Work cited throughout this writeup: Miles Kahler, "External Influence, Conditionality, and the Politics of Adjustment" in The Politics of Adjustment , pp. 89-133.
Simple repayment...does not capture the continuing interest that International Financial Institutions have in developing country policy trajectories. The behavior of the IFIs (or aid agencies) is not profit-seeking, rather it satisfies the goals of their principals, particularly the largest industrial states, who have both economic and strategic interests in particular developing countries. (Kahler 102)
How do outside actors affect domestic policy change in developing countries? Behind the economic intervention efforts of international financial institutions (hereafter, IFIs - namely the IMF and World Bank), are wider-ranging and less predictable goals than those of other external actors. While private lending institutions such as commercial banks are mainly interested in profitable repayment, and other country actors can be reliably predicted to be acting in line with their foreign policy goals, IFI policies keep international macroeconomic policies in line with the Washington Consensus. How IFIs further these implicit aims is Kahler's concern, and "External Influence, Conditionality, and the Politics of Adjustment" outlines the political issues surrounding structural adjustment programs and how conditionality brings these external actors into the development mix.
Broadly, one may define conditionality as bargains between states, private creditors, other governments and IFIs that constitute an exchange of policy changes for external financing (appearing in the form of debt rescheduling, relief, multilateral credits, bilateral loans, and aid grants). When lending by one set of creditors (commercial banks, bilateral aid donors) is made dependent upon the lending decision of another (such as the IMF), it is termed "cross-conditionality". This phenomenon is also known in dependency theory as embedded conditionality, as its use may be perceived as being embedded in a larger sphere of international phenomena, seeking to influence the actions and outcomes of state policy for foreign profit. IFIs of course deny the formal use of cross-conditionality, although performance criteria, prior conditions, and specific conventions -- the "arcane technical vocabulary" of IFI loan agreements -- amount to what Richard Feinberg calls "de-facto cross-conditionality."
The convergence of institutions on "structural" issues of economic management...has necessarily produced behavior that appears as cross-conditionality.(Kahler 112)
These include using similar criteria in both World Bank and IMF agreements, as well as the problem of indirect financial linkage, also known as "creditor coordination": when the failure to meet one organization's targets is caused by suspension of payments by another. IFIs participating in such regimes could perhaps be seen as acting hegemonically, hence Kahler's smirking reference to "creative conditionality": "their {the IFI's} willingness to maintain a low profile became part of the underlying bargain" (Kahler 123).
The need for IFIs to "move loans," that is, encourage renewal of lending, in the case of the World Bank in order to maintain its own solvency, must not be overlooked when studying conditionality in SAP agreements. Kahler suggests that suspending lending when governments don't live up to their agreements would bring about more commitment from recipient governments in the long run. It is almost impossible to achieve an acceptable mix of financial support and conditionality in SAP agreements because the necessary information for "selection and monitoring" is simply insufficient. One fact that has been widely accepted is the common sense notion that the less political the adjustment is, ie. if an agreement is focused on price regulation rather than than the recipient's track record on human rights, the less political resistance that agreement will meet. The domestic political resistance to structural adjustment and the moral hazard for IFIs that ignore such conflicts are not to be overlooked as some primary factors in the failure of many structural adjustment programs.
While economists would suggest that IFI credibility could be extended with more emphasis on efficiency in agreements, i.e. more adequate financing and less reliance upon cross-conditionality, implicit in these demands is the need for more technocratic intervention by the IFIs. Conversely, sociologists would imply that we need less technocratic leadership; instead of "area specialists" these client states need teachers to train bureaucrats to be able to implement IFI initiatives. "Learning must be extended from technocrats to political principals and to implementing agencies" (Kahler 131). Furthermore, the IFIs' own short institutional memory is reinforced via cross-conditionality.
IFIs themselves must change as they reassess national and international conditions...one of the costs of empowering their technocratic allies may be more serious debate over the correct policy line. (Kahler 131)
Cross-conditionality generates complex political dilemmas for developing countries, allowing IFIs to subtly exert hegemonic influence over client states. Cross-conditionality also poses a bureaucratic pitfalls for the credit reputation of a developing country, adding "noise" to the record of credit, creating increasingly intricate goals for the structural adjustment process, and impeding efficient program implementation because of institutional overload, misguided financial linkage and misleading signals. Indirect financial linkage can itself bring about program failure, and is the source of much political resistance to adjustment.
Levels of trust and cooperation inevitably declined when IFIs started to be seen not as agents for developing countries but as bill collectors for a creditor cartel. (Kahler 106)
The "order of play" in cross-conditionality is paramount to success in adjustment. Countries that commit to economic adjustment programs of their own volition, before financial support from IFIs arrives, tend to be the most successful.
Deducing the elements behind success seems far simpler than discerning the reasons programs fail. Structural adjustment programs often bring about an initial period of economic stagnation, inciting domestic political conflict between a country's leadership and its rivals. Conditionality often fans the flames by adversely affecting certain groups, inspiring nationalist resentment over intervention and sometimes even shutting down entire programs -- euphemistically termed "involuntary defection":
Political resistance to adjustment from groups that will suffer costs poses the knottiest issues for those outside a country who are attempting to further the resisted changes. (Kahler 120)
IFI's try to encourage recipient countries to claim "ownership" of their adjustment program, in order to avoid "scapegoating" the IFI for problems. "The managing director of the IMF, Michel Camdessus, publicly refused to accept the role of lighting rod, passing responsibility back to national political leaders":
It is a prerogative of sovereign states to decide themselves what measures are required for recovery, however unpleasant those measures may be. And it does them honor if they take responsibility for policies in the eyes of their people, even in the most adverse circumstances.
(Kahler 122)
Given the political implications of cross-conditionality, one would think Kahler would be writing in opposition to its use, but one would be naïve to do so. In several instances Kahler indicates that with the evolution of larger macroeconomic management insititutions like the WTO and the EC, and certainly with the 1989 working paper making cross-conditionality permissible on certain projects undertaken by both the World Bank and the IMF, all signs point to more "creditor cartels" in the future. Kahler, however, does not shy away from citing a study of Latin American programs which argued that despite cross-conditionality, the power of the IFIs is overstated: "The ability of the IMF to impose programs from the outside is distinctly limited" (Kahler 99). Perhaps Kahler's paper will lend insight toward extending the power of IFIs in the future, for while his contribution is indeed thorough, it never diverges from its aim to uncover the impediments to convergence at the "Washington Consensus". Considering that this "consensus" represents the neo-liberal free market ideological underpinning of the Bretton Woods Institutions, Miles Kahler is certainly at its service, never mentioning the possibility of (or indicating client states' desires for) a "post-Washington consensus".