Issues and Debates

Conditionality

The main issue surrounding multilateral aid is what is known as conditionality. Conditionality refers to the conditions attached to aid money dispersed from multilateral organisations, in particular from multilateral development banks like the World Bank and the Asian Development Bank. When these organizations give aid to a country, the country receiving aid promises to pay it back, but they also promise to undertake a series of other measures that have become very controversial. The actual conditions do vary depending on the organisation and conditions have changed over time in response to various criticisms, however the underlying premise of the conditions has remained the same. The basic set of conditions that each country receiving aid must undertake includes the following:

• Cutting back on government spending. In order to reduce the cost of government, countries receiving loans are required to reduce the size of government which includes cutting back on government spending and also reducing the number of government departments and services. This is often concentrated in areas such as health and education where costs are high, which has a major impact on ordinary people as they have reduced access to health care and schooling.

• Privatising key sectors of government and public services. In order to stimulate economic growth and reduce the costs of government, key sectors such as water provision, essential infrastructure, hospitals, electricity, and natural resource management are privatised, meaning they are sold to private companies, most of which are foreign, who attempt to run these sectors for a profit. This has been very controversial as it reduces the power of governments and puts control of key sectors into foreign hands, which may not have the best interests of the country in mind. By running these sectors for profit the costs of services for ordinary people have tended to increase.Private companies are not able to be voted out like governments and it can be difficult to ensure they act responsibly.

• Export-led growth. In order to bring in more money from trade, countries are encouraged, and in some cases required, to reorient their economies towards producing goods for export rather than for consumption within their countries. In many poor countries this means producing agricultural goods that can be sold in global markets or exporting manufactured goods. Often this means goods such as coffee, soy beans, and tea, as well as textiles. The problem is that many other countries produce the same goods, so the prices these goods fetch on the global market are quite low. At the same time these countries must import other goods that they no longer produce. This can be very expensive particularly when the returns from agricultural goods are low and fluctuating exchange rates usually work against poor countries. In addition a reorientation towards exports shifts resources away from subsistence agriculture, which plays an important role in maintaining local livelihoods.

• Lifting essential subsidies. In many poor countries governments subsidise essential items such as rice, grain, oil, and even petrol. They do this so that the prices of essential items do not prohibit people from meeting their daily needs. This can be very expensive for governments to maintain as they bear the costs of rising global prices to shield their populations. Often countries receiving loans are required to lift these subsidies and allow goods to be sold at ‘market prices’ making them very vulnerable to inflation, the fluctuating exchange rates of local currencies and to shortages. When prices rise this has a major impact on ordinary people who are often no longer able to meet their basic needs.