CHAPTER FOUR - REFORMING THE IFIS' POLICY FRAMEWORKS:
ACCENTUATING POVERTY REDUCTION AND SUSTAINABLE HUMAN DEVELOPMENT

1. RESTORING CONFIDENCE IN THE EFFECTIVENESS OF INTERNATIONAL DEVELOPMENT FINANCE

In their half century of existence, the Bretton Woods institutions have become leading agencies of the current highly formalized (and bureaucratized) regime of official international assistance and finance, which now extends to include a number of post-Communist countries in Central and Eastern Europe and the former Soviet Union. The World Bank in particular is seen as having a dominant influence in shaping aid and development thinking, and over this period it has lent a total of some US$700 billion, primarily to developing countries. This is not all concessional aid (ODA), but even if it is borrowed on private markets (backed by the Bank's proud "triple-A" rating, healthy net income and US$14 billion in cash reserves), it is official public finance which presumably, therefore, must be justified on the basis of serving essential public purposes. Among the most important that have been put forward (though the degree of emphasis varies and seems to rise and fall according to development fashions and trends) are the satisfaction of "basic human needs" and the reduction of world poverty, which are also seen (as most recently in UN Secretary General Boutros Boutros-Ghali's Agenda for Development) as crucial to reducing global instability and violence. Development approaches have also reached growing convergence around the importance of building human capital, not simply physical infrastructure, of highlighting the role of women, education and primary health care, and of fostering an attractive environment for private investment.

At the same time, given the evidence from many parts of the world, and especially Africa, of growing poverty, instability and social inequality, the effectiveness of this official framework of public flows in achieving its stated aims is highly contested. In observing the sceptical mood in the new U.S. Congress, a Wall Street Journal article cites a recent study which found no correlation between aid flows and reducing infant mortality, a basic measure of welfare, but concluded that: "the principal effect of foreign aid seems to have been to raise the consumption levels of the richest members of poor countries' populations." 25 Indeed, the IFIs have been attacked by a range of critics from the left to the right, and in books such as Graham Hancock's The Lords of Poverty, for using the poverty issue to serve themselves, or worse, for actually hurting more than helping, poor people who are affected by their activities. In the Committee's Washington roundtable Jerome Levinson of the Economic Policy Institute described the IFIs as "impervious and institutionally hostile" on issues of workers' rights and popular interests; whereas Ian Vasquez of The Cato Institute argued that free-market development on its own would be a more effective poverty reduction strategy. 26 While this polemic is far from new, its contemporary politics are combining to corrode further rather weak Congressional support for (and public understanding of) foreign assistance spending in the country that is the largest contributor to the IFIs. 27

The supporters of official multilateral assistance are therefore on the defensive, even as they argue that institutions such as the World Bank have done much to improve their understanding of the complexities of development processes, and to modify their approaches to incorporate all of the human as well as technical factors which together constitute an "enabling environment" for sustainable economic progress. In a 50th anniversary publication, the Bank identifies its challenges as: "pursuing economic reforms that promote broad-based growth and reduce poverty"; "investing in people"; "protecting the environment"; "stimulating the private sector"; "reorienting government". And in becoming "an even more efficient, flexible institution", it resolves to be guided by the principles of: "selectivity; partnership; client orientation; results orientation; cost effectiveness; financial integrity".28 The problem, however, is not one of declared intentions, but of confidence in actual and future performance.

In our Washington roundtable, Wolfgang Reinecke argued that the IFIs have been correcting past mistakes and lack of foresight, with factors previously regarded as incidental now regarded as instrumental to their design of programs. In addition to that, however, they must begin also to address the disparities arising from economic globalization, the causes of escalating internal violence, and the forces for social and political disintegration afflicting a number of states. In our Ottawa hearings, Gordon Smith and David Preston of the Department of Foreign Affairs supported a focus in the Halifax Summit on relating the IFIs to poverty themes. However, Preston posed a large number of searching questions in that regard, acknowledging that: "we have a pretty good idea of the factors involved in development, but we don't as yet have a precise handle on how you `do development' or even reduce poverty." [18:9]

The government's February 1995 response to the special joint committee's report of last year, in pointing to Canada's urging that "priority be placed on the environment, poverty alleviation and good governance", states: "The banks are slowly responding but much remains to be done." The conclusions of comprehensive studies of the MDBs undertaken by the North-South Institute are also somewhat tentative even if positive overall. Official donor surveys have found them to be "relatively `effective' channels of development cooperation". However, along with some serious "rethinking" of what constitutes development progress, even the World Bank is having to show "some humility (on) the perplexing questions about development". Moreover, a disturbing finding of the Institute's forthcoming individual studies of the regional banks is, in Roy Culpeper's overall assessment, that their development achievements "have been least satisfactory in the very countries and regions where social and economic advance is most desired".29

A climate of uncertainty and questioning of the IFIs' methods and impacts makes it difficult to make a strong case for additional public resources to them at a time when fiscal pressures are increasingly squeezing donor government budgets. The most recent annual report of the Development Assistance Committee of the OECD points to some worrying signs in the changing composition of financial flows to developing countries. In 1993 these investment flows increased to a record US$167 billion, but official development finance (including non-concessional) from all sources declined to US$68.5 billion (just over 40% of the total), and global ODA fell to $55.2 billion. Different kinds of private capital flows to "emerging market" countries have shown large increases, though subject to equally large year-to-year fluctuations. And in April 1995, the Washington-based Institute for International Finance estimated that private flows to these countries would fall to US $82 billion this year, barely more than half the 1994 total. Moreover, according to the DAC Report these flows have been strikingly concentrated "in a relatively small number of countries, particularly the more advanced ones but also such large economies as China, India and Indonesia. The poorer countries and regions receive little or no private flows on a net basis and this is unlikely to change to any significant extent in the near future." 30 It is precisely the poorest and neediest countries which remain most dependent on the declining official sources of development finance, which are also the sources that are highly vulnerable to domestic political criticism. That in turn raises the challenge of whether and how ODA might be used in a policy sense to turn around the situations of these countries so that they too can compete for private capital. More generally, the global financial challenge is to achieve an efficient net transfer of savings to the non-OECD world where the need for human investment is the greatest and also growing fast.