– By Nancy Dubosse –
This week the scarlet letter is worn by the international financial institutions (IFIs).
Two weeks ago, the IMF scored some kudos in the realm of public opinion, even among staunch IMF critics, for rescinding an emergency loan of $100 million to Haiti and re-offering it as a grant. But how did Haiti get to the point where taking on another loan could actually put lives in danger?
Haiti’s debt is often in the news, but not enough attention is paid to its debt service. Given fixed resources, servicing a public debt implies fewer resources for social services and development programmes. According to Paul Farmer, in Haiti’s case, by the end of the 19th century, 80% of the national revenue was earmarked to repay debt. The Haitian Platform Lobbying for Alternative Development has also written extensively on the tension between debt service and human rights. It estimates that by 1999, the country was paying $38 million in debt service; while the health budget the same year was $26 million. Between 1995 and 1996 in particular, Haiti paid 900 million gourdes in debt service. During the same period, only 120 million was invested in agriculture. Please note that half the population lives in rural areas. According to the Haitian Central Bank, in 2006 alone, total debt service paid was $57 million, with 47% going to IADB, 30% to the World Bank, and 10% to the IMF. Voila!
Internationally, the ineffectiveness of development assistance became the subject of international discussions in Paris in 2005. The outcomes of this meeting was a document outlining the way in which aid should be delivered, coordinated, managed and monitored.
The baseline for engagement of international financial institutions (IFIs) with developing countries has been laid by the Paris Declaration for Aid Effectiveness (2005). All the major IFIs and most developing countries are signatories to the Paris Declaration. It sets the criteria for ensuring both the effectiveness and efficiency of development under five governing principles:
- The principle of ownership dictates that development programmes should be the result of a consultative process within country.
- The principle of alignment dictates that donors should direct their assistance to the identified priorities of recipient countries, using the latters’ public financial management systems.
- The principle of harmonization dictates that donors must coordinate their assistance so as to minimize transaction costs and duplication of administrative functions for developing countries.
- The principle of managing for results dictates that development programmes should be monitored and evaluated according to mutually agreed targets.
- The principle of mutual accountability dictates that donors should report to both their peers and their own constituencies regarding the nature, scope and destination of development assistance.
A historical analysis of World Bank development assistance in Haiti cited the use of aid towards the privatization of infrastructure and the delivery essential social services (e.g. education and health) by NGOs, instead of government. Obviously, this practice undermined the capacity of the central government to provide these services and improve its management capabilities.
Marc Bazin, former Minister for Planning and External Cooperation, in a response to the World Bank Country Assistance Evaluation of Haiti (2002), argued for a development assistance programme in two parts. The first would be directed towards immediate relief, as hunger, malnutrition, HIV/AIDs, et al, were endemic and life threatening. The second would be a programme with the long-term goal of sustainability and good governance, as well as enhancing economic livelihoods.
Even as Bazin’s response to the WB was pre-Paris Declaration, he also spoke directly to the use of conditionalities that have traditionally accompanied development assistance, expressing the view that aid to the first, given its urgency, should be “ad hoc in nature and would be judged mainly on their ability to contribute directly to the success of poverty alleviation efforts instead of needlessly obstructing them”. Among the suggested conditions that Bazin proposed were close links between external financing and broad participation and integration of the poor, the promotion of decentralized implementation structures, an increase in the contribution of the State to education, health and nutrition, and convening national dialogues on poverty reduction. Wow!
The Inter-American Development Bank (IADB) is the single most important creditor of Haiti. The Bank holds 40% of Haiti’s external debt (US$550 million out of US$1.3 billion), which represents 13% of the country’s GDP. Presciently, the recommendations in the IADB’s Country Performance Assessment: Haiti (1990-2000) reflected the main grievances of the high-level meeting in Paris.
On general ineffectiveness:
“The Bank did not follow through and did not generate a relevant body of knowledge on the development challenges that Haiti faces. …. when the presence and engagement of the IDB should have been capitalized in terms of generating a solid body of knowledge on the Haitian challenges… Key studies are missing, for example regarding the investment gap needed to attain desirable levels of infrastructure and services in key areas such as health, education and transportation that could inform policy making, or the long terms prospects of a sustainable fiscal system in Haiti.”
On the absence of ownership:
“Based on the accumulated experience in Haiti over the last twenty years –that shows that donors do not know how to work to tackle the country’s development challenges in face of the implementation challenges— operations should be meticulously drafted with a demonstrative design in mind. However, the current portfolio was not designed with these considerations.”
“[The IADB] has continued to work through project executing units that are in part justified by the lack of confidence on the public management system, to which the reform efforts supported by the policy-based loans are directed. Besides this contradiction, the technical assistance and analytical work required to tackle the root causes of the problems faced in terms of public finance and fiscal management have not been sufficient.”
Back to the IMF.
In 1996, it launched the Highly Indebted Poor Countries Initiative, which was meant to alleviate the debt burden of poor countries provided they met certain criteria and fulfilled certain conditions. The lure of HIPC, after graduating, is that poor countries would have more fiscal space for development financing and a sustainable level of debt.
Haiti is also a good example of the arbitrariness of the IMF’s HIPC criteria. Haiti could not qualify for HIPC until 2006, when its debt to exports ratio rose to 189%, though the IMF threshold is 150%. Yet all along, the IADB, which held 40% of Haiti’s external debt stock, represented 13% of the country’s GDP. The failure to evaluate a country’s potential to repay as an indicator is one of the main concerns with the IMF’s debt sustainability framework. Until very recently, Haiti had been a haven for export processing activity, yet the government’s ability to raise revenue internally was impaired. This was somehow not perceived as a source of potential instability.
An additional disparity is yet to be acknowledged. The volume and value of total exports does not necessarily reflect the revenue from exports. This is because Haiti, like other countries engaged in export processing and assembly activities, allows repatriation of profits. Further, income distribution effects are minimal, since the main lure of export processing is the lower-than- average labour costs.
Further, loans undertaken after 2006 have not been factored into the fiscal space assumed to be created by the debt relief. As of end 2006, outstanding external debt amounted to $1418.6 million. In spite of the risks and the $32.4 million, as of 2006, that Haiti already owes the IMF, the former’s debt to the IMF is projected to rise to 4.2 billion gourdes by 2009, 86% of debt service in 2007, and 6% of net international reserves.
The IFIs cannot be absolved of the questionable lending practices to dictators and military juntas. The World Bank has admitted as much in its evaluation of the historical performance of its development assistance.
“The efficacy of the Bank’s programme has been negligible and it efficiency, low…..lending has had little impact. Based on both its impacts and the ratings of its individual components, the outcome of the assistance programme is rated unsatisfactory (if not highly so), the institutional development impact, negligible, and the sustainability of the few benefits that have accrued, unlikely. The Bank and other donors erred by offering traditional assistance programmes without identifying the fundamental governance and political barriers to development.”
Ironically in 2002, the World Bank identified its own comparative advantage, among a field of crowded donors, as working with government and civil society to build institutional capacity and improved governance.
From an economic rights perspective, any fiscal space created by debt relief should be directed toward essential social services and decreasing the dependency on aid and not on new loans. Further, the international financial community had 206 years (Haiti won its independence in 1804) to assist with strengthening the capacity of the State and didn’t do so. Why do we need them now?
Filed under: Economic Governance | Tagged: debt, Haiti, IFI, IFIs, IMF, Transparency, World Bank, world governance | 2 Comments »