Author: Anh Nguyen | University of Vienna
(This post is part of the First Edition of the ‘Symposium on Development Aid: Charity, or An Oppressive Tool of Inequality?’ by asiablogs.)
“Conditionality” tied into development aid and finance provided by international finance institutions (IFIs) has revealed itself to not only fall short of fostering the intended political, economic, and social progress in the beneficiary states but has rather also been shown to perpetuate aid-dependency of those states on the benefactor states. The deeper, more fundamental issue, however, is the hold such conditionality mechanisms have over the recipient states’ economic sovereignty and self-determination. This article leans on a third-world approach to international law (“TWAIL”) in order to determine the guardrails international law should provide on conditionality so that such provisions do not hollow out recipient states’ economic sovereignty.
Development aid and its pitfalls
In 1980, aid comprised only 3.4 per cent of GNP in sub-Saharan Africa as a whole. However, by 1994, this had risen to 16.3 per cent. In 1980 there were 14 highly aid-dependent states, in which foreign aid comprised 10% or more of their GNP. Not more than 15 years later this number had more than doubled to 34%. Traditional development economics has operated under the assumption that large donations are the solution to alleviate extreme poverty in states with the world’s “bottom million”. However, reports from the World Bank show that out of the 700 million people who were pulled out of poverty between 1981 and 2010, 627 million, 89.6%, of them were in China, thus not from the targeted aid-recipient states. In fact, as the percentage of aid flows in sub-Saharan African rose between 1970 and 2000, the level of growth of GDP per capita dropped from 15% to 0.4%.
Furthermore, a recent 2020 World Bank Working Paper details the “elite capture” of foreign aid, documenting that aid disbursements to highly aid-dependent countries coincided with sharp increases in bank deposits in specifically offshore financial centres. The Working Paper outlines that the “urban myth” of foreign aid being systematically diverted into the pockets of politicians and their cronies can be proven by combining quarterly information on aid disbursements from the World Bank to 22 most aid-dependent countries (to finance development projects and provide general budget support) with datasets on foreign-owned deposits in all significant financial centres, especially havens with financial secret and asset protection laws such as Switzerland, Luxembourg, Cayman Islands, and Singapore. The study showed that in a quarter where a country receives aid equivalent to 1% of GDP, its deposits in havens increase by 3.4% relative to a country receiving no aid. The study concludes that the implied leakage rate is around 7.5 percent at the sample mean and tendency to increase with the ratio of aid to GDP.
Asymmetry, leverage and the undermining of recipient governments?
Below the surface level ineffectiveness or outright foundering of the development aid agenda lies a deeper, more structural problem: The IMF and the World Bank stand as gatekeepers to a large portion of aid disbursements to the poorest countries, e.g. 75% of aid to sub-Saharan Africa, consequently creating an asymmetry which dangerously opens up the opportunity for IFIs to exercise unchecked leverage over recipient government’s economic sovereignty. This asymmetric “gatekeeper” dynamic between Western driven IFIs and Third World state gives rise to questions on exploitation and subordination of such states and draws attention to colonial foundations of the international law governing this dynamic. Thus, a TWAIL approach (Chimni 2010, 31-32) is warranted to first examine the international law framework, which confers IFIs their mandate and authority to extend development aid to recipient states and second to examine the international law norms which guarantee sovereign equality and economic self-determination of the recipient states.
TWAIL observations on the role of IOs and IFIs on the international stage
First, TWAIL draws upon a historical perspective that international institutions often have their roots in colonial ideas and practices, with scholars observing that IFIs operate upon the same premise of the Mandates System of the League of Nations: “civilising the backward people of the world” (Anghie 2000, 243). This is especially in respect of IFI’s framing of policies that seek to “bring economic stability, development, and good governance to former colonial countries”. Second, TWAIL underlines that international institutions rather than reflecting the sum agenda of their members, constitute an autonomous “Imperial Global State”, which advances the interests of an emerging transnational capitalist class in the international system to the disadvantage of subaltern classes in the third and first worlds (Chimni 2004, 1) – an especially pertinent consideration for IFIs. Third, TWAIL puts forward that IFIs carry out their mandate within an international law framework facilitated by a consensus-building mechanism that produces “ideational ambiguity” in its norms. This is the case when ideas can accommodate various and often contradictory normative and/or causal beliefs and thus allow for strategic interpretations of the IFIs’ mandates to further advance the aforementioned global capitalist interests.
The mandates and conditionality of IFIs within the framework of international law
The IMF was established to promote international monetary cooperation and to help the Member States manage temporary balance-of-payments problems. On the other hand, the World Bank was established to provide loans and grants to the governments of low- and middle-income countries to pursue development projects. Typically these funds are disbursed tied with de facto obligations of states to implement policies or execute measures set out in conditionality provisions.
Art IV (10) of the World Bank Articles of Agreement lays out that only economic criteria shall determine the decisions of the Bank, while explicitly prohibiting “interference in the political affairs of any member”. However, this embodiment of the principle of non-intervention anchored in Art 2 (4) and (7) of the UN Charter runs into conflict with the Bank’s objective of promoting “good governance”. Due to the “ideational ambiguity” of the notion of “good governance”, the Bank’s objective could on the one hand be interpreted to mean highlighting and recommending economic best practices amongst its Member States; on the other hand, it could also be used to justify attaching invasive conditionalities aimed at “political reform” under the banner of advocating for “good governance”. There is a sharp difference between general advocacy for good governance and actively mandating policy changes (e.g. reallocating national budgets or adopting austerity measures), which the state’s government must carry out in order to receive IFIs’ funds.
Conditionalities are found in international agreements concluded between the World Bank or IMF and the Member States for a loan or financing agreement. Thus, when interpreting such agreements the Vienna Convention on the Law of Treaties between States and International Organizations (1986) would apply. However, the IMF most notably contends that stand-by agreements (SBAs) (an economic program run by both the IMF and World Bank, extending financial aid to a member state in need of assistance, typically after a financial crisis, in return for executing stipulated needed reforms in the recipient country aimed at bringing it back on a path of financial stability and economic sustainability), are not to be regarded as International agreements (IMF Guidelines on Conditionality, para 9). This would not only shield conditionalities from scrutiny by international law but take them out of the international law framework altogether.
Despite the IMF’s Guidelines, an international agreement between an IFI and Member State is still subject to customary international law, especially, that which is codified in the VCLT. Art 31(3)(c) VCLT sets out that treaty provisions shall be interpreted taken in the context of “any relevant rules of international law applicable in the relations between the parties.” This is referred to by former ICJ Judge Bruno Simma as “systematic integration [of general international law] qua treaty interpretation”. Coupling this notion of interpretation with TWAIL considerations one would arrive at an imperative to bind conditionality provisions to respect the principle of state sovereignty. IFIs, with respect to planning, evaluation, and implementation of conditionality, would have to refrain from interfering in those matters that fall within a Member State’s domaine réservé, a notion linked with state sovereignty and refers to matters within states’ regulatory competence free from international obligations and regulations, such as the organisation of their government, treatment of their citizens and use of their territory. The notion of economic sovereignty is additionally derived from such notions of sovereignty over the territory, referring to the self-determination of peoples over natural wealth and resources on their territory.
However, because of recipient states’ dependence and ultimate acceptance of conditionality, the mechanism of IFIs’ conditionality makes the recipient states’ restructuring their internal fiscal and economic policies, a matter of organisation of government falling within states’ domaine réservé a fait accompli. Consequently, affected communities must be allowed to engage in the policy-making process which implements IFIs’ conditionalites. Such “counter-acting” mechanisms should be instituted to give effect to the public’s rights to participate effectively in administrative processes in realising the principle of economic self-determination. Traditionally this entailed people’s capacity to dispose freely of “natural wealth and resources” in accordance with democratically-taken decisions, with a contemporary, more liberal interpretation encompassing the ability to set independent economic policies as a whole (Lienau 2020, 675). Given that civic engagement has been, and continues to be, largely ad hoc, IFIs’ conditionality should be brought to align with international law? Through the codification of minimum standards for public involvement and engagement in these policy-making processes (Hunter 2010, 201)
The moral hazard of ex post conditionality
Notwithstanding the fraught nature of conditionality, perhaps a core problem of IFIs conditionality undermining the recipient states’ economic sovereignty rests in its “ex-post” nature. In ex-post conditionality, which is how IMF typically disburses its funds, the state receiving aid agrees to conditions that it will carry out after receiving the aid. Later follow-ups determine whether it might receive more aid – as opposed to ex-ante conditionality which requires a state to meet certain conditions and prove it can maintain them before it will receive any aid. The moral hazard arises when a government takes a calculated risk while factoring the option of turning to the IMF in the “worse case scenario” and with that offering, the IFIs an understanding that the government would integrate and implement the externally dictated conditionality into their economic and fiscal agenda “as its own”, thus “self-sacrificing” its economic sovereignty.
In order to rein in conditionality in the IFIs’ disbursement of development aid and financial assistance, such provisions should be coupled with a participation mechanism for stakeholders of the recipient state to counteract the undermining effects of the conditionality’s de facto obligations on the recipient state, thus constraining its economic sovereignty and self-determination. In this context, special consideration needs to be paid to affected communities, which had no hand in their government’s engagement in the moral hazard leading up to the acceptance of conditionality in the first place.
Anh Nguyen is a law graduate of the University of Vienna and trainee in international dispute resolution at Knoetzl Haugeneder Netal, currently completing her judicial clerkship in the Vienna Circuit.