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BoughtonLombardi Woods Contribution

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BoughtonLombardi Woods Contribution ...

Ngaire Woods in The IMF and Low-Income Countries (edited by James Boughton and Domenico

    Lombardi, Oxford University Press, 2008).

    Governance matters: the IMF and Sub-Saharan Africa

    Ngaire Woods

Introduction

    The IMF has found it extremely difficult to facilitate successful economic growth, development, and policy reform in Africa. This is puzzling from the outside because on the face of it the IMF looks very powerful vis-à-vis African countries. It has considerable resources, knowledge, and expertise compared to its interlocutor agencies on the ground. Borrowers in Africa are among the least likely to have access to alternative sources of finance. And the institution has now worked with African countries for a long time. But after two decades of engagement, the IMF’s main

    borrowers in sub-Saharan Africa are still deeply affected by the institution and yet seem no closer to the promise of economic growth.

    This chapter argues that the IMF’s failures in Africa cannot be divorced from the governance of the institution. At the Board level, developing countries have insufficient voting power to give them appropriate incentives to engage meaningfully in deliberations and decisions. The Executive Board of the IMF is dominated by the wealthiest economies who command more than 40% of votes of the organization. By contrast, sub-Saharan African countries, who account for a quarter of the membership of the IMF, have just over 4 percent of the vote. Belgium (population 10 million) has more votes than Nigeria, Ethiopia, Zambia, Tanzania, Mozambique and South Africa combined (total population around 300 million).

Although the IMF’s Board typically does not resort to voting, voting power and

    quotas strongly underpin calculations as to when a decision has been reached (typically described as `consensus’). In recent years Board members report that the collegial and consensual nature of decision-making has eroded sharply making voting power yet more important. This renders the voice of developing countries on the Board yet weaker. As one former Executive Director from South Africa has put it, the miniscule voting power of African and other developing countries renders it almost impossible for them to put items on the agenda in either organization (Rustomjee 2003). Simply to muster enough voice to be heard is a gargantuan task.

    The international community has recently committed itself to enhance the voice and capacity of developing countries in the institution. Modest steps have been made to help the two Executive Directors on the Board who represent sub-Saharan African countries, including by enhancing their capacity to communicate with the capitals of their members. These may well be helpful steps but properly to assess them requires considering what the real problems with the IMF’s engagement with the continent have been, and whether governance reform of any description could make a difference to the IMF’s work in Sub-Saharan Africa.

Why does governance matter?

    There are three reasons to expect that governance might affect the IMF’s impact in Sub-Saharan Africa. The first reason concerns the responsiveness of the organization.

    The argument here is that the capacity of the institution to generate pertinent and relevant programs and instruments for its low-income members could be enhanced if

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Ngaire Woods in The IMF and Low-Income Countries (edited by James Boughton and Domenico

    Lombardi, Oxford University Press, 2008).

    low-income members have an incentive to voice their concerns and priorities within

    and to the organization and if others have an incentive to listen. The presumption would be that a failure to listen in the past has led to insufficient responsiveness

    which has hindered the quality of efforts on the part of the IMF. To assess this

    argument, we need to examine the quality of those efforts and to explore under what

    conditions the IMF has `listened’ (or not), to whom, and why.

A second reason why better representation or voice by African countries might alter

    the IMF’s performance has more directly to do with effectiveness. Here the argument

    is that for the IMF’s work to have positive effects in Sub-Saharan African countries

    would require the institution to establish early and deep engagement with

    governments and sufficient `buy-in’ from them and their societies to make the organization’s work and advice effective. The governance structure of the organization offers one way to build some degree of `buy-in’ – indeed the origins of

    the current governance structure in which the US is heavily represented and

    empowered was precisely in order to ensure the US would participate and engage

    deeply. As the institution has become more heavily involved in Africa, a change in the

    structure of representation adequately to reflect this has not occurred. By examining

    the recent history, we can assess why this might make a difference.

A third way in which governance affects the IMF’s impact is because it affects the

    organization’s accountability. The Board of the IMF sets the priorities of the organization and oversees their implementation, their impact, and their evolution. In

    theory at least, the Board monitors the performance and work of the senior

    management of the organization. The managing director and senior staff, in turn, hold

    to account all other staff working for the organization. Needless to say, all players

    across the organization have an incentive to meet the desiderata of those members of

    the Board who can most powerfully affect their careers and direction of work. If there

    is little scope for Sub-Saharan African countries to play a role in this, the risk is that

    the priorities and needs of the continent will constantly be under-served by a system

    which skews accountability towards meeting the preferences of other more powerful

    groups. By examining the recent history we can assess this argument and examine

    whether alternative arrangements might produce different effects.

This chapter will examine the evidence of the past two decades of IMF engagement in

    Africa to ascertain how responsiveness, effectiveness and accountability have worked,

    and what, therefore, might be changed by a change in the governance structure of the

    institution.

Setting priorities: the IMF’s approach to Africa

In the early 1980s the IMF plunged into a widespread debate about what kind of

    economic reform would work in Africa. Up until the late 1970s most developing

    countries had favored a statist approach to development, using economic planning,

    import-substitution-industrialization, price controls, credit rationing, state-owned

    enterprises, and government control of agricultural marketing (Van de Walle 2001,

    Lofchie 1994, Killick 1989, Waterbury 1999). In Africa the approach was reiterated

    in the Lagos Plan of Action set out by the Organization for African Unity in 1980.

    The concern of African leaders advancing the plan was to shift the continent away

    from its dependence on the export of basic raw materials, which “had made African

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Ngaire Woods in The IMF and Low-Income Countries (edited by James Boughton and Domenico

    Lombardi, Oxford University Press, 2008).

    economies highly susceptible to external developments” (Economic Commission for Africa 1980, Preamble). To this end, the plan focused on increasing Africa’s self-

    reliance, promoting industrialization, and building up regional and subregional cooperation and integration.

    In the IMF in the early 1980s, the African or Lagos view of Africa’s needs was rejected. The Lagos approach to development faced two severe challenges. First, it required resources and by the early 1980s most African countries were in economic crisis. Hit by the increase in oil prices in 1973-74 as well as a slump in commodity prices, many had increased their borrowing in the 1970s so that by 1980 they faced a world economic downturn with a huge debt burden on their backs. There was a huge gap between the resources required for a renewed push toward industrialization and what was available. External donors were unlikely to come forward, in part because industrialized countries faced problems of inflation and a downturn in their own economies. Also skepticism had grown among governments in several industrialized countries about the statist approach to development. This was the second challenge faced by the Lagos approach.

    The IMF Board was dominated by members whose ideological climate had changed dramatically in the early 1980s. In the United States, the United Kingdom, and Germany, President Reagan, Prime Minister Thatcher, and Chancellor Kohl espoused a new antistate, antigovernment, free-market rhetoric. Their hostility to government spending, industrial policy, and the welfare state soon spread into their view of aid. Suddenly the focus was on the failures of development policy in the 1970s (Bauer 1984, Tucker 1977). In the worst cases in Africa the state-owned, state-driven economic model had created and sustained a kleptocratic state. Across the continent as a whole, economic development seemed at the time to have failed. In the twenty years from 1960 to 1980 the average annual rate of growth for Africa was about 4.8 percent, dropping to 2.9 percent for the least developed countries (Economic Commission for Africa 1980). At the time these figures were treated as disastrous, although by the late 1990s they looked like a golden age of development on the continent. For example, over the period 1990 - 2001 Africa suffered a negative 0.2 percent average annual percentage decline in gross national income (World Bank 2003, chap. 1).

    Against the background of scarce aid resources and skepticism about state-centered development, the IMF defined conditionality for Africa in the 1980s within two important assumptions. First, the IMF treated the primary cause of the 1980s crisis in sub-Saharan African countries as internal rather than external to each country. Eschewing African leaders’ concerns about external shocks and constraints and how these might be mitigated (a central theme of the Lagos Plan), the institution focused its attention on actions indebted governments needed to take. The IMF chose to reject the state-centered industrialization model, which had prevailed until the end of the 1970s, and to focus on reducing the state in the hope that this would enhance the role of the private sector.

The IMF’s approach began first and foremost with a requirement that governments

    undertake stabilization policies to reduce the budget deficit and stem inflation. This was evident in the conditions attached to loans during the 1970s. The Fund’s largest

    loan at the time was to Zambia, which took out its first standby arrangement with the

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Ngaire Woods in The IMF and Low-Income Countries (edited by James Boughton and Domenico

    Lombardi, Oxford University Press, 2008).

    IMF in 1973 when its border with Rhodesia was closed by that country’s white-

    controlled minority government of Ian Smith, who was trying to suppress the majority

    struggle for control in that country. Among many other effects, the border closure

    severely disrupted Zambia’s commercial transportation system, decimating the

    country’s trade (Boughton 2001, 787).

In 1976 and 1978 Zambia took out two further IMF loans, this time as its economy,

    heavily dependent on copper exports, was rocked by shifts in the world copper price.

    In each program the Fund required the Zambian government to take measures to

    reduce inflation and trim the deficit. In these terms Zambia succeeded and indeed this

    spurred further IMF offers of assistance (IMF External Evaluation 1998, 95; Callaghy

    1990, 290; Boughton 2001, 291). However, a 50 percent reduction in the deficit

    between 1976-1979 was essentially achieved by cutting recurrent and capital

    expenditure, and this policy soon caused a political backlash that wiped out the gains

    of reform (Callaghy 1990, 290).

Even as Zambia met its core program conditions, its debts mounted alarmingly, and

    by the early 1980s Zambia could no longer repay the IMF in a timely fashion

    (Boughton 2001, 787). For the IMF this spelled out the need for deeper measures of

    “structural adjustment,” while critics argue that the case of Zambia in the 1970s

    underlined the extenuating impact of external factors - political, strategic, and

    economic (Economic Commission for Africa 1982).

The alternative to the tough stabilization approach taken by the IMF which African

    members probably would have pushed, had they had more voice in the organization -

    was a more explicitly gradualist approach to reform as advocated by many

    development economists at the time. The Economic Commission for Africa produced

    an African Alternative Framework as a conceptual starting point, although this did not

    include specific program designs (Economic Commission for Africa 1989). A more

    specific alternative was drawn up by an independent team of advisers to Uganda,

    sponsored by the Canadian International Development Research Centre, who

    advocated a program of economic stabilization and reform while retaining several key

    elements of the existing system of centralized planning and control (Uganda

    Economic Study Team 1987). Likewise, a three-person group drew up an alternative

    plan for Tanzania (McDonald and Sahle 2002). At the core of gradualist alternatives

    was an attention to attenuating the vulnerability of African economies to world

    markets, exogenous economic shocks, and their reliance on exporting primary

    commodities - in the case of Uganda 90 percent of its export earnings came from

    global coffee markets (Loxley 1986). 1 Commodity

    The issue that the G-7-dominated IMF marginalized was commodities.exports lay at the core of the problem for many low-income developing economies.

    Their reliance on exporting commodities laid a vicious economic trap for three

    reasons. First, access to markets for commodities was (and still is) tightly controlled

    by industrialized countries who instead of opening their markets, operate tight

    discretionary policies. Second, the price and demand for many primary commodities

1 The 1963 Compensatory Financing Facility provided the possibility of only very

    limited and short-term alleviation and shareholders failed to expand it in the 1980s.

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Ngaire Woods in The IMF and Low-Income Countries (edited by James Boughton and Domenico

    Lombardi, Oxford University Press, 2008).

    was in a long-term decline, which meant that even if the volatility in world prices for

    commodities were alleviated, an alternative long-term strategy was still required.

    Finally, the possibilities for poor countries to pursue a longer-term strategy of moving

    away from raw commodities into semi-processed and processed goods were blocked

    by industrialized countries who applied higher and higher barriers to these goods,

    effectively kicking away the development ladder from any countries trying to move

    up it: a 1988 United Nations Conference on Trade and Development (UNCTAD)

    study showed industrialized countries were applying twice the level of nontariff

    barriers to manufactured goods from developing countries compared to that they were

    applying on manufactured trade with each other (UNCTAD 1988, Chakravarthi 1989).

A more African approach to the continent’s crisis in the 1980s would have recognized

    that all small, low-income economies were being buffeted by factors beyond their

    control, including shifts in terms of trade, in capital flows, and in world interest rates.

    Calling on small, low-income economies to adjust their own economies was like

    exhorting passengers in a lifeboat to paddle faster when their raft is in the middle of

    the Atlantic Ocean in a hurricane. No matter how impressive the efforts of the

    passengers, it is unlikely that their paddling will bring them to safety. Without a

    coherent approach to international conditions, it was clear to some economists that the

    “adjustment” programs being foisted on one country at a time would not work. The fallacy in the IMF’s approach was, as Tony Killick expressed in 1990, that adjustment “has come to be viewed primarily as something to be undertaken by deficit countries,

    with no equivalent pressure for action on surplus countries” (Killick 1990a, 1990b).

The IMF was not sufficiently responsive to its African members, even as it began so

    extensively to work with them. Instead, the institution remained beholden to major

    shareholders in the institution who had extended loans to African countries

    throughout the 1960s and 1970s for a variety of geostrategic, postcolonial, economic,

    and domestic political reasons. In the 1980s, finding that their aid-dependent partners

    could not repay even the most concessional loans, the creditor countries directed the

    IMF to expand its engagement, thrusting the institution into a more active role in

    Africa, without altering its governance.

By the end of the 1980s the IMF was playing a key role coordinating the region’s

    relations with creditors, setting down the conditions debtors needed to meet in order

    to continue borrowing not just from itself but from all donors. Sub-Saharan African

    countries had become massively indebted throughout the decade. The total debt of

    countries on the continent doubled between 1979 and 1985 and doubled again by the

    early 1990s. The value of their external debt as a share of gross national product

    (GNP) rose from around 25 percent in 1980 to more than 80 percent in 1994. As the

    IMF coordinated reschedulings in the 1980s, the debt burden of African countries

    increased sharply. As debt-service payments were postponed, outstanding debt was

    increased as debt-servicing obligations were added to the capital sum.

    The IMF’s injection of resources was seriously limited. In March 1986 the Structural Adjustment Facility (SAF) was created in the IMF with $3.2 billion to provide loans

    to the poorest countries (essentially the same as those eligible for assistance from the

    Bank’s International Development Association) with balance of payments difficulties. However, after strong U.S. opposition to new or easy money, the facility was

    meagerly funded from repayments on previous loans to the IMF’s Trust Fund.

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Ngaire Woods in The IMF and Low-Income Countries (edited by James Boughton and Domenico

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    (Boughton 2001, 646). Likewise, strong UK opposition tightly limited the Enhanced Structural Adjustment Facility (ESAF) in 1987 with the U.S. administration arguing that it needed to concentrate on securing appropriations for the International Development Association (IDA) from Congress and refusing to countenance selling some of the IMF’s gold stock in order to finance the new facility (and U.S. approval was a sine qua non since such as sale required 85 percent of total voting power on the Board of the Fund).

    The Enhanced Structural Adjustment Facility magnified the bargaining power of the IMF vis-à-vis Africa. It combined much-needed loans with particularly far ranging and high-level conditionality covering medium-term policy changes and short-term monetary and fiscal management. It was a prerequisite for loans from all other bilateral donors and other international funding programs. Fund conditions were thus “at the top of the hierarchy of donor conditionality” not because of the amount of resources that the Fund transferred but because the Fund was the lead coordinator (IMF External Evaluation 1998, 26).

    Loans from the IMF in the 1980s reflected new stringent constraints on creditor countries: a squeeze on resources as their industrialized country members responded to general economic downturn; and a new ideological imprimatur imposed very rapidly and forcefully in each institution when the Reagan administration took office (Boughton 2001, Kapur et al. 1997). These constraints meant that it was easier for the IMF to call on borrowers to tighten their belts than it was to extract more resources from industrialized country members, or indeed even their cooperation in macroeconomic coordination. In short, the priorities and policies of the organization as it implemented far-reaching initiatives in Africa, were being set without sufficient input from the countries most affected.

Implementing policies without responsiveness

A core part of the IMF’s stated mission in Sub-Saharan Africa throughout the 1980s

    was to bring about economic reform. Effectively to do this, the organization needed close relations with governments and policy prescriptions which responded appropriately to rapidly changing political and economic circumstances. The case of Senegal, a leading recipient of aid per capita in Africa from 1980 to 1987, illustrates the way politics, economics, and conditionality were intertwined. It highlights the extent to which the IMF’s governance structure enabled the organization to be unresponsive to the rapidly shifting needs and constraints of African borrowers.

    In the late 1970s economic crisis and a collapse in revenue from peanut exports on which Senegal depended brought reformer Abdou Diouf to power, first as prime minister and then as president (Mbodji 1991). In a first flurry of reform, Prime Minister Diouf took a loan from the IMF’s Extended Fund Facility. The loan required

    the government to cut its current account deficit by more than half, almost double net public savings by 1985, increase overall investment from 16 percent in 1981 to 18 percent in 1985, and achieve a 4 percent annual growth rate of GDP (World Bank 1989e; Ka and Van de Walle 1994, 309).

    The IMF loan soon ran into difficulty. Bad weather affected exports and necessitated greater food imports, public debt was higher than originally admitted, and fiscal

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Ngaire Woods in The IMF and Low-Income Countries (edited by James Boughton and Domenico

    Lombardi, Oxford University Press, 2008).

    revenues actually declined from 1981 to 1984 (Ka and Van de Walle 1994, 311). The IMF loan was discontinued in January 1981 and replaced by a one-year standby arrangement. For a government facing a sharp drop in the export price of peanuts and in the run-up to an election, it was increasingly difficult to sustain unpopular, contractionary reforms (Landell-Mills and Ngo 1991, 48; Mbodji 1991, 124 - 25). For some analysts this demonstrated that Diouf’s political base was too narrow and

    technocratic with insufficient grounding in political parties, the political process, and electoral politics of Senegal - a constraint that soon began to change (Ka and Van de Walle 1994).

    Immediately after the 1983 elections in Senegal, Diouf began to consolidate his political power. He eliminated the post of prime minister and limited the power of the National Assembly, strongly reinforcing his position as president. He also began to usher a new breed of technocrats into positions of authority across all ministries, enhancing and streamlining the capacity of the government to negotiate with external aid and lending agencies and to undertake new economic policies. Principal among the new breed of officials was Mamoudou Toure, a former IMF official who was to lead Senegal’s structural adjustment effort from 1985.

    By mid 1984 Senegal enjoyed a new IMF loan (and three newly approved World Bank loans) (IMF-Senegal 2004, World Bank 2004a). The government embarked on a program of economic reform. Government expenditure was slashed, credit was controlled, and fiscal and current account deficits were both cut. As Senegal struggled with an exchange rate fixed within the CFA franc zone and fluctuating against the dollar, it relied heavily in the period 1980 - 87 on foreign aid flows, which grew by about 18 percent per year, totaling about one fifth of Senegal’s GDP.

    By 1987 the president’s reform agenda faced powerful opposition. Austerity and cuts in government spending soon led to student boycotts, school closures, strikes, and union opposition to the government. In the aftermath of the 1988 election a state of emergency was called by the government as opponents of the government went on a rampage, and even once order had been restored, public demonstrations against reform continued. In the spring of 1989 riots took on an ethnic dimension as tensions with neighboring Mauritania spilt over in the streets of Dakar, forcing Mauritanian shopkeepers out.

    The IMF succeeded in supporting the government to undertake stabilization, but longer-term reforms seemed to be slipping rapidly out of reach. The key technocrats in charge of structural adjustment - Mamoudou Toure and Cheikh Hamidou Kane - both left government in March 1988. Meanwhile, key structural adjustment policies were reversed in the face of the need to shore up political support and the government’s lack of revenue. For example, the government had removed trade protective tariffs as a core part of a relatively successful new industrial policy (Boone 1991, Thioune 1991). By 1988, the policy was reversed because the government needed the revenues that tariffs produced and a small number of large, powerful businesses lobbied against it (Ka and Van de Walle 1994). While outside commentators accuse the IMF (and other donors) of having imposed conditions that were too detailed and copious to be implemented and too seldom enforced (Ka and Van de Walle 1994, 329), Senegalese critics of structural adjustment in that country

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Ngaire Woods in The IMF and Low-Income Countries (edited by James Boughton and Domenico

    Lombardi, Oxford University Press, 2008).

    argue that it imposed unsustainable and unacceptable costs in health, sanitation,

    education, and literacy (Ndiaye 2003).

In retrospect, a survey of the assumptions underpinning the IMF’s plan makes clear

    why it failed. During the 1980s, the IMF (and World Bank) justified the program in

    Senegal as one which, after the initial stabilization and a first phase of adjustment,

    would achieve an annual growth rate of around 3.8 percent. This prediction was based

    on some extraordinary premises. For example, it was assumed that liberalization in

    agriculture and industry would produce an immediate “supply response.” In other

    words, farmers could and would rapidly increase production in response to greater

    market freedom. Similarly, industry would expand as privatization and liberalization

    attracted new credit and permitted new export sectors to flourish. Unsurprisingly

    (given all other cases of stabilization and structural adjustment) new policies would

    take much longer to produce change, and in Senegal there were technical and

    environmental factors along with wide fluctuations in world market prices of exports

    and low international peanut prices that prevented an expansion of food production

    and exports (Landell-Mills and Ngo 1991, 52). In respect of industry, the

    establishment of new private sector activity and increased investment would require at

    the very least a more developed banking system. More generally, in the words of one

    scholar examining the evidence in the textile industry, “Senegal’s Structural

    Adjustment programs offered no economically viable or politically acceptable means

    of restructuring the existing textile industry” (Boone 1991, 146).

The problem with the Fund’s approach to Senegal was that while it fit well with the

    priorities of the IMF’s most powerful members (to reduce their commitments to

    Africa in the face of their own straightened economic circumstances), it did little to

    balance the external and internal possibilities and constraints facing Senegal. One

    such constraint was the country’s inability to devalue its currency. As a member of

    the West African Monetary Union, Senegal was locked into the CFA franc zone

    arrangements. In essence this left the government with only two real instruments of

    adjustment: cutting government expenditure, and controlling exports and imports. The

    overvalued CFA franc made the latter extremely difficult.

Why did the IMF accept and support Senegal’s currency arrangement? In economic

    terms a permanently fixed and externally guaranteed exchange rate coupled with a

    supranational central bank should promote low inflation and encourage savings,

    investment, and growth. These benefits have been reviewed by several IMF and

    World Bank economists (Bhatia 1985, Devarajan and de Melo 1987, Elbadawi and

    Majd 1992). Certainly low inflation was achieved within the franc zone and some

    scholars go further and positively correlate the currency arrangement with growth

    (Devarajan and de Melo 1987, Guillaumont et al. 1988). However, these studies also

    show that members did not benefit equally. Indeed, smaller countries such as Senegal

    did much worse than the larger members (Medhora 2000). Furthermore, the most

    obvious benefit of the currency arrangement - exchange rate stability - may well have

    been illusory for Senegal since the real effective exchange rate was more unstable

    than the nominal effective exchange rate (de Macedo 1986). In economic terms there

    was (and still is) genuine debate and disagreement as to the merits and demerits of

    Senegal’s currency arrangement through the 1980s.

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Ngaire Woods in The IMF and Low-Income Countries (edited by James Boughton and Domenico

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    For the IMF there was a further political reason underpinning support for Senegal’s currency arrangement. As one of France’s former colonies and largest aid recipients,

    decisions about Senegal are led by France’s preferences, with other powerful

    shareholders in the international institutions loath to intervene in respect of what they

    recognize as a special sphere of influence. Senegal’s currency arrangements in the

    1980s were part of France’s CFA-franc zone encompassing the West African Monetary Union and a currency union among the central African states across which

    France guaranteed the convertibility of the common currency - the CFA franc

    (Medhora 1992). France vigorously opposed CFA franc devaluation and fought any

    Fund recommendations in this respect. The French position was not robustly

    challenged and altered by the Board.

The IMF’s governance structure did not ensure the institution `heard’ and adapted to

    the escalating problems faced by African governments during the 1980s, nor did it

    provide adequate oversight of IMF policies in the region. The fact was that

    conditionality and structural adjustment were not working: one worldwide survey of

    305 IMF programs from 1979 to 1993 found implementation failure in 53 percent of

    cases where failure was defined as a country not implementing 20 percent or more of

    the program’s conditions (Killick 1996). A number of evaluations undertaken by the IMF also provide evidence. Combing through the studies, which use a variety of 2 It was not until the late 1990s that the IMF Board finally commissioned an methodologies, it is difficult to find any evidence that countries that entered into independent evaluation of its work in Africa (IMF External Evaluation,1998). programs of structural adjustment with the IMF did any better than countries that did not.To whom should the institution be accountable?

The IMF’s work in Africa over the past two decades has been characterized by

    extreme slowness in responding to challenges on the ground, by ineffectiveness in

    achieving stated goals, and by a lack of accountability for poor advice, poor outcomes,

    or inappropriate priorities. Each of these problems has a direct link to the governance

    of the organization. If affected countries were more engaged in informing the

    organization through its staff, its senior management, and its Board, if they had

    greater confidence in working with the organization, and if they were able to hold it

    more closely to account, then it could be argued that the IMF could have done its job

    better. So how could the governance structure be improved?

Better representation through increased basic votes

Basic votes were originally distributed in equal numbers to all members of each

    institution. They were a symbol of state equality in institutions which otherwise

    allocated votes proportional to economic weight. Currently basic votes represent just

    2.1% of total votes in the IMF. At the founding of the institutions, they represented

2 See the excellent summary of the IMF work from Khan 1988 onwards in Boughton

    2001 and the ESAF review (IMF, External Evaluation 1998). The World Bank

    reviews include World Bank 1989a (Adjustment Lending); World Bank 1989e

    (Africa’s Adjustment), and World Bank 1989f (Sub-Saharan Africa).

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Ngaire Woods in The IMF and Low-Income Countries (edited by James Boughton and Domenico

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    just over 10% of votes. The result has been to erode equality among members in a subtle way. If basic votes were to be brought back to their original level, the effect on African constituencies in the IMF would be fairly small. It would raise their voting power by just under two two percentage points.

    This would not alter the power balance within the institution. However more subtle effects might be achieved. First, an increase in basic votes would permit African countries to change constituencies and to form smaller ones in which each could participate more fully and better hold their representative to account (more on this below). Second, at the margins, a modest increase in voting power could enhance the incentive on powerful members to consult African members. That said, there is a more effective way to do this.

    Creating an incentive to consult African members through double-majority voting

    An alternative to increasing basic votes in the IMF, or a way significantly to leverage an increase in basic votes is to introduce a double-voting system which protects the right of small countries within each organization. Proposals in this vein have been prepared by advisers to the German government as well as by scholars working on the governance of multilateral development banks.

    Already in the IMF a double majority is required to alter the Articles of Agreement as well as to expel a members or deny a member state benefits. This means not just that there must be 85% of voting power agreeing with an amendment, but a 60% majority of members. Other international organizations also use double-majority voting (e.g. the EU Council of Ministers, the Global Environment Facility in the World Bank). The effect of a double-majority voting rule applied to a wider range of decisions would be to ensure that the Board’s consensus reflected not only a majority of voting power but also the support of a majority (or set percentage) of members of the organization achieving a similar effect to basic votes (as above).

    Applying a double-majority voting rule to a wider range of decisions would require amending the articles (which itself requires the double-majority outlined above). But this would not be extraordinary. Many such changes have been undertaken in the past in particular so as to expand the range of decisions for which a special majority is required (i.e. a simple majority of 85% of voting power as opposed to a double-majority).

    The impact? As argued above in respect of basic votes, at present the G7 members of the IMF command just over 40% of voting power and need only find one further

    Executive Director’s vote in order to pass a decision. In other words, ten or so

    members of the institution can pass a measure. A double-majority voting rule would mean that decisions would have to command not only 50% of voting power, but also the support of, say 50%, of the membership. In others words, the G7 would have to forge a wider alliance of members in order to pass measures. This would immediately create an incentive for the powerful members of the Board to forge alliances with the numerically-large African constituencies. One obvious issue to which an extension of

    the decision-making rule is the institutions’ leadership selection (more on this below).

Enhancing capacity to prepare, to lobby and to have a voice on the Board

     10

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