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Conference in Tokyo: Asian policymakers examine country ownership and effectiveness of IMF conditionality

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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Tokyo conference on IMF conditionality

Participants at the Tokyo conference agreed that conditionality needed to ensure that IMF loans are used for the intended purpose and lead to stronger growth and sounder finances in the borrowing country. Conditionality is a two-sided commitment: it gives the borrowing country assurance that funds will be available as long as it meets agreed conditions, and it gives the IMF assurance that lending is achieving the desired purpose and that funds will be repaid.

In theory, conditionality can also serve a number of subsidiary functions, according to Japan’s Deputy Vice Minister of Finance for International Affairs Haruhiko Kuroda and Hitotsubashi University’s Takatoshi Ito. When political gridlock blocks adjustment and reform efforts, the IMF can act as an arbitrator and move the reform process ahead through its conditionality. Moreover, the IMF seal of approval can give private investors assurances that reforms will be carried out. Thus, conditionality can help draw private capital inflows at an early stage. And, finally, many IMF programs are put in place during crises, which tend to offer a window of opportunity during which reforms, including some not critical to addressing the immediate crisis, can be carried out under the banner of IMF conditionality.

Some problems

In the view of many participants, however, conditionality in practice does not always confer the benefits claimed for it. Conditions perceived to be so stringent that they are unlikely to be implemented can undercut the credibility of IMF programs and hamper a program’s ability to serve as a “catalyst” or “window of opportunity.” These failures were apparent during the Asian crisis, according to Ito. Many viewed IMF conditionality during the Asian crisis, he said, as akin to asking a sick man to demonstrate his fitness by carrying out a tough regimen of exercise. It reminded Ito of the aging Chairman Mao taking his famous swim in the Yangtze River in the hope of convincing his people that he was not as weak as they believed.

Another problem with conditionality, according to Kuroda and Ruogo Li, Assistant Governor of the People’s Bank of China, is that many structural reforms take a long time to carry out, while the duration of a typical IMF program is only a few years. Reform of the U.S. auto industry, following the difficulties it encountered in the 1970s, took a couple of decades, Li noted, not a couple of years. In contrast, IMF programs expect “too much, too soon” from borrowing countries. The compressed time-frame often does not allow for adequate consultation of various groups in society or for careful consideration of alternate reform strategies.

Moreover, according to Li, IMF programs are not flexible enough to make room for the kind of gradualist structural reform strategy that China has pursued to great benefit. Li said that in implementing its conditionality, the IMF should not be “too rigid,” heeding Deng Xiaoping’s advice that it does not matter if the cat is black or white, as long as it catches mice.

Yoko Kitazawa of the Japan Network on Debt and Poverty questioned the need for conditionality during the Asian crisis. It was primarily a liquidity crisis, she said, and could have been resolved through the provision of credit.

Case histories

The case histories that participants presented tended to take the view that conditionality does not always deliver promised benefits. Amando Tetangco, Deputy Governor of the Philippine Central Bank, noted that with over 20 IMF programs in the past 40 years, the Philippines was a “veteran” in negotiations with the IMF. While acknowledging the overall benefits of IMF assistance and conditionality, particularly in making the Philippines more resilient to the Asian crisis, Tetangco said that the sheer number of conditions in some programs had been overwhelming. The 1998 program had over 100 conditions in 8 areas of structural reforms. Some conditions, such as the passage of a bill reforming the country’s power sector, dealt with critically needed structural reforms. In his view, other conditions, such as the strengthening of securities laws, were not essential to helping the Philippines through the Asian crisis and were, in any event, likely better handled by the multilateral development banks.

Indonesia’s Boediono, currently an advisor to the Coordinating Agency for Poverty Reduction, was a key member of the team that negotiated the country’s programs with the IMF during the Asian crisis. He thought it “quite possible” things might have turned out differently in Indonesia had conditionality in the initial IMF programs been confined to areas central to dealing with the immediate crisis. Other conditions, such as dismantling the clove monopoly and rationalizing the national car and airplane industries could have been postponed, said Boediono, “until our head was above water.”

Hafiz Pasha, of the United Nations Development Program, was Pakistan’s Finance Minister when an IMF Enhanced Structural Adjustment Facility arrangement was put in place in 1997. Pasha observed that while there were some achievements under it, the program did not fully take into account the lack of institutional capacity to implement aspects of the program, such as the contemplated ambitious changes in tax administration. Moreover, he said, the IMF puts great faith in ownership of programs by “bureaucrats and technocrats,” but it is ownership by the people, particularly those with political roots, that is critical. He added that because many countries choose to negotiate with the IMF under a “cloak of secrecy,” suspicion is created among broad segments of the populace.

According to Mohamed Ariff, Executive Director of the Malaysian Institute of Economic Research, often it is not the conditions themselves that provoke conflict but the manner in which they are imposed. Many perceive the conditions as “externally imposed” and put in place “when one’s pride is already hurt” by a crisis. A package arrived at through consensus building and broad consultation would likely be more durable than one achieved through IMF “arm-twisting” of a few members of the country’s government. Noriyuki Suzuki of the International Confederation of Free Trade Unions called for labor union and civil society participation in formulating IMF-supported programs. The Asian Development Bank’s Shoji Nishimoto emphasized the need to involve other international financial institutions in areas of structural reform where the IMF lacked the needed expertise.

Defense of conditionality

Not everyone was a critic of conditionality. Hubert Neiss, Chair for Asia at Deutsche Bank and the Director of the IMF’s Asia and Pacific Department during the Asian crisis, mounted a vigorous defense of the IMF-supported programs put together in Asia during recent and earlier crises. A comprehensive program needs to be put together when a crisis erupts, Neiss explained, because a crisis always reflects “multidimensional” problems. Recovery thus requires simultaneous measures in many different areas. Moreover, private markets and the international community start to focus on all the deficiencies of a country’s economic policies once a crisis emerges. Thus, a strategy of “stabilize first, reform later” does not help restore market confidence or ensure support from official lenders.

Neiss also provided examples where IMF-supported programs had provided a window of opportunity to usher in reforms that aided countries’ longer-term prospects. In the Philippines, the dismantling of sugar and coconut monopolies under an IMF-supported program in 1983–84 is now applauded as a useful structural reform. The Indian government initiated broad structural reforms amid the country’s 1991 balance of payments crisis, and these are now credited with setting the stage for a much-improved growth performance. Even in Indonesia during the Asian crisis, the strong implementation of the program for a while under the Habibie government showed that comprehensive programs can work if the political leadership stands behind them.

Korea’s Deputy Finance Minister for International Affairs Yong-Duk Kim noted that his country’s experience during the Asian crisis also represented a “successful IMF case”—one in which a comprehensive economic program was put in place during the crisis. He attributed that success to President Kim-Dae Jung’s strong political leadership and a concerted attempt to build national consensus by keeping groups such as labor unions apprised of negotiations with the IMF. And, he noted, the program dealt appropriately with the factors that had triggered the crisis.

IMF response

While in listening mode for the most part, IMF officials often interjected to respond to the views of Asian policymakers. Jack Boorman, Director of the IMF’s Policy Development and Review Department, acknowledged that the perception of a large number of conditions attached to IMF programs “has caught the public imagination” and led to a clamor for a shorter list. But sometimes appearances deceive: introducing a value-added tax (VAT), for instance, involves dozens of separate steps, each of which is treated under IMF programs as a separate condition. Listing the introduction of the VAT as a single condition would shorten the list but not change the underlying conditionality.

And not every structural reform takes time, Boorman suggested; some reforms can be accomplished in a few years, and perhaps it is these that should be carried out under the window of opportunity offered by a crisis and the associated IMF-supported program. Boorman was somewhat skeptical about the ability to push through very strong reform programs in peaceful times through IMF surveillance or technical assistance or under the influence of peer pressure. The inability of these mechanisms to foster reforms was one reason behind the expansion of IMF conditionality in the first place.

While acknowledging the need for broad involvement of society in the negotiations leading to an economic program, Boorman and IMF First Deputy Managing Director Stanley Fischer cautioned that ownership of a program cannot be universal. Boorman noted that the process of reforms inevitably “generates winners and losers, some unexpectedly” so there will always be opposition to reforms from groups that expect to be, or end up being, hurt. Fischer added that some civil society groups may lack strong credentials as democratic or representative groups; it is unclear that involving them in negotiations would lead to better or more popular programs.

Fischer and Boorman also questioned whether a strategy of “stabilize first, reform later” was realistic. If private capital is fleeing the country during a crisis because of a lack of reforms in some critical areas, then carrying out those reforms becomes an essential part of the stabilization process. Boorman noted that markets sometimes expect a country to carry out oft-postponed reforms during the crisis because the feeling is: “If they don’t do it now, when will they do it?”

In his summing up, Fischer stated that IMF conditionality, while indispensable, should focus on the steps needed to restore macroeconomic stability and market confidence. Some conditions, such as targets on fiscal deficits, clearly met this criterion, whereas others might be the subject of some dispute. The requirements for restoring market confidence, he acknowledged, were sometimes difficult to identify before the fact. But even if disagreements persist about the appropriateness of conditionality on structural policies, the IMF could not walk away from structural issues altogether. For instance, because the IMF should steer clear of lending to corrupt governments, it cannot avoid using governance-related conditions. Fischer suggested that, despite differences of opinion on structural conditionality, a practical way to move ahead would be to put the burden of proof on the IMF to justify why a particular structural measure was critical to the goals of the program.

Fischer noted that “results-based conditionality” (conditionality on outcomes rather than on policy instruments) deserved further examination. It could help avoid micromanagement by the IMF and give the governments greater flexibility in exploring alternate policies to achieve agreed goals, but by moving the locus of conditionality away from variables directly controlled by governments, would reduce the assurance provided to governments that they would continue to receive funding if they pursued agreed policies.

Fischer agreed that there was an “element of justification” in the charge that some IMF-supported programs attempt too much, too soon. Hence the IMF ought to take more time to negotiate programs. Moreover, the IMF and governments should try harder to line up public support behind the program. But he cautioned that despite these measures to improve the “ownership” of IMF-supported programs, they might well remain unpopular because they often involve taking painful steps that governments have long postponed. It is only when the benefits of the programs become apparent that they become popular: “Programs will be owned if they succeed” said Fischer.

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