Response to "Distilling the Lessons from the ESAF Reviews"

The Halifax Initiative response to the recommendations found in Distilling the Lessons from the ESAF Reviews

August 1998

The Halifax Initiative welcomes the opportunity to comment on the paper Distilling the Lessons from the ESAF Reviews, and the recommendations of the external review of ESAF. The effort to open the process to public input is commendable, and a positive step for the institution. The Fund is to be congratulated for undertaking the external review of ESAF, which was independent, highly credible and reflected many of our concerns in depth. The recommendations of the external review panel, and the discussions that have followed, indicate a recognition, on the part of the Fund, of the importance of a participatory process around an appropriate set of programs.

Unfortunately, the recommendations found in Distilling the Lessons from the ESAF Reviews do not indicate that the Fund is willing to adjust its policy process sufficiently to ensure that (1) poverty alleviation is fully incorporated as a program goal, and (2) the policy process is democratized, to ensure informed popular participation in decision making. The Halifax Initiative is concerned that the IMF response to the external review has been a defensive one, asserting an existing, rigid ideology, which is non-inclusive and non-participatory.

We expect that the Fund will actively encourage input on the structural adjustment policy review process in the weeks and months to come. We also trust that what is learned in these discussions, and what will come from the forthcoming case studies, will be supplemented in a real way with what comes of the SAPRI process in which the World Bank is currently taking part.

We look forward to a timetable for implementation of the recommendations of the external review, and appropriate monitoring and evaluation mechanisms to ensure full implementation.

General observations

The importance of the recognition by the International Monetary Fund that the question of "ownership" is critical and essential cannot be overstated. This recognition is pivotal to the fundamental re-evaluation of the relationship between the Fund, recipient country governments, and in-country civil society.

This is a big step forward, and one that is encouraged by the Halifax Initiative, along with those other aspects of the democratization of the IFI policy process that are being promoted: access to information and popular participation in decision making.

The unsupportable argument that poverty alleviation will result from economic growth alone, and this growth is best obtained through adherence to structural adjustment programs, affects much of the discussion on improvements to ESAF:

"Our joint objective continues to be to target the ESAF with the objective of improving the living conditions in the poorest countries to better integrate them into the world economy based on a viable growth and development process in which all groups of the population can participate." - Bernd Esdar, German ED, at the IMF press conference on the external evaluation, 13 March 1998

"A consensus seems to be emerging... that adjustment leads to growth and that growth is good for both poverty alleviation and distribution."- Prof. Jan Willem Gunning, member of the external review panel of experts. It is astonishing that these arguments are still made, given the context of a widening gap between rich and poor. Poverty alleviation and equitable distribution are issues of justice, and do not derive directly from the workings of the market.

Discussions are limited by the assumption that the only suitable development processes are those located within parameters that have been determined by the Fund. The extent to which countries can design alternative programs, for example, would be restricted by IMF-defined delineations. Similarly, the extent to which programs will emerge out of a national consensus or ownership by the people of a country is regarded as secondary to achievement of objectives, which the Fund regards as its area of prerogative.

The Halifax Initiative continues to be dismayed that the IMF contribution to a solution to the debt problem is via ESAF, and regards this as an unsuitable instrument. HIPC countries need serious debt cancellation, and highly concessional funding with as few strings attached as possible, so they can get on the road to recovery.

As to the social impact of ESAF, broader considerations beyond economic indicators like income disparity and social spending, although these are important of course, are necessary. These would include ensuring that structural adjustment programs do not have a negative social impact in terms of universal standards of human rights, including labour rights. Any assessment of the impact of adjustment on people needs to include an evaluation of how macroeconomic policy prescriptions negatively affect the environment, and the health and well-being of present and future generations. These aspects are addressed to some extent in the Halifax Initiative’s response to specific points raised by the external evaluation of ESAF and in Distilling the Lessons from the ESAF Reviews .

Positive aspects

The Halifax Initiative welcomes the apparent openness on the part of the IMF to make positive changes in the structural adjustment policy process. Several specific considerations that were discussed in Distilling the Lessons from the ESAF Reviews are desirable improvements, and we look forward to seeing these become part of an improved structural adjustment policy process:

Recommendation: There is recognition of the need to anchor programs in national consensus and ownership, and the loss of control felt by many countries over the negotiation process.

In this context, the points of consideration include:

• There is support on issues of ownership, and the need for national consensus.
• Ownership of a program would be fostered by 1) widening the policy discussions within governments 2) considering alternative policy mixes and 3) building national consensus for reform.
• There is acceptance that delay in program implementation may be desirable if ownership is to be encouraged.
• Policy Framework Papers (and similar documents) and letters of intent should be published.

Recommendation: A country needs to define its own development agenda, develop a national consensus on this, and continue to educate about the objectives.

Recommendation: Programs could be designed through broad "economic management teams", not just with finance ministers but other members of government

Response:

The Halifax Initiative welcomes the acceptance of these recommendations, and looks forward to their timely implementation.

Problem areas

Several recommendations that came out of the external review were positive, but have not been received with enthusiasm at the IMF. Recommendations of concern, and the Halifax Initiative response are here outlined.

Recommendation: The negotiation framework should be flexible.

Response:

The Fund’s reaction to the suggestion that the institution is perceived to be inflexible is extraordinarily cautious. A reference appears only once in the paper on lessons learned:

"The scope for such flexibility would need to be reasonably clearly defined ex-ante in briefing papers, so that program objectives would not be diluted, and the principle of uniformity of treatment maintained. Attempts to impart greater flexibility need also to guard against the risk that understandings reached between missions and the authorities are subject to significant revisions at headquarters, a process that would be deleterious to national ownership. This risk can be minimized through good communication between headquarters and missions in the field."

The Halifax Initiative regards as inadequate the response thus far to the concern that the IMF is perceived to be inflexible. The recommendation that the framework be made flexible should be taken seriously if the Fund is to be at all successful in improving its approach to fostering ownership in policy formation.

Recommendation: The IMF should be open to alternate paths to recovery.

Response:

The response that greater flexibility "should be afforded missions to agree with the authorities on alternative policy mixes that would be consistent with an appropriate set of policy objectives" is inadequate. Although there is explicit recognition that alternative paths to the same outcome can exist, there is the caveat that program objectives should not be diluted.

The Halifax Initiative considers that "alternate paths to recovery" include the designation of program objectives. There should be much greater scope for negotiation in program design beyond that which would be possible if objectives are predetermined by the Fund.

Recommendation: Program designers should encourage public debate, including civil society organizations

Response:

The Halifax Initiative agrees that ownership by the national government is a priority, and that the Fund "cannot be involved in prescribing the nature of the participatory process in member countries".

The Halifax Initiative is very concerned with the reservations that have been expressed about ownership:

- that the achievement of a national consensus (distinct from government "ownership") is "desirable but not always feasible or essential".

- that "directors considered it important to strike the right balance between fostering ownership and securing a strong arrangement".

The Fund is far too ready to ignore the will of the people in program countries. It is important that the Fund come to understand that dictating policy without adequate regard for popular concerns or desires is unacceptable.

The Halifax Initiative recognizes that full consensus may not be possible in some cases. The Fund should encourage national governments to demonstrate good faith in bringing about national consensus on program goals, and policies for achieving their ends, through ongoing consultations and in a transparent manner.

Recommendation: There should be an identification of distributional impact beforehand - who might suffer, and who benefits - and a monitoring of impact on those living in poverty during a program.

Response:

The Halifax Initiative supports this recommendation, and agrees with the considerations that: - Social impact assessments should be done during the program design

- Measures to protect the poor should be incorporated into the design of programs.

- Social safety nets should be more prominent in programs.

The Halifax Initiative agrees that there should be systematic monitoring of social spending. We support the recommendation that social impact should be monitored during implementation, that the level and distribution of social spending should be watched, and that there is a need for improved quality and composition of public spending, so that programs protect - and increase spending on - health, education and basic infrastructure.

ESAF programs should be made consistent with achieving broader goals of poverty reduction, such as those outlined by the Development Assistance Committee targets for social development and reducing extreme poverty by half by the year 2015, and those included in the Copenhagen Declaration of the United Nations Social Summit, which stated that:

The United Nations system, including the technical and sectoral agencies and the Bretton Woods institutions, should expand and improve their cooperation in the field of social development to ensure that their efforts are complementary and, where possible, should combine resources in joint initiatives for social development built around common objectives of the Summit.

A serious issue is the contention that "to make these [social spending] objectives feasible, savings would need to be generated in other areas over the medium term, notably through far-reaching reforms of the civil service and public enterprises."

This implies layoffs, increased unemployment and poverty. Such far-reaching economic reforms must be subject to broad public debate as they raise considerable concern for many citizens in program countries. It also implies an assumption on how best a country should accrue savings in its national budget and a judgement on where inefficiencies in public spending lie. Once again, it is evident that the Fund is not willing to make serious concessions to input from outside on program design. The Fund alone should not decide how social programs will be funded.

Recommendation: There should be increased Bank/Fund cooperation on social implications

Response:

The Halifax Initiative agrees that the cooperation of the World Bank in social assessments would be helpful. We look forward to seeing the outcome of the five or six pilot cases of Bank/Fund cooperation that have been proposed.

There are two main problems with this recommendation:

1) The parameters for evaluation of social impacts have already been set (they are outlined in Section D: "Assessing the social impact of adjustment", and Box 2. "The scope of assessments of the social impact of adjustment").

There has been no provision for input on the evaluative factors. Although the factors that are outlined are valid as economic indicators, and should provide a good overview in terms of such factors as price increases and public expenditure and social spending, other social impact considerations need to be included. An example of the latter would include consideration of how the impact of a structural adjustment program disproportionately affects women and girls.

Social impacts may not be the same in all the program countries, and evaluative factors should remain flexible enough to take many factors into consideration. For example, a particular IMF program may result in an increase in migration to urban areas. How will changes in use of land and water, pressures on urban health and education systems, crime rates, child labour, growth in the informal sector, and a host of other problems that sometimes accompany rapid increases in migration to cities be evaluated, if the assessment factors are pre-determined?

Social implications of adjustment programs are a focus of the SAPRI process now underway, with the participation of the World Bank, civil society organizations, and national governments. The outcomes of this process should be incorporated into the Fund’s efforts to improve its programs.

2) The first assumption regarding the social impact of adjustment suggests that "it is widely accepted that adjustment policies do generally have positive effects on growth and hence per capita income". This betrays a bias toward structural adjustment as it is currently constituted, which may operate against any real improvement in program design to better assist the poor.

The emphasis on Bank/Fund cooperation, in order to better consider social development implications, is fine as far as it goes, but the recommendation needs to be expanded. The Halifax Initiative is concerned that the only consideration of cooperation outside of the Bank/Fund partnership was limited to this recommendation in the external evaluation report:

"National ownership requires, first and foremost, that the country itself define its medium to long-term vision along with a supporting policy agenda and that it mobilize a sufficient body of national consensus behind it, before it begins negotiations with the Fund and other external agencies. Where the capacity does not exist in the country or with its nationals abroad to elaborate a national program, it is for the country to ‘acquire’ it by whatever means are available - free-standing technical assistance, hired consultancies, etc. Our discussions in the various countries show that Fund technical assistance provided independently or collaboratively with the UNDP and/or bilaterals can be particularly useful in these situations."

The Halifax Initiative strongly urges the Fund to consider how other international bodies, the United Nations Development Program and the International Labour Organization in particular, can have input into the policy process, in an effective and regular manner.

The cooperation of the UNDP and ILO would bring a substantial amount of legitimacy, knowledge and effectiveness to the inclusion of social development objectives in adjustment programs, given their capacity and experience. It would be helpful to have the expertise of these organizations to assist the policy dialogue process, especially in those countries where the civil society capacity may be weak.

Recommendation: Sequencing of reforms is important, especially that financial reform "should take place only once the budget is sufficiently under control". Specifically, since many of the poor are in rural areas, "front-loading of the rural reforms is necessary".

Response:

The Halifax Initiative considers that the response to this recommendation is inadequate, in that it is limited to the argument that sequencing of reforms should be done, "but with a clear emphasis on measures that would stimulate private investment and entrepreneurship", especially through trade liberalization. The Halifax Initiative is dismayed to note that there is no mention of sequencing in favour of the poor, or on behalf of the rural reform priorities, as was discussed in the external evaluation.

Recommendation: In a post-crisis and stabilization period, "the emphasis needs to shift from negotiation for further policy change to surveillance and accreditation of the level of policy reform... a shift from negotiation to surveillance and accreditation". The IMF would not be in the position of negotiating policy, but only serve to provide some sort of certification of creditworthiness.

Response:

The Halifax Initiative is concerned that this recommendation is not being accepted in full. The recommendation that ESAF-eligible countries with little or no need for IMF resources could have a "precautionary arrangement" set up is not quite the shift to a role of assessing and certifying creditworthiness. The way this is framed will encourage the continued active involvement in a country by the Fund, and demonstrates the reluctance of the Fund to shift to a passive surveillance role.

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The Halifax Initiative appreciates the opportunity to provide this input, and trusts that our views will be given serious consideration by the Executive Board as it prepares its report to the Interim Committee. We encourage the Board to be assertive in promoting the concerns for poverty alleviation and a fully democratic process that we have tried to convey.

We look forward to:

• the time when adjustment programs will be implemented with the goal of social improvement in the broadest sense, in full and honest partnership with the people affected.
• seeing the protection of profit and privilege set aside as an improper function of the International Monetary Fund.
• seeing Fund support of economic stability form part of a broader goal of human development, one which takes respect for the human condition as its inspiration, in a world of justice and compassion.