Structural Conditionality in IMF-Supported Programs

The use of structural conditionality by the IMF rose significantly in the 1980s and 1990s, as the IMF became more deeply involved in issues pertaining to growth, the institutional underpinnings of macroeconomic adjustment, and the containment of financial vulnerabilities. The proliferation of structural conditions was met with strong criticism outside the IMF. It was argued that many structural conditions were not needed for the achievement of program goals, and that there was not a clear division of labor between the IMF and the World Bank. It was also argued that there were areas where the IMF had become too “ideological,” such as privatization and trade reforms, and that these conditions undermined the “ownership of policymaking” by national authorities and that in some cases they infringed on the member country’s sovereignty. Largely in response to this criticism, the IMF launched in 2000 a “streamlining initiative” aimed at reducing the volume and scope of structural conditionality and issued new conditionality guidelines in 2002.

The evaluation aims at answering two broad questions: (1) How effective has structural conditionality been at promoting structural change? and (2) What has been the effect of the streamlining initiative and the 2002 Conditionality Guidelines? For the first question, the evaluation examines how compliance with conditionality varies across sectors and with country circumstances. It then addresses the question of whether conditionality has been conducive to reform and how this is related to its design. As for the streamlining initiative and the 2002 Conditionality Guidelines, the evaluation mainly examines how they affected the number and sectoral composition of conditions.

To address these questions the evaluation did statistical analysis of data from the Policy Development and Review Department database for monitoring arrangements (MONA) for all programs approved in 1995–2004, which included 6,500 structural conditions. In an effort to explore design and effectiveness issues, 43 case studies were prepared for countries with arrangements between 1999 and 2004—including a subset of 13 in-depth studies, of which 5 entailed visits to the countries. These programs represent a fairly large fraction of the 102 programs approved during that period, and account for 1,567 conditions of the 3,652 conditions in those programs. Along with a study of trends and patterns of structural conditionality based on MONA, the impact of the streamlining initiative was reviewed through in-depth studies of the documentation submitted to the Board as well as through Grays, Minutes, and Summings-Up, for 10 programs approved in 2004 (4 Stand-By Arrangements and 6 PRGFs) and an additional 8 PRGFs approved in 2005. A staff survey and focus groups with staff involved in programs over the past five years examined their views of streamlining initiatives, program design, and IMF–World Bank cooperation. Finally, the views of the authorities on various aspects of program design were canvassed during country visits or through teleconferencing.

Aspects of IMF Corporate Governance—Including the Role of the Board

This evaluation will review the IMF’s governance arrangements, that is, the institutional structure and the formal and informal relationships that govern the IMF’s activities and decision making. In the six decades since its founding, the IMF has seen important changes in its membership and roles, but it is often claimed that its governance arrangements have not kept up with these changes. For example, critics have argued that the Board is too absorbed in micromanagement to provide effective oversight and strategic guidance. They have also raised concerns about unclear lines of accountability and about the lack of transparency in decision making and in the selection of the Managing Director. The evaluation will address the validity of some of these criticisms by focusing on the IMF’s efficacy, efficiency, voice, and accountability—the core issues of governance that seem most relevant to these concerns. It will assess the degree to which existing governance arrangements at the IMF are consistent with widely accepted principles of good governance, and it will seek to identify areas where they can be strengthened to help it better fulfill its mandate.

The evaluation will focus primarily on the relationships between management, the Executive Board, and the IMFC—the bodies at the center of the IMF’s governance. Issues related to the Board of Governors, staff, and country groupings will be covered in the context of their interactions with the bodies mentioned above. The evaluation will not address issues of voting power or the ownership structure of the IMF, because these are currently under active consideration.

The evaluation proposes to compare actual governance practices with three standards. First, governance practices will be compared with the arrangements set in the Articles of Agreement and other IMF documents. The second comparison will be with the governance structures and practices of other intergovernmental organizations. These are probably the organizations most closely comparable to the IMF, but they may not necessarily embody best practice. The third comparison will be with principles of good governance developed in the private and public sectors, which would be adapted to make them relevant to the IMF. Together, these three standards for comparison should provide a robust set of insights, even if each of them on its own would have serious weaknesses as a benchmark for IMF governance.

The evaluation will be based on several building blocks that, together with a series of surveys, will inform a chapeau report with the main findings and recommendations. The building blocks will include a detailed description of the current IMF governance and its legal authorizing environment, a historical overview of the evolution of IMF governance since its inception, and comparisons of the IMF’s governance arrangements with those in a sample of intergovernmental organizations that share some functional commonalities with the IMF and with organizations in the public and private sectors. A series of in-depth case studies will be prepared to exemplify how key governance functions, such as strategic thinking, policy implementation, and oversight and accountability, are performed in practice.

The IMF’s Interactions with Its Member Countries

The effectiveness of the IMF depends in large part on a successful relationship between the IMF and its member countries. The IMF comprises the Executive Board, management, and staff, and while most of the interaction with member countries takes place between the staff and the country authorities, messages delivered by the Executive Board and other channels of interaction have become increasingly important in recent years. In particular, greater efforts have been made to establish contacts between staff (either headquartersbased or resident representatives) and nongovernment institutions (parliamentarians, civil society, market participants, the press, etc.) in member countries. The evaluation would focus on how the relationship between staff and country authorities is working, but would also investigate how other channels of contact have affected that key relationship.

A starting point would be to establish how well the nature of the relationship is understood by various parties, including an understanding of the appropriate interactions given the unique set of rights and obligations inherent in IMF membership. Thereafter the study would examine the nature of the interactions. In some cases the relationship is perceived to be working very well and the study would attempt to identify underlying best practices, including why some regions have been more receptive to the IMF’s efforts. In other cases there is frequent criticism that the IMF too often conveys advice and views to country authorities without adequately taking account of country circumstances, or without listening carefully enough to the views of the authorities. As a result, critics contend, the IMF does not form an accurate assessment of the true needs and priorities of the membership or, even when broadly correct, is insufficiently specific to be helpful. It thereby misses opportunities to be effective or, worse, misdiagnoses problems or recommends inappropriate policy advice.²

A second type of criticism is that even when the IMF’s views are carefully considered and well worth listening to, they are conveyed in a way that is unlikely to be effective. Either the written documents are too long and inaccessible to be widely used, or contacts are not made with sufficiently senior officials, who, in some instances, are simply unaware or misinformed about the IMF’s purpose and the nature of its activities. Relatedly, it is sometimes claimed, the IMF, while being much more transparent in recent years, has not proactively used the opportunities to shape opinion in member countries that could facilitate debate on and reform of economic policies.

The study would rely on various sources, including (1) a perception survey of senior officials in member countries and in a sample of countries; (2) interviews with officials as well as with parliamentarians, representatives of the private sector, and nongovernmental organizations; and (3) a survey of relevant staff, management, and Executive Directors. Based on the views of country authorities and others, such a project could evaluate whether the IMF’s engagement with member countries could be more effective. It would examine aspects of IMF country operations across a wide array of instruments, including program relationships, Article IV consultations, and technical assistance and training, and the modalities of interaction, including through missions, resident representatives, and communication with headquarters. The evaluation would attempt to assess how well the IMF’s instruments and modalities of operation are aligned with the needs of policymakers, and how well the relationship with member countries is managed.

The IMF’s Research Agenda

Seven years ago, a group of independent experts evaluated the IMF’s economic research activities.³ At that time, the Executive Board agreed with the group’s finding that there was “substantial room for improvement in the overall quality of the IMF’s research.” Among other conclusions, Directors endorsed the recommendation that the mix of research conducted at the IMF would need to be focused more on areas where it could add the most value and agreed that it could be integrated to a greater extent into policy work—an assessment that has also been shared by external critics of the IMF. The evaluation would be a follow-up exercise and look at two areas.

• First, the evaluation would examine the way in which research topics are selected and priorities imposed across the IMF, and the extent to which the recommendation to direct research more to areas where it could add the most value and be better integrated into policy work has been carried out. In order to do this, an analysis of the research conducted by all departments in the IMF would be undertaken, using as a starting point the work performed by the existing interdepartmental Research Committee. The evaluation would attempt to identify which pieces of research had been particularly relevant and influential for the country and policy work of the IMF. In addition, a survey of staff and country officials would try to elicit whether some topics could have received greater priority. Given the attempt to streamline and focus IMF activities in recent years, and to seek ways to save costs—issues that will be of even greater importance in the years to come—the evaluation would explore the extent to which decisions on research topics are guided by the opportunities to rely on research conducted outside the IMF, either at other institutions such as the World Bank and the Organization for Economic Cooperation and Development, or in academia.

• Second, the evaluation will investigate aspects of the quality (as opposed to the scope and relevance) of IMF research. The process by which IMF research is supervised and vetted would be examined. A panel of external experts would be asked for their views on a sample of research. Issues such as the degree of innovation and the consistency with first best methodology would be studied.

The IMF’s Approach to International Trade Issues

A stated purpose of the IMF is to facilitate the expansion and balanced growth of international trade.⁴ A recent internal staff review of the “IMF Work on Trade”⁵ concluded that the IMF has consistently advocated open trade regimes as a means to improve economic efficiency, combat rent seeking and corruption, and promote income growth. While providing a broad overview of the IMF’s work on trade policy, including conditionality, the internal review did not seek to address far-reaching questions relating to the appropriateness and effectiveness of the IMF’s advice on trade reforms. During the review’s discussion at the Board,

Directors generally agreed that it would be desirable to conduct case studies on the impact and design of trade policy reforms recommended by the IMF. They considered such studies helpful for drawing lessons for future country-specific policy advice and program design.

The IMF’s approach to trade has always drawn substantial criticism. According to critics, (1) IMF supported trade liberalization has been too fast, (2) programs have not included appropriate social safety nets for affected vulnerable parts of the population, (3) IMF advice on trade liberalization has ignored market imperfections in domestic and world markets, (4) the IMF has failed to take into account the impact of tariff reductions on the revenue base and fiscal sustainability, (5) trade conditionality has been driven by the agenda of developed country shareholders in the IMF, (6) IMF requirements to liberalize unilaterally have decreased program countries’ bargaining power in the multilateral negotiations, and (7) the IMF has been too soft on tariffs and nontariff barriers in industrial countries as well as on other policies of industrial countries that amplified global trade imbalances.

The evaluation would entail in-depth case studies of program, surveillance, and technical assistance activities focusing on IMF involvement in trade reforms and their impact. It would assess the quality and effectiveness of the IMF’s advice at country, regional, and multilateral levels, as well as on global trade imbalances. It would also look at the IMF’s coordination with other organizations such as the World Trade Organization, the World Bank, the United Nations Development Program, and the United Nations Conference on Trade and Development (all of which have their own respective mandates in the area of trade). Finally, the evaluation would include the IMF’s contribution to the work of the Integrated Framework since its inauguration in October 1997. The evaluation would complement the evaluation of the World Bank’s trade policy advice carried out last year by the Bank’s Independent Evaluation Group.⁶