rehabilitate, theDhands as a habitat and ecosystem.The negative effects on the Dhandsamount to a “significant conversionor degradation” within the meaningof OP 4.04.

• The Bank did not adequatelyconsider the risks of furtherdegradation of the Jhubo lagoon, acritical natural habitat.

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4. Other Issues

• Unfortunately, the people ofSouthern Sindh, whose lives werealready recognized as beingaffected by the Tidal link, felloutside the field of vision of thosewho designed and appraised theproject.

• The Choleri Weir collapsed only oneweek after the publication of theimplementation completion report(ICR). There is concern that the ICRthat was circulated to the Boardwas insufficiently transparent onimportant shortcomings of theproject.

• Management was slow to visit thesite of the Tidal Link failure, anddid not have a consistent approachto interacting with the localpopulation to understand andaddress the social andenvironmental implications of thisfailure. Management’s failure toconsult with people affecteddownstream for over half a decadefollowing the breaches in the TidalLink is of great concern.

5. Conclusion

• To a very large degree, the damagessuffered by people in the project-affected areas have not beenredressed, and many of the sameconditions that led to these arestill in place.

The World Bank’s Refusalto Take Responsibility

In the wake of the independent panel’sobservations, it was expected that the Bankwould accept the truth and takeresponsibility. However, it refuted all of the

panel’s observations. By not accepting thecommunities’ concerns and trying to placeresponsibility on government institutions,the Bank called into question the validity ofits own accountability mechanism(inspection panels). There was no otheraccountability mechanism available to makethe Bank take responsibility for the damageit caused and the lack of respect of thepeople’s right to natural resources.

The communities have used all thepeaceful means at their disposal to protecttheir rights, but all in vain. They are stillwaiting for justice. Frustratingly, the Bankrightly identifies the problems facing thedelta and surrounding areas, but is silentabout the causes of this situation. In itsmanagement report and recommendationsfor the area it says: “While salinity may bethe biggest challenge, other importantthreats to development benefits in theIndus Basin are growing in importance…urgency-management of the coastal zoneand the delta, conservation of wetlands andrelated environmental services, andmanagement of pollution and water quality.In Sindh and Badin District in particular, themajor changes in the Indus Delta that haveoccurred sine the development of the IndusBasin’s water resources have resulted in seaintrusion, increased salinity and loss ofmangrove forest diversity and extent, andreduced productivity of the estuary.”( Para17)

The management recognizes thedegradation of the Indus delta and thepoverty and environmental risks in lowerBadin and Thatta districts but wronglyhighlights natural disasters as the maincause. It also recognizes the suffering ofBadin and Thatta as a result of inequity inwater distribution. However, the plan ofaction prepared by the management toaddress the problems raised in theinspection request and backed up by thepanel experts is a joke. None of thecommunities’ concerns have beenaddressed, but rather the Bank hasapproved another loan to fix the problemcreated by two earlier projects.

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Notes

1 See Staff Appraisal Report (SAR), Left Bank OutfallDrainage Stage 1 Project, South Asia ProjectsDepartment Irrigation 1 Division, World BankReport No. 5185-Pak, November 5, 1984.

2 See para. 36 of the Implementation CompletionReport, LBOD Stage-1 Project, Rural DevelopmentSector Management Unit South Asia Region WorldBank Report No. 18037.

3 People died in one sub-district Badin, of districtBadin in Sindh province Pakistan. Informationcollected through police.

Conclusions

World Bank-funded projects, including theLeft Bank Outfall Drain Project,construction of the Tarbela Dam on theriver Indus and other upstream structuresto divert water on the river Indus are majorcauses of the degradation of the Indusdelta and sources of livelihood for localcommunities. Flawed designs andinadequate implementation have reducedfresh water flow, increased the risks fromflooding and caused sea water to flooddelicate fresh water ecosystems.

The bank used a totally misplacedanalysis of the sustainability of theinfrastructure projects it chose toimplement and failed to take into accountthe needs and risks facing localcommunities. None of the projectsrecognized the need of water for the deltabecause they were all focusing oninequitable economic growth models, basedon the idea of producing for exportmarkets, rather than sustainable humandevelopment and meeting local needs. Theprojects totally disregarded the feasibilityof alternative approaches such asdrastically reducing water use and hencedrainage by switching to ecologically-friendly crops and organic farming orreducing crop intensity.

The absence of accountability at bothstate and IFI level has encouraged these

institutions to continue with the samewater resource development paradigm inthe face of all the disastrous impacts on thelivelihood of local communities. Theycontinue to push a model, which onlyserves to increase existing inequalities inthe control of natural resources,perpetuate poverty and keep violating thebasic human rights of local communities.

By putting the burden of proof oncommunities, with only the limited scope torequest an inspection, the existingaccountability mechanism has been shownto be inadequate and counter productive.It is lengthy and time consuming, overlytechnical, builds false expectations in thecommunities and ultimately fails to hold theBank to account. Even after establishing thefact that people have been severelynegatively affected by projects, no justicehas been provided to the communities.

In such a situation, aid has been usedto strengthen existing power structures,which keep denying peoples’ sovereigntyover natural resources and facilitatesexploitative forces to extract privatebenefits at the cost of historical owners ofresources. Genuine and effectivemechanisms of accountability are essentialto put a stop to such practices and ensurethat aid is used to support localcommunities in tackling poverty anddeprivation.

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Introduction

Nepal’s developmental failure over the pastfive decades is attributable not so much tothe paucity of resources as to the lopsidedconsequences of the international aid-based economic and fiscal system. Ashappened in other countries of the world,aid-giving in Nepal gradually became thepreserve of the most unaccountable,undemocratic and opaque internationalfinancial institutions (IFIs), working intandem with private multi-nationalcorporations (MNCs).

There is a crippling paradox at theheart of the international system of power.The rhetoric is strong on ethical symbolism,exemplified by the ratification of aprofusion of human rights, developmentaland environmental instruments of the UNand other regional organisations, mainly theEuropean, Inter-American and Africansystem of human and people’s rights. Thereality, on the other hand, ispreponderantly dictated by the interestsand calculations of global financial capital,represented by the IFIs and private globalcorporations which flagrantly violate all theinternational instruments of rights that aresupposed to govern the relations betweenstates and with their peoples.

Democratic Ownershipand Mutual Accountability to InternationalHuman Rights: A Reality Check of Nepal

Gopal Siwakoti ‘Chintan’ with Rabin SubediNepal Policy Institute (NPI)

IFIs Undermining UN Principles

Although the IFIs and other tradeorganisations - such as the World Bank,International Monetary Fund (IMF), AsianDevelopment Bank (ADB) and World TradeOrganisation (WTO) - ostensibly aim atpromoting national development and claimto uphold the apparent values andprinciples of the UN, based on equality andhuman rights without any discrimination,their actions have primarily served more tode-legitimise and erode the credibility ofthis international organisation. It has alsoled to undermining of the funding for theUN’s rights-based human rights anddevelopment programmes.

Inter-institutional conflict was clearlyrevealed at the 1993 UN World Conferenceon Human Rights in Vienna, the 1995 WorldSocial Summit in Copenhagen and otherfollow up processes. By this time, thenotion of the collective rights of individuals,peoples and the communities was underattack from the well-packaged globalcorporate framework of economic andtrade liberalisation, privatisation andglobalisation. This will not change untilthere is a well-defined balance of approach,translating the concept of profit intocollective national interests, and notnarrow corporate profit.

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The problem for poor countries likeNepal is that they will be punished heavilyboth economically and politically if they failto comply with the global corporate agendaof development. But no punishment orenforcement measures are allowed in theevent of violations of UN human rights andenvironmental treaty obligations in thepursuit of such corporate-led development.UN obligations are confined within theparameters of member states’ moral andvoluntary obligations and are invoked only ifthere is no conflict with corporate-leddevelopment or the geo-political interestsof donor countries.

The tragedy is that the UN system ofobligations is more strict and supreme informal legal terms compared to those of theprofit-led corporate institutions. However,what prevails today is the rules for profitand real politik. As a result, even nationalcourt systems have abdicated theresponsibility to guarantee and protect theconstitutional rights or international humanrights of citizens. IFIs and MNCs not onlyenjoy all diplomatic privileges but alsoimpunity for the human rights violations andthe economic crimes they commit duringthe course of their operations.

The UN is reduced to a cash-strappedorganization that has to rely on the largesseof tycoons like Bill Gates, who donate asmall share of their corporate profits inreturn for unpublicised but obviousbenefits, giving them a standing superior tothe governments of the developingcountries who make up the majority of theorganisation’s 193 members!

Why the Paris Declaration?

The Paris Declaration on Aid Effectiveness(2005) is no more than a reflection of thedeparture from or destruction of theinternational commitments made during theadoption of the UN Charter (1945), theUniversal Declaration of Human Rights (1948)and numerous other instruments developedsubsequently between the 1950s and 1970s.

These instruments were gradually put incold storage as soon as the rich countriessaw the UN promoting the cause of thethird world countries and their billions ofpoor people.

All the development agencies of the UNwere reoriented to conform to marketprinciples and corporate interests and thusrights-based development was repudiated.The old and strong UN framework that thedeveloping countries desperately need hasbeen replaced instead by the ParisDeclaration, the principles of which arelegally weak, non-binding andunenforceable, with limited moral value. Tocompound matters, even this inadequateframework is routinely flouted by aid-givingcountries and international agencies.

There is no doubt that theeffectiveness of aid can be enhanced if allthe Paris Declaration principles, limitedthough they are, are complied with bythose who are managing, dictating andcontrolling the global development processand its outcomes. Even the Paris Declarationof mutual accountability can serve as ameaningful tool to measure developmenteffectiveness. However, that is not the casetoday because aid and development havebecome the most effective post-colonial,neo-colonial and neo-liberal tool of the dayto continue with the past legacy ofdomination and exploitation in a moreindirect, more faceless and apparently morecivilised manner.1

Past Failures of Aid Effectivenessin Nepal

In Nepal as a country case study, it isimportant to highlight some of thecharacteristics of aid-funded projects andactivities, particularly after the democraticchanges ushered in after the 1990 peoples’movement. Nepal, relatively speaking, had afair constitution that guaranteed most ofthe civil and political rights, and recognisedall the basic economic, social, cultural,environmental and developmental rights

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(although not explicitly as ‘rights’, but atleast as directive principles of the state).They were to be enforced by law wheneverpossible.

However, the new democraticallyelected governments that replaced somethree decades of absolute monarchicaldictatorship were forced by the IFIs and bi-lateral donors, mainly the World Bank, theIMF, the ADB, the US and the UnitedKingdom, to put in place the globallydesigned free-market policies as acondition for receiving aid. As a result,even a Nepali Congress government withthe strongest leftist opposition inparliament and, subsequently, a full-fledgedbut a minority government of theCommunist Party of Nepal (Unified Marxist &Leninist) (or CPN-UML) could not do muchin protecting Nepal’s national interests andpriorities in the economic and developmentsectors.

Any attempts these political groupsmade at formulating pro-people policies,such as the social security provisions forthe elderly, or subsidies in food, drinkingwater and electricity, or grants for localgovernment were heavily criticised by theaid agencies. Whatever the UMLgovernment tried to achieve on the fiscal,economic and developmental frontsprovoked the ire of the liberal parties,leading to the collapse of the governmentin nine months in 1995. All Nepal’s major aidagencies were involved in the politicalmanoeuvring that led to the downfall of thefirst ever elected communist government. Ifthe UML government had been given achance to run the country for some years,the face of Nepal today would have beendrastically different. The country couldhave been spared the 10-year Maoistinsurgency launched by the CommunistParty of Nepal (Maoist) (or CPNM) and theensuing claim that Nepal had become a‘failed state’.

In fact, the same aid agencies and IFIswere mainly responsible for all thefundamental failures of the 15 years (1990-

2005) of the multi-party system. This wasone of the main reasons behind thesystematic growth of the Maoist insurgencyand the successes of the People’s War(1996-2006). Even the World Bank hasrecognised this fact and described theMaoist rebellion as an ideology-basedpolitical movement catalysed by theeconomic and development failures andcorruption of the period.2

Two examples of failed initiatives by aidagencies are part of the developmentfolklore of Nepal. In one instance, the UNDPfailed to eradicate poverty even in the onedistrict, Syangja, that it chose for intensiveintervention. Its programme failed despiteall its vision statements, missions,programmes, staff and funds. There is alsothe curious case of the USAID’sdevelopment project in the Rapti zone.Soon after the completion of this projectwas announced amidst much fanfare, theMaoist uprising began in this very area. Onemain reason is that their developmentapproach and process created morepoverty and intensified the inequalitybetween the ‘haves and haves not’ and,thus, rural youth were ready to join anarmed struggle once they were providedthe visionary Maoist leadership.

Another instance of failed developmentintervention was an international NGO’smodel projects in the districts of Sindhuliand Sindhupalchowk which were withdrawnafter a decade. The INGO not only leftthese two districts in a mess but alsodisturbed the local farming pattern andmethods which they are now correctinggradually.

There were other potentially damaginginterventions that would have had long-termdamaging consequences, but which werestopped by popular struggles. The Arun 3hydroelectric project was one suchinstance. It was to be implemented in 1993with over four dozen lending conditionaltiesof the World Bank that would have madeNepal a virtual donor colony, but which waseventually cancelled in 1995 due to massive

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local and international campaigns offeringbetter alternatives to implement smaller,cheaper and better hydropower projects.3

The ADB-funded Kali Gandaki ‘A’hydroelectric project also had adverselending conditionalities. The Khimti andBhotekoshi hydropower projects funded bythe private sector aid/loan window of theADB and the International FinanceCorporation involved conditionalities thatresulted in power purchase agreementssigned under duress by which inordinatelyhigh electricity tariffs were imposed. Due tothe aggressive stance taken by donors onthe aid/loan conditionalities imposed by theADB on the Melamchi river diversion andKathmandu water privatisation projects,even the Maoists are now afraid of pushingahead with the cancellation of patentlyunnecessary and corrupt projects.

There are other examples of suchprojects which are heavily controlled bydonors, with the national government noteven exercising the right to decide whichprojects should be implemented and whichshould be rejected. There is never anytransparency in the process and decisionsare made unilaterally. Most of the experts,consultants, equipment and raw materialsare procured from outside Nepal, sonational capacity is never developed, andno information is ever furnished to thepublic about any of the details, proceduresand consequences of the project in atimely and meaningful manner. Under suchcircumstances no underdeveloped countrycan ever progress.

The Latest Reality

Despite all the criticism that has beenraised around such flawed projects andpractices, these foreign-aided projectscome with more strings attached than ever.They create more contractual obligationsfor the recipient countries to comply with,thereby raising the financial andenvironmental costs.

One of the main reasons for this is thatIFIs support a contract framework known asFIDIC or Federation Internationale desIndustries et Consultants. Once a project issigned as a FIDIC contract, the recipientcountries or governments are bound to payany amount of additional costs or cost over-runs to the contractors as recommended bythe consultants. Contractors win most ofthe cases that go to internationalcontractual litigations and arbitrations. InNepal project costs have increased up to 70percent, such as in the case of Kali Gandaki‘A’. There are several on-going water supplyand hydro projects in Nepal financed underthe FIDIC framework.

Another aid-financed projectframework is called BOOT, or Build,Operate, Own and Transfer, under whichrecipients as well as local communities losealmost all their sovereign and traditionalrights to co-own the projects andassociated natural resources such as accessto rivers and water for future use or evendaily use in some cases, e.g. the proposedcontroversial West Seti hydroelectricproject.

As this is becoming the standardpractice worldwide to guarantee thehighest amount of profit for corporations,recipient countries are always on the losingside. Although these BOOT projects aresupposed to be beneficial to recipientcountries as they get it back ‘free of cost’at the end, what they really get is thetransfer of ownership of the project afterits useful life is over, typically withunbearable maintenance costs.

No questions are or can be raised asregard disclosure of information to ensuretransparency in such projects. Theopportunities for participation andinvolvement throughout the project cycleare limited.4 Environmental assessments andcompliance with mitigation plans are usuallyfictitious. No effective attempts are made atbenefit sharing with the local beneficiaries.Moreover, such projects have violatedinternational and domestic rules,

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regulations, norms and standards of humanrights and socio-economic justice. Even theordinary and accepted rights of labourersand workers as per international law arenot respected.

In such an aid regime, there is simplyno possibility of establishing mutualaccountability and transparency in aid-funded projects. There is certainly morewillingness on the part of recipients tocomply with such standards or principles,such as the Paris Declaration, but less ornone on the part of the IFIs and majorlending/donor countries or agencies.

A New Political Reality in Nepal:The Rise of the Left

In the case of Nepal, there is now a newdimension that the corporate world of aidand lending has to contend with—theinstitutional rise of radical left-wingpolitics. The recent and first ever electionsto the Constituent Assembly amplydemonstrated that Nepal is overwhelminglya left-wing country, with the Maoists andthe UML alone garnering more than 50percent of the vote. Nepal now hasanother opportunity to correct themistakes of the past, reforming existing aidpolicies and projects that are harmful forNepal, removing the constraints to thegrowth of the country’s trade andentrepreneurship and coming up with acomprehensive socio-economic and fiscaltransformation package addressing theneeds of a broad spectrum of Nepalisociety, in accordance with nationalrequirements, national priorities and localcapacities.

For the donors, the extraordinaryperformance of the Maoists has come as asurprise since they were confident thatthey would win only a small number ofseats. While they have reluctantly comearound to accepting the outcome, they areextremely unhappy with it. Accustomed todictating terms to Nepal for decades, they

have suddenly come face to face with thereality that the people of Nepal wish tomake their own independent decisions. Thedilemma for them is whether to stand bynorms of electoral process or to expresstheir ideological biases beyond theirterritorial jurisdiction or legitimateconcerns. If a new Nepal is to beconsidered a fully sovereign state, then thedonor community will have to abstain frominterfering in its domestic developmentpriorities as has been their wont in thepast.

The lesson that all the donors of Nepalneed to learn immediately is thatdevelopment effectiveness cannot beensured in the country if they persist withtheir old ways. The spirit of welfare-baseddemocratic socialism has been born in Nepaland reactionary forces will find it difficultto suppress it. The usual slogan they chant,“communism is dead,” will not work inNepal. For the majority of rural Nepalis andpoor urbanites, the world of Bush and theUS war on terror simply do not exist andtheir priorities are more focused oneveryday issues of livelihood. The changethat has come about in the Nepali polity isdue not only to the Maoist People’s War andthe UN-monitored peace process but alsoto the desire for everyday transformation.

There are only two options in front ofthe Maoists. Either they will have toconfront the donor community and take astrong stand or they can simply cave in tointernational pressure for the sake ofremaining in power - a suicidal mistake theUML made in 1994-1995. The communist-phobic West must be made to realise thatthe dominant mood in Nepal is anti-neo-liberal and anti-imperialist. The aidcommunity must understand that the powerstructure of the new republic of Nepal willreflect the pluralism of society and must,therefore, pursue a progressive nationalagenda of independence and people-leddevelopment. This is difficult for members ofthe international community in Kathmanduto swallow since they have used their

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financial clout to purchase the loyalty ofthe entrenched upper caste vestedinterests that had been running Nepal.

International Civil Society as Donors

It is relevant also to touch upon the realityof aid that comes through international civilsociety as intermediary donors. Known asinternational non-governmentalorganisations (INGOs), many of theseorganisations channel their aid throughnational or local non-governmentalorganisations (NGOs). Some of these INGOsare not very different from official donors asthey practice the same values ofdevelopment and adopt the same corporatemanagerial style.5

This type of INGO takes money fromtheir governments and establishes its ownbureaucracy and control mechanisms in itsown capital. The mutual agreementbetween such INGOs and their supportinggovernments is that the same philosophy ofdevelopment will be perpetuated throughthe aid disbursed through them. Even thebetter INGOs are not allowed to go beyondthe boundaries fixed by their governmentsas the original donors. There is now a newpractice that development aid cannot begiven to NGOs or civil society organizationsin the south unless they have an INGOpartner in the north – which then becomesa new form of dependency!

As a result, a huge part of the moneyallocated for the south goes towardsoperations, salaries and travel expenses ofINGO officials in the north. The rest of themoney is then invested in developmentthrough national or local NGOs that aremore accountable to their paymasters inthe north and proportionately non-transparent to local society in the actualareas of their operation. These I/NGOs areoften actively engaged in underminingnational states and political organisationsthrough subtle and explicit propaganda inthe areas where they work. In many cases,

local NGOs then hijack the prevailing socialand political agenda and establish family andparty-cadre-based NGO empires.

The main motivation of many of thesecivil society professionals is the easy accessto huge foreign money they have, thecapacity it gives them to build patronagenetworks and the freedom from localcontrol and accountability that they enjoyin the absence of strong laws and aregulatory framework to monitor and ensurethe effectiveness of the development work.The way these I/NGOs work is not verydifferent from the operational style ofprivate corporations and the perks of officeare equally generous.

In Nepal, it is not difficult tounderstand why so many professionals andexperts have left political and socialmovements and joined the NGO world orhave established their own home-basedNGOs for development. These same peopleare paid money by IFIs and I/NGOs forcritiquing their national governments whohave, through aid, been reduced to a stateof supine dependence and acceptance ofinternationally driven development agenda.

Given this situation, it will not besurprising if the political struggle againstthe Maoists or a government led by theMaoists with radical agendas is led by thevarious NGOs in Kathmandu and elsewherein the name of human rights. They will tryto maintain their stranglehold and with thebacking of the international communitybecome focal points for reaction againstany progressive and radical policies initiatedby the new Nepali state. They will almostcertainly also try to undermine all stateagencies responsible for delivering publicservices in the social sector, such asdrinking water, food, electricity andhealthcare.

It is important to understand that NGOsshould never attempt to replace the stateand its agencies and they should focus theircivil society work instead on advocacy.Learning from the lessons of various nationaland regional civil society consultations held

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in Nepal for the Accra process, it wasreaffirmed that NGOs like those involvedwith the International Steering Group (ISG)of the civil society parallel process to theOECD’s HLF on Aid Effectiveness can playthe role of bridging and liaising with thedonor governments and agencies inchanging their development policiesaccording to the needs of recipientgovernments and national developmententities. National or local NGOs can alsofacilitate policy formulation and planning ofdevelopment within the country,particularly in favour of rural communitiesand their civil society organisations.

Conclusions and Recommendations

It is imperative to recognise that aid is atemporary instrument and should not beconverted into a permanent andinstitutionalised mechanism of new forms ofresource extraction, policy distortions,economic exploitation and political controlby international financial institutions andmajor donors. Aid should not be regardedas money given by the poor of the richcountries to the rich of poor countries. Aidmust follow national needs and priorities asproposed by its democratically electedgovernments in a true sense and not bedictated by IFI conditionality, whetherformalised or not. The practice of aidconditionalities, and contractualarrangements such as BOOT and FIDIC insupporting large and destructiveinfrastructure projects must be stoppedand discouraged.

The framework of any aid must bewithin the boundaries and obligations of UNand other multilateral or regional humanrights, environmental and developmentframeworks, including the Paris Declaration.Aid should be directed towards those whoneed it most, should reach recipientcommunities directly and should be spent

in the manner most suitable for the localpublic good. Local government anddevelopment authorities must have asignificant role in governing aid money andthese institutions should be accountable tolocal communities and not beholden to theIFIs. Civil society can play an important rolein ensuring a multi-stakeholder process ofdemocratic decision-making and monitoringdevelopment effectiveness. Priority shouldalso be given to budgetary support andnational capacity-building and not toproject-based approaches.

Developing countries should not beforced to do anything against their nationaland international framework of human rightsand environmental obligations in ensuringequal access and opportunity to all rightsand resources, including aid money, and theguarantee of not only civil and political butalso economic, social, cultural,environmental and developmental rights.The aid community, and IFIs in particular -who play such a dominant role in this -should also refrain from disengaging withgovernments that may differ with them onthe policies of liberalisation, privatisationand globalisation and rather take analternative path of development such asthat which may emerge in Nepal.

Nepal is now ready to provide analternative model of development based onUN human rights principles, the ParisDeclaration and other emerging norms ofthe right to development. However, thequestion remains as to whether the IFIs andaid agencies will allow the dream of a newNepal to be translated into reality, orwhether they will try to make Nepalcontinue to follow the existing pattern ofaid packages or even pull out from thecountry. Furthermore, will Nepal be allowedto govern itself with full sovereignty by itsgiant neighbour and donor, India, whosemain aim is to control the country geo-politically and to utilise its resources?

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Notes

1 For a better aid framework, for example, see,Oliver S. Saasa, Galio C. Gurdian, ZenebeworkeTadesse & Gopal Siwakoti ‘Chintan’, ImprovingEffectiveness of Finnish Development Cooperation— Perspectives From the South, Ministry forForeign Affairs of Finland, 2003.

2 See The World Bank, Nepal Country StrategyPprogramme Document (2004-2007), Report No.26509-NEP, p. 7-9.

3 Gopal Siwakoti ‘Chintan‘, ‘Constraints andChallenges for Building a New Nepal’ inContemporary Perspectives: History and Sociologyof South Asia, Volume 2 Number 1, January - July2008, p. 151-158 (published by Centre forJawaharlal Nehru Studies Jamia Millia Islamia, NewDelhi and Cambridge University Press, India).

4 For details, visit www.wafed-nepal.org,www.bothends.org at Encyclopaedia of

Sustainability under the Integrated River BasinManagement (Successful Campaigning against LargeDams: The shelving of Arun III in Eastern Nepal) andalso www.inspectionpanel.org under Requests forInspection at Nepal: Arun III Proposed Hydroelectricproject and Restructuring of IDA Credit (1994).

5 In Nepal, a western-funded community NGOprofessional can earn more than of a full-timepermanent university professor does. The affluenceof the NGO world is evident also in the kind ofvehicles that they purchase—Sports Utility Vehicle’slike Pajero and Prado. See, Gopal Siwakoti‘Chintan’, Foreign Intervention in Politics throughNGOs: A Case of the Left in Nepal at Juha Vartola,Marko Ulivila, Farhad Hossian & Tek Nath Dhakal(eds), Development NGOs Facing the 21st Century:Perspectives from South Asia, Institute for HumanDevelopment, Kathmandu, pp. 134-143.

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European Commission:Providing the Kind of Budget Support

That is Needed?1

Sasja BökkerinkOxfam International

Introduction

Access to basic health care and educationis a distant dream for millions of people,mostly wome, around the world. Every day,72 million children, mostly girls, do not go toschool. Every minute a women dies duringpregnancy or in childbirth. Every threeseconds a child dies, mainly due to diseasesthat could easily be prevented with accessto a doctor.2

A key factor in this needless deprivationand suffering is the chronic shortage ofhealth workers and teachers in the world.An estimated two million teachers and morethan four million health workers are neededto reach the Millennium Development Goals(MDGs) on health and education.3 Theworkers that are there are often grosslyunderpaid and work in appalling conditions.

Access to basic health and educationare human rights, and governments areresponsible for delivering on these rights.Over the past decade, many poor-countrygovernments have made extraordinaryefforts to increase access to health andeducation. Countries such as Tanzania,Uganda, and Malawi, for example, have madeeducation free, allowing millions of childrento go to school. However, many poor-country governments simply lack theresources by themselves to guaranteeaccess to quality health care and education

for all. External aid is needed to fill the gapsin their budgets for health and education.

Unfortunately, many rich countries notonly fail to provide the level of aid theyhave repeatedly promised to give, they alsofail to provide the right kind of aid. Thisarticle will show that the EuropeanCommission, which currently is the biggestprovider of multilateral aid, does providesome of the kind of aid that is needed.However, it is still far from enough, and itwill need to make some key changes if it isto lay down a challenge to other donors.

The Need for More Budget Support

Today’s aid system is extremely fragmented,with hundreds of different providers of aid.Most of them mainly give project aid, whichis short-term by nature, is outside thegovernment’s discretion, and cannot beused to finance recurrent costs such assalaries for teachers and health workers.This scattered system is highly inefficientand comes with great costs attached. Forexample, every single week the Tanzaniangovernment receives 19 donor missions andevery quarter it writes 2,400 donor reports.4

Furthermore, too much aid is still beingspent on expensive foreign consultants. Forinstance, as much as 70 per cent of aid foreducation is spent on technical assistance.5

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Some of this is clearly necessary and useful,but in some countries 100 days ofconsultancy bills cost cost as much as thesalaries of 100 teachers for a year, or thecost of keeping 5,000 children in school.6

Many donors provide aid only on thecondition that poor-country governmentsimplement specific economic policies,including, for example, the privatisation ofservices and liberalisation measures. Suchconditions, frequently imposed by theWorld Bank and the IMF, can undermineownership as they leave no room for poor-country governments to design their owneconomic policies. They can unnecessarilydelay aid flows and sometimes do moreharm than good, actually increasingpoverty. In Mali, for example, aid from theWorld Bank and the IMF was tied to cottonsector reforms, which according to theWorld Bank itself would actually increasepoverty by more than 4.6 per cent.7

Instead of this kind of aid, poorcountries need more long-term andpredictable aid, which is provided for atleast three years and which becomes partof poor-country governments’ budgets. Thisbudget support – which can be providedeither as general budget support or assector budget support - should be alignedwith national plans to fight poverty,developed in close consultation with civilsociety. Furthermore, it should be de-linkedfrom economic policy conditions andinstead be tied to outcomes related topoverty reduction that do not undermineownership, and which provide space forpoor-country governments to design theirown policies.

There is increased internationalconsensus about the need for enhancedlevels of budget support and othergovernment-based approaches, as forinstance reflected in the Paris Declaration,a set of principles and targets that aim toincrease the quality of aid, which wereagreed by donors and partner countries inParis in 2005 and which will be reviewed ata High Level Meeting in Accra in September2008. Nonetheless, only about 5 per cent of

global aid is currently given as generalbudget support.

Risks of Budget Support

There is a widespread fear that giving aid topoor-country governments is a riskybusiness, and that precious aid money couldbe wasted by corrupt governments.However, as a joint review of general budgetsupport in seven countries shows, budgetsupport is not affected more by the risk ofcorruption or waste than other types ofaid.8 In fact, there is no type of aid that isimmune from the risk of waste; the rationalein providing aid, despite the risks, is thatthe returns in terms of poverty reductionare very high. Choosing to completely avoidthis risk would mean not giving any aid,which is not an option.

This does not imply that all countriesare well placed to receive general budgetsupport. It should only be given togovernments that can demonstrate a strongcommitment to fighting poverty, inparticular to increasing access to healthcare and education for all and to promotinggender equality. It is equally important thatgovernments have reasonable financialsystems to account for the use of resourcesand that they have plans in place tocontinually improve these systems, and inparticular to enhance accountabilitytowards their citizens.

In countries where the overallgovernment environment is more risky, butwhere a particular ministry is functioningwell, it may be more advisable to give sectorbudget support rather than general budgetsupport.

The Positive Impact of Budget Support

Evidence shows that budget support doesindeed help countries to expand access tobasic health and education. A 2005independent review of general budgetsupport in Burkina Faso, Malawi,

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Mozambique, Nicaragua, Rwanda, Uganda,and Viet Nam, commissioned by the OECD,reveals that recipient countries havestepped up pro-poor spending and havescaled up social service delivery.9

Furthermore, a more recent evaluationof the impact of general budget support,published by the UK auditing office inFebruary 2008, demonstrates that, as aresult of general budget support, inRwanda, India, Zambia, and Ethiopia, manymore children go to school and manypeople have gained access to medical help.The study notes that in Rwanda, forexample, budget support has helped thegovernment to increase vital recurrentexpenditures in health, supporting therecruitment, training, and salary costs ofhealth workers.10 In addition, it highlightsthe fact that defence spending in Rwandafell between 2003 and 2007, demonstratingthat budget support does not necessarilylend itself to abuse.

The European Commission’s Budget Support

The European Commission (EC) is the biggestmultilateral provider of aid and a strongproponent of budget support.11 TheEuropean Consensus, a key documentagreed upon in 2005 that lays out thedevelopment vision of the Commission andthe EU member states, declares, forexample, that general and sector budgetsupport are “the preferred aid modalitywhere conditions allow.”12

The Commission’s preference forbudget support is reflected in its spending.Between 2002 and 2005, the EC committed atotal of €4.9bn to budget support, or 18.6per cent of all aid committed. Of this total,€3bn was for general budget support and€1.9bn for sector budget support.13 Africancountries are the biggest recipients of theCommission’s general budget support, whilesector budget support is focused more inthe other regions. A positive feature of theCommission’s general budget support is that

the Commission links it to improvements inhealth care and education.

The Commission provides the main shareof its budget support on the condition thata country meets three general eligibilitycriteria: it should have a poverty reductionplan; it should work towards improvingpublic finance management (PFM); and itshould aim for macro-economic stability.The remainder of the funds are disbursedaccording to the country’s performanceagainst specific indictors on health care,education, and PFM.

Research by Oxfam and the EuropeanNetwork on Debt and Development(Eurodad), based on general budget supportagreements with 11 different Africancountries, shows that each agreementincludes performance indicators on health,education, and PFM. Overall, over half ofthe performance indicators tied to theeleven agreements call for directimprovements in poor people’s health andeducation, in particular for girls andwomen.

To be more precise, health indicators,such as the rate of deliveries attended byskilled health workers, make up 29% of thetotal. Education indicators, such as thenumber of girls going to school, make upanother 23%. In addition, 11% of theindicators call for increases in the nationalbudgets for health and education. Another28% of indicators are PFM indicators.

Sometimes the agreements includeother indicators, such as roads, water, andprivate sector development. Veryoccasionally, these can be deemedsomewhat intrusive. In Ethiopia, forinstance, the EC required the introductionof a competition law, application foraccession to the World Trade Organisation,and revision of urban land lease laws.14

By linking its budget support primarilyto outcomes in health and education as wellas improvements in PFM, the ECdistinguishes itself from other donors suchas the World Bank. Research by Eurodadbased on 32 agreements in 16 differentcountries shows that a quarter of the World

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Bank’s conditions consist of specific andsensitive economic policy conditions, suchas privatisation and liberalisation.15 Bymoving away from specific economic policyconditions, and instead often focusing ongender-specific outcomes in health careand education, the Commission sets apositive example to other providers ofbudget support.

Furthermore, evidence suggests thatthe EC’s budget support does help to makea change in poor people’s lives. Governmentspending on education has increased bynearly a third (31 per cent) in eight of thecountries that receive some of the largestamounts of the Commission’s general budgetsupport: Ghana, Kenya, Madagascar, Mali,Mozambique, Niger, Rwanda, and Zambia. Inall but one country (Rwanda), this hasresulted in an increase in the number ofchildren enrolled in primary school. InMadagascar, the proportion of childrenenrolled in primary school increased from69 per cent in 2001–02 to 92 per cent in2005. Of course the Commission is notexclusively responsible for these positiveresults, but the evidence does show thatwhere it is giving large amounts of budgetsupport, headway is being made in reducingpoverty.

Longer-Term Commitments

Another advantage of the EC’s budgetsupport is that it is fairly long-term. Atpresent, it is usually provided for a periodof three years. Furthermore, theCommission is working on a proposal for‘MDG contracts’ which it aims to introducein 2008 (see box). By providing generalbudget support for a period of six years,with just one mid-term assessment, thisambitious proposal could be a major stepforward in terms of increasing long-termpredictability. It is a proposal that EuropeanUnion member states should support.

On-Going Challenges

But while there are several positive aspectsto the EC’s budget support, it is still farfrom adequate. The first main problem isthat it is still not fully free from harmfulconditions. It is particulary problematic that– like most other providers of aid – theCommission generally only gives budgetsupport if countries have an IMF programmein place. IMF programmes commonly have aseries of quantitative conditions, whichinsist that poor-country governmentsachieve a series of targets such as reducinginflation to single digits, reducing thebudget deficit, imposing a ceiling on thewages paid to public servants, or committingto use aid to build up internationalreserves.

While these aims may not all be wrongin themselves, the IMF approach tends tobe far too conservative and to subsequentlyact as a barrier to more ambitious spendingby governments on poverty reduction. Thiscan be counterproductive. Recentindependent assessments have shown, forexample, that much of the aid increases tosome African countries have been ploughedinto increasing international reserves at thebehest of IMF programmes, meaning thatpoverty spending has not increased as muchas it could have done.16

The second main problem is that toooften the Commission’s aid comes latebecause of its own burdensomebureaucratic procedures. In fact, accordingto a 2005 Special Programme for Africareview, as many as 29 per cent of thedelayed disbursements are due to theCommission’s own internal procedures.Although this is a major improvementcompared with 2004 – when as many as 40per cent of the delays were related to ECprocedures – it is still worrying. Whileacknowledging that in the past five yearsthe EC has shown ‘significant improvementin financial management, contracting andprocessing of Commission paper work’, apeer review of EC aid also stresses thatpartner country governments feel that the

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Commission should simplify proceduresfurther still and accelerate programmeimplementation.17

The third main problem with theCommission’s aid is that it suffers from asevere lack of transparency and genuineownership by poor countries. The EC’sbudget support is usually well aligned withnational poverty reduction strategies.However, these often lack true democraticownership. The EC could do more to ensurethat poverty reduction strategies reflectwhat citizens want and more generally, toensure that citizens are able to hold theirgovernment to account. Through parliamentand civil society organisations (CSOs),

citizens should be able to influence thedesign of national policies and the budget,and they should be able to monitor whetherthe government’s spending is in line withthe promises made. The EC can support thisby including indicators in budgetagreements calling for improved downwardaccountability and by providing financialsupport to civil society organisations.

At another level, the Commission shoulddo more to make the dialogue on budgetsupport more inclusive. At present,involvement of CSOs or parliamentarians inthe dialogue on sector and budget supportis a rarity.18 In Malawi, for example, CSOs aresometimes invited to meetings of the joint

Box 1: Key Features of MDG Contracts

The details of the proposal are not decided yet. The likely features of MDG contractswill be:

• Funds will be committed for six years, instead of the usual three years.

• The main share of the funds will be disbursed on the condition that there is nobreach in the eligibility criteria; the remainder will be largely tied to performancecriteria on MDGs and public finance management.

• Annual payments for the first three years will be fixed; annual payments for thenext three-year period will be set after a mid-term review of performance withrespect to MDG-related indicators.

• There will be annual monitoring of performance; under-performance will notimmediately lead to cuts in funding (as is currently the case) but rather to areinforced dialogue.

• If the country is not performing well on the eligibility criteria, this may lead to atemporary withholding of a small part of the annual allocation.

• In addition to the regular entry conditions, there are three further eligibilitycriteria: countries must have a good track record on implementing budget supportover three years; they must show a commitment to monitoring and achieving theMDGs; and there should be an active donor co-ordination mechanism to supportperformance review and dialogue.

• Up to ten African countries are likely to be eligible.

Source: EC (2008) ‘The MDG Contract. An Approach for Longer Term and MorePredictable General Budget Support’.

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donor budget support group, whichincludes the European Commission, but notto key meetings, and often too late.19

Contributing to this lack of involvement isthe fact that CSOs often have limitedaccess to information. It is not commonpractice for official documents, such asbudget agreements, to be publicly available.

There are exceptions. In Ghana, forinstance, the donor community has createda working group to promote a deeperinvolvement of civil society in the budgetsupport process. In Zambia, civil society hasbeen involved in reviews of the budgetsupport programme.20 Such examples areencouraging. The next step is for theCommission to embark on a more systematicapproach by establishing a more formalmechanism to ensure the involvement ofcivil society and local members ofparliament in the dialogue on sector andbudget support.

In addition, in the case of generalbudget support, the EC should involve theline ministries in its dialogue, rather thanonly inviting the Finance Minister as is thecommon practice.

Recommendations

Considering the need for increased levels ofbudget support based on social sectoroutcomes, the EC is an important player ininternational development. In particular, itsambitious proposal for MDG contracts couldconstitute a positive challenge to otherdonors, suggesting the provision of budgetsupport tied to social sector outcomes fora period of six years, which goes far beyondcurrent common practice.

However, if the Commission is to showleadership and to challenge other donorsto improve the quality and quantity of theiraid, it must implement some key changes.

The European Commission should:

• Continue to increase spending onbudget support, including bysignificantly stepping up sectorbudget support for health andeducation, in particular to Africancountries.

• Continue to tie budget support togender-specific social sectoroutcomes, while also addingoutcomes that promote women’scivil rights.

• Continue to tie its general budgetsupport agreements to targetedincreases in spending on health andeducation. These targets shouldreflect an ambition to reach theAbuja Declaration target ofspending 15 per cent of a nationalbudget on health and the GlobalCampaign for Educationrecommendation to spend 20% of abudget on education.

• Delink its aid from the approval ofthe IMF and at the same time putpressure on the IMF, together withthe other major budget supportdonors, to come up in its advicewith more flexible fiscal targets andmore ambitious spending scenarios.In countries that have achievedmacroeconomic stability, theCommission should work with otherdonors to see a rapid exit from thecountry by the IMF.

• Reduce unnecessary delays causedby cumbersome bureaucraticprocedures to a maximum of 5 percent of the total by 2010.

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• Make its budget support morepredictable by implementing MDGcontracts and expanding theprinciples of MDG contracts tomore countries and to sectorbudget support.

• Ensure the involvement of civilsociety, members of parliament, andline ministries in all steps of thebudget support process, includingthe design, monitoring, and reviewof the programme.

• Adopt a policy of automaticdisclosure of relevant information,with a strictly limited regime ofexceptions.

• Strengthen the capacity of civil-society organisations, localgovernment bodies and parliamentsto engage in national policydevelopment and budget processes.

European Union member states must:

• Support the plans of the EuropeanCommission to implement itsproposed MDG contracts, includingby providing financial support.

• Increase the amounts they givebilaterally as budget support.

• Use their collective voice on theboard of the IMF to push for theinstitution to leave countries thatare stable at the macroeconomiclevel, and in remaining countries topress for more flexible fiscalframeworks.

• Use their collective voice on theboard of the World Bank to pushfor it to adopt similar processes tothe Commission’s best practice.

• Increase expenditures on health to15 per cent of the national budget(as recommended by the AbujaDeclaration) and expenditures oneducation to 20 per cent of thenational budget (as recommendedby the Global Campaign forEducation).

• Tackle corruption and guaranteefull transparency andaccountability for governmentexpenditure by ensuring genuineparticipation of local governmentbodies, parliamentarians, and CSOsin the development of nationalpoverty reduction policies andenable parliament and civil societyto monitor and influence thenational budget process andgovernment spending.

Notes

1 This article summarises the main findings of apaper by Oxfam International: Fast Forward. Howthe European Commission can take the lead inproviding high quality aid for education and health.Oxfam International briefing paper, April 2008.

2 UNICEF. (2008). State of the world’s children. p.1.

3 Oxfam. (2007). Paying for people. OxfamInternational briefing paper.

4 Eurodad. (2007, September). Linking budgetanalysis with aid advocacy: How civil societygroups can monitor donor budget support.

5 World Bank. (2005). Global monitoring report2005. IBRD/World Bank. p.93.

6 World Bank. (2006). Global monitoring report2006. IBRD/World Bank. p.60.

7 Oxfam. (2006). op.cit.

8 IDD and Associates. (2006). op. cit., p.S14.

9 IDD and Associates. (2006). Evaluation of generalbudget support: Synthesis report. OECD/DAC.Birmingham, UK.

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10 National Audit Office. (2008). DFID Providing BudgetSupport to Developing Countries. Report by theController and Auditor General. HC 6 Session 2007–08, 8 February 2008. The report notes thatutilisation of health services rose from 0.25outpatient attendances per person per year in2001 to 0.59 by 2006.

11 IDA. (2007, February). Aid architecture: Anoverview of the main trends In officialdevelopment assistance flows. p.4.

12 EEPA. (2008). Administering aid differently: Areview of the European Commission’s generalbudget support. p.21.

13 Beynon, J. (2006). Budget support. EC perspectivesand the results-priented approach. Paperpresented during the European Commission OFSEconference held on December 5, 2006.

14 Financing agreement between the EuropeanCommission and the Federal Republic of Ethiopia,Poverty Reduction Budget Support II (ET/7200/005),EDF IX.

15 Eurodad. (2007, November). Untying the knots.How the World Bank is failing to deliver realchange on conditionality.

16 Independent Evaluation Office of the IMF. (2007,March). The IMF and aid to Sub-Saharan Africa.

17 OECD. (2007). European Community DevelopmentAssistance Committee peer review. p.18, 72.

18 EEPA. (2008). pp.47-48; CIDSE. (2007). p.42.

19 Interview with Andrew Kumbatira, MalawiEconomic Justice Network.

20 EEPA. (2008). pp.47-48, 58.

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