Non-concessional Non-concessional financial flowsfinancial flows

Multilateral (public) lendingMultilateral (public) lending• Lending to developing countries on Lending to developing countries on

non-concessional terms (with rates of non-concessional terms (with rates of interest and repayment periods interest and repayment periods determined in the market). determined in the market).

• Most important lenders are Most important lenders are Multilateral development banks and Multilateral development banks and IMF, which borrow in international IMF, which borrow in international capital markets to raise funds.capital markets to raise funds.

• Multilateral development banksMultilateral development banks: : members include members include developed donor countries and developing borrower developed donor countries and developing borrower countries.countries.

– World BankWorld Bank– African Development BankAfrican Development Bank– Asian Development BankAsian Development Bank– Inter-American Development BankInter-American Development Bankwhich lend to governments of LDCswhich lend to governments of LDCs– European Bank for Reconstruction and European Bank for Reconstruction and

Development (EBRD), which lends to the private Development (EBRD), which lends to the private sector in transition economiessector in transition economies

• IMFIMF

To finance development projects To finance development projects aimed at alleviation of poverty and at aimed at alleviation of poverty and at economic and social development.economic and social development.

• Funds used to finance investments in Funds used to finance investments in infrastructure, health, education, infrastructure, health, education, trade and energy. Together with trade and energy. Together with technical assistance. technical assistance.

Purpose of loans to Purpose of loans to governmentsgovernments

Purpose of loans to private Purpose of loans to private borrowers borrowers (by EBRD)(by EBRD)

• To assist the development of private To assist the development of private sector activitiessector activities

• To assist the strengthening of To assist the strengthening of marketsmarkets

• Support of privatizationSupport of privatization• Development of private sector Development of private sector

institutionsinstitutions

• IMF has a very different mandate, as IMF has a very different mandate, as it lends to countries in order to it lends to countries in order to alleviate balance of payments alleviate balance of payments difficulties and avoid exchange rate difficulties and avoid exchange rate fluctuations.fluctuations.

The World BankThe World Bank• ‘‘A development assistance A development assistance

organization that extends long-term organization that extends long-term credit to developing country credit to developing country governments for the purpose of governments for the purpose of promoting economic development and promoting economic development and structural change’.structural change’.

• Created in 1944, to help reconstruct Created in 1944, to help reconstruct Europe after WW II. From late 1950s, Europe after WW II. From late 1950s, activities extended to LDCs.activities extended to LDCs.

• 185 member states, joint owners.185 member states, joint owners.

Consists of two organizations:Consists of two organizations:1.1. International Bank for Reconstruction International Bank for Reconstruction

and Development (IBRD). Lends on and Development (IBRD). Lends on non-concessional terms to LDCs.non-concessional terms to LDCs.

2.2. International Development International Development Association (IDA). Similar activities to Association (IDA). Similar activities to IBRD, but lends funds to very poor IBRD, but lends funds to very poor countries on highly concessional countries on highly concessional terms (soft loans).terms (soft loans).

World Bank activitiesWorld Bank activities• 1950s-1960s: focused on lending for 1950s-1960s: focused on lending for

development of infrastructure, such development of infrastructure, such as energy, transport, as energy, transport, telecommunications, irrigation.telecommunications, irrigation.

• 1970s: poverty alleviation. Projects 1970s: poverty alleviation. Projects focusing on water supplies, focusing on water supplies, sanitation, education, health, sanitation, education, health, employment,...employment,...

• 1980s-mid 1990s: structural adjustment 1980s-mid 1990s: structural adjustment loans (SALs).loans (SALs).– Intended to reduce government Intended to reduce government

intervention and promoting competitionintervention and promoting competition– Key mechanism by which the WB influenced Key mechanism by which the WB influenced

LDCs to adopt an outward orientation to LDCs to adopt an outward orientation to int’al trade (free trade and free market int’al trade (free trade and free market principles).principles).

– Loans in order to assist governments in: Loans in order to assist governments in: removal of price controls, interest rate removal of price controls, interest rate liberalization, trade liberalization, liberalization, trade liberalization, elimination of restrictions to new FDI, cuts elimination of restrictions to new FDI, cuts in G,...in G,...

• Mid-1990s to present: poverty Mid-1990s to present: poverty alleviation, sustainable development, alleviation, sustainable development, role for the government.role for the government.– Poverty alleviation. Countries borrowing Poverty alleviation. Countries borrowing

funds for debt relief are required to funds for debt relief are required to commit to attacking poverty. Also, the WB commit to attacking poverty. Also, the WB has committed itself to helping countries has committed itself to helping countries achieve the MDGs.achieve the MDGs.

– Poverty-oriented projects are intended to Poverty-oriented projects are intended to be environmentally sustainable, they must be environmentally sustainable, they must not give rise to environmental destruction not give rise to environmental destruction and, whenever possible, improve upon the and, whenever possible, improve upon the quality of the environment.quality of the environment.

– WB pays attention to the need for WB pays attention to the need for institutional development. Markets institutional development. Markets cannot work effectively in the absence of cannot work effectively in the absence of strong institutions thatstrong institutions that•Provide education and health servicesProvide education and health services•Ensure availability of and access to Ensure availability of and access to

necessary infrastructurenecessary infrastructure•Provide and effective and equitable taxation Provide and effective and equitable taxation

systemsystem•Ensure access to creditEnsure access to credit•Secure property rightsSecure property rights•Minimize corruptionMinimize corruption•Ensure and promote competition, ...Ensure and promote competition, ...

Evaluating the role of the Evaluating the role of the WBWB1.1. Social and environmental concerns. Social and environmental concerns.

The WB has been criticized for The WB has been criticized for implementing environmentally implementing environmentally unsustainable projects. However, in unsustainable projects. However, in the recent years it makes greater the recent years it makes greater efforts to ensure that project objectives efforts to ensure that project objectives are consistent with social and are consistent with social and environmental concerns.environmental concerns.

2.2. WB governance dominated by rich WB governance dominated by rich countries. countries.

Voting power determined by the size of Voting power determined by the size of financial contributions, which are in financial contributions, which are in proportion to the size of the country. proportion to the size of the country. Poor countries have the least Poor countries have the least representation in decision-making.representation in decision-making.

3.3. Excessive interference in countries’ Excessive interference in countries’ domestic affairs, particularly in domestic affairs, particularly in connection with structural connection with structural adjustment lending.adjustment lending.

4.4. Conditional lending. Conditional lending. Conditions imposed to the borrowing country Conditions imposed to the borrowing country

in order to qualify for the loan are a in order to qualify for the loan are a mechanism for inducing desirable policy mechanism for inducing desirable policy changes. changes.

5.5. Damaging impacts on LDCs. Damaging impacts on LDCs. SALs have been criticized for increasing SALs have been criticized for increasing

income inequalities and poverty within income inequalities and poverty within LDCs, due to: increasing UE, cuts in LDCs, due to: increasing UE, cuts in provision of merit goods, cuts in food provision of merit goods, cuts in food subsidies, introduction of fees for health subsidies, introduction of fees for health and education,...and education,...

6.6. Inadequate attention to poverty Inadequate attention to poverty alleviation. alleviation.

The WB has been criticized for...The WB has been criticized for...– not allocating enough funds for loans not allocating enough funds for loans

intended to meet the needed intended to meet the needed investments in education, health investments in education, health services and infrastructure. services and infrastructure.

– Not doing enough in the area for debt Not doing enough in the area for debt relief through the Highly Indebted Poor relief through the Highly Indebted Poor Country Initiative (HIPC). Many very Country Initiative (HIPC). Many very poor and highly indebted countries do poor and highly indebted countries do not qualify for debt relief.not qualify for debt relief.

The IMFThe IMF• Established together with the WB in 1944.Established together with the WB in 1944.• Original purposeOriginal purpose: lending to countries with : lending to countries with

BoP deficits under the fixed exchange rate BoP deficits under the fixed exchange rate system prevailing at the time.system prevailing at the time.

• Current purposeCurrent purpose: to make short-term : to make short-term loans to governments on commercial loans to governments on commercial terms in order to stabilize exchange rates terms in order to stabilize exchange rates and alleviate BoP problems.and alleviate BoP problems.

ActivitiesActivities• Since the 1980s: focus on lending funds to Since the 1980s: focus on lending funds to

developing countries.developing countries.• Stabilization policiesStabilization policies: a package of policies : a package of policies

that the country receiving the loan must that the country receiving the loan must adopt.adopt.

• They include:They include:– Tight monetary policy: Tight monetary policy: ↑i → ↓AD → ↓ demand for M. ↑i → ↓AD → ↓ demand for M.

Higher i encourages financial inflows.Higher i encourages financial inflows.– Tight fiscal policy: cuts in G + cuts in food and other Tight fiscal policy: cuts in G + cuts in food and other

subsidies + ↑ taxes + imposition of fees for education and subsidies + ↑ taxes + imposition of fees for education and health services → ↓AD health services → ↓AD

– Currency devaluation or depreciation, to Currency devaluation or depreciation, to discourage M and encourage X.discourage M and encourage X.

– Cuts in real wages in order to Cuts in real wages in order to ↓AD.↓AD.– Liberalization policies: Liberalization policies:

• Eliminating or reducing controls on prices, interest Eliminating or reducing controls on prices, interest rates, M and foreign exchangerates, M and foreign exchange

• Encouraging full currency convertibility on both the Encouraging full currency convertibility on both the current and financial accountscurrent and financial accounts

...in order to promote a free market and free ...in order to promote a free market and free trade environmenttrade environment

Evaluating the role of the Evaluating the role of the IMFIMFCriticismsCriticisms::1.1. IMF governance dominated by rich IMF governance dominated by rich

countries (idem WB)countries (idem WB)2.2. Excessive interference in countries’ Excessive interference in countries’

domestic affairs, even more than in domestic affairs, even more than in the case of the WB.the case of the WB.

3.3. Conditional lending. Countries are Conditional lending. Countries are forced to accepts harsh conditions.forced to accepts harsh conditions.

4.4. Damaging impacts on developing Damaging impacts on developing countries. countries.

IMF policies (leading to higher UE, lower real IMF policies (leading to higher UE, lower real wages, cuts on provision of merit goods,...) wages, cuts on provision of merit goods,...) are inconsistent with economic and human are inconsistent with economic and human development objectives.development objectives.

5.5. IMF stabilization policies based on a IMF stabilization policies based on a flawed concept. flawed concept.

Success in alleviating BoP problems is Success in alleviating BoP problems is only short-lived. Countries suffer low or only short-lived. Countries suffer low or negative growth rates, being unable to negative growth rates, being unable to grow out of their BoP problems.grow out of their BoP problems.