The Paris Declaration was signed in 2005 with official donors committing to improve the effectiveness of their official development aid (ODA) towards greater reductions in poverty and inequality. The aid reform agenda promoted spans ownership, alignment, harmonization, managing for results and mutual accountability with a dozen indicators for monitoring progress. But despite all this and after all the attention given them, the most basic question can still be asked: what is it really about aid that makes it “ineffective” and unhelpful in reducing poverty and inequality?

The Paris Declaration was signed in 2005 with official donors committing to improve the effectiveness of their official development aid (ODA) towards greater reductions in poverty and inequality. The aid reform agenda promoted spans ownership, alignment, harmonization, managing for results and mutual accountability with a dozen indicators for monitoring progress. But despite all this and after all the attention given them, the most basic question can still be asked: what is it really about aid that makes it “ineffective” and unhelpful in reducing poverty and inequality?
 
For all the concerns the Paris Declaration raises it is unfortunately conspicuously silent on conditionalities. Yet among the wide range of aid and aid-related concerns this is likely the biggest problem with the most far-reaching adverse effects. The reality is that “aid effectiveness” cannot just be about improved aid delivery and management or more efficient aid processes. The issue of conditionality is central and there is a strong case for arguing that the Paris Declaration and the aid reform agenda will be futile if it doesn’t meaningfully address this.
 
“Conditionalities” are basically any specific requirements donors ask of recipient governments before they give aid, whether loans or grants. In doing this, donors consciously exploit the economic weakness of underdeveloped countries which suffer scarce capital, foreign exchange and fiscal resources. They purposely wield ODA in pursuit of their foreign policy interests and use the corresponding financial pressure to leverage actions that they want the recipient government to undertake. In many cases it also helps that large-scale ODA provides lucrative opportunities for corrupt officials and local businessmen.
 
Policy conditionalities invariably involve “free market” policies of trade and investment liberalization, privatization and deregulation. These are of course packaged as rational economic policies that ultimately benefit domestic economies and peoples, even some unavoidable short-term pain or adjustment is conceded. However the Philippine experience is a cautionary tale of the real effect of such policy conditionalities.
 
Philippines policy conditionalities
 
The Philippines has a long history of ODA conditionalities particularly associated with the International Monetary Fund (IMF) and World Bank (WB). To be sure, conditiona-lities aren’t the only factor in domestic socioeconomic policy-making. Nonetheless they’ve been a significant influence especially in the last three decades - with severe effects on the local economy and the lives and livelihoods of millions of Filipinos.
 
The country’s first loan with the IMF in 1962 was on condition of the removal of foreign exchange controls and resulted in a sudden drastic devaluation of the peso against the dollar. The next four decades had 24 IMF loans totaling US$3.0 billion and SDR3.1 billion and each of which more or less contained the standard IMF “stabilization program” of tight fiscal and monetary policies. The last IMF loan, for instance, was a US$1.4 billion stand-by arrange-ment from 1998-2000 which had 110 conditionalities euphemis-tically called “structural reform measures”.
 
Likewise with the WB. The country’s first structural adjustment loan (SAL) with the WB in 1980 - which was only months away from being the WB’s first such loan anywhere in the world - initiated trade liberalization which the Philippines is in the final stages of today. To date there have been some US$2.8 billion in WB structural and sectoral adjustment loans. The most recent is a US$250 million Development Policy Loan in 2006 which among others covered fiscal austerity and new taxes - picking up from where the IMF left off - as well as power privatization.
 
IMF and WB aid conditionalities especially since the 1990s have been far-ranging and included, among others: tax reform, import liberalization, oil deregulation, power sector reform, retail trade liberalization, financial and banking sector reform, securities reform, privatization and general foreign investment liberalization. All these have gone far in turning the Philippines into one of Southeast Asia’s most open economies with the lowest tariffs and least restrictions on foreign capital, next only to Singapore.
 
“Globalization” and underdevelopment
 
The effect on the economy has been dramatic. Trade measured as a percentage of gross domestic product (GDP) has doubled, from 52% in 1980 to 105% in 2005, while foreign investment by the same measure has nearly quadrupled, from 4% to 14 percent. Yet the Philippines is more backward than ever. The country’s productive sectors are devastated. Manufacturing is a smaller share of the economy than it was in the 1960s as well as the most foreign-dominated it has ever been. Agriculture’s share in the economy is at historically low levels, agricultural trade deficits have been rising since the mid-1990s, and the country is more dependent than it has ever been on imported food.
 
Most tellingly, joblessness has been at record highs for over six years now and the unemployment rate has averaged over 11% with, in 2006, 12 million jobless or otherwise underemployed Filipinos. This deteriorating situation drives some 3,500 overseas to find wok everyday and there are now some 9-10 million overseas Filipino workers (OFWs), or “economic refugees”, scattered in over 190 countries. There is severe poverty especially at the lowest income levels which is disguised by sharpening inequality. In any case, some 69 million Filipinos or 80% of the population struggle to survive on the equivalent of some US$2 or less a day. Around 46 million Filipinos go hungry everyday and cannot meet even minimum nutritional requirements.
 
But policy conditionalities have not just been about macroeconomic policies and have been applied on a sector per sector basis, with much the same devastating effects. Nor has it been only the IMF and WB which have used ODA to leverage desired “free market” outcomes. The case of health sector is just one example.
 
The Philippines’ public health sector cannot be said to have ever been very substantial, even it had long dominated the country’s health service system, yet this inadequacy has become even worse in recent decades. The first WB Health Development Project in 1989 worth US$70.1 million arguably began the process of thoroughgoing health privatization in the country. This combined with consecutive technical assistance efforts to establish privatization and decentralization as the central thrust of public health policy. Most recently, the Asian Development Bank’s (ADB) US$200.0 million Health Sector Development Program in 2004 covers health care financing, public hospital financial autonomy, and rationalization of health facilities and performance. The WB also provided US$110.0 million in 2006 as National Sector Support for Health Reform.
 
National government (NG) health spending has correspondingly fallen steeply from what was already a low “peak” of 0.74% of GDP in 1990-91, to just 0.31% programmed in the 2008 NG budget. The impact of deteriorating public health services in the context of a poor population with incomes not even enough for decent living - much less able to cope with sudden health emergencies - is evident. For instance, the proportion of Filipinos dying without medical attention is increasing; 74% of deaths in 1975 were attended by trained health professionals compared to just 67% in 2002. Coverage of fully-immunized children has fallen from 69% in 1993 to 60% in 2003. In the 2008 NG budget, there are conspicuous cuts in programs for the poorest such as in subsidies to indigent patients and for the public hospitals they go to.
 
Aside from macroeconomic and sectoral conditionalities, it may even be argued that alongside this should be the implicit debt service conditionality. While not formally written in any specific loan or grant agreement, the unspoken donor demand for all debt to be honored is clear. In the Philippines, as with many other heavily indebted countries worldwide, this means high and rising foreign debt payments. The country’s debt stock was US$17 billion in 1980. Over US$130 billion has since been paid in debt service yet the debt stock has continued to rise and stands at some US$64 billion today.
 
Key lessons
 
The Philippine experience affirms the adverse effect of conditionalities. There has been severe and accumulating damage to economy and to people’s lives and livelihoods that has been worst for the most vulnerable sectors (e.g., peasants, labor, informal workers, women, children, migrants and others).
 
But apart from these socio-economic effects the very process of aid and conditionalities has altered the policy-making landscape itself. The relentless efforts over decades has resulted in much greater “internalization” by the Philippine government and its technocrats of the “free market” policy content of conditionalities. National “development” strategies are now virtually indistinguishable from what donors want and there is now unparalleled ideological convergence with donor priorities and concerns. Among the domestic business community, corporate elites have aligned with foreign capital and add to the semblance of these policies’ “legitimacy”. The way in which conditionalities influence policy has then evolved to seem less intrusive or externally imposed.

There is even a Philippine Development Forum (PDF) which regularly brings together donors and the country’s top policymakers to define and thresh out socioeconomic policy thrusts.
 
And still, the basic vulnerability to the financial carrot of ODA remains with the country’s need for capital, foreign exchange and fiscal resources as stark as ever. The government’s fiscal bind is revealing. In 2006, nearly 90% of the national government’s total revenue of P980 billion went to foreign and domestic debt service (i.e., P854 billion). With only P126 billion remaining and yet P734 billion in total non-debt expenditure, the government had to borrow some more and ended up financing 83% of its non-debt expenditure from additional borrowing, especially from ODA. This reliance on borrowing translates into considerable donor country leverage. As it is, ODA commitments (not disbursements) in 2006 reached US$9.5 billion (P488 billion at prevailing exchange rates), and ODA took up over 40% of the country’s foreign debt stock.
 
Areas for CSO action
 
In terms of the Paris Declaration, the question is how its ostensible aid reform agenda can be linked to the larger development framework that the people need and that civil society organizations (CSO) advocate. Reforms in delivery and management are important but - as the Philippine experience points to - removing the undue direct and indirect donor influence on national policies through ODA is crucial.
 
The demand to remove all explicit and especially “free market” conditionalities in ODA is then central. These conditionalities are arguably the single biggest barrier to aid effectiveness which not only makes aid developmentally ineffective but actually counter-productive. Without meaningful reductions the danger is that the aid reform agenda will be merely diversionary and a smokescreen to continue pushing destructive “globalization” policies. And while their removal may not automati-cally result in development, it will at least remove a key adverse influence on domestic policies.
 
There are also other areas for action. Donor-proposed mechanisms that further increase their individual and collective leverage over recipient country policies should be opposed, especially those that are IMF- and WB-centered, This includes such as Poverty Reduction Strategy Papers (PRSP), Country Assistance Strategies (CAS), Highly-Indebted Poor Countries (HIPC) initiative and others. Debt cancellation is also critical inasmuch as continued and burdensome debt servicing is a pervasive, albeit merely implicit, conditionality. On the other hand, more aid should go to health, education, water and sanitation especially for countries with greater absolute poverty.
 
CSOs can also work towards making governments more transparent and accountable. They can undertake efforts at creating the domestic policy and political conditions to overcome backwardness. The CSO voice, capacity and role in the aid system can be strengthened. At the end of the day, however, the link of ODA to self-interested donor foreign policy is a basic constraint in the current aid system. This points to how fundamental changes that de-link ODA from donor foreign policy may, more than anything else, go furthest towards making aid building societies that genuinely serve the people’s interests and welfare.