The Conditionalities of International Financial Institutions: the Inherent Impasses of Policy Externalisation

The financing of international financial institutions (IFIs) for countries in financial need has always been based on conditional lending. Finance is disbursed on the condition that the borrowing country implement a set of policies that are devised by the IFIs (the lenders), with these policies expressing a specific theoretical paradigm, i.e. the neoclassical views of economic causalities. This mechanism has become particularly visible in developing countries from the 1970s onwards, after the fall in commodity prices revealed the vulnerabilities of these countries, as all of them have been subjected to similar conditionalities. This ‘exchange of finance for policy reform' is an openly asymmetrical device. Moreover it can be described as a ‘policy externalisation' and simultaneously a deep intrusion of outside entities within the sovereignty and the political economy of a country. The effectiveness of the reforms-cum-conditionalities that were prescribed by the IFIs has been limited, especially in Sub-Saharan Africa (almost four decades of conditional lending), leading the IFIs to make modifications (e.g., on ‘governance', etc), which did not change the framework. The paper argues that this conditional policy externalisation is detrimental to the borrowing economies, due to the irrelevance or the non-developmental character of the content of the prescribed policies (‘austerity' with liberalisation). Indeed, the countries that achieved high growth, e.g. the Asian ‘developmental states', did so via economic-political arrangements that often were exactly the opposite. The paper also argues, moreover, that conditionality cannot be effective because it is affected by intrinsic impasses, which stem from the concept of conditionality per se due to the asymmetry inherent in the device of conditionality and to tensions between effectiveness and credibility. Despite the intrinsic ineffectiveness of the device and almost four decades of detrimental policies, the resilience across time and countries (from Sub-Saharan Africa to Greece) of both the device and policy contents thus seems a paradox: besides reasons related to cognitive issues (e.g., beliefs that the neoclassical framework is ‘true'), it may be asked whether rather than the economic effectiveness of the ‘content' (the prescribed policies), the continuation of the ‘form' of the device, i.e. the global political economy that underlies the lenders-borrowers asymmetry, is not in fine a key aim of the policy externalisation that is created by conditionality.