IMF's conditionalities

The uncertainty seems to be over, almost. We are going to the International Monetary Fund (IMF) by end March for a new programme, as according to the federal finance minister Asad Umar the differences between the lender of the last resort and the perpetual borrower over, presumably, the Fund conditionalities have narrowed down considerably.
This is, therefore, what is called the pre-negotiation stage when normally the two negotiating teams finalise their respective cases. In our case we have invariably entered this stage like a sacrificial lamb, prepared to sacrifice even our economic sovereignty in return for some quick balance of payment support, no matter what the attached conditionalities are.
Hopefully, this time, it would not be a repeat of the past exercises, as the PTI-led coalition government has taken more than enough time making up its mind whether or not to go to the Fund. Still, one would like our negotiating team to give a last minute once over to its case in hand in its proper depth. It is in this context that one would like the negotiating team to take time out to do a close reading of a recently published technical paper on the subject. Since it is a technical work, it would be appropriate if the Planning Commission's technical manpower is given the task to go through it (The world system and hollowing out of state capacity: how structural adjustment programmes affect bureaucratic quality in developing countries) with fine toothcomb.
One can get an idea about the thrust of the paper from its abstract: The administrative ability of the state to deliver effective policy is essential for economic development. While sociologists have long devoted attention to domestic forces underpinning state capacity, the authors focus on world system pressures from Western-dominated international organisations. Scrutinising policy reforms mandated by the International Monetary Fund (IMF), the authors argue that "structural conditions" exert deleterious effects on bureaucratic quality by increasing the risk of bureaucrats falling prey to special interests and narrowing potential policy instruments available to them. The authors test these arguments using a new data set on IMF conditionality from 1985 to 2014. Their analysis shows that structural conditions-especially conditions on privatisation, price deregulation, and public sector employment-reduce bureaucratic quality. Using instrumentation techniques, the authors also discount the possibility that the relationship is driven by the IMF imposing structural conditions precisely in countries with low bureaucratic quality. A careful reconsideration of IMF policy reforms is therefore required to avoid undermining local institutions. Structural conditions imposed on developing countries by the International Monetary Fund undermine their 'state capacity' for economic development, finds the study led at Cambridge Judge Business School.
The study, published in the American Journal of Sociology, finds that conditions on privatisation, price deregulation and (to a lesser extent) public sector employment flexibility "have a significantly negative effect on bureaucratic quality" - increasing the risk of bureaucrats falling prey to special interests and narrowing available policy instruments.
In addition, companies in developing countries experience more bribery by public officials when they face more structural conditions under IMF programmes, says the study, which is based on data from 141 developing countries over a 30-year period.
"Our study offers important lessons for all international organisations to consider," says the study. "We now know which elements of IMF programmes are counterproductive and misguided" - those structural conditions that seek to "rapidly overhaul" domestic institutions, reducing the ability to recruit, train and retain qualified staff.
The paper was co-authored by Dr. Bernhard Reinsberg of the University of Cambridge; Dr. Alexander Kentikelenis of Bocconi University; Dr. Thomas Stubbs of Royal Holloway, University of London; and Professor Lawrence King of the University of Massachusetts.
"Much previous research on the socio-economic impact of IMF programmes has focused on economic growth, but it did not examine how such programmes transform state institutions," says Dr Reinsberg. "This is surprising, given the importance of able states to economic development."
The paper argues the IMF has an important role in helping countries overcome balance-of-payment problems, but it needs "fundamental reforms" to avoid undermining local institutions. The IMF contends that its practice of mandating far-reaching policy changes as a condition of loans is necessary to secure macroeconomic stability, improve the business climate, foster job creation and support medium-term growth.
While previous studies had examined domestic forces that undermine state capacity for economic development, the authors focus instead on outside Western-dominated international organisations - and concentrate on "structural" rather than less intrusive "stabilisation" conditions imposed by the IMF. "To our knowledge, we present the first systematic inquiry into the effects of IMF conditionality on state capacity," the article says.
The study breaks down data into three-year periods between 1985 and 2014 to compare how bureaucratic quality evolves in the medium term in countries under an IMF programme under different conditionality profiles. The research uses the International Country Risk Guide to measure bureaucratic quality and the Business Environment and Enterprise Performance Surveys to assess bribery-related issues.
Bernhard Reinsberg's research broadly covers the political economy of international organisations - such as the World Bank and the International Monetary Fund - and seeks to contribute to a better understanding of what drives their behaviour and when their development interventions are effective.
One line of his research examines the heterogeneous impacts of different policy conditions in International Monetary Fund lending programmes on state capacity and other socio-political outcomes.
The paper under discussion focuses on the activities of the International Monetary Fund (IMF)-one of the world's most powerful international organisations-which has been able to set the broad parameters of economic reform in the developing world. This power stems from the organisation's systemic role in upholding global financial stability, which endows it with extensive resources and an unrivaled position as a global lender of last resort.
Within this framework, powerful inter-governmental organizations-like the European Union or the World Bank-are central actors that undergird and perpetuate the dependency of "peripheral" nations (developing countries) on the capitalist "core". To do so, these organisations make their financial or technical support to developing countries conditional on the introduction of certain reforms that-explicitly or implicitly-favour the interests of the West and weaken bureaucratic quality.
The IMF as an "agent of neo-liberalism" represents an international force that exerts direct policy pressure toward unleashing market forces in developing countries. The earliest studies in this tradition argued that the economic penetration of developing countries by advanced countries-in the form of exploitative trade and investments in natural resources-stunted economic development in the former through transfers in surplus to the latter. Indeed, since potentially taxable surpluses shifted to advanced nations through exploitative relationships, peripheral states were consigned to perennially limited public revenues to invest in building up capable bureaucracies.
In this context, donor states provide aid to increase the likelihood that governments of the periphery will tolerate the continuation of outflows of private profits and interest on past debts. Such aid may support governments by providing a short-term solution to economic difficulties, but in the long term it perpetuates dependence on continued foreign aid flows. Countries with greater foreign aid revenue are less reliant on tax revenues drawn from citizens and thus face less domestic pressure to maintain popular legitimacy through investment in effective public institutions.
More recent perspectives document how international financial institutions (IFIs) - the IMF, the World Bank, and regional development banks - deepen core-periphery dependency relations. These studies posit that IFIs inhibit economic development by siphoning surplus from developing countries in the form of debt and interest payments on loans. Further, the practice of conditionality gives creditors - the high-income countries controlling IFI operations - unparalleled leverage to alter the political economies of borrowing countries in the interests of the West. Most conspicuously, Western business and financial interests have benefited from securing contracts and expanding their access to developing countries implementing structural adjustment programs. This evidence is in line with the expectations of world systems theory: the conditionalities of the IMF and development banks entrench developing countries within the periphery.