Ethics Assessment: International Financial Institutions
Do International Financial Institutions behave ethically? A Case Study of the IMF in Africa
Introduction
International financial institutions (IFIs) have worked continuously on the African continent since the 1970s in an attempt to modernise the economies of Sub-Saharan African states. However, the popular image of African life remains as one of poverty and hardship – and unfortunately, this is not entirely inaccurate. Between December 2014 and 2017 alone, the value of outstanding IMF programmes in Africa rose from $1.8 billion to $7.2 billion (Friederich & Harb, 2018)(Butler & Dumoluin-Smith, 2018). Measured by number of countries under disbursement, the IMF is highly engaged in Africa in comparison to elsewhere. Once more, the financing gap between most countries and the IMF remains around 10%, with Tunisia at a staggering 12% of GDP equalling $5.1 billion. Across all recipient countries, growth in GDP averaged 0.5% annually and debt was only decreasing at a rate of 10.7% in the same time frame.
Indeed, this leaves a question to be answered: what exactly are these IFIs doing to warrant their continued but underwhelming work, and why does it appear Africans are no better off for the presence of these IFIs? SPI’s analysis will cover the previous fifty years of African financial and economic history whilst endeavouring to understand what institutions such as the IMF have been doing during this period. The purpose of this paper is to understand how African states and IFIs interact, what may be contributing towards lower than desired efficacy of IFI programmes and ultimately whether this relationship is an ethical one on the part of the IFI.
Definitions and Clarifications
This topic is a broad one, even when limiting the location to Africa and the institutions to only one. Therefore, it’s important to proceed without any misunderstandings.
International Financial Institutions –These institutions are founded by two or more countries and are henceforth subject to international law. For instance, the IMF’s fundamental mission is to ensure global stability through surveillance, technical assistance and lending. The World Bank for instance focuses more on ending poverty. However, Per Jacobsson sets out a more general, but helpful definition in which he claims IFIs work to (a) continue globalisation and as such improve living standards and equally (b) inhibit conflict through the promotion of “cooperative partnership” (Camdessus, 2005. Pp 3).
Poverty – Poverty is a nebulous term when used generally, but within this discussion poverty is understood almost entirely in economic terms. The detriment to Africans by the policies of IFIs is measured through metrics associated with income, the purchasing of commodities, labour and land ownership. Poverty is primarily a condition of dearth.
Ethical – Ethical behaviour can be understood very simply as behaviour driven by an established concept of right and wrong. More specifically, behaviour being deemed as ethical involves a consideration of normative ethics, as we are concerned with the practical element of behaving in accordance with a set of ethical norms.
IMF Loan Structures
Central to this argument is an understanding of how developing nations in (mostly) Sub-Saharan Africa receive support from IFIs. Obviously, the majority of this support is financial as programmes are all based on loans. Loans of this magnitude are not given out as easily as simple bank loans or small loans to developed nations. However, there is significant variation between different programmes offered not only by different IFIs, but also within one institution. In this instance SPI will focus on the IMF primarily, allowing for general inferences about IFIs whilst retaining a specific direction for this research.
The IMF offers most African nations the Extended Credit Facility (ECF). This medium to long term system of support is importantly distinct from programmes offered to developed countries. The two key elements of this programme are the (a) lack of interest payments required from the borrower and (b) the grace period afforded to the borrower (Butler & Dumoluin-Smith, 2018). The latter is simply a measure taken to allow for short term issues to be resolved through a period of unbridled spending, as most often IMF support is sought during intense, short-term crises. More importantly, the lack of interest is symbolic of a significant part of the debate on IFI behaviour in Africa. In place of interest payments, recipients of the ECF programme are expected to conform to strict guidelines under the specific lending instrument afforded to them (SFC). This is where the IMF applies its surveillance and technical assistance. Where recipients fail to conform, assistance may be withheld just as a debtor would foreclose on a borrower if interest was not paid. The measures imposed are fairly comprehensive in the coverage of three main areas. Firstly, the IMF sets quantitative targets and uses them to monitor success of macro-economic policy. This usually serves as a measure of the short-term success or failure of IMF intervention and of how well a country is reacting to a recent shock. Long term damage is structural and contributes to a lot of the issues faced by LDCs – poor infrastructure, limited trading partners and corruption, to name a few. Secondly, ECF programmes require that structural benchmarks are taken periodically to assess the progress of reforms to critical structures in the economy. Finally, both of these conditions are accompanied with a condition of continuity – if countries fail to meet targets and benchmark poorly, then they risk an alteration or termination of their programme.
The Benefits of IMF assistance
Interest Free Loans for African States
In of itself, this is not problematic. Indeed, the IMF and its operations are handled by highly qualified and intelligent individuals with a thorough understanding of how specific financing can improve macroeconomic performance as well as a country’s overall standing. Replacing interest payments with conditions of assistance not only seeks to prevent further debt and damage to already struggling economies, but serves to make long-term structural improvements to historically under-performing economies.
The Catalytic Effect & Investor Sentiment
There is also evidence to suggest the presence of the IMF in an advisory role has a secondary positive impact as IMF guidelines tend to reassure potential investors and therefore, improve sentiment (Butler & Dumoluin-Smith, 2018; Vadlamannati, 2017). In the long-term this should direct more private sources of investment toward African countries, reducing their dependency on IFIs and government aid. The catalytic effectof IFI involvement is argued to be of greater value than its supplying of funds (Bird & Rowlands, 1997). Indeed, the IMF specifically has “emphasised the importance of its catalysing role, maintaining that its overall influence on international financial flows is much greater than would be suggested by its direct provision of finance alone” (Bird & Rowlands, 1997. Pp 967). Indeed, the catalytic effect of drawing in outside investors is essential for providing relief during short-term periods of crisis, and correcting long-term balance of payment deficits for countries with deep, structural issues in the economy. However, some believe IFIs like the IMF may cause certain specific issues in LDCs, despite the general improvement to economic management and performance. Partially to blame for some of these issues are private investment groups who were drawn in by the IMF, as will become clear later.
The Problems with the IMF in Africa
The Inherently Imperfect Balance of Power
The clashes between recipient states and the IMF result in a number of issues affecting the individual and the state as a whole. These issues range from poverty to sovereignty and representation. Not only are targets set and policy advice given by the IMF, but recipient countries are in constant communication with IMF advisors, which culminates in frequent progress reviews. For instance, in June of 2016 due to a failure to meet certain budget cuts, Ghana’s programme was under review as to whether it would receive a fourth disbursement of $115 million (Kpodo, 2016). It would be disingenuous to argue that African recipient states are controlled by the IMF. There is usually a significant amount of negotiation regarding targets, policies and timings – after all, the IMF is there first and foremost to help. However, the fact of the matter is the IMF undoubtedly holds the upper hand in each of these negotiations as, to put it crudely, they hold the money.
This is the first ‘problem’ so to speak. However, labelling it a problem is probably inaccurate. It is difficult to avoid a situation in which a lender does not have a certain amount of power over a borrower. It appears that the position of the IMF is based on relative morality, rather than on a strict sense of deontological ethics. That is, rather than feeling bound by duty to act a particular way according to universal truths, the IMF tries to have a net positive influence on the countries it helps and in this pursuit accepts minor damage in areas unrelated to the economy. However, as will become clear, this damage is not minor and the IMF should indeed have an ethical duty to prevent these damages occurring.
IMF Economic Liberalisation Policies and African Rural Livelihood
Policies encouraged by the IMF usually revolve around significant economic liberalisation and therefore, can drastically affect commodities pricing (Bryceson, 2004). Through controlling the prices of primary agricultural commodities, such as seeds and grain, smaller farms often suffer under IMF involvement. Once more, as the agricultural sector of the economy shrinks under IMF direction, the price of secondary agricultural commodities, primarily food, rises due to the smaller supply. The rising price of commodities usually negatively affects individuals who are already poor, especially in the case of African farmers who rely on cheap commodities to sustain smaller farming operations. This reduces the viability of an economic reliance on agriculture for many African families and therefore leads to forced relocation and significant community damage. The causal relationship between IMF policy and commodity inflation is covered in more depth under “The Mechanism for Rural Deprivation”.
Economic Liberalisation
Primarily the IMF’s attempts to liberalise African economies focus on enforcing specific changes to be made by African governments and businesses. Privatisation is highly encouraged; land allocation is determined by new criteria focussing on larger commercially successful farms; manpower and employment is kept to the required level to avoid wasted expenditure and the utilisation of existing capital resources is redirected by IMF advisors and their consultants (Hodd, 1987; Bryceson, 2004.) Liberalisation policies are encouraged with the goal of transforming African states into “enabling environments” for economic success (Bryceson, 2004. Pp 620/1). According to the IMF, such environments are defined in the absence of interference from African structures. Once more, this interference is not economic, but rather “social and legal”, referring to “institutions and culture whose deficiencies were held to generate high risks for business”. This aversion to existing African institutions, which are not even economically or financially focussed, holds potential for the erosion of significant social, political and cultural institutions within African states. Indeed, a common criticism of IMF policy is the specific nuances of each state’s situation are not accounted for in planning programmes and it is easy for the IMF to appear as a brute force for westernisation.
From a simple ethical perspective, the IMF fails to consider whether its desire to do good extends toward the largest group. In fact, by attempting to remove or ignore existing social and political institutions the IMF fails on a utilitarian level to provide the greatest good for the greatest number. Although it caters for the needs of many on an economic level, as it attempts to promote economic success, it’s tendency to allow social, cultural and political institutions to fall or be ignored takes away from the good it does for the economy. The idea that short-term sacrifice is made for long-term utilitarian good was common previously but has since been rebuked by both the ongoing failure of IMF policy, and the transformation of short-term sacrifices into multi-generational alterations to African institutions
Impact on Rural Livelihood and Community
More serious still is the impact of IMF policy on smaller, rural communities throughout Sub-Saharan Africa. Similarly, in its broad approach to African legal, social, political and cultural institutions, the IMF tends to ignore the effect that an economic desire for efficiency can have on social cohesion and community survival.
The process of “deagrarianisation”, as described by Bryceson, is one of adjustment – occupation, income, social identification and dwelling all change through this process. (Bryceson, 2004). Occupation and income are now unrelated to agriculture or animal husbandry and the population relocates toward more urban areas, people become aware of the new social space they inhabit (Bryceson, 2004). In Tanzania for example, agricultural incomes declined by over 71% between 1979 and 1992. Across the continent, after 1990 between 60% and 80% of household income on the continent was from non-agricultural sources – previously, it had been closer to 40%.
These processes are similar to the urbanisation which defined the nineteenth century in Western Europe, although with dissimilar causality. “Depeasantisation” is another term used by Bryceson in this area of research. It more precisely describes the undermining of peasant communities, especially relating to their economic capacity and continued social cohesion (Bryceson, 2004). The relevance of these terms is that, indirectly, IMF policy has been shown to contribute toward these processes. The IMF’s contribution to these damaging processes and the lack of support for these communities is explained and evaluated below.
The Mechanism for Rural Deprivation
Liberalisation usually has the effect of reducing the supply of the commodities used and grown by small-scale, poorer African farmers. As inefficiency is wiped from the market the smaller farms, embodying the type of inefficiency the IMF hopes to remove, are the first to go. The method of removal usually involves guiding smaller farmers towards renting their land to larger farmers. This is rarely done directly by the IMF and instead is achieved indirectly through policy which tends to crush smaller farms – this is the causal relationship.
The first step in this process of deterring smaller farms from continuing their practice is to make their environment financially inhospitable. Private investors, brought in by the IMF, raise the prices of primary agricultural commodities. Already successful, large and efficient farms can adapt to this increase whilst the smaller farms cannot. As such, output from small farms decreases and so too do profit margins. In the interest of economic stability and survival, smaller farm owners are forced into selling or renting their land to larger, commercial farmers. These larger farmers are usually recipients of significant IMF direction and thus land allocation and usage is overseen by the IMF once it is given up by smaller farmers (Bryceson, 2004). Simply put, the result of this policy is that smaller farmers tend to give up and find new occupations and larger farms become commercially successful. This finding is backed by extensive research conducted by the DARE[1]programme in Ethiopia, Nigeria, Tanzania, Malawi, Zimbabwe and South Africa helps to paint a picture of the effects of this IFI policy across the continent. The research yielded one main finding: The peasant groups previously discussed were dismantled by IMF policies across each of these states, apart from South Africa[2].
Once again, a utilitarian evaluation of IMF behaviour regarding rural livelihood yields a similar conclusion to an evaluation of IMF behaviour regarding existing African institutions. Although the IMF’s pursuit of improvement through economic means is noble, it fails to achieve the greatest good for the greatest number when it (a) forces occupational change due to deliberate changes made to the economic environment and (b) damages communities which existed through a common bond of agricultural work. By ignoring non-economic factors, IMF policies result in unethical practices that tend to harm as much as help.
IMF Structural Issues of the Organisation: “Bad Governments” and Vote Share
During the 1980s and early 1990s, liberalisation and Friedmanite free market policies were widely accepted as the means for economic development. This approach has not really changed significantly. However, what has changed is the perception of governments which had not yet begun to implement such policies. In the past, African governments were categorised by the IMF as bad or good. This classification process relied upon one factor – whether they had accepted the reform and advice of economic liberalisation. Bad governments were often ignored by the IMF and other IFIs alike, whereas good governments received the lion’s share of available resources. It was a case of what Bryceson calls “the efficient market” versus “the corrupt state” (Bryceson, 2004).
This perception began to deteriorate in popularity around 1991 after numerous studies from across Sub-Saharan Africa revealed that, whilst the number of states accepting IMF assistance had risen, indicators of economic development and high performance had declined. However, the perception of Africa as generally inept remains in some part today, represented by the vote-share system of the IMF. Whilst it is unsurprising the USA, UK, Japan and other developed economies hold the majority of the vote share, more concerning is the disparity in votes between LDCs. Indeed, during the era of the bad-good distinction, the percentage of votes held by African countries, totalling 43, was 5.2%. Comparatively, other LDCS, totalling 80 countries, had a share of 27.3% (Hodd, 1987). This low representation excludes African governments from being able to direct and influence operational policy in their own countries. Indeed, some argue that as aid recipients they should not have this role. However part of the issue is the IMF’s tendency to ignore the nuances of each state’s economic situation and the secondary effects of new policies in these areas. Once more, it is concerning that Latin American LDCs hold a comparatively larger share of the vote than African countries. One naturally is inclined to think that the USA, the primary contributor and power in the IMF, have a vested interest in the development of its closest potential trading partners, although that is an entirely different research direction if of itself.
The ethical dilemma here is one of inequality of distribution. Simply put, it is unfair that African states have little say in how their countries are affected by IMF policy. Perhaps more importantly, this inequality in control/vote share has not and does not serve Africa well. Consulting Rawls’ theory of justice, unequal distribution should be permitted only where those worst off will be better off under this arrangement. Once more, it is demonstrably true that under this unequal division of power it is harder for African states to occupy positions of power.
Conclusion
Perhaps the Sub-Saharan Africa section on the IMF website represents a stronger case for its policies than put forward here. Each heading relates to growth, exchange rates or public debt. Each of these are important for understanding the macroeconomic climate and thereafter implementing effective policy. However, there appears to be little to no consideration of how its policy effects African society more broadly, especially regarding communities which tend to be disturbed through the promotion of market efficiency. Indeed, the impact of these issues could be mediated if African governments had a greater input into the direction of IMF policy in Africa. In recent years there has been an increase in the issuance of sovereign bonds by nations such as Ghana (Allen, 2017), and an increasingly strong relationship formed between China and a number of African states (Agbebi & Virtanen, 2017). Perhaps the prevalence of African nations seeking out alternative means of economic improvement, away from both the USA and EU (Goodison & Stoneman, 2004) suggests IMF policy requires further ethical scrutiny.
Bibliography: Referenced Works
Agbebi, Motolani. Virtanen, Petri. (2017) Dependency Theory – A Conceptual Lens to Understand China’s Presence in Africa? Forum for Development Studies, 2017 Vol. 44, No. 3, 429–451
Allen, Kate (2017) African Nations turn to bond markets for finance needs, Financial Times. https://www.ft.com/content/08d5c562-994f-11e7-b83c-9588e51488a0
Bird, Graham. Rowlands, Dane (1997). The Catalytic Effect of Lending by the International Financial Institutions.The World Economy, Vol. 20, No. 7, Pp 967-991.
Butler, Melissa. Dumoulin-Smith, Adrien (2018). The IMF in Sub-Saharan Africa. White & Case LLP Publications and Events. – https://www.whitecase.com/publications/insight/imf-sub-saharan-africa
Byrceson, Deborah Fahy. (2004) Agrarian Vista or Vortex: African Rural Livelihood Policies. Review of African Political Economy, Vol. 31, No. 102, Agendas, Past & Future, pp. 617-629
Camdessus, Michel (2005). International Financing Institutions: Dealing with New Global Challenges.IMF, Washington D.C.
Goodison, Paul. Stoneman, Colin (2004) Europe:Partner or Exploiter of Africa? The G-90 & the ACP. Review of African Political Economy, Vol. 31, No. 102, Agendas, Past & Future pp. 725-734.
Kpodo, Kwasi. Ghana says on track to halve budget deficit after IMF deal.The Africa Report – http://www.theafricareport.com/West-Africa/ghana-says-on-track-to-halve-budget-deficit-after-imf-deal.html
Rawls, John (1971). A Theory of Justice
IMF (2017) Sub-Saharan Africa – The Path to Recovery– https://www.imf.org/en/News/Articles/2017/10/27/na103017-sub-saharan-africa-the-path-to-recovery
Non-referenced Works
Amsden, Alice H, Good-bye Dependency Theory, Hello Dependency Theory (Studies in Comparative International Development, Spring 2003, Vol. 38, No. 1, pp. 32-38.)
Boughton, James M, The IMF and the force of History: Ten Events and Ten Ideas that Have Shaped the Institution (Washington, D.C., International Monetary Fund, 2004)
Boughton, James M, Does the World Need a Universal Financial Institution? (Washington, D.C., International Monetary Fund, 2005)
Noy, Shiri, Globalisation, International Financial Institutions, and health policy reform in Latin America (Dissertation/Thesis; ProQuest. 2013)
[1]This was a research group spanning across most of SSA between 1996 and 2002. It was funded by a Dutch government branch and focussed on livelihood policies in towns and areas in which agricultural work was common historically.
[2]This by no means denotes positive action taken by the IMF – the fact of the matter is that, since 1913 the ability of black Africans to purchase land for farming in South Africa has been significantly inhibited.