GOVERNANCE CONDITIONALITY AND THE REFORM OF MULTILATERAL DEVELOPMENT FINANCE

INTRODUCTION "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else." John Maynard Keynes, The General Theory of Employment, Interest and Money (1936) "Justice without strength is helpless, strength without justice is tyrannical. Unable to make what is just strong, we have made what is strong just." Blaise Pascal, Pensées (1670) The current financial crisis in Argentina has revived with a vengeance the debate on the reform of the international financial architecture. The last decade has been particularly stormy for the once-promising emerging markets, from the Mexican peso crisis in 1994 and the subsequent "tequila effect" in Latin America in 1995, the Asian currency debacle in 1997, the Russian financial troubles in 1998, the Brazilian devaluation in 1999, to the current state collapse in Argentina, the largest debt default in history. Unable to shake a deep recession triggered by Brazil's currency devaluation in January 1999, Argentina has suffered almost four successive years of recession. A country that was once heralded as a model of the neo-liberal economic reforms advocated by the Washington intelligentsia, Argentina has seen its rate of poverty skyrocket to 40 percent of the population, dragging down an important portion of the lower middle class. The economy has stagnated since 1998 and is in a state of bankruptcy. Furthermore, and unlike Brazil in 1998-99, the Argentine crisis has developed into a profound crisis of governance, as the result of the mismanagement of the economy, an inflexible currency board established a decade ago and the ineffectiveness of political institutions. Argentina's collapse is "a decline without parallel"1. A particularly salient aspect of the reform of the international financial institutions (IFIs) concerns the uses, misuses and abuses of conditional lending. Conditional lending has been increasingly used not only to induce policy reform, but more fundamentally to alter the institutions of governance in borrowing countries. This new generation of conditionality has been labeled structural conditionality in the case of the IMF (Collier and Gunnning 1999; Goldstein 2001) and governance conditionality in the case of the World Bank and its sister regional development banks (Kapur and Webb 2000). The controversies concerning the effectiveness of governance conditionality emerged with great force in the aftermath of the Asian crisis in 1997. The role of the IMF in Indonesia was severely criticized, as the IMF's standard medicine only accentuated poverty (Feldstein 1998). The IMF's role in East Asia in the late 1990s went far beyond the role it played in Latin America in the 1980s download