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INTERNATIONAL LAW

THE WORLD BANK, IMF AND


STATE SOVEREIGNTY

INTERNATIONAL LAW

THE WORLD BANK, IMF AND


STATE SOVEREIGNTY
Chris Chizindu Wigwe PhD,(Leeds) BL


Readwide Publishers
12 Ablade Road, Kanda Estates,
P.O. Box OS600
Osu-Accra
Ghana
International Law - The World Bank, IMF and State Sovereignty by Chris Chizindu
Wigwe. LLM, PhD, BL
Published by Readwide Publishers 2010
All right reserved 2010
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iv

Veronica, Lisa, Sophie, Stephanie,


Sabrina, Sharon, Chris ( Jnr.) and Marcus.

Acknowledgements
With gratitude to God Almighty, I acknowledge with great thanks the contributions
of distinguished Professor Surya Subedi who was my supervisor during my
doctorate degree programme at the University of Leeds UK. I would like to pay
tribute to his eloquent, charismatic teachings, his persuasion and encouragement
that propelled me to publish this book. Similarly, I appreciate the contributions
of erudite Professor Andy Campbell, the Director of Centre For Business Studies,
University of Leeds, who was my second supervisor during my PhD degree
programme in the University.
My foremost editorial thanks, goes to Readwide Publishers Ltd in Ghana,
Ansa Asari, the Director of Ghana Law school, Nana Kissiedu who have been so
wonderful for devoting so much time to this book. I appreciate with great thanks
the great skill and calm professionalism exhibited by Francis Nunoo of Department
of Publishing Studies, Kwame Nkrumah University of Science and Technology,
Ghana. In spite of my numerous telephone calls he never wavered throughout the
period of this publication. My special thanks goes also to Professor Ben B. Kanyip,
a Judge of Industrial Court Nigeria, who offered so many valuable advice, indeed he
was quite reliable and dependable during the period of this publication.
My sincere thanks goes Justice Rosalyn Haggins of International Court of
Justice, Justice Onnoghen, Justice Niki-Tobi, Justice Oputa and Justice KatsinaAlu, all, of the Supreme Court of Nigeria, whose judgements inspired and
propelled me to pragmatically examine and analyze some topics in this book from
the Positive and Realists Schools of thought perspectives. This acknowledgement
will be incomplete without the mention of Chief Mike Onoja, former Permanent
Secretary, Ministries of Defence and Power, in Nigeria, King Alfred Diete Spiff,
former Governor of Old Rivers State in Nigeria and Chief I.H. Wigwe former
General Manager of Hotels and Tourist Corporation, Port Harcourt, Nigeria.
Their support and encouragements during my doctorate degree programme at the
University of Leeds, UK, which eventually led to the publication of this book, are
highly appreciated.
Finally, I acknowledge with great thanks the sacrifice and support of my wife,
who at the time of writing this book, was rounding up her doctorate degree
programme in Petroleum Law at the University of Dundee in Scotland, UK, but
she still found time to participate in the conclusion of this book.
Chris C. Wigwe
LLB, LLM, PhD (Leeds), BL
vi

Summary of table of Contents


Acknowledgements
Abstract
Table of Cases
Table of Treaties
List of Abbreviations
Chapter 1 Introduction
Chapter 2 The Traditional Notion of State Sovereignty
in International Law
Chapter 3 The Modern Application of Sovereignty
Chapter 4 Political and Economic Background
to the WB and the IMF
Chapter 5 The Powers of the World Bank and the IMF
Chapter 6 The Relationship between The Wb, The Imf
and Member States
Chapter 7 The Controversies Regarding the
Operational Policies of the WB and the IMF
Chapter 8 The Obligations of the Wb and the Imf
Chapter 9 Conclusion and Recommendations
Bibliography
Index
Appendix

vii

Table of Contents
Acknowledgements vi
Summary of table of Contents

vii

Abstract xiii
Table of Cases

xiv

Table of Treaties

xix

List of Abbreviations

xxviii

Chapter 1
Introduction 1
1.1 The Subject
1
1.2 Issues
8
1.3 Arguments
10
1.4 Methodology
12
1.5 Outline of Chapters
13
Chapter 2
The Traditional Notion of State Sovereignty in International Law
2.1 Definition of Sovereignty
2.2 The Legal Meaning and Purpose of Sovereignty
2.3 The Old World Order
2.4 Sovereignty as a Political Order
2.5 Absence of Referees to Enforce the Rules
2.6 Exercise of Sovereign Powers by External Bodies
2.7 Judicial Legal Hegemony
2.8 Capacity of States
2.9 The Role of The League of Nations
2.10 The New World Constitutional Order
2.11 Decolonization
2.11.1 A Brief History

16
17
19
22
24
24
26
28
29
30
33
34
34

1.12 Other Methods of Acquiring Sovereignty


1.12.1 Accretion

36
36

1.12.2 Artificially Induced Accretion

38

1.12.3 Acquisition of State Sovereignty by Cession

39

1.12.4 Acquisition of Sovereignty by Conquest

40

1.12.5 Acquisition of Sovereignty by Prescription

40

viii

Table of Contents

1.12 Effects of Possession of State Sovereignty


1.13 Conclusion

42
43

Chapter 3
The Modern Application of Sovereignty
1.1 The Essence and Legal Significance of Non-Intervention
1.2 Enforcement Powers of The United Nations
1.3 The Essence and Legal Significance of Economic Sovereignty
1.4 Sanctity of Economic Sovereignty
1.5 Economic Sovereignty after Resolution 1803
1.6 Wb and Imf Policy on Nationalization Disputes
1.7 Charter of the Economic Rights and Duties Of States
1.8 Qualification and Transformation of Sovereignty
3.9 Applicability of Ultra Vires
3.9 Conclusion

45
48
50
53
55
60
66
69
72
74
77

Chapter 4
Political and Economic Background to the WB and the IMF 78
4.1 The Great Economic Depression
79
4.2 Collapse of Peace and Security
80
4.3 The Impact of Reform on World Trade
81
4.4 The Positive Effect of World War Ii on the Us Economy
82
4.5 The Urge to Establish the Institutions
82
4.6 Negotiations at the Conference
84
4.7 Dominant and Facilitating Influence at the Conference
85
4.8 The Articles of Agreement
87
4.9 The Imf 87
4.10 The World Bank
91
4.11 Marshall Plan
93
4.12 Structural Adjustment Lending
95
4.13 Conclusions
96
Chapter 5
The Powers of the World Bank and the IMF 98
5.1 Economic Influence
99
5.2 The Influence of the Paris Club and the G8
100
5.3 The Influence of the Group of Eight (G8)
102
5.4 The Legal Framework
103
5.5 Elastic Interpretation of the Legal Framework
106
5.6 Universal Acceptance of the Aims and
Objectives of the Institutions
106
ix

Table of Contents

5.7 Exercise of the Sovereign Powers of States


5.8 Powers as Agents for the Member States
5.9 Powers Under Public International Law
5.10 Domestic and International Legal Capacity
5.11 Specific Legal Nature of a World Bank Agreement
5.12 Inspection Panel
5.13 Conclusion

107
109
110
111
113
115
116

Chapter 6
117
The Relationship Between the WB, the IMF and Member States
6.1 The Difference Between the Wb, the Imf and Other
International Organizations and their Member States
125
6.2 Delegation of Sovereignty to the Wb and the Imf 129
6.3 Revocation of Delegated Sovereign Power
133
6.4 Concurrent Powers of the World Bank, the Imf and States
134
6.5 Transfer of Sovereign Powers to International Organizations
136
6.6 Facts in Support of Conferment of Sovereign Power
to International Institutions by Transfer
138
6.7 Transfer as A Limitation on State Sovereignty
139
6.8 Limits of Exercise of Transferred Sovereign Powers
143
6.9 Conclusion
146
Chapter 7
The Controversies Regarding the Operational
Policies of the WB and the IMF 148
7.1 Obligations Under the Articles of Agreement
152
7.2 Consent as a Necessary Ingredient
154
7.3 The Object Clause and Purposes of the Institutions
157
7.4 The Imf 157
7.4.1 Assessment of Compliance with the Object
Clauses or Purposes of the IMF 157
7.4.2 Interpretation of Articles of Agreement or
Treaty under General Principles of Law

158

7.4.3 Application of Article 1 (v) of the Articles of Agreement

159

7.4.4 Overriding Obligations under the Articles of Agreement

169

7.4.5 Interpretation of Articles of Agreement or Treaty under


International Law

170

7.4.6 Conditions Recognized by the Articles of


Agreement for the Use of IMF Resources

174

Table of Contents

7.4.7 The Structural Adjustment Policy

176

7.4.8 Financial Weakness of the Developing Countries

177

7.5 The World Bank


7.5.1 Interpretation of Article IV (10) of the
World Banks Articles of Agreement

186

7.6
7.7
7.8
7.9
7.10
7.11

192
196
197
207
208
210

Inconsistent Approach
Public Sector Governance
Administrative and Civil Service Reform Policy
Counterfactual Argument
Is Article Iv (10) a Sword or a Shield?
Conclusion

179

Chapter 8
The Obligations of the WB and the IMF 212
1.1. Relationship among the Wb, the Imf And the Un 212
8.2. Obligations Under the Un Charter
213
8.3 Lending Based on Democratic Criteria
217
8.4 Political Reform Policy
220
8.5 Constitutional Review Policy
228
8.6 World Bank and Imf Judicial Reform Policy in Bms 231
8.7 Brief Overview of the World Legal System
232
8.8 Consent by Economic Pressure and Coercion
236
8.9 Lending for Legal and Judicial Reforms
237
8.9.1 Case Study
238
8.9.2 Legal and Judicial Reform as Conditionality
8.10 Population Control Policy
8.11 Conclusions

240
242
243

Chapter 9
Conclusion and Recommendations
9.1 Conclusion
9.2 Articles of Agreement
9.3. United Nations Charter
9.4 Political/Democratic Reform Policy
9.5 Reforms in Domestic Regulatory Laws
9.6. Constitutional Reform Policy
9.7 Legal and Judicial Reforms Policy
9.8 The Role of G8 and the Paris Club
9.9 Population Control Policy
9.10 Recommendations
xi

244
244
245
246
247
248
249
250
252
252
253

Table of Contents

Bibliography
Index 291
Appendix 293
IBRD Articles of Agreement

293

Articles of Agreement of The International Monetary Fund

323

Charter of the United Nations; June 26, 1945


CHAPTER I
Purposes and Principles
CHAPTER II
Membership
CHAPTER III Organs
CHAPTER IV The General Assembly
CHAPTER V
The Security Council
CHAPTER VI Pacific Settlement of Disputes
CHAPTER VII Action with Respect to Threats to the Peace,

Breaches of the Peace, and Acts of Aggression
Regional Arrangements
Chapter VIII
CHAPTER IX International Economic and Social Co-Operation
CHAPTER X
The Economic and Social Council
CHAPTER XI Declaration Regarding Non-Self
Governing Territories
CHAPTER XII International Trusteeship System
CHAPTER XIII The Trusteeship Council
CHAPTER XIV The International Court Of Justice
CHAPTER XV The Secretariat
CHAPTER XVI Miscellaneous Provisions
CHAPTER XVII Transitional Security Arrangements
CHAPTER XVIII Amendments
CHAPTER XIX Ratification and Signature

399
399
401
402
402
406
408

Vienna Convention on the Law of Treaties


PART I. Introduction
PART II. Conclusion and Entry into Force of Treaties
PART III. Observance, Application and Interpretation of Treaties
PART IV. Amendment and Modification of Treaties
PART V. Invalidity, Termination and Suspension of

The Operation of Treaties
PART VI. Miscellaneous Provisions
PART VII. Depositaries, Notifications, Corrections and Registration
PART VIII. Final Provisions

431
432
434
441
445

xii

410
413
414
415
418
419
423
424
425
427
428
428
429

447
458
459
462

Abstract
This study deals with the question of whether in practice the policies of the World
Bank and the International Monetary Fund (IMF) erode the sovereignty of the
borrowing member states. Sovereign powers that are subject to international law
are inherently vested in states. However, some of these powers are delegated to
the World Bank and the IMF in the enabling instruments empowering them to
execute specific duties towards preventing the recurrence of events such as those
that led to the economic depression of the 1930s and the World War II.
With the delegation of sovereign powers clearly provided in the constituent
documents of these institutions, the legitimacy of their exercise of sovereign
powers are not in doubt, yet there is a growing concern as to whether their policies
are consistent with or even ultra vires the legal framework as provided in their
constituent documents. Policies apparently inconsistent with and ultra vires the
legal framework not only risk eroding the member states sovereignty, but also
potentially increase an undermining of international law which could in turn lead
to a reinvention of the old legal order.
To sustain and encourage the compliance with international law that promotes
peace and security within the community of nations, the World Bank and the
IMF must limit their policies to the extent of the sovereign powers delegated or
conferred on them, in order to prevent a trend by other international organizations
towards the erosion of state sovereignty.
The World Bank and the IMF should operate within the parameters of their
constituent documents. If they need to expand their activities into new areas,
they should seek to amend such constituent documents to suit the new situation,
rather than continue operating on the basis of the so-called creative and elastic
interpretation of the existing rules which may likely sharpen the edges of the old
world order before the creation of United Nations and the League of Nations.

xiii

Table of Cases
1.

Admission Case ICJ Reports 1947-1948 174, 221, 249, 276, 287

2. Advisory Opinion Case ICJ Report (1949) p 172


3. Advisory Opinion on Western Sahara, ICJ Report (1975) p 12
4. Agip v Popular Republic of Congo, (1982) 27 ILM p 117
5. American Power & Light Co. v Security and
Exchange Commission (1967)329 US p 90.
6. Amin Rashhed Shipping Corporation v Kuwait Insurance
Co [1984] AC p 50
7. Arab International Monetary Fund v Hashim, (1991) AC p 114
8. Arab Monetary Fund v Hashim and Others (1991) All ER p 871.
9. Arab Monetary Fund v Hashim and others. (1990) 1 All ER p 690
10. Ashbury Railway Carriage & Iron Co. v Riche (1875) LR 7 HL p 653
11. Australia v US, AJ 10 (1916) (Special Suppl. 306) in
Oppenheim, L., ed. Lauterpacht (1963) p 364
12. Bell Houses v City Wall Properties Ltd. (1966) 2 QB 656 (1966)
13. Bultwick v Grant (1924) KB 483
14. Cambodia v Thailand in the case concerning the Temple of
Fresh Vihear, ICJ Report 15 June 1962.
15. Cameroon v Nigeria. Judgement delivered on 10 October 2002 by
International Court of Justice (ICJ)
16. Cameroon v United States of America BIT,
making of America Trade Agreements in
http//www.tcc.mac.doc/cgi-bin/doit accessed 22 February 2006
17. Commonwealth of Massachusetts v State of New York
argued 4 March 1926 decided 12 April 1926 and
citation as 271 US 65 1926.
18. Condition for Admission Case ICJ Report 1948 and Condition
for Admission Case, ICJ Report (1956) p 23. 167, 174, 221, 222, 225, 240249, 253,
274
xiv

Table of Cases

19. Costa v ENELI (1964) ECR p 585


20. Cotman v Brougham (1918) AC 514 (H L)
21. Cutter v Eagle Star Insurance (1998) 4 All ELR 417
22. Dayton v Czechoslovak Socialist Republic and Others,
US District Court, District of Columbia,
19 December 1986 79 ILR p 596.
23. Delaney v Staples (1992) 1 AC 687 at 692
24. Dredge v Conway, Jones & Co (1901) 2KB 42
25. Edlow International Co v Nuklearna Elektrarna Krsko,
US District Court, Columbia, 7 December 1977 63
ILR p 100 at 103.
26. ERTA case, ECR (1971) p 263
27. Federal Republic of Germany v The Netherlands
(Continental Shelf Case)
28. First Sports Ltd v Barclays Bank plc. (1993) 1 WLR p 1229
29. Foto-Frost v Hauptzollamt, ECR (1987) pp 4199; 4230.
30. France v US (1952) ICJ pp 185; 188
31. Frontini v Ministro delle Finanze, 2 CMLR (1974) p 372
32. German European Parliament and Council of European Union
ECR 2000, p 1.8524.
33. Greg v. Planque (1936) 1 KB 669
34. Grey v Pearson (1857) 6 HL Case 1
35. Haslund v City of Seattle (1976) 547 p 2D at p 1230.
36. Head v Filley (1869) 4 Ch. App. 548
37. Heydons Case (1584) 3 Co Rep. 7a
38. IBRD and the IMF v All American Cable and Radio Inc. (1953)
FCC, US. 22 ILR p 705
39. ICJ Report in Reparation of Injury case (1949) p 174 at p 184
40. Illinois v Kentucky (1991) 500 US 380.
41. Industrial Union Department AFL-CIO v
American Petroleum Institute (1980) 487 US p 607
xv

Table of Cases

42. International Court of Justice in Rights of United States Nationals in


Morocco, ICJ Report 1952.
43. International Tin Council v Amalgamet Inc. 524 NYS 2d (1988) p 971
44. JH Rayner Ltd v Department of Trade and Industry (1989)
3 WLR 969 and J H Rayner v Department of Trade (1990) AC p 418
45. JH Farrar v DG Powles (1973) 36 MLR 270.
46. Jewsbury v Newbold (1857) 26LJ 7 HL 802
47. Jones v DPP (1962)1 QB 273
48. Jones, Justice, Opinion Judgement Delivered in Commonwealth of
Massachusetts v State of New York (1927) 271 US 65.
49. Klausner v Levy 83 F. Supp. (EEVA, 1949).
50. Legality of the Threat or Use of Nuclear Weapons, ICJ Reports (1996) p 64
at p 79 para 25
51. London and North Eastern Railway v Berriman (1946) AC 278.
52. Lord Oliver of Aylmerton in Tin Council case, (1990) 29
IML p 670 at p 700.
53. Lotus Case, France v Turkey, Permanent Court of International
Justice, 1927 (1927) PCIJ 3
54. Maastricht Case, CMLR (1994) p 57.
55. Maclaine Watson v International Tin Council (1988) Ch 1 at p 23 and
Maclaine Watson v International Tin Council, (1989) Ch. 253 at p 257
56. Maclaine Watson v Department of Trade and Industry
(1989) 80 ILR p 39 at 114
57. Namibia Case ICJ Report (1971) p 45
58. Namibia/Botswana and Kasikili/Sedudu (Kasikilis case) ICJ Report 1999
59. Namibias case, ICJ Report (1976) p 203.
60. National Bank de Cuba v National Bank of New York,
431. F.21.919720 394, 399-402.
61. Nauru v Australia, ICJ Report 1989.
62. Nicaragua v United States of America, ICJ Report (1986) p14
xvi

Table of Cases

63. Norberg, Charles Robert, Current Issues in International Commercial


Arbitration: reported US v United Mexican States, 12 Journal Intl Bus (1989)
86 and 91.
64. North Eastern Railway Co v Berriman (1946) 1 All ER p 225
65. North Sea Continental Shelf case (1969) ICJ Reports, p 3
66. Powell v Kempton Park
67. Prosecutor v Dusko Tadic,Case No IT.94.I.7 May 1997.
68. Puyallup Indian Tribe v Port of Tacoma, (1983) 717F 2d 1251.
69. R v Allen (1872) LR 1CCR p. 367
70. Reparation for Injuries Case ICJ Report (1949)
71. Rutili v Minister of Interior ECR (1975) p 1219.
72. Salmon v Salmon and Co. (1897) AC 22
73. Saudi Arabia v Arabian American Oil Company (1991)
at 117 particularly at p 119.
74. SS Lotus Case (France v Turkey) PCIJ (1929) No 9 .
75. State of New York v State of New Jersey (1998) 66 LW 4389
76. State v Wakeen (1953) 263 Wisconsin 401
77. Suncorp Insurance and Finance v Milano SPA (1993)
2 Lloyds Report 225 at 241.
78. Supreme Court of Israel in Attorney General of
Israel v Kamiar, 9 June 1968, 44 ILRP 197 at 249.
79. Tempest v Kilner, (1846) 3 CB 249.
80. Texaco Overseas Petroleum v. Libya (1978) 17 ILM
81. Turner v Sawdon (1901) 2 K B 653
82. United States v Holt States Bank (1924) Ct. 197, 548, 152 US.1.
83. Van Gend en Loos v Nederlands (1963) ECR p1 at p 12
84. Vincent v Southern Railway Corporation (1927) AC 430
85. Voting Procedure Case, ICJ Report (1955) p 67.
86. Welsh Development Agency v Export Finance Co (1992)
BCLC 148 at p 173.
xvii

Table of Contents

87. Whitley v Chappell (1868) LR 4 QB147


88. Whitworth Street Estates Ltd v James Miller & Partners Ltd [1970] AC 583
89. WHO and Egypt Case, ICJ Report 1980 pp 87-90
90. Williams v Shipping Corporation of India, US District Court, Eastern
District Virginia, 10 March 1980, 63 ILR P 590 at 596.
91. Wimbledon Case PCIJ Report (1923)

xviii

Table of Treaties
1.

Westphalia Treaties of 1648

2. Amendment of Multilateral Treaties, Articles 40 (40) and Articles 30 (4)


(b) of Vienna Convention on the Law of Treaties 1969.
3. Treaty establishing the European Constitution, submitted to the President
of the EU on 18 July 2003, CONV 850
4. Investment Treaty between Cameroon and the United States of America,
Senate Treaty Documents, 99-22 signed 26 February 1989.
5. EC Treaty
6. Paris Peace Treaty/League of Nations 1919
7. Protectorate Treaty of 1912
8. International Tin Agreement
9. Maastricht Treaty
10. United Nations Charter, San Francisco, 1945
Official documents
1.

14 IMF Survey (October 1985) p 297

2. 17 UN GAOR Supp (No17) at 15 UN Doc A/5217 14/12/1962


3. Afghanistan Constitution 14 January 2004
4. Agreement between IBRD and IMF signed in New York on 15April1948
cited as UNTS Vol. 16 (1948)
5. Agreement the UN and the IBRD 1948
6. Amendment of Multilateral Treaties, Articles 40 (40) and Articles 30 (4)
(b) of Vienna Convention on the Law of Treaties 1969
7. Annan, Kofi, UN Secretary General, 2003 in Building Inclusive
FinancialSystem, Donor Guidelines, The World Bank Publications
8. December 2004
9. Article 24 of German Constitution

xix

Table of Treaties

10. Articles 1 (2) World Bank and IMF Relationship Agreement between
theUnited Nations (UNTS) Vol. 16, (1948) p 346
11. Articles 10 of Directive 2002/95 EC of 27 January 2003
12. Articles 176 of Brazilian Constitution
13. Articles 28 (II) Greece Constitution of 7 June 1975
14. Articles 3 Roman Convention
15. Articles 59 (1) of the treaty establishing the European Constitution,
submitted to the President of EU on 18 July 2003, CONV 850
16. Articles 73, Azerbaijani Law on the Constitution of 1978 amended 1993
17. Australia Constitution as altered on 31 October 1993
18. Austrian Constitution Amended on 1 July 1981
19. IMF Fiscal Affairs Department, Working Paper No 02/58, 2002
20. An Agenda for Peace, United Nations, New York 1992
21. Chechnya Constitution of 12 March 1992
22. Civil Service Pay And Employment, World Bank Publication 1991
23. Civil Service Reform Loans to Brazil-Loan No. 4046-BR dated 29 May 1996,
Civil Service Reform Loan to Ukraine No 4118UA dated 15 November, 1996.
and Loan to Russia-No 4058 RU 5 June 1996
24. Civil Service Reform; A Review of the World Bank Assistance Report No
19211 of 27 April 1999
25. Compact adopted by the State of Oklahoma and the State of Texas in
respect of Red River Boundary on 24 May 1999. Section 12.002
26. Cooperation and Independent Agreement between the Bretton Woods
Institutions and the UN, 16 UNTC (1948) p 346
27. Covenant of the League of Nations
28. Decisions 149 of 25 Issues of 2000, Decision 7925 of 8 March 1985
29. Directive 2002/95 EC of the European Parliament and the Council of 27
January 2003
30. Draft Constitution of the EU
31. 20 IMF Survey 337 of 18 November 1991
32. England Bill of Rights 1689
xx

Table of Treaties

33. European Economic Area Joint Committee Decision


No 182/1999 of 17 December 1999
34. Executive Board Decision No 155-(52/57) of 1 October 1952
35. Federal Republic of Nigeria Constitution, 1979
36. France Constitution of 27 October 1946 as
reconfirmed in their Constitution of 4 October 1958
37. French Law of Agency and Distributorship Agreements (1976)
38. General Agreement to Borrow (GAB)
Executive Board Decision No 1289 24th Issues 1999
39. General Counsel of the World Banks letter to the United Nations
Secretariat on 5 May 1967 cited in the
United Nations Juridical Year Book (1967) p 121
40. IMF Survey, Vol. 10. 23 May (1983) p 146
41. The International Monetary Fund in International Law.
An Introduction, IMF pamphlet series no. 4, Washington DC (1965)
42. Conditionality, 2 IMF Pamphlet Series, No 31 of 1979
43. IBRD Articles of Agreement
44. IBRD, Second Annual Report, (1947) p 17
45. IBRD, Third Annual Report, (1948) p 14
46. ICAO Council Case (1972) ICJ Report p 46
47. ILC Articles on States Responsibility 2002
48. ILM Vol. XIV No 6 Nov. 1975 pp 1579-1585
49. IMF Annual Report (2003) p 15
50. IMF Annual Report, 1989 p 35
51. IMF Annual Report, Table 11.3 and 11.4, 2001
52. IMF Articles of Agreement
53. IMF Pamphlets Series 19 November 1976 p. 7
54. IMF Press Release 6 June 2003
55. IMF press Release No 02/29 of June 2002, IMF and World Bank Highly
Indebted Poor Countries (HIPCs)
xxi

Table of Treaties

56. IMF Press Release No 98/7 of 19 March 1998


57. IMF Press Release No. 01/51, 7 December 2001
58. IMF PRGF 2000
59. IMF Public Information Notice (PIN) No. 04108 27 September 2004
60. IMF Public Information Notice No 05/107 of 9 August 2005
61. IMF Washington DC Guidelines on Continuality, (1989) Item 4
62. Institutional Development Fund, Established in 1992-World Bank Annual
Report 1992
63. International Arbitral Award, 19 January 1977, 17 ILM 1 (1977) P 389
64. International Civil Aviation Articles
65. International Development Association (IDA) Articles of Agreement.
66. International Finance Corporation Agreement
67. International Legal Material (ILM) Vol. 8 (1969) p 1339, UN Doc. A/
AC.109/333 of 3 July 1969
68. International Legal Materials (ILM) Vol. VI (1967)
pp 150-153 especially at p 152
69. International Monetary Fund Annual Report 1983-86
70. International Telecommunication Commission
71. Investment Treaty Between Cameroon ant the United States of America,
Senate Treaty Documents, 99-22 signed 26 February 1989
72. Landell-Mills J. Helping the Poor the IMF New Facility for Structural
Adjustment, A Report sponsored by the D IMF research team, IMF
Washington DC 1991 and 1992
73. IMF Fiscal Affairs Department, Working Paper No. 97/179, 1997
74. McNair A. The Law of Treaties (1961)
75. Memorandum Report of World Bank IDA/R80-22, 5 February 1980
76. Memorandum Report of World Bank R80-17/1, 20 March 1980
77. Memorandum Report WB R-122 IDA/R80-83, 9 May 1980
78. Netherlands Constitution of 17 February 1983
79. Nigeria Constitution of 1979
xxii

Table of Treaties

80. Nigerian Civil Service Code 1985


81. Nigerian Civil Service Code 1990
82. Nigerian Constitutions as amended in 1999
83. Re-thinking Civil Service Reform: An Agenda for Smart
84. Government, World Bank Publication No 86, 1997.
85. Parliamentary Assembly of the Council of Europe Report and Draft
Resolution, 7th Committee on Economic Affairs and Development on the
Bretton Woods Institutions. Doc. 7256, 17 February 1995
86. Polish Nationals in Danzig case (1931) PCIJ Reports,
Series A/B No 44 at page 24
87. Preamble, Vienna Convention on the Law of Treaties, 1969
88. Regulation on the Use of the IMF General Resource and Stand-by
Arrangement, Decision No 6056-(79/38) of 2 March 1979
89. Report of Working Group and Statement by Central Bank
Governors and Finance Ministers of G7 Countries, 29
April 1983, 12 IMF Survey ( June 1983) p 137
90. Resolution 2131 [XX] of 21 December 1965
91. Resolution 523 (VI) of January 1952
92. Resolution 670 adopted by the UN Security Council at
its 2943rd meeting on 25 September 1990
93. Resolutions 2054A (XX) of 15 December 1965
94. Sanford JE in IBRD and IDA Yearbook of the
United Nations Vol. 26 (1972) p 316
95. Sectoral Adjustment Loan Report, 24 January 1986 (R86-9) p 34 para.4
96. Statutes of International Court, Articles 38
97. The French law of Agency Distributorship (1976)
98. Title V of the Draft Constitution, in particular Articles 111-193
99. Treaties of Westphalia 1648
100. UK Companies Act 1985
101. UN and IBRD and IMF Documents signed in
New York on 15 April 1948: UNTS Vol. 16 (1948) p 344
xxiii

Table of Treaties

102. UN Charter on Human Rights Obligations 1948


103. UN Condition for Admission Case ICJ Report 1948 p 64
104. UN Document E/C.120 of 22 July 1947
105. UN Gen.Res. 2158 Paragraph 5 of 25 November 1966
106. UN General Assembly 20th Session, Supplement No 14 United Nations
Document A/6014
107. UN General Assembly Declaration on Principles of International law
Concerning Friendly Relations and Cooperation among States of 24
December 1974
108. UN General Assembly modified Resolutions 1803 of 25 Nov. 1966
109. UN General Assembly Resolution 1803 (XVII) of 14 December 1962
61,68,70,80
110. UN General Assembly Resolution 2625 [XXV] of
111. 24 October 1970
112. UN General Assembly Resolution 2626 (XXV) of 24 October 1970
113. UN General Assembly Resolutions 1514 (XV)
of 14 December and renewals until 22 November 1988
114. UN General Assembly Resolutions 2426 of 18 September 1968
115. UN General Assembly Resolutions 2526 of 24 October 1974
116. UN General Assembly Resolutions 2625 (XXV) 24October1970
.. 52,125,245,251,255,256,283
117. UN General Assembly Resolutions 3171 of 17 December 1973
118. UN General Assembly Resolutions 3281 of 12 December 1974
119. UN General Assembly Resolutions 55/146 in 2000
declaring that colonialism must end by 2010
120. UN press Release/GA/SHC/3753 Ensuring Rights
of Self Determination, 28 October 2003
121. UN Resolution 1267
122. UN Resolution 1333 of December 2000
123. UN Resolution 3082 (XXVIII) of 6 December 1973
xxiv

Table of Treaties

124. UN Resolution 46/87 of 16 December 1991


125. UN Resolution 748 of 31 March 1992
126. UN Resolution 883 of 11 September 1993
127. UN Resolution 917 adopted on the 6 May 1994
128. UN Resolutions 1508 of 19 September 2003
129. UN Resolutions 1510 of 13 October 2003
130. UN Resolutions 1521 of 22 December 2003 concerning Liberia
131. UN Resolutions 2625 (XXV) of 24 October 1970
132. UN Resolutions 3379, 10 November 1975
133. United Nations Charter 1945
134. United Nations Document E/C1/120 of 22 July 1947
135. United Nations Resolution 670 adopted by the Security Council
at its 2943 meeting on 25 September 1990
136. United Nations Resolutions 731 of 21 January 1992
137. United States Diplomatic and Consular Staff in Tehrans case,
ICJ Reports, (1980) pp3-29
138. United States Exchange Commission Rule 10 b 5 824 of 1943
139. Universal Declaration on Human Rights in reference to
Articles 1, 55, 56, 68 and 76 of the United Nations Charter
10 December 1948
140. Universal Postal Service Union
141. US Bill of Rights 17 September 1787
142. Use of the Fund General Resources Decisions 6056 of 1979
143. Vienna Convention on the Law of Treaties 1969
144. Westphalia Treaty of 1648
145. World Bank and the IMF-Legal Reforms Project
(Loan 4035) of 21 June 1996
146. World Bank Annual Development Report 1990
147. World Bank Annual Report (1991) p ii, iii and 1
148. World Bank Annual Report 1989-1999
xxv

Table of Treaties

149. World Bank Annual Report 1992


150. World Bank Annual Report November 1992
151. World Bank Articles of Agreement
152. World Bank Burkina Faso Fourth Poverty Reduction Credit Project
Program Doc. No. 28293-BUR of 14 April 2004
153. World Bank Civil Service Reform No 19211 of 1999
154. World Bank Decentralization, Civic engagement, challenges of
intergovernmental Reform Sector Report No. 24384SEN of October 2003
155. World Bank Decision Sec M90-445, 6 April 1990.
156. World Bank Development Report 1995
157. World Bank Discussion Papers No. 199 of 1993
158. World Bank General Condition Applicable to Loans and
Guarantees, 1 January 1985
159. World Bank General Conditions Applicable to Loan and Guarantee
Agreements, 1 January 1985
160. World Bank Group 3 and the Private Sector Development
(Sec M 95-867, IFC/SecM95-149, MIGA/Sec95-25 in 4 August 1995
161. World Bank Interim Report on Adjustment Lending, R88-15,
25 January 1988
162. World Bank Legal Technical Assistance 2, World Bank Policy
Research Working Paper No. 1414, 1995
163. World Bank Madagascar, Second Poverty Reform Adjustment,
Program Doc. No. 32516-MAG of 9 June 2005
164. World Bank Policy Reform Working Paper No 1414
(Legal Department 1995)
165. World Bank Population Control in Philippines, by Insight Staff, Issue: July/
August 2002
166. World Bank Public Administration Reform in Morocco,
Program Doc. No. P7589-MOR of 4 June 2004,
World Bank Basic Education Support Program Project Appraisal
Doc. No. P3O721 7 January 2005
xxvi

Table of Treaties

167. World Bank Public Expenditure Reform Adjustment Credit


Vol. 1 of 21 December 2000
168. World Bank Sector Report No 24384-SEN October 2003 Senegal;
Decentralization, Civic Engagement and the Challenges of
intergovernmental Relations Reform For Better Service Delivery
169. World Bank Staff Appraisal Report, Peru Judicial Report Project,
Report No 17137-PE October 1997
170. World Bank Venezuela and Infrastructure loan for training legal
personnel and providing buildings Project Loan No. 3514-VE of 30
December 1993, Bolivia Judicial and Legal Loan No PPF825-1-BO of 19
August 1994
171. World Bank Working Paper 733 May 1995
172. World Bank Working Paper July 1999
173. World Bank Working Paper Series No 945 1992
174. World Bank, IDA, IFC, Policies and Operations,
World Bank Document (1968) p 43
175. World Bank, Managing Development: The Governance Dimension.
A Discussion Paper, 1991, World Bank Washington DC
176. WTO Agreement Articles, XI, X
177. Yoo, Byun Chul, a Superintendent at the Correction Bureau of the
Ministry of Justice, Republic of Korea who is also currently a
PhD student at the Faculty of Law, University of Leeds,
interviewed on 29 March 2006

xxvii

List of Abbreviations
ARAMCO

Arabian American Oil Company

BIT

Bilateral International Treaty

BMS

Borrowing Member State

CSR

Civil Service Reform

DSB

Dispute Settlement Board

EC

European Commission

ECOWAS

Economic Community of West African States

ED

Executive Directors

EEA

European Economic Area

ESAF Enhanced Structural Adjustment Facility


ESAP Enhanced Structural Adjustment Programme
EU

European Union

G8

Group of Eight Industrialized Countries

GAB

General Agreement to Borrow

GDP

Gross Domestic Product

HIPC

Heavily Indebted Poor Country

HR

Human Rights

IAEA

International Atomic Energy Agency

IBRD

International Bank for Reconstruction and Development

ICC

International Criminal Court

ICCPR

International Covenant on Civil and Political Rights

ICJ

International Court of Justice

ICSID

International Centre for Settlement of Disputes

IDA

International Development Association

IFC

International Financial Corporation

ILO

International Labour Organization

IMF

International Monetary Fund

IMFGC

International Monetary Fund Guideline on Conditionality

ITA

International Tin Agreement

MIGA

International Investment Guarantee Agency


xxviii

List of Abbreviations
MNC

Multinational Corporation

MS

Member State

NAB

New Agreement to Borrow

NEIO

New International Economic Order

NGO

Non-Governmental Organization

OECD

Organization for Economic Cooperation and Development

PRF

Poverty Reduction Facility

PRP

Poverty Reduction Programme

PSD

Private Sector Development

SAF

Structural Adjustment Facility

SAL

Structural Adjustment Loan

SAP

Structural Adjustment Policy

SDR

Special Drawing Rights

SFF

Special Facility Fund

UDHR

Universal Declaration of Human Rights

UK

United Kingdom

UN

United Nations

UNESCO

United Nations Economic Social and Cultural Organization

UNGA

United Nations General Assembly

US

United States

US

United States of America

USSR

(Former) Union of Soviet Socialist Republics

WB

World Bank

WGCLG

World Bank General Conditions Applicable to Loans and


Guarantees

WMD

Weapons of Mass Destruction

WTO

World Trade Organization

WWI

World War I

WWII

World War II

xxix

Chapter 1

Introduction

1.1 the subject

he World Bank and the IMF were established in 1944 towards the end of
World War II with the main aims of encouraging world trade by stabilizing
and promoting regulated uniform foreign exchange rates, the removal of
unhealthy and competitive import licences that restricted world trade, including
the infrastructural development particularly for the war-torn areas in Western
Europe. The process leading to the establishment of the institutions started long
before 1944, yet because of the independence of states and their sovereignty, it
took several rounds of negotiation that spanned three years before a consensus
was reached in 1944.
At the negotiation stage during the Atlantic Charter, most state delegates were
more apprehensive about the functions designed to be performed by the IMF
than those of the World Bank, because the formers activities have the tendency
to impinge upon the national affairs and sovereignty of member states. However,
there were safeguards: the injunctive restrictive clause in Article 1 (V) of the
World Bank Articles of Agreement1 provides, among other features, that the Bank
shall be guided in all of its decisions by the purposes set out in the Articles of
Agreement; Article IV Section 10 of the World Bank Articles of Agreement2 dealing
with political neutrality of the Bank and restricting its officers from interfering
in member states political activities. Similar injunctive restrictive clauses are also
provided in Article 1 (V) of the IMF Articles of Agreement3 that the Fund shall be
guided in all of its policies and decisions by the purposes set out in the Articles
of Agreement. Together, these suggest that the institutions from the start never
intended to interfere in the sovereignty of member states.

1
2
3

Article 1 (V) World Bank Articles of Agreement


Article IV Section 10 World Bank Articles of Agreement
Article 1 (V) IMF Articles of Agreement.

Introduction

Over an extended period, the activities of the World Bank and the IMF have
come under intense scrutiny and criticism, while some authors are of the view
that there is an increasing integration and overlap in their activities, and that their
policies are touching on an increasing number of economic issues of member
states, particularly those of the developing world;4 other writers have taken the
extreme views that the World Bank and IMF policies are not only unjustifiable,
but that they also undermine the respective sovereignty of the borrowing member
states.5
Similarly, some authors have acknowledged the role of the institutions, especially
the World Bank, in resolving disputes amongst its members. One example is the
Indus River dispute in the 1950s between India and Pakistan in South Asia, the
resolution of which by the World Bank and the IMF was based on the principles
of equity, fair play and no harm to either party. It constitutes a landmark in water
dispute resolutions brokered by the World Bank. However, the formulation of
its own internal guidelines in forestalling such disputes as that which occurred
between India and Pakistan creates more growing concern that there is a tendency
for both institutions to exceed their own constituent documents and dictate to
borrowing member states their own controversial conditions, with the guidelines
on international waterways being such an example.6 While the effective role of
the World Bank as a third party in providing the solution to the Indus Water
dispute has been acknowledged, certain other activities of the institutions are not
provided for in their Articles of Agreement.7 Since both bodies are expanding in
their activities, they are also urged in their lending policies to take an interest in
promoting and protecting human rights.8 This view can be endorsed only, when
it is given legal validity by amending the Articles of Agreement, as activities not
included in the articles of agreement are deemed to be essentially within the
domestic jurisdiction of a member state.
Also, in contrast to the common criticisms of some authors and some
non-intergovernmental organizations, this book is not a study of the political,
economic and social justification of the World Bank and IMF policies; it is,

5
6
7
8

Subedi, Surya P., The Challenges Ahead for the World Bank and the IMF with Regard to
the Human Rights Agenda in Human Rights and Development: Law, Policy and Governance,
LexisNexis, Hong Kong, Singapore. Malaysia School of Law, City University of Hong
Kong (2006) p 177.
Danaher, Kevin, 10 Reasons to Abolish the IMF and World Bank (2001) pp 10-34.
Subedi, Surya P., Resolution of International Water Disputes: Challenges for the 21st
Century, The Permanent Court of Arbitration/Peace Palace Papers, 8 November 2002.
Ibid., p 37.
Subedi, Surya P. (2006) op. cit. p 178.

Introduction

rather, an investigation as to whether some of these policies in practice erode the


sovereignty of the borrowing member states.
While it can be said that one of the cardinal principles of state sovereignty is
non-intervention in members states internal affairs, it may equally be argued that
policies actually arising from the activities conferred on the institutions appear
not to erode state sovereignty even when they are not justifiable. Conversely, the
accusation of erosion of state sovereignty by the World Bank and the IMF levelled
by some critics may be sustained even when their policies are justifiable yet are not
covered in their constituent documents. Most of the criticisms of the World Bank
and the IMF have been based on presumed justifiable and unjustifiable policies.
Little attention has been paid to investigating the legitimacy of these policies,
which appears to be one of the legal bases for determining whether or not state
sovereignty is indeed eroded by the institutions.
Aside from compliance with the institutions constituent documents as the
bases for complementing the principles of state sovereignty, the provisions of the
UN Charter, the Vienna Convention on the law of treaties, and principles of public
international law, all of which are geared towards protecting state sovereignty
and promoting peaceful international relations and security, are interpreted
conjunctively in the course of investigation as to whether the policies of the World
Bank and the IMF erode the sovereignty of the borrowing member states.
The book is divided into two parts: the first part will examine the facts leading
to the establishment of the institutions; these facts will be relied upon to avoid
absurdity in the interpretation of their constituent documents, their purposes and
the powers that enable them to implement the policies, including the examination
of the meaning and the essence of state sovereignty and the various methods of
its acquisition. The second part analyzes whether the institutions policies are in
compliance with their legal framework drafted to conform to the principles of
sovereignty and international law, as policies that are in breach of the latter could
erode the sovereignty of the borrowing member states
Member states of the World Bank and the IMF possess fundamental and
inherent sovereign rights; however, at the establishment of the Bretton Woods
institutions, some of the states sovereign rights were conferred upon them for
specific purposes either through agency relationship, transfer or delegation of
power. The limit and the extent of the conferred powers are clearly provided in
their Articles of Agreement. The growing concern is whether the institutions
are able to exercise the conferred sovereign powers within their legal framework
and without an infraction of the sovereignty of the borrowing member states not
expressly conferred or delegated to them, as compliance with the legal framework
complements rather than erodes state sovereignty.
3

Introduction

Sovereignty is an exclusive right of an independent state and its citizens to


exercise authority within its geographical territory, while in relation with other
states, the state government usually exercises its sovereign powers9. It can be
said that the state membership of World Bank and the IMF could limit their
sovereignty, however it is not obligatory for states to become members of such
international organizations. But, it is obligatory for international organizations to
respect the principles of state sovereignty and limit themselves to the conferred
powers as such organizations cannot on their own determine their competence.10
The entire world depends on the coexistence of sovereignties between states, yet
these sovereignties are legitimately exercised by international organizations when
delegated by states through a treaty.11 The argument and part of the decision
of the court that international treaties could not deprive a state of its sovereign
rights12 can be endorsed in this book. Furthermore, although the doctrine of
self-determination is an attribute of state sovereignty, the courts have similarly
declined to give judgement for a treaty that prevents states from performing a
particular act based on a restrictive interpretation of a treaty that prevents states
from exercising legitimate sovereign rights.13
The World Bank and the IMF are now global institutions. They were established
just before the end of World War II by a group of states who pooled some of their
sovereignty into a limited subject area to enable the institutions to perform certain
specific duties for their common benefit and expressed in an international treaty in
the form of Articles of Agreement. While the World Bank was set up to handle the
reconstruction of the war-torn areas and provide infrastructural development, the
IMF was set up to regulate the member states foreign exchange and to reconcile
the problems associated with member states balance of payment accounts.14
The purposes of the institutions are clearly provided in their Articles of
Agreement and there is no provision therein that their duties can be varied or
performed interchangeably, neither jointly nor severally by either institution. At
the beginning of the institutions activities, their functions were quite distinct, but
the distinctions between the institutions later became blurred. In order to prevent
perhaps unsustainable allegation or claims from critics regarding the erosion of
state sovereignty by the institutions, their unauthorized variation of functions
9
10
11
12
13
14

Bouviers Law Dictionary, Revised Sixth Edition (1856) p 433.


Brownlie I., Principles of Public International Law, Fifth edition (2001) pp 289-90
especially at 290 para 1.
Ibid., p 290.
Wimbledon Case, PCIJ Report (1923) 7, 28, 192 and 273.
Ibid., Sheila Weinberger, The Wimbledon Paradox and the World Court, 10 Emory
International Law Review (1996) p 397.
Article 1 of World Bank and IMF Articles of Agreement.

Introduction

will be examined to ascertain whether they are in conformity with the conferred
powers as expressed in the Articles of Agreement. The fusion of their activities
without amending the articles of agreement may also constitute a ground for
a claim of erosion of state sovereignty. The legal validity of the fusion of their
functions can be achieved only through amending the Articles of Agreement as
provided in their constituent documents.15
There has been a growing controversy over both the restrictive and elastic
interpretation of the Articles of Agreement of the two institutions, as the forms
of interpretation have the capacity to erode a states sovereignty. In the Wimbledon
case the court declined to give judgement for a restrictive interpretation of Article
380 of an international treaty, which provides that Germany should not exercise
its sovereignty within its territorial waters;16 similarly, it can be said that an elastic
interpretation17 of international agreements is likely to erode the sovereignty of
an organizations member states sovereignty given that the interpretation could
vary from the actual authorized delegated sovereign power. For instance, it does
appear perhaps that Article 1 (V) of the IMF Articles of Agreement, under which
the institution derived its powers to create most of its reform policies, may have
been given an elastic interpretation.
The Articles of Agreement provide, inter alia, that the institution shall give
confidence to members by making general resources of the Fund temporarily
available to them under adequate safeguards, thus providing them with the
opportunity to correct maladjustments in their balance of payments without
resorting to measures destructive of national or international prosperity. In
adopting legal literal rules of interpretation the courts in North Eastern Railway
v Berriman, Vincent v Southern Railway Corporation, Dredge v Conway, and Jones
& Co and Greg v Planque,18 cases with identical facts, held also that words must
be given their ordinary meanings in interpretation, otherwise the situation could
lead to absurdity. Even currently, these courts decisions are still the locus classicus
adopted in non-subjective interpretations.
Similarly, the Vienna Convention on the Law of Treaties, which is similar
to the English common law rules of interpretation, provides that treaty and
international agreements shall be interpreted in good faith with emphases on
15
16
17
18

Article XXVIII of the IMF Articles of Agreement; Article VIII of IBRD Articles
of Agreement.
Wimbledon Case, supra.
Maxwell, Peter, Interpretation of Statutes, Twelfth edition (1969) pp 239-40.
North Eastern Railway Co v Berriman (1946) 1 All ER p.225; Vincent v Southern
Railway Corporation (1927) AC 430; Dredge v Conway, Jones & Co (1901) 2KB 42;
Greg v. Planque (1936) 1 KB 669.

Introduction

the ordinary meaning of the text.19 However, in the event of ordinary meaning
leading to absurdity, the Vienna convention treaty requires that the preamble and
the annexes including any relevant rules of international law should be used as
an aid to the interpretation. Following the provision of the Vienna convention
on the law of treaties, in order to arrive at objective interpretation of the articles
of agreement, it can be suggested that the term adequate safeguard should be
interpreted to mean financial relationship and caution that exist between borrower
and lender in ordinary. It can be argued that this analysis could be used even when
adopting the golden rules of interpretation,20 or the mischief rules, which requires
that reference should be made to the main reason, and purpose that the statute is
meant to achieve respectively as decided in the Heydon case.21 Also, even when
the ejusdem generis rules approach is adopted in interpreting the term adequate
safeguards, the interpretation will fall within the parameters of the common
practice between lender and borrower in a financial relationship. Where the
parties have exhausted the three main rules of legal interpretation, the applicable
common practice should be used in the interpretation. This was also decided in
Powell v Kempton case.22 Similarly, the argument that interpretation which are at
variance with accepted norms may lead to absurdity,23 alter common rules and
order,24 can be endorsed in this book as the institutions are expected not to exceed
the sovereign powers only conferred or delegated to them by the member states.
The views of intergovernmental organizations25 and legal authors26 that all of
both institutions powers and policies are based on pressure, coercion and the
influence of the US may not be totally correct and endorsed in this book; the
institutions can be said to be acting under some legitimate conventional powers,
based on the Articles of Agreement. Unconventional powers based both on their
economic influence and on their domestic and international legal personality
are, furthermore, founded in international law and the general principles of law.
While it may be claimed that the Articles of Agreement provide evidence of the
conferred sovereign powers and nonetheless regulate the institutions exercise of
19
20
21
22
23
24
25
26

Articles 31 Vienna Convention on the Law of Treaties.


R v Allen (1872) LR 1CCR p. 367; Smith & Bailey Modern English Legal System, Third
edition (1996) pp 351-403.
Heydons Case (1584) 3 Co Rep. 7a.
Powell v Kempton Park Racecourse Company, (1897) 2 QB 242 at 260.
Graham, R.N., Unified Theory of Statutory Interpretation, Doc. No 1999. 002 CIT p 1.
Bennion, Francis, Statutory Interpretation, Second edition (1992) p 618.
Danaher, Kevin, The Ten Reasons Why the World Bank and the IMF Should be Abolished,
(2001) pp 6-10.
Brown ,S., The United States and the Politicization of the World Bank: Issues of International law
and Policy: Elements of Coercion Analysis (1991) pp 31; 53; 162-164.

Introduction

the sovereign powers, on the one hand, and even though they have an independent
autonomous agreement with the United Nations,27 perhaps on the other hand the
institutions are also bound to be regulated by the UN Charter and Declarations,28
its being a global body regulating the international affairs of members and nonmembers alike. It could be held that those policies of the institutions in conformity
with the conferred sovereign powers complement rather than erode state
sovereignty; also, the institutions policies within the conferred sovereign powers
appear not to fall under matters essentially within the domestic jurisdiction of
states; those subject matters have been legally and legitimately conferred upon
the institutions through the Articles of Agreement.29
Apart from the Articles of Agreement of the two institutions it can be argued
that policies not in conformity with Articles 1 (2) and 2 (7) of the UN Charter may
probably erode the sovereignty of the borrowing member states.30
The merits or justifications for the institutions policies may possibly be said not
be a ground for the presumption of erosion of their member states sovereignty, as
long as the policies are in conformity with the conferred sovereign powers in the
legal framework;31 it can similarly be suggested that those policies are consistently
ultra vires the Articles of Agreement and at variance with the international legal
obligations imposed on the institutions could erode state sovereignty.

27

United Nations Document E/C1/120 of 22 July 1947; UN, IBRD and IMF Documents
signed in New York on 15 April 1948: UNTS Vol. 16 (1948) p 344. Articles 57 and
63 of the UN Charter provide for specialized agencies defined under Article 57 to be
brought into a relationship with the Economic and Social Council (ECOSOC) subject
to the approval of the UNGA. There was, though, a test case as to whether the UN
could exercise control over the affairs of the institutions in spite of their independent
and autonomous agreement: during the cases of apartheid in South Africa, and
Human Rights abuse in Chile and Portugal. (ILM) Vol. 8 (1969) p 1339, UN Doc. A/
AC.109/333 of 3 July 1969.
28 UN General Assembly Resolution 2426 of 18 September 1968 appealing to all
international organizations to stop giving aid to countries abusing human rights, UN
Resolutions 3379, 10 November 1975 relating to Apartheid in South Africa and UN
Resolution 46/87 of 16 December 16 1991 that brought the oil, aid and technical
assistance sanctions ending the apartheid regime in South Africa.
29 Article 1 (1)-(5) of World Bank and the IMF Articles of Agreement dealing the object
clauses and purposes of the institutions.
30 Article 1 (2), 2 (1) and 2 (7) of the UN Charter.
31 The IMF and World Bank Articles of Agreement.

Introduction

1.2 issues
The book aims to examine whether some of the policies of the World Bank and
the IMF lie within the parameters of the sovereign powers conferred on them by
their constituent documents. This is because sovereign powers not conferred in
the constituent documents may be said to involve matters essentially within the
respective domestic affairs of member states; if the World Bank and IMF policies
impinge upon the domestic affairs of a member states, the result may be an erosion
of this states sovereignty.
It is therefore necessary to define and to delimit clearly the meaning and
essence of state sovereignty, from the Old World Legal order to the New World
Legal Order. For clarity and the understanding of the importance attached to the
principles of international law, the various methods of acquiring state sovereignty,
and the effects of political and economic sovereignty, including the principles of
non-intervention that amplifies the fundamental rights to self-determination, are
briefly elucidated.
States are subjects of international law, and only they possess inherent
sovereign powers. However, some of these sovereign powers are conferred on the
World Bank and the IMF either by the specific transfer of a certain duty, an agency
relationship or a delegation of powers evidenced by the legal framework. At the
conclusion of the legal framework, the institutions acquired an international legal
personality similar to that of each state. They may have greater unconventional
powers expressed through their economic influence, while the exercise of their
sovereign powers remains limited to that granted or conferred by the states as
expressed in the Articles of Agreement or legal framework. Their legal framework
or the Articles of Agreement comprise the object clauses and purposes, including
the modus operandi, clearly and unambiguously expressed in writing. Given that
the institutions possess special rights and privileges, they are also bound by their
international legal obligations, which consist of:
Obligation under the Articles of Agreement: Whether the institutions policies are
in conformity with the Articles of Agreement that have clearly set out the object
clause and purposes; including the modus operandi and the process of amendment,
where and when it is desirable. Where and when might it become necessary to
alter, vary or change the object clause and purposes, whether due process as
anticipated and expressly prescribed by the member states was indeed followed
in amending the Articles of Agreement? It may sometimes be possible for a policy
of the institutions that could erode the sovereignty of states to have been based
mistakenly on a wrong or subjective interpretation of the Articles of Agreement;
were the statutory rules of interpretation applied to prevent absurdity and the
erosion of member states sovereignty?
8

Introduction

Obligation under the UN Charter: Whether the institutions policies are in


conformity with the UN Charter.32 Some of the provisions of the charter,33 such
as the non-intervention in the affairs of another member state, which can be
said to be synonymous with the doctrines of state sovereignty, are regarded as
peremptory norm, for which derogation may not be allowed. It can be argued that
the institutions observance and due regards to these provisions is obligatory.
Obligation under the UN General Assembly Declarations: Whether the institutions
policies are in conformity with the UN General Assembly Declarations, particularly
those dealing with non-intervention, self-determination, sovereignty over natural
resources, and specifically, that each state has the right to choose and develop its
political, social, economic and cultural systems.34
Obligation under International law: Whether the institutions policies are in
conformity with the principles of public international law and particularly, the
principles relating to agency relationships, territorial sovereignty and domestic
jurisdiction35, the principles of self-determination,36 and the responsibilities of
international organizations.37 The provisions of the treaty may be said to bind the
World Bank and the IMF to being non-state actors in international law,38 including
the mode of observance of the treaty39 and its application and interpretation.40
There is a general presumption that the institutions, under the principles of public
international law, should take steps to amend the treaty before any change or
alterations in their policies.
Obligations under the General Principles of Law: Whether the institutions policies
are in compliance with the general principles of law. Although the ultra vires
doctrines are recognized by international law,41 they are more commonly applied
in domestic law. Confirming the meaning of ultra vires doctrines as unauthorised
32
33
34

Articles 2 (1), 2 (7) 57 and 63 of the UN Charter.


Articles 2 (4) and (7) UN charter.
UN General Assembly Resolution 1803 (XVII) of December 1962, dealing with
Permanent Sovereignty over Natural Resources; UN General Assembly Resolution 2626
(XXV) of 24 October 1970 dealing with the Declaration on Principles of International
law Concerning Friendly Relations and Cooperation Amongst States in Accordance
with the Charter of the United Nations, including the Universal Declaration on Human
Rights in reference to Articles 1, 55, 56, 68 and 76 of the United Nations Charter of 10
December 1948.
35 Brownlie, op. cit., p 577
36 Ibid., p. 599
37 Ibid., p. 557,
38 Article 26 Vienna Convention 1969
39 Article 27 Vienna Convention 1969
40 Article 28 Vienna Conventions 1969.
41 Amerainghe, C.F., Principles of Institutional law of International Organizations (1996) p 163.

Introduction

acts,42 the court has held amongst other things that it is an act performed without
any authority.43 It can be argued that in domestic or national law, while the ultra
vires act may only vitiate a contract or the contract be declared null and void, it goes
beyond this boundary in international law: every ultra vires act of the institutions
could be said to erode the sovereignty of the member states, as it is performed
without the conventional authority of the state. The fact that an unconstitutional
and illegal act is made and obeyed gives no rise to binding obligations; an assertion
by some authors that the doctrines of ultra vires are not applicable in international
law44 may be contested in this study, as such a claim defeats the entire purpose of
the Articles of Agreement and the sovereignty of states.

1.3 arguments
The member states hold inherent sovereign powers. However, some of the sovereign
powers are conferred on the World Bank and the IMF through the delegation of
power, an agency relationship or the transfer of specific powers in order to enable
them to execute certain specialized functions. Whether the conferment of the
sovereign powers is achieved by an agency relationship, the transfer of powers
or by the delegation of powers, the fact remains that states are the principals of
the institutions. It does not, therefore, appear that the institutions policies can
be accorded legal validity in international law when they exceed the limit of those
powers conferred on them, given that such a step might be inconsistent with the
doctrines of non-intervention.
It can be said that the principles of state sovereignty reach beyond the legal
protection and regulation of the conduct of states in international relations to
protecting ethnic minorities and individuals within the weak and strong nations
alike. This view appears to further the doctrines of non-intervention, with the
Articles of Agreement regulating, aiding and sustaining the institutions and their
policies. The policies of the institutions that are not made within the constituent
documents not only affect the rights of the borrowing member states, but also
those of the non-borrowing states who may not expressly have endorsed a new
policy in accordance with the due process dealing with amendments as already
provided in the constituent documents.
It can be said that the Articles of Agreement of the institutions evidenced the
conferred sovereign powers. Policies not in conformity with the conferred powers
are considered as interference in the domestic affairs of member states. It can be
42
43
44

Blacks Law Dictionary, 1950 p 1,522.


Haslund v City of Seattle (1976) 547p 2d p 1230.
Osieke, A., Unconstitutional Acts, 28 ICLQ (1979) pp 2-3.

10

Introduction

argued that matters within the exclusive jurisdiction of a member state are those
not conferred by the Articles of Agreement; the justification for the policies of
the institutions is immaterial as long as it is legally conferred with such authority
based on the principles of self-determination and international law without any
form of domination and coercion.
The functions and purposes of the World Bank and the IMF are separate and
distinct; the sovereign member states did not confer on the institutions the
sovereign power to vary their activities and functions. Also, there is no provision in
the constituent documents that their functions can be performed interchangeably
or jointly and severally. Thus, regarding policies which tend to blur the distinction
and fall outside the necessary due process as provided in Article XXVIII of the
IMF, that any modification of the activities of the institution, whether proposed
by the Board of Governors, Executive Directors or the member states, must be
approved by three-fifths of members having eighty-five per cent of the total voting
power,45 a similar provision is given in Article VIII of the World Bank Articles of
Agreement.46
Certain policies made as a result of modification, the expansion of activities, or
creative innovation, whether they be in furtherance of promoting good governance,
accountability, and the prevention of corruption, including other moral, patriotic
and effective roles not covered within the parameters of the constituent documents
and not carried out with the express mandate of the member states according to
the doctrinal analysis of Articles 2 (7) of the UN Charter in this study, can be
presumed to impinge upon the domestic affairs of member states and are thus
likely to affect the member states sovereign rights.
Under the general principles of law, whether it be contract law, constitutional
law, or even criminal law, the agreements, rights, and obligations of corporate
bodies and individuals are regulated by law, terms of contract, and obedience to
civil law. As parties are bound by their agreements, no party can be prosecuted
on the ground of immorality. Similarly, in international law, their treaties, rights,
duties bind parties, and obligations arising from the treaties has legal validity and
creates international legal obligation. Also, obligation arising from the creative
innovative policies of one of the parties, whether from a state or a non-state actor,
affects the rights of the party upon whom the obligation is imposed.
Even where the obligation of either party is compelled under any form
of pressure, the consistent practice may not acquire the status of customary
international law because of the directive nature of the policies that are either
not in conformity with or are completely in breach of the treaty. Although the
45
46

Article XXVIII IMF Articles of Agreement.


Article VIII World Bank Articles of Agreement.

11

Introduction

World Bank and the IMF may rely on an elastic interpretation of the constituent
document to expand their activities, this claim can rest on the resort to legal rules
of interpretations where the mischief rules, requiring that where all other rules or
interpretations lead to controversies or absurdity, state that the last resort should
be made by inquiring into the factors that led to the establishment of rules, law
and the agreement. In endorsing this rule in this analysis, it can be said that where
the institutions are interpreting the constituent documents under the principles
of implied or ostensible powers, reference should be made and a high degree of
importance attached to the reasons and events that led to the establishment of
the institutions; perhaps, also to examine the minutes of the negotiations. The
argument is predicated on the grounds of the accurate and objective interpretation
of the constituent documents or the amendment through the procedure prescribed
by the member states to prevent a possible infraction of state sovereignty.

1.4 methodology
The methodology is founded in the doctrinal literature survey and on a legal
qualitative analysis based on the positive philosophical school of thought and
legal jurisprudence that the policies and decisions of the World Bank and the IMF
must conform with their constituent documents; that were drafted to promote
the economic development and progress of member states under the checks
and balances of public international law. This presupposes that international law,
conventions, rules, or declarations of the UN General Assembly Resolutions,
including the general principles of law, are a unique socio-political phenomenon
guiding the behaviour of state and non-state actors in international relations. The
legal validity of the institutions policies thus depends on compliance with this
philosophical approach.
The examination and analysis is also predicated on the fact that the constructive
and objective interpretation of the constituent documents of the institutions
asserts individual state legal rights and affirms the legal validity of the policies and
the principles of state sovereignty, rather than eroding the borrowing member
states sovereignty; the legal approach is likely to guarantee the principles of
justice, fairness and procedural due process.
The methodology in this study does not underplay the Natural and Realist
philosophical approach, but after evaluating the international political economy
before the Westphalia Convention of 1648 and before the universal acceptance
of the concept of state sovereignty as a legal norm and doctrine, the positive
philosophical approach is adopted. This approach may be said not to shut the
door on political and social phenomenal changes in circumstances and times: the
12

Introduction

notion of international legal obligation which seems to suggest that the rules must
be followed may not preclude progressive variation and amendment under the
legal due process.
The current author paid visits to the headquarters of the World Bank, the IMF
in Washington and their regional offices in the UK, China and Nigeria, including
the United Nations in New York, for the purposes of using the library to research
primary documents and engage in discussions with their staff. However, little was
achieved in this regard as visitors to the institutions and the UN have, since the
11 September crisis, been restricted from access to these institutions. Discussions
with the staff of the Central Bank of Nigeria and the Ministry of Finance were
nevertheless quite helpful.
The substance of the academic research is based on books, judicial decisions,
journals, and opinions of courts of competent jurisdictions; the United Nations
Charter and the UN General Assembly Resolutions; the Vienna Convention
on the Law of Treaties, including various countries constitutions, and on the
opinions of other researchers.

1.5 outline of chapters


Chapter One offers a brief account of and the background to the events that led to
the establishment of the World Bank and the IMF, including the apprehension of
state delegates as regards the effects of such institutions on their state sovereignty,
despite their enthusiasm for the concept. The chapter gives the reasons behind the
motivation before consensus was reached during the negotiations at the conference
that members should surrender only the necessary few of their sovereign powers,
just enough to enable the IMF to perform some specified functions.
Chapter One also elucidates the legal issues to be analysed in this thesis and
the arguments supporting them, most of which are based on the moderate legal
analytical concepts and philosophical approach of the Positivist school of thought;
the methodology is included.
Chapter Two discusses the definition and the early concepts, including the legal
meaning and the purpose of state sovereignty, starting from before the period of
Treaties of Westphalia in 1648; the chapter addresses the interpretation from the
1933 Montevideo Convention on state sovereignty to the modern meaning and
legal order, as well as the role then played by the League of Nations in comparison
with the present role of the United Nations towards maintaining world peace
and security. The emphasis placed on state sovereignty by the United Nations is
analysed in the light of the roles of such institutions as the World Bank and the IMF
13

Introduction

in eradicating colonialism and encouraging the independence, self-determination


and sovereign equality of all nations that are synonymous with state sovereignty.
Chapter Three examines the modern notion of sovereignty and the essence and
legal significance of state sovereignty. The study may be completely appreciated
only when the importance and the legal significance of sovereignty is analysed.
State sovereignty goes beyond the political and economic sovereignty that has
been briefly discussed to the individual rights of self-determination aggregated to
state sovereignty.
Chapter Four examines the events that led to the establishment of the
institutions. The negotiations at the Bretton Woods conference, the successes of
the Marshall Plan, the domination of the Chief Executive of the both institutions
by the US and Europe, with the object clauses and purposes of the institutions as
separately assigned to each of them are also briefly discussed.
Chapter Five examines the powers of the World Bank and the IMF, as they
seem to have both conventional and unconventional powers. Their powers under
the Articles of Agreement and the UN Charter as international organizations have
been critically analysed. Also, as non-state actors in international law, they possess
a domestic and international legal personality that enables them to do business
with member states and third parties. The cooperative nature of the institutions
as designed on paper enables them to enjoy special privileges and immunities as
non-profit and communal co-operative organizations. The chapter discusses their
unconventional powers, which includes both their economic influence and that
of the Paris club and the G8. These powers of course enable the institutions to
perform their functions in any member state with great confidence and impunity
for their staff and institutions in those member states.
Chapter Six establishes that the sovereign powers inherent in member states
are legitimately conferred upon the institutions, through the delegation of powers,
an agency relationship or a transfer of specific powers to enable them to execute
the designed and specifically assigned functions. Although there are sustained
arguments that the World Bank and the IMF are non-state actors with an agency
relationship with member states and as such are referred to as state actors in the
international arena, the general assumptions are furthermore that the member
states are principal to these non-state actors. The chapter further analyzes the
powers of the agent and principal where such a relationship exists, as the agent
acts only under the authority conferred by the principal except in certain cases
where the authority is implied within the parameters of the assigned duties.
The comparison between the likely effects of the authorized acts of agents in
domestic national law and in international law is briefly discussed and analyzed in
this chapter in support of the proposition of this study.
14

Introduction

Chapter Seven examines the international legal obligations of the World Bank
and the IMF as they enjoy rights, privileges and immunities in international law;
there are corresponding duties and obligations to which they are bound. Their
non-compliance with an international legal obligation may be seen not only as a
violation of international law, but could also be said to erode the sovereignty of
the member states. The chapter discuses and analyzes one of the major obligations
under the Articles of Agreement and the effects on the sovereignty on states in
interpreting some of its provisions.
Chapter Eight examines the obligations of the institutions under the UN Charter,
including a critical analysis of a selection of the reform policies. Given that the UN
Charter is one of the basic documents of international law, some measures that
protect and promote the modern notion of state sovereignty are provided therein.
Aside from the World Bank and the IMF, member states have obligations under
the UN Charter. The chapter analyzes some of the policies of the World Bank and
the IMF, and whether they are in compliance with the provisions relating to the
protection and respect of state sovereignty. For example, one of such provisions
is in Article 2 (7) of the UN Charter,47 which provides inter alia that the United
Nations, which by implication includes other international organizations such as
the WB and the IMF, shall not intervene in matters essentially within the domestic
jurisdiction of another state.
The doctrinal analysis of this provision is that sovereign powers not expressly
conferred or implied within the parameters of the institutions constituent
documents thus lie within the respective domestic jurisdictions of member states.
The probable effects of non-compliance with this obligation under the UN Charter
and the assumptions as to where they may exist have been critically analyzed and
elucidated, with selected states used as case studies and illustrations to support
the research findings in this chapter.
Chapter Nine contains the Conclusions and Recommendations.

47

Article 2 (7) UN Charter.

15

Chapter 2

The Traditional Notion of State


Sovereignty in International Law

his chapter examines the international normative framework that upholds


the sovereign statehood in the world, during and after Imperialism and
Colonialism. A brief history of the old world order, where some states are
administered as Colonies, Mandates and Trust territories by Imperial Masters,
is given. The chapter discusses various methods of acquiring state sovereignty
to enable the appreciation of the core theme of this thesis. The enjoyment of
sovereign rights by, according to the modern terminology, Developing and
Developed states48 will also be examined, including the modus operandi adopted
in achieving the institutionalization of the concept of sovereign rights particularly
among the former Third World states, as they were then designated.49 The chapter
analyzes the unique political and constitutional framework that evolved as a
result of the universal institutionalization of the basic concept of sovereignty.
There is no concrete codified definition of sovereignty, yet the supposition is
that legal authors merely describe the concept and the objectives it is meant to
achieve. While some merely apply it as the basic constitutional doctrine of the
law of nations,50 others are of the opinion that it provides for the preservation and
protection of self-government and self-determination without external influence
for constitutionally independent nation-states with a view towards protecting the
dignity of their citizens.51
The further purpose of this chapter is to set out the scope, significance, and
examination of the sanctity of state sovereignty as a foundation and means for
sustainable world peace and security, including the preservation of each individual
48
49
50
51

Cox, Robert W., Social Force: States and World Orders, Beyond International Relation
Studies Theory Millennium, Journal of International Studies (1981) Vol. 10 pp 126-55.
Worsley, Peter, The Third World: A Vital New Force in International Affairs (1970) Second
Edn. p 390.
Brownlie, I., The Principles of Public International Law, Fifth Edition (1998) p 289.
Schrijver. Nico, The Changing Nature of State Sovereignty, The British Yearbook of
International Law 1999, Oxford: Clarendon Press (2000) p 59.

16

The Traditional Notion of State Sovereignty in International Law

nation-states social and cultural identity, guaranteeing their independence


without external interference, as the erosion of state sovereignty by another state
or non-states actor could threaten international peace and security.
Furthermore, the examination of sovereignty will be restricted to the aspect
that deals with the self-determination and equality of states as a legal condition:
principles, standards, conventions, practices, and international legal jurisprudence.
The jurisprudence of this concept provides a common denominator for a number
of related rules,52 such as the self-determination that is a result of the common
denominator forming part of the jus cogens of the law of nations.53 The chapter
concludes by examining different methods of acquiring state sovereignty, the roles
played by the League of Nations and the UN, the judicial hegemony, and the legal
effects of state sovereignty.

2.1 definition of sovereignty


Sovereignty represents the basic constitutional doctrines of the law
of nations that governs a community consisting primarily of states,
having a uniform legal personality. If international law exists, then the
dynamics of state sovereignty can be expressed in terms of law.54
Many authors have tried to define the term sovereignty; the term can better be
described than defined, although some philosophers present the term as a rule
of law made to preserve internal order and the integrity of state, and to protect
the state from external interference.55 However, certain authors argue that
sovereignty is an organized principle of international politics according every state
the prerogative to pursue its rights and organize internally into a form of economic
integration that facilitates the development desired by the state for its citizens.56
Sovereignty has been defined as the power a country has to govern itself and
make its own laws.57 Others have defined sovereignty as the supreme, absolute
and uncontrollable power by which any independent state is governed: supreme
political authority, the power to accomplish the will of the state within the state
and with no accountability to an external body.58 The meaning and importance
52
53
54
55
56
57
58

Schwarzenberger, G., and Brown, E.D., A Manual of International Law, Sixth Edn. (1976)
pp 33-6.
Brownlie, I., Principles of International Law, Third Edition (1979) p 515.
Brownlie, I., Principles of International Law, Fifth Edition (1998) p 289 para. 1.
Bodin, Jean, The History of Political Thought: Sovereignty (1992) p 23.
Milestein, Brian, The Crisis of External Sovereignty: The US and the World.
Oxford School Dictionary, Third Edition (2002) p 681.
Blacks Law Dictionary, Sixth Edition (1996) p 1020.

17

The Traditional Notion of State Sovereignty in International Law

of sovereignty were consolidated at the Peace of Westphalia in 1648 when Europe


moved from the Middle Ages to the regime of sovereign states.59 After the
Westphalia conference, the authority of states was no longer being challenged by
the Roman Empire as states began to respect the principles of non-interference
in another state.60 It can also be said that the norms of sovereignty, as it was then
understood, encouraged and sustained peace and are enshrined in Articles 2 (4)
and 2 (7) of the UN Charter; this prohibits attacks on the political independence
and integrity of, and sharply restricts intervention in the affairs of, another state.
It has been said that no Treaty provision or international agreement, can
deprive a state of its sovereign rights.61 All of a states obligations, including its
relationships with other states, arise from its sovereign rightsa term sometimes
used to describe the legal competence of a state. Although treaty obligations
and the membership of an international organization could limit the states
sovereign rights, that is as far as and the extent to which the sovereign powers are
conferred on each one. The limitation is to prevent the erosion of state sovereignty.
International law may to some extent primarily be based on the notion of state
sovereignty. This assertion can be supported by the fact that the first principle
of the UN Charter commenced with an injunction of the sovereign equality of
all members.62 The decision in the Wimbledon case63 gave an indication of the
importance of state sovereignty, yet not as an absolute concept; it is, however, a
concept that guarantees the self-determination of a nation, the violation of which
will erode the sovereignty of that state.64
The concept has been liberalized following changes in the worlds political
economy where international organizations are allowed to exercise a limited
amount of sovereign powers on behalf of states;65 in such circumstances, the rules
of conduct are quite prescriptive, laid down, acted on, applied and regulated by
international law as the worlds political order.66 The concept of sovereignty can
be said to undergo change and transformation in line with global growth, thus the
concept clearly confers independence on states. When considering the political
59
60
61
62
63
64
65
66

Kantorowwics, E., A Study in Medieval Political Theology (1959) p 10.


Philpot, D., Revolutions in Sovereignty; How it shaped Modern International Relations (2001)
p 23.
Ibid., p 290.
Article 1 (2) of the UN Charter
Wimbledon Case (1923) PCIJ p 25.
Ibid., p 26.
Twining, W. and Miers, D., How To Do Things with Rules, Second Edition (1984) pp 1267.
Emmet, Dorothy, Rules, Roles and Relations (1966) p12. The philosopher is of the view
that the structure of a general norm guiding conduct and rules remains unchanged
while the outlook can be fantasized.

18

The Traditional Notion of State Sovereignty in International Law

economy and interdependence of states, in practice absolute sovereignty and


independence might be remote.
State sovereignty has for the past decades been a defining principle of interstate
relations and a deep foundation of the world order. The concept lies at the heart
of both customary international law and the UN Charter, with the main object of
maintaining international peace and security, including protecting weaker States
against the stronger ones67. The concept has never been inviolable, either in law or
in practice, as its legal definition might imply: a factor observed by some political
leaders. They argue that even where absolute sovereignty may have seemed to
exist, it was highly theoretical; hence, it has never matched reality.68

2.2 the legal meaning and purpose of sovereignty


Legally, state sovereignty denotes the capacity and competence, independence and
legal equality of states. The concept, which became the foundation of International
law, was shaped to the acceptance of all leading powerful nations by agreements
concluded by European states as part of the Treaties of Westphalia in 1648. The
supremacy of the sovereign authority of states was established within a system of
independent and equal units as a way of establishing peace in all parts of Europe.
It later became codified as the rights and duties of states in the 1933 Montevideo
Convention, and was later adopted by all civilized nations.69 At the Montevideo
Convention it was emphasized that the major component of sovereignty was an
adequate display of the authority of a state, irrespective of its military strength,
whether weak or strong, to act over its territory to the exclusion of other states.70
While some authors argue that it is merely a principle of non-intervention in
the affairs of another state, the most popular opinions concerning state sovereignty
accentuate the self-determination, political independence and freedom it brings.71
Perhaps it does appear that the concept encompasses all matters in which states
are legally allowed by international law to decide and act without intrusion from
other sovereign states.
67
68

69

70
71

Articles 1, 2(4), 2 (7), and 51 of the UN Charter.


Boutros Boutros-Ghali, former UN Secretary General, at his second opening section
of the UN General Assembly (An Agenda for Peace) at the United Nations, New York
(1992) para. 17.
Treaty of Westphalia, 24 October 1648, regarded as a peace treaty between the Roman
Emperor and the King of France and its allies. The protection of weaker states was also
negotiated during this conference.
Hensley, Frances, State Sovereignty, (1966) p 126.
Reisman, Mickeal W., Sovereignty and Human Rights in Contemporary International
Law, American Journal of International Law 84 (1990) p 867.

19

The Traditional Notion of State Sovereignty in International Law

The possession of state sovereignty includes, inter alia, the choice of a political,
economic, social, and cultural system including the formulation of foreign policies
and defence of its territories72. However, it is important to add that the freedom
of self-determination is not unlimited. International law has incorporated
international relations among states to respect both the rule of law and international
agreements made voluntarily,73 such as the Articles of Agreement of the WB and
the IMF.74
The view is that even though the concept of sovereignty has never been
watertight, what is left of it has routinely been violated by the strong nations.75
The invasion of the Iraq by US and British forces has been condemned by world
leaders as inconsistent with the UN Charter,76 established on the basis of sovereign
equality of all of its members. Although it has been suggested that, in todays world
of closer global links, cultural, environmental, social, and economic influences
neither respect borders nor require an entry visa, at the same time territorial
boundaries have come under stress and have diminished in significance as a result
of contemporary international relations. Technology and communications have
similarly made borders permeable; exposing political dimensions of internal
disorder and suffering inviting humanitarian intervention have further made the
concept less absolute.77 For this reason the concept is well entrenched in legal and
political discourse at least to encourage the preservation of human dignity. This
explains why the perspectives on the range and role of state sovereignty have over
many years evolved quickly and are universally applied internationally.
The concept is not an entirely new one originated by legal practitioners and
authors; it has been in existence since the mediaeval era when the sovereign
powers were concentrated in monarchs who were the heads either of an empire
or of a state. The independence of these empires and states revolved around the
Emperorsand Popes, in the case of the Roman Empirerather than within states
guided by the rule of law, where sovereignty is regarded as the property of states.78

72
73
74
75
76
77
78

Abiew, Frances, The Evolution of the Doctrines and Practice of Humanitarian Intervention (The
Hague: Kluwer 19999) pp 26-27.
Treaties of Westphalia 1648.
Article 15 of the Vienna Convention on the Law of Treaties 1969.
Henkin, Louis, International Law: Politics and Values, edited by Martinus Nijhoff (1995)
pp 9-10.
Annan, Kofi, The Guardian, (UK) Thursday, 16 September 2004.
Mohammed, Ayoob, The New-Old Disorder in the Third World, Global Governance 1,
no 1 (Winter 1995), pp 59-60.
Jackson, Robert H., Quasi State: Sovereignty, International Relations and the Third World
(1990) p 26.

20

The Traditional Notion of State Sovereignty in International Law

The controversy as to whether sovereignty is a norm or fact has been put to


the test by certain writers, who are of the opinion that it is an international and
legally prescribed conduct of the rule of law for independent states, affirming the
freedom, liberty and self-determination of citizens,79 and prohibiting external
interference or intervention by other states.80 However, non-intervention or noninterference in the affairs of member states are said to be virtually the same coin as
sovereignty.81 Today, they constitute the distinctive reciprocal formal-legal rights
and duties of an international social contract between states. Some authors define
sovereignty succinctly as a legal, absolute and unitary-condition rule that signifies
the independence of other states.82
They claim that the word absolute is used because semi-sovereignty cannot
possibly exist; also, the language of the concept is strictly categorical and
consistent with all legal rules.83 A state is a sovereign state, but colonies and
Trust territories are dependant on the sovereignty of the colonial administrator.84
Sovereignty is further perceived as one of those several norms of the mediaeval
period incorporated into international statute to deal with a common enemy in
the name of colonialism, and to preserve the dignity of man; it includes reducing
inter-state conflicts among the developed countries.85
It may be noteworthy to mention that only independent states enjoy
sovereignty. All states under the suzerainty or under the protectorate of another
state, or are a member state of federal state in a federal system of government, may
not enjoy the rules and the legal order under this concept. However, it has been
said that the very existence of a state lacking sovereign powers is an anomaly.86
Compliance with the norms of sovereignty not only allows states to take advantage
of the doctrines of self-determination; it also encourages the maintaining of the
international peace and security that could be threatened where state sovereignty
is eroded. It can be argued that non-state actors are more vulnerable to the erosion
of state sovereignty than are state actors. This approach stems from the reason
that international organizations exercise sovereign powers conferred by states
and there is thus a tendency for them to exceed the sovereign powers conferred,
therebyif not properly regulatederoding the state sovereignty.
79

Schwarzenberger, G. and Brown, E.D., A Manual of International Law, Sixth Edn. (1976)
pp 54-5.
80 Article 51 UN Charter 1945.
81 Jackson op. cit., p 27.
82 James, Alan, Sovereign Statehood London (1986) p 25.
83 Kelson, Hans, General Theory of Law and State, Cambridge (1945) p 29.
84 Brownlie, I., Principles of Public International Law, Third edition, p 515.
85 Crawford, J., The Criteria for Statehood in International Law, p 96.
86 Oppenheim, L., International Law, edited by H. Lauterpacht (1963) pp 118-9.

21

The Traditional Notion of State Sovereignty in International Law

States are the subjects of international law.87 However, the WB and the IMF have
been conferred with specific sovereign powers by states through the delegation,
agency or outright transfer of these to enable them to perform the functions for
which they were set up.88
There is a general presumption that all member states of the WB and the IMF
possess the characteristic of statehood with a sovereign government;89 treaties
between the states and the international institutions are binding.90 Having
discussed the peculiarities of the WB and the IMF and their place in international
law, it will be helpful briefly to examine the genesis from the old world order of the
sovereignty of states.

2.3 the old world order


The current thesis is based purely on legal principles and on compliance with the
international rule of law, thus the chronology of the development of the doctrine
of state sovereignty will be brief and to the point.
During the old world order, the sovereignty of a nation state or empire resided
within the domain of the monarchs or the acclaimed leaders of the people. However,
this situation became less fashionable towards the end of First World War and
the beginning of the Second. A new era emerged where the sovereignty of a state
now resides with the electorates, who in turn transfer state sovereignty to their
elected government. There are also instances where in the absence of democratic
rule, states are bound by norms or established customs and their monarchs are
allowed to be heads of state and of a government that performs sovereign acts on
behalf of the state.91
The view is that state sovereignty was determined to a large extent by the 1648
Peace Treaty of Westphalia. A question, however, hangs over the status of the
most borrowing member states of the WB and IMF who were colonies under the
external and colonial administrators. It can be observed that the most borrowing
member states of WB and the IMF were either Trust territories, Mandate territories
87
88
89
90

91

Schwarzenberger and Brown, op. cit., p 3.


Koh, H.H., Transnational Legal Process, 75 Nebraska Law Review (1996) p 181ff at
p 205.
Ibid., p 118.
Article 7, Vienna Convention on the Law of Treaties 1969: Heads of sovereign
government, or their Ambassador or any representative accredited to international
conferences, are acknowledged as having the powers to represent the state; any
decisions adopted or signed on behalf of the state are binding.
Saudi Arabia falls into the category of states where the monarch is the Head of the
Army and the government. He performs and delegates all sovereign acts.

22

The Traditional Notion of State Sovereignty in International Law

or outright colonies administered by the external rulers and with no government


of their own choice. The sovereignty of these states existed only to the extent of
the powers delegated to the native administration through indirect rule, as was
the case of colonial territories controlled by Britain, or by direct administration
through the policy of assimilation, as was the case of territories administered by
France.92 Such states at that time had neither the political will nor the authority to
provide within their territory the socio-economic welfare traditionally associated
with independent states, as they lacked the institutional features of sovereign
states as defined by classical international law.93 While it would appear that the
colonial rulers might defend such states in the event of external invasion, this is
not the same as defending themselves or having the freedom to choose whom to
have as allies. They were merely protected by the colonial rulers, who enjoyed only
the classical, formal, legal condition of non-intervention in the affairs of sovereign
states.94
Further, the possession of sovereignty by states presupposes the capability
of the states to be their own masters; to have the enjoyment of the direct rights
of non-intervention by external bodies, and to collaborate with other states for
commercial, technological, social, and financial purposes on a reciprocal basis.95
In the old internal economic order, most borrowing member states of the WB and
the IMF enjoyed no liberty to choose any of the above factors, notwithstanding the
cultural and social differences with their colonial masters. These states, as has been
argued, were denied sovereignty because they had neither independence nor selfgoverning authority: self-government is synonymous with sovereignty.96 A state
cannot be said to be partially sovereign: either a state is sovereign and possesses all
of the sovereign powers, or it depends on other sovereign states for its enjoyment
of the status of sovereignty only as allowed or permitted by the colonial rulers or
by a state in charge of the Trust territories.97

92
93
94
95
96
97

James, Alan, op. cit., p 25.


Jackson, Robert, Quasi-States, Sovereignty, International Relations and the Third World (1990)
pp 21-2.
Schwarzenberger, Georg, A Manual of International Law, edited by Professor E.D. Brown,
Sixth edition (1976) p 54.
Ibid., pp 54 and 564.
James, Alan, Sovereign Statehood (1986) p 25.
Crawford, J., The Criteria for Statehood in International Law, British Yearbook of
International Law 1976-1977 (1978) p 96.

23

The Traditional Notion of State Sovereignty in International Law

2.4 sovereignty as a political order


It can be argued that sovereignty was a mere political item during the old world
constitutional order. Greater emphasis lay on the political control by the colonial
masters of both domestic and external territories. Even at the time of struggle for
independence by the colonies, little attention was paid to other characteristics of
sovereignty.98 Sovereignty at this stage was simply articulated as a set of rules and
prohibited actions through weak agreements that were sometimes not obeyed;
the prominent players were Europe, holding on to its fragmented empires within
the same continent. Sovereignty as agreement in the old world order is quoted as
being prone to disorder and breakdown as the agreements stifled the will of the
weaker states, which had been in the majority before the post-1945, post-World
War era when political liberty and freedom were highly prized.99

2.5 absence of referees to enforce the rules


The absence of authorities or referees to enforce the rules of sovereignty led to the
frequent breakdown of rule and order in the old political system. Furthermore,
given that there was larger number of states lacking sovereign status than those
that actually possessed it, leading to an over-heating of the worlds political
economy, the issue of the erosion of state sovereignty was not prevalent, as most
states had then never even had it. State sovereignty at that time, as it is argued,
existed within rival dominant states. What was common in terms of treaties can be
described as alliances between weaker states and stronger ones. An international
treaty such as that now forming part of the modus operandi in international law
was not common.100 Rivalries and wars or the use of force were commonly used
to enforce disagreement or broken alliances because the authority to enforce rules
was left to the stronger states.101
Only states with sovereign powers have the capacity to enter into an alliance
with others. Unfortunately, the majority of the borrowing member states of the
IMF and WB lacked the capacity to enter into voluntary alliance, as they were still
colonies or Trust territories under the once most powerful Europe. The fashion
was for these non-sovereign states to sit and watch helplessly, against their volition,
the dictates of their sovereign masters. The question that agitates the minds of
98
99
100
101

Oakeshott, Michael, The Rule of Law: On History and Other Essays (1983) pp 125-8.
Ibid., p 128.
Plamena, John, On Alien Rule and Self-Government (1960) pp 21-3.
Grotius, Hugo, in Robert Jackson op. cit., p 35: States were divided along regional blocs,
as was loyalty.

24

The Traditional Notion of State Sovereignty in International Law

certain commentators102 was whether such a situation could serve as the basis
for alliances.
The basic rights of the states and the individuals therein were at the behest of the
whims and caprices of the colonial government. It can be said to be no question
of the erosion of state sovereignty, then non-existent among the dependent
states that were, therefore, neither independent nor self-governing. There was no
balance of power.
This of course led to the global hegemony of powers dominated by Europe and
a few other selected states on the American continent.103 It was suggested that
the move was encouraged by the League of Nations, which even supported the
Mandate territory system that facilitated trading alliances with Dominions against
opposing colonial masters.104 It was further suggested that the notion of Mandate
territories was seen as the institutional manifestation of protection by colonizing
powers, whose interest in the landsrather than in the interests of the aborigines
should be looked after in trust by that power.105
The old world order appears to have focused more closely on world domination
than on sovereign autonomy for the numerous states under the administration of
colonial government.106
The inherent value of states during the old world order lies, among other
factors, in each ones defence with organized, well-equipped armed forces for the
purpose of defending its territory or acquired territories. There was no focused
institutionalized body such as the UN to enforce the doctrines of sovereignty.
Furthermore, two paradigms are prominent in these postulations. Firstly, it
postulates sovereignty as a power organization: with conflicting national interests
yet lacking consideration of the morality of individuals except as war machines, the
only means of rationalism for enforcing national security;107 secondly, sovereignty
of states is conceived as an association or a unit of sovereign states that guarantees
impartiality yet not equality under their common rules.108
This view sounds deeply metaphorical. However, it appears to have been the
image of states in the old sovereignty regime. For this reason the US fought and
achieved freedom from the British Empire even at a time when the whole of Africa
102 Anghie, Anthony, The Hearth of My Home: Colonialism, Environmental Damages
and the Nauru case, 34 Harvard International Law Journal (1993) p 445; 454.
103 Bull, Hedley, The Theory of International Politics 1919-1969, in Brian Porter (ed), The
Aberystwyth Papers (London 1972) p 32.
104 Article 22 of the League of Nations.
105 Anghie, Anthony, op. cit p 455.
106 Heinz, Lubasz, The Development of Modern States, First edition (1946) p 3.
107 Bull, Hedley, The Anarchical Society (1977) pp 8-9.
108 Wight, M., Power Politics, Second edition (1986) p 125.

25

The Traditional Notion of State Sovereignty in International Law

was partitioned and ruled by the European continent. Europeans held sway over
much of Africa until the League of Nations, later argued to be a failure, began
to import some semblance of sovereignty based on the novel doctrine of selfdetermination, to colonial entities that in reality were inept,109 as handicaps are
awarded to poor golfers.110
From the views and arguments of authors and commentators expressed above,
it can be observed that state sovereignty was a privileged right for the strong
nations until they are fought for.111 Furthermore, due to the sovereignty jealously
guarded by states that already possessed it, the worlds political and economic
system became over-heated. After the Second World War, Nationalist movements
opened another era of state sovereignty leading to what has been defined today.

2.6 exercise of sovereign powers by external bodies


It is important to examine governmental powers over states before and
immediately after World War 11. Governmental powers and state sovereignty
are quoted as being two sides of the same coin. Communities regarded as states
yet under colonial government lacked one of the sovereignty characteristics:
self-determination, but they were indeed exercising sovereign powers. Entities
considered as states were regarded as independent communities with the final
authority for colonies under Britain coming from His Majesty.112 His Majesty
and the two Houses of Parliament for colonies under British control were directly
or indirectly making laws and administering the novel states. Indirect rule was
the system adopted by Britain in their colonies, where a governor-general or
president-general was appointed by His Majesty. Also, no major decision would
be taken without the approval of the parliament and King or Queen for territories
under British rule; other colonial masters adopted a similar approach.113

109 Jackson, op. cit., p 40.


110 Jones, E.L., The European Miracle. (1981) pp 106; 118-9.
111 America fought for sovereignty from the British Empire when it was fashionable for
powerful nations to dominate the whole world during the old sovereign regime after
the Westphalia Treaty of 1648.
112 Galloway, Joseph, A Plan for the Union of Great Britain and the Colonies (1774).
113 Congress in America and the Parliament in Nigeria before Independence sought
approval for most major political decisions; they will be given legal backing by colonial
masters before implementation. A plan for Maryland, North Carolina, Georgia,
Pennsylvania, Connecticut, New York and New Jersey to independent counties was
submitted by Congress to the King through the Houses of Parliament before being
implemented in the US.

26

The Traditional Notion of State Sovereignty in International Law

Towards the end of colonialism the colonial governments began to weaken as


Trusteeship, a lesser degree of colonialism grew in favour. It stemmed from Article
22 of the League of Nations, and Articles 75 and 76(b) of the United Nations
Charter that, among other features, describes one of the basic objectives as the
promotion of the political, economic, social, and educational advancement of the
inhabitants.114
It is equally important to examine the relationship between the colonial
government and their respective colonies during the period in question, as this
may be relevant during the examination of state sovereignty that exists in the
current century. A colony was regarded as a dominion that starts out with mutual
and cordial relationship between the duos, one with its own government yet
deriving all of its powers from the colonial home government.
Some authors are of the view that the relationship is similar to that between
husband and wife. However, while a wife has the choice whether or not to obey all
commands from her husband, or vice versa, the colonies had no choice in refusing
to carry out a lawful order from the colonial masters.115 The protection of these
Dominions (States), as they were appreciatively named, was usually carried out
by a combination of the Armed Forces of both the colonial government and the
colonized territories.116
State sovereignty was not of universal applicability: European nations
dominated 85 per cent of the world in the form of a colony, protectorate or
dominion.117 The administration never took cognizance of the needs and
aspirations of those being governed, as the colonizers culture was used as a
standard for governance.118 Views have been expressed that the stigmatization as
inferior of the social and cultural background of the colony by the government
of the colonial administrators, though, increased the latters prestige119 while
introducing discrimination and racism.120 The colonial government held itself

114 Anghie, op. cit., p16 vat 457.


115 Galloway, Joseph, op. cit. p 2.
116 Ford, Peter, Tracing Todays Conflicts Back to Colonialism, Nado Media, 30 March
1999 p 1.
117 Said, Edward, Culture and Imperialism in Africa (1993) p 8: Ten per cent of Africa
was colonized in 1870; by 1900 the number had risen to 90 per cent, and all were
administered from foreign colonial offices.
118 Chowduri, R.N., International Mandates and Trust Trustee Systems (1955) pp 60-1.
119 El-Ayouty, Yassin, The United Nations and Decolonization: The Role of Afro-Asia (1971) p 4.
120 Wilson, Henry S., The Imperial Experience in Sub-Saharan Africa Since 1870 (1977) p 116.

27

The Traditional Notion of State Sovereignty in International Law

and its people to be superior; they therefore claimed that the task was to instil
civilization,121 which commenced with religious enlightenment of the colonies.122

2.7 judicial legal hegemony


It should be noted that courts under the colonial rule in territories controlled by
the colonial administration did not have final judgement. Appeals lie from the
highest courts in the territories to Appeal courts or to the Privy Council and the
House of Lords in territories controlled by the British sovereign. Subject states
never had an independent judiciary based on laws formulated by their people
for their people, as the courts were not considered institutions separate from
the colonial home territories. Colonies were regarded as a metropolitan state of
colonial rulers. The concept of territorial sovereignty founded in the 1648 Treaty of
Westphalia made it impossible for colonies to adopt another suitable legal system
or their customs as the first choice of their domestic law.123 It is therefore observed
that customary laws that are proved by evidence become technically difficult to
establish because of sharp customary differences between domestic and alien
customs. Considerable research and historical analysis indicate that controversies
about civilization and the socio-cultural background of colonies administered by
colonial government have occasioned miscarriages of justice for appellate cases
decided in the home countries of the imperial masters.124 Foreign colonial courts
where appeals were made following the legal principles of judicial precedent
influenced domestic courts, which led to the exploitation of the cultural heritage
of the lesser-developed regions.125
Even after independence was granted to colonies, for a very long time
afterwards courts of colonial administrators still exercised jurisdiction over
former colonies. The colonies were seen as part of the territorial jurisdiction of
sovereign colonial administrators. The courts had held in many cases that judicial
authorities from the courts of colonial administrators home state should serve
as judicial precedents. In Klausner v Levy,126 where the court was confronted
121 Bull, Hedley, European States and African Political Communities, in The Expansion of
International Society(1984) pp 99; 107-8.
122 Crawford Neta, Decolonisation as an International Norm: The Evolution of Arguments
and Beliefs, in Emerging Norms of Justified Intervention by Laura W. Reed & Carl
Kaysen (1993) p 37-38
123 Janis, Mark W., An Introduction to International Law (1988) pp 163; 178.
124 Donovan, Thomas, Jurisdictional Relationship between Nations and Their Former
Colonies, Gonzaga Journal of International Law.
125 Umozurike, U.O., International Law and Colonialism in Africa. (1979) pp 7-8.
126 Klausner v Levy 83 F. Supp. (EE VA, 1949) p 599.

28

with a claim of citizenship between England and Palestine, the court held inter
alia that citizens of Palestine were citizens of a foreign state who could rely only
on British law to prove their case. The perception that former colonies could not
completely detach their legal system from that of their former imperial masters
can be sustained; as most legal systems were tailored towards those of imperial
masters. This factor has encouraged jurisdictional ties between former colonies
and their former administrators up until today. Also, the socio-cultural, economic,
and military ties that remain between former ruler and colony make it necessary
and inevitable that jurisdictional ties would exist.127
It should also be noted that Independence failed to absolve the former colonies
from most of the jurisdictional issues. For instance, British Common Law still
serves as the pervasive authority for the Nigerian courts in reaching a decision in
accordance with natural equity and good conscience.128 When customs subjected
to rigorous proof are eventually proved, the Appellate courts sitting in the foreign
colonial office may declare such customs as repugnant to equity and good
conscience.129 It was suggested that considering British culture as the nucleus
of refined customs to be followed by courts is more than egocentric. However,
the British assisted in the enlightenment of the citizens and the provision of
infrastructures suitable for trade.130

2.8 capacity of states


From an historical perspective, at the initial stage of the old world order, Kings and
Emperorsrather than the statespossessed an international legal personality,131
later transferred to independent states who exercised the rights for themselves
and on behalf of dependent, mandate, and trust territories.132 It is argued that
the implication for colonies of their not possessing an international personality
entailed that their officials equally fail to enjoy diplomatic immunity.133
Furthermore, the restriction on the international legal personality for dependent
states is said to have foisted a restriction on them not to trade with power blocs
127 Gorgon, Ruth, Saving Failed States: Sometimes a Neo-Colonialist Notion 12 American
University Journal of International Law and Politics (1997) pp 183; 903; 940.
128 Oblilade, O., A Textbook of the Nigerian Legal System (1978) 5-9.
129 Ibid., p 24.
130 Schwarzenberger, Georg, The Frontiers of International Law (1962) p 44.
131 Ibid., p 43.
132 Ibid., pp 43-5.
133 Brown, E.D. and G. Schwarzenberger, A Manual of International Law, Sixth edition
(1976) pp 33-9.

29

The Traditional Notion of State Sovereignty in International Law

in Europe, since an international legal personality is the capacity to possess rights


and duties enforceable under international law.134
The states did not possess an international legal personality. Even their domestic
legal capacity was at the whim of the colonial masters because the states were seen
as metropolitan states. The domestic situation was riddled with controversies,
particularly when a judgement was declared null and void on the ground of
repugnancy based customs and cultural heritage of the colonies.135 It can be
observed that even where the colonial government has relaxed its dominion over
the colony by administering them as Mandate or Trust territories, other nations
refused to accord the state the right of an international legal personality.

2.9 the role of the league of nations


The question remains as to what roles were played by the League of Nations during
the old world political order and protection of state sovereignty. Also, it could
be asked how effective the organization was in promoting human rights leading
to the self-determination and sovereignty of states, including the promotion of
international peace and security.
The League of Nations was an international organization founded after the
Paris Peace Conference of 1919. The purposes in setting up the organization
included disarmament; preventing wars through collective security, and settling
disputes between countries through negotiation and diplomacy. This was unlike
the earlier situation, when wars and reprisals were used as ways of settling disputes
and improving global warfare. The diplomatic philosophy behind the League
represented a fundamental shift in thought from the preceding years when
wars and military strength were favoured means to settle disputes. Although it
lacked armed forces of its own, it depended on the great powers to enforce its
resolutions, which they were reluctant to carry out when called upon. However,
the perceptions are that the League recorded little success, as it was substantially
riddled with unprecedented failures. It proved incapable of preventing aggression
and there were many atrocities not only in Africa, Asia, and North America, but
also in Europe.136

134 Islami, Iriana, The Insufficiency of Legal Personality of Kosovo As Attained Through
European Court of Human Rights: A Call for Statehood. An Essay written by Professor
Islami of the University of Pristina.
135 Anghie, op. cit., p 164.
136 Roger, Louis Wm., African Origins of the Mandate Idea, International Organization Vol.
XIX No. 1 (inter, 1965) pp 20-36.

30

The Traditional Notion of State Sovereignty in International Law

It can be observed that part of the reason for setting up the League was to
guarantee political independence and territorial integrity to great nations, weak
nations, and small ones alike. The mission of the League can be analyzed from
the type and number of commissions put in place to facilitate the aims and
objectives. The Disarmament Commission was conformed to outlaw wars; the
Health Commission was to eradicate an epidemic of typhus and prevent it from
spreading throughout Europe; the Mandate Commission supervised the League
nations Mandated territories; the International Labour organization successfully
banned the addition of lead to paint and convinced several countries to adopt an
eight-hour working day, amounting to a forty-eight-hour working week, including
the end of child labour and an increase in the rights of women in workplaces. Also,
the Commission for Slavery sought to eradicate both the slave trade and forced
prostitution, including drug trafficking, part of the functions of the Permanent
Central Opium Board that legalized the trade in opium.137
The general sovereignty of states, coupled with self-determination and selfgovernment, were not seen as belonging on the agenda of the League even though
it recorded some successes through its Agencies and Commissions. Examples are
found in the combating of international trade in opium and sexual slavery, with
further success in alleviating the sufferings of the Refugees, particularly in Turkey
in 1926. It is argued that the foundations of some of the civilized culture that exists
in the world today were laid by the League of Nations.138
Having amplified the successes of the League of Nations yet unable to take the
issue of sovereignty regarding the dependent states as one of the cardinal points,
it is observed that the League created the awareness of and the enlightenment
for independence and territorial sovereignty.139 The outbreak of World War11
led to the demise of the League of Nations. New world powers emerged, paving
the way for the codification and statutory provision of sovereignty of states
with the emphasis on decolonization rather than on the protection of territorial
sovereignty140 exclusive to states already independent.141
To summarize the argument of commentators as to the status and effect given
to state sovereignty during the period of the old world order before World War 11,
it can be remarked that there was a general agreement on the sacrosanct nature
of state sovereignty, but only under the umbrella of territorial sovereignty as is
137 Punch Magazine, Satirising the perceived weakness of the League of Nations, 28
July 1920.
138 Robson, W.A., Civilization and the Growth of Law (1935) p 15.
139 The Avalon Project, Yale: The Covenant of the League of Nations.
140 Article 10 of the League of Nations.
141 Brierly, J.L., The Law of Nations, Second edition (1936) p 103.

31

The Traditional Notion of State Sovereignty in International Law

statutorily provided in the articles of the League of Nations.142 State sovereignty


was not a universal right of all states. In the Leagues attempt to remain neutral
and not to provoke a war, a factor that can be argued as one of its weaknesses,
dependent states were seen to enjoy state sovereignty only to the extent allowed
by their colonial masters.143
The emphasis attached to territorial sovereignty for independent states, in
addition to their protection by colonizing forces through reprisals and wars,
stimulated the dependent states to engage in nationalist movements for freedom
and self-determination; this was contrary to the perception of state sovereignty
as the protection of peoples rights and sentiments rather than of the sovereigns
sovereignty.144 Given this observation, human rights were apparently being made
into cardinal principles, and territorial sovereignty was awarded priority only
to protect the Eurocentric domination of the world.145 In the old world order,
sovereignty was almost absolute and not contingent; emphasis was on territorial
sovereignty rather than on the fundamental rights of citizens.146 This view could
thus further be amplified by contemporary politics in developing countries deeply
conditioned by the legacy of colonialism: European states ruled a vast number
of Asian and African countries either without their consent or in flagrant breach
of the consent-based system of the law of nations.147 In complementing the old
world order, state sovereignty jealously guarded by the statutory provision of
implied absolute territorial sovereignty underlies the system of international
order in relations among states, making an act of aggression unlawful,148 not only
because it undermines international order and leads to human tragedies149 but to
prevent the regional and international security which may result in the breakdown
of international peace.150

142 Article 10 of the League of Nations.


143 Article 22 of the League of Nations.
144 Annan, Kofi, Two Concepts of Sovereignty, The Economist 352 (September 1999) pp
49-50.
145 Thakur, Ramesh, Global Norms and International Humanitarian Law: An Asian
Perspective, International Review of the Red Cross 83, no. 841 (March 2001) pp 19-44.
146 Deng, Frances, and A. Abiew., Protecting the Dispossessed in the Evolution of the Doctrines and
Practice of Sovereignty (1993) pp 1-2.
147 Merriam, Charles E., History of the Theory of Sovereignty Since Rousseau (1958) p 11.
148 Cortright, David, and George Lopez, Economic Sanctions: Panacea or Peacebuilding in a
Post-Cold War Era, (1995) pp 97-120.
149 Matray, James I., Exposing the Myths of the Forgotten War Part 2 (2002) vol. 34 No
2 at pp 1-2.
150 Mueller, John and Muella, Karl, Sanctions of Mass Destruction; Foreign Affairs (1999) pp
43-53.

32

The Traditional Notion of State Sovereignty in International Law

2.10 the new world constitutional order


The end of World War 11 ushered in the new world order, as the embattled
colonialism began giving way to peoples government, as the French colonial policy
of Assimilation,151 the Belgian colonial policy of Paternalism,152 the Portuguese
policy of Assimilado,153 and the British policy of Trusteeship or indirect rule154
came under unprecedented criticism, the accumulated freedom of political
leadership by the native lites was released explosively as nationalist movements
for self-determination took centre stage. Concurrently, the demise of the League
of Nations and the birth of the United Nations as referee and enforcer of the new
international constitutional legal order have now been pragmatically codified as
an index of international law.
This section of the thesis examines the impact of decolonization on the
institutionalization of the sovereignty of states and the roles played by the United
Nations, which not only made the concept as a right of the people, but also
provided for fundamental human rights and outlawed interference in the domestic
affairs of other states. The protection of state sovereignty is being emphasised in
the new world economic order by virtue of the UN Charter and the declarations
of UN General Assembly resolutions.155
The section, thus examines other methods of acquiring state sovereignty that
can be recognized by other nations. To this end, a brief history based on empirical
facts will be elucidated for an appreciation of the circumstances leading to the
emergence of the doctrines of state sovereignty and equality of states that form
the core topic of this thesis. This examination asserts the importance of state
sovereignty and its protection when it acquired and recognized by other nations.

151 Gardinier, David, French Colonial Policy of Assimilation: United Nations Challenge to Colonial
Administration (1963) pp 10-3.
152 Crawford, Young, The Belgian Colonial Policy of Paternalism; Politics in the Congo (1965) pp
59-72.
153 Duffy, James, Portuguese Colonial Policy of Assimilado: Portuguese in Africa, edited
by Philip Quigg (1964) pp 91-94.
154 Mitchell, Philip, British Colonial Rule-Trusteeship: African Afterthoughts (1954) pp 274-6.
155 Articles 1 (2), 2 (4) and 2 (7) of the UN General Assembly Resolutions 2526 of 24
October 1974.

33

The Traditional Notion of State Sovereignty in International Law

2.11 decolonization
2.11.1 A

Brief History

There were mixed reactions over the era of colonialism, although it had inner
contradictions that formed the seeds of its own destruction.156 It can be observed
that within the inner caucus of the colonial masters, some are of the views that
colonialism is a product of the moneyed interest of a few social classes with an
economic taproot in imperialism.157 One of the more sustainable arguments
is that the European mission for colonization was to civilize those nations that
were colonized. This, however, implies that once the mission of civilization was
accomplished, colonization would beat a retreat. The controversies and questions
arising from these assertions concern who was to judge whether the mission was
accomplished: would it be the colonizers, the colonized, the League of Nations, or
the United Nations?
The other main argument is that colonization brought about all of the refined
cultural and social relationships, economic growth, education, and technological
development, including governance and modern judicial administration.
Foundations laid for the administration of justice and courts system by the colonial
masters are, it should be noted, still being used todaylong after the demise of
colonialism; it might suffice to argue that the claim in favour of their civilization of
the colonies by the colonial masters can be sustained.158 Most former colonies still
adopt the dress styles of judicial officers in England and Wales; laws of contracts in
the various former dependencies are modelled towards the English legal system
for those colonized by Britain, even where Article 3 of the Roman Convention
gives litigants in contract matters the choice to adopt a legal system suitable for
their agreements.159
Those who argue in favour of colonization are of the view that it is better for
the whole world to come under one leadership wielding political power over the
world through decentralized administration; such a system will be identified as
internationalism, similar to that achieved in the old Roman Empire yet not on the
156 Tandon, Yashpal, Readings in African International Relations, Vol. 1 (1972) p 99
first para.
157 Hobson, J.A., Economic Theory of Imperialism. A study first published by the Michigan
University Press in 1902 but revised in this second edition. (1965) pp 7-12.
158 Randolph, Fergus and Roger Masefield, A Position paper on behalf of the Law Reform
Committee of the General Bar Council of England and Wales.
159 Article 3 Rome Convention: A contract shall be governed by the law chosen by
the parties

34

The Traditional Notion of State Sovereignty in International Law

basis of the equality of states.160 In cases litigated upon outside British territories,
litigants still want to be governed by the English legal system long after the demise
of colonial rule, evidence that the English legal system is not only refined but
also preferred by litigants.161 Even in cases where colonization lasted too short
a period for the territory to assimilate the British system, litigants still prefer to
be governed by English law.162 This argument contrasts with the perception that
colonial administration was purely for the exploitation of the colonies. However,
while it may be flattering to the ego of the Western world to ascribe the ending
of colonial rule to an advance in moral conscience condemning domination and
exploitation, it is equally flattering to attribute its ending to a combination of the
new-found strength of the dependencies with their ability to persuade the world
of the rightness of their cause.163
It can be said that the two emerging world powers after World War 11, the
United States and the Soviet Union, having unscrambled the ephemeral German
Empire, also set out to unscramble the much older empire of their erstwhile allies
in Western Europe in the hope that the ashes of the old empires may provide the
foundation of their own empire.164 However, rather than happening as they had
anticipated, the reverse was the case as the elites of the former colonized countries
were enthusiastic to have political independence and the governance of their own
countries. The hold on colonial power suffered a serious setback as the fate of
Britain, in the forefront but weakened by the sufferings in World War 11, is said to
have affected the other European colonial masters.165
The embattled colonialism and a quick retreat from colonies under the rubric
of decolonisation was one major characteristic of post-WWII political order; it
stands as striking proof that the older Eurocentric condition of global affairs now
has a place in history books. The rise of the masses towards political participation
within states formerly dominated by European countries and the United States
had found these states by no means uniformly hostile to the lure of imperialist
slogans; yet the general effect of the spread of democracy and of liberal and
socialist doctrines found a common enemy in colonialism.166 Finally, it can be
160 Hobson, op. cit., pp 2-3.
161 Whitworth Street Estates Ltd v James Miller & Partners Ltd [1970] AC 583 That
selection of parties of the R.I.B.A. form of contract was a determining factor in favour
of English proper law.
162 Amin Rashhed Shipping Corporation v Kuwait Insurance Co [1984] AC p 50
163 Emerson, Rupert, From Empire To Nations, Harvard University Press (1960) pp 15-17.
164 Tandon, Yashpal, Unscramble the Empire in Readings in African International Relations
vol. 1 p 101.
165 Macmillan, Harold, The Wind of Change, a selection of speeches made by Harold
Macmillan MP during his tour of Africa (1960) pp 10-12.
166 Ibid., pp 101-2.

35

The Traditional Notion of State Sovereignty in International Law

argued that the end of World War 11 marked the zenith of European colonialism,
leading to the acquisition of state sovereignty by75 per cent of the countries in
the world.
It can be observed from the foregoing that self-determination anchored
on political sovereignty rather than on economic sovereignty aggravated the
spread of nationalist movements, as most of the decolonized countries were
economically better off under colonial rule than many are even now, after many
years of independence.
However, for the purposes of this thesis it can be adduced that decolonization
is one of the verifiable means through which dependent states may achieve the
status of sovereign state.

1.12 other methods of acquiring sovereignty


As well as decolonization, there are other uncommon methods for states to
acquire sovereignty. They will be examined and briefly summarized in this thesis.
Ordinarily such a discussion would have been omitted; however, considering the
contemporary issues and the recent happenings in the global political economy, it
would be inappropriate to ignore these methods. The collapse of the former Soviet
Union and the intervention of NATO in the crisis that bedevilled and culminated
in the division of most countries in Eastern Europe can be said to have attached
importance to this section. It is not intended to make this section descriptive; the
argument is that state sovereignty, once acquired through any of the methods
stated herein, offers a state the same privileges as others in the worlds political,
economic, and constitutional order.167 It is not enough to examine the history of
state sovereignty alone: how it is acquired demonstrates the degree of importance
attached to each principle, including recognition by international communities.
1.12.1

Accretion

Accretion can be examined after first investigating what it means and how States
acquire sovereign rights through the method.
The view is that accretion is the force of nature acting to change the geographic
frontier of a state. It relates to boundary jurisdiction between two states submerged
by land and/or water, or it signifies an increase in existing landmasses by new
geological changes or the formation of a new island in a river.
167 Brace, Loring C., and Robert J. Hilton, Tooth-Size Variation as a Reflection of
Biological and Cultural Mixing in Current Anthropology, vol. 22 No 5. (October 1981)
pp 549-69.

36

The Traditional Notion of State Sovereignty in International Law

As uncommon as this principle may seem, it has generated a significant number


of controversies and states have acquired sovereignty through this principle. It
is based on the British common law of equity, adjudicated upon by the highest
domestic and international courts in virtually all of the continents. From the legion
of cases under this principle, it may be argued that it usually concerns a dispute
between two sovereign states. The dispute may be resolved by the conceding
by one state to the other or the relinquishing of its sovereignty over a marine
boundary or boundary submerged by land and water.168 State sovereignty can
be contested or ceded under this principle on demographic or natural grounds;
the parties must abide by the decision of the court by amending or reflecting the
same in their treaty.169 In the case of Massachusetts v New York, which involved
the rights and title of sovereignty and jurisdiction over land submerged by water
between one party and the State of New Jersey, the court in a well considered
judgement held, inter alia, that one party had acquired more land as a result of
natural causes not accessioned by the other party.170 It has further been held, inter
alia, for the issue of the water boundary in applying the doctrines of Madison v
Basart171 regarding the construction of a deed of water boundary that parties must
within thirty days of judgement enter into a treaty delimiting the water and land
boundary.172 It can be argued that sovereignty contested under this principle has
in the majority of cases economic underpinnings. Citing the works of a Chinese
geologist, the Peoples Republic of China asserted that Chinas claim that Taiwan
was an integral part of China173 by once being connected by a land bridge that
became submerged due to rising sea levels174 was biased by the economic and
political considerations. However, the PRCs argument failed for lack of geological
historical evidence; they later admitted that Taiwan had not been within the PRC
at the time the sand bridge existed, including the fact that the whole of what is

168 Jain, J.P., The legal status of Formosa: A Study of British, Chinese and Indian Views,
American Journal of International Law vol. 61, no 2 (April 1967) pp 521-546.
169 Justice Jones, Opinion judgement delivered in Commonwealth of Massachusetts v
State of New York (1927) 271 US 65.
170 Commonwealth of Massachusetts v State of New York argued 4 March 1926, decided
12 April 1926 and citation as 271 US 65 1926.
171 Madison v Basart 59 ID (1947) p 415.
172 Broadus, Jerry P.L.S., Water Boundaries: The Effects of Artificially Induced Changes to Shoreline
(2000) p 1.
173 Lerman, Arthur J., National Elites and Local Politicians in Taiwan, The American
Political Science Review, vol. 71 No. 4 (Dec. 1977) pp 1406-22.
174 Gordon. Leonard, H.D., United States Opposition to Use of Force in Taiwan Strait,
1954-1962, The Journal of American History, vol. 72 No. 3 (Dec. 1985) pp 637-60.

37

The Traditional Notion of State Sovereignty in International Law

today known as the Peoples Republic of China was probably uninhabited in the
period over which the claim was being made.175
The argument of authors regarding the Chinese claim is that the result would
have been different if there were sufficient geological proof that the sand bridge did
exist; also, the principle does not encourage the extinction of existing sovereign
states.176 Similarly in the case of Cameron v Nigeria where the Plaintiff obtained
judgement against Nigeria,177 one of the contentious issues concerned the oil-rich
submerged areas on the Bakassi Peninsula; the judgement has not been complied
with on the grounds of irreconcilable cultural and linguistic differences between
the inhabitants, formerly colonized by the British in one section of the peninsula
and by the French in the other.
However, certain critics argue that the acquisition of sovereignty based on
Accretion may not necessarily entail adjudication by a court. States may sign a
treaty in the creation of friendly and harmonious interstate relationships and for
the avoidance of the multiple exercise of sovereignty jurisdiction that includes
taxation, judicial and police matters; it may also include a jurisdictional venue for
civil and criminal trials and the promotion of economic and political stability.178
One significant issue concerns what happens when the change in demographic
condition is artificially induced by either of the parties.
1.12.2

Artificially Induced Accretion

The views are that artificially induced accretion is not covered under British
common law. Thus, it was held, inter alia, by Chief Justice Taney that where
there is avoidable construction that diminishes the public rights on the shore of
water, leading to the cause of accretion, that factor in itself limits the right of the
diminishing party over the claim of sovereignty.179 In the case of New York State
v New Jersey, New York State built a park across the boundary; one party later
claimed accretion and prescription because the other party had been collecting
taxes and licences from the more than twelve million people who visited the
175 Lee, Paul Siu-nam, The Official Chinese Image of Taiwan, The Australian Journal of
Chinese Affairs No 24 ( July, 1990) pp 143-61.
176 Kim, Hong N., and Jack Hammersmith, US-China Relation in Post-Normalization Era,
1975-1985 Pacific Affairs, Vol. 59 No 1 (1986) pp 69-91
177 Cameroon v Nigeria. Judgement delivered on 10 October 2002 by the ICJ.
178 Section 12, 002, Text of Compact adopted by the State of Oklahoma and the State
of Texas in respect of the Red River Boundary on 24 May 1999. By this Compact
otherwise regarded as Treaty in International law parlance, it was agreed that whatever
happens, Oklahoma possesses sovereignty north of the boundary of the Red River and
the State of Texas possesses sovereignty south of the boundary of the Red River.
179 United States v Holt States Bank (1924) Ct. 197, 548, 152 US.1.

38

The Traditional Notion of State Sovereignty in International Law

historic park. The court denied the claims by New York of state sovereignty on the
grounds of both prescription and accretion.180 In the case of Puyallup Indian Tribe
v Port of Tacoma, where the US carried out the artificial filling and rechannelling
of a navigable waterway which led to the erosion and destruction of the lands of
the native Puyallup tribe, the tribes claims of immunity and state sovereignty over
what was known as the boundary were denied by the court.181
International law thus appears to recognize state sovereignty as a result of
natural changes in geographical frontiersand not the reverse.182
The acquisition of sovereignty on the basis of accretion yet adjudicated by a
competent court or international arbitration conforms to views that Adjudication
in itself is one form of acquiring state sovereignty.183
1.12.3

Acquisition of state sovereignty by Cession

This method is considered as a peaceful transfer of territory sovereignty between


states. It usually occurs as part of the peace settlement following inter-aggression
or war. The peaceful withdrawal by Israel from the West Bank has been claimed to
fall within this category, as does the transfer of Iraqi sovereignty to the Iraqi people
after the controversial war led by the United States and Britain to change the Iraqi
leadership. However, financial or other considerations may be offered as reasons
for the country to be ceded; the argument remains that the cessation of military
operations, together with the handing over of the highly prized sovereignty, are
considered sufficient considerations.
Commentators have written that the transfer of Formosa and the Pescadores
from China to Japan in 1895 was a cession, in that the territories were transferred
peacefully and then possessed by the owners after transfer.184
The handing over of Iraqi sovereignty to its citizens, as has been stated, falls
under the category of cession even though the war in Iraq has been adjudged
to be illegal because the US and Britain were alleged to have breached the UN
Charter.185 The UN did not sanction the invasion of Iraq.186 The principles of
180 State of New York v State of New Jersey, (1998) 66 LW 4389.
181 Puyallup Indian Tribe v Port of Tacoma, (1983) 717F 2d 1251.
182 Ho, Samuel P.S., The Economic Development of Colonial Taiwan; Evidence and
Interpretation, Journal of Asian Studies, Vol.34 No 2 (Feb. 1975) pp 417-39.
183 Chen, Edward, Japans Decision to Annex Taiwan: A study of Ito-Mutsu Diplomacy,
1894-95, Journal of Asian Studies, Vol. 37 No 1 Nov. (1977) pp 61-72.
184 Ka, Chih-ming, Japanese Colonialism in Taiwan; Land Tenor Development and
Dependency, 1895-1945 (1995).
185 Article 51 of the United Nations Charter 1945.
186 Annan, Kofi, Iraq War is Illegal as it was not sanctioned by the United Nations. I
have indicated that the war was not in conformity with the United Nations Charter.

39

The Traditional Notion of State Sovereignty in International Law

cession may differ slightly from the British and US experience in Iraq because
these countries are considered as the custodians of the UN Charter by virtue of
their being permanent members of the UN Security Council, considered one of
the most powerful organs in the world.187
1.12.4

Acquisition of sovereignty by Conquest

This is a method where state sovereignty is acquired by the consent of the


vanquished, extorted by the superiority of the conqueror. The method is outdated
at the time of this new world constitutional order. It was prevalent during the
First World War and before the end of WWII. Conquest has been sent to its own
grave by the UN Charter.188 The invasion of Iraq by the US and Britain may be
compared to this method even though sovereignty was quickly returned because
of global opposition to the war.189 The argument that it is no longer fashionable
to recognize a government whose sovereignty was obtained through conquest
can currently be sustained. On 2 August 1990, Iraqi forces invaded and occupied
Kuwait. A few months later, on 26 February 1991, a US-led coalition supported and
approved by UN Resolution 670 of 1990 restored the sovereignty of Kuwait.190
1.12.5

Acquisition of sovereignty by Prescription

There has been controversy over this method of acquiring state sovereignty. The
doctrine is analogous to the common law principles in dealing with title to land,
where possession plays a part in land ownership.191 In England and Scotland, the
title of an owner may be lost by adverse possession or limitation.192 Therefore, it
can be said that sufficiently long possession by one state of disputed territory can
override the claim or title of another state that may have originally possessed the
title but has not exercised it.193 Equally, undisturbed continuous possession could

187 Carroll, James, America in a state of war.


188 Article 51 of the UN Charter 1945.
189 Powell, Colin, former US Secretary of State, Return of Sovereignty to Iraq Takes Time,
Peoples Daily.
190 UN Resolution 670 adopted by the Security Council at its 2943 meeting on 25
September 1990.
191 Saeed, Mohammed and Ahmed El Mahdi, Some General Principles of Acquisition of
Ownership of Land and Rights over Land by Customary Prescription in the Sudan,
Journal of African Law, Vol. 20. No 2 (1976) pp 79-99.
192 Cusine, D.J., Adverse Possession of Land in Scots and English Law, International and
Comparative Law Quarterly, Vol. 45, No 3 ( July, 1996) pp 667-75.
193 Jennings, Robert and Arthur Watts, Oppenheims International Law (1996) p 706.

40

The Traditional Notion of State Sovereignty in International Law

under certain circumstances produce good title for the possessor if the possession
had lasted for an appreciable length of time.194
In international practice, states have been considered to be the lawful owners
of territories originally taken possession of wrongfully, provided that the
possession is undisturbed and conforms to international law. Under international
law prescription may be defined as the acquisition of sovereignty over a territory
through continuous and undisturbed exercise of sovereignty for a period necessary
to create the impression that the possession of the territory is in conformity with
the international order.195
This method of acquisition of sovereignty has not been common in either the
old world constitutional regime or the new world constitutional era.196 Thus, in
the case of Namibia/Botswana and Kisiliki/Sedudu Island where the ICJ declined
to give judgement on the grounds of prescription, the court observed that the
parties agreed that acquisition of state sovereignty does exist by acquisitive
sovereignty; however, the court was of the opinion that the conditions for
awarding sovereignty based on the concept did not exist. The court had to examine
whether possession was exercised titre de souverain; whether the possession was
peaceful and uninterrupted; whether the possession was public, and whether
the possession has endured for a sufficient length of time. The failure of the first
criterion dissuaded the court from examining the other conditions.197 However,
in the case of Guatemala, which declared that Belize was part of its territory, all of
the conditions stated by the court were in existence as there had been undisputed
possession for about 175 years.198
Perhaps it can be said that the acquisitive prescription disappeared with the
mediaeval period. It should be noted that Republic of China might have established
its sovereignty over Taiwan through claiming prescription. However illegal the
occupation may be, once there is the existence of acquiescence for a reasonable
length of time, acquisition of state sovereignty will be assumed to have taken place.
In Illinois v Kentucky, a dispute over the common boundary of the plaintiff and
the defendant, the court declined to give judgement; its opinion was based on the
defence of acquiescence and laches, including the defence for accretion, erosion
194 Anderson, Stuart, Easement and Prescription, Changing Perspectives in Classification,
Modern Law Review, Vol. 38, No.6 (Nov. 1975) pp 641-59.
195 Hanna, John, The Submerged Land Cases, Stanford Law Review, Vol. 3, No 2 (1951) pp
193-219.
196 H.H.G. ( Jnr.) The Effects of Prescriptive Possession of Land on the Title of
Sovereignty, Virginia Law Review, Vol. 23, No 1. (Nov., 1936) pp 58-67.
197 Namibia/Botswana and Kasikili/Sedudu (Kasikilis case) ICJ Report 1999.
198 Belize Case in Waddell, D.A.G., Development in Belize 1946-1960, American Journal of
International Law Vol.55 No 2 (April. 1961) pp 459-69.

41

The Traditional Notion of State Sovereignty in International Law

and avulsion as Kentucky could not prove the existence of the conditions under
the doctrine of prescription for the acquisition of state sovereignty.199 It can be
argued that the acquisition of sovereignty by prescription has been enabled by
the general principles of law on estoppels. The court in the case concerning the
Temple of Fresh Vihear, between Cambodia and Thailand, expressed its opinion
that acquiesces in stating that estoppel and preclusion must be read together in
arriving at a judgement relating to state sovereignty by prescription.200

1.12 effects of possession of state sovereignty


The elementary effects of state sovereignty will be examined and analyzed on
empirical facts to enhance the appreciation and degree of importance attached
the concept by the international communities, as the current thesis intends to
examine whether the World Bank and the IMF by their policies have eroded the
facts and thus the legal meaning of the concept.
Apart from economic, social, and political advantages, state sovereignty is
viewed as imparting other legal effects and advantages in the new world order:
under economic advantage, the state will be able to generate, utilize and allocate
its resources within its territory without being accountable to an external body;
under social effects, the state can provide social services specific to its citizens
with due consideration of the cultural heritage and educational requirement of
the inhabitants; health services include the self-volition as to whether or not to
introduce a user fee for those services; with respect to political effects, the state will
enjoy all of the rights and privileges associated with self-determination and selfgovernment under customary international law, such as the defence and control
of territorial borders, immigration, internal policing, having an indigenous judicial
system, and public international law; lastly, under the legal effects, the state will
not only possess an international legal personality, but will also enjoy the status of
a sovereign state with certain privileges and immunities for selected state officials
including recognition, receiving aid, and inter-cooperative association with other
sovereign nations.
States are therefore pleased to have grown into adulthood and become
recognized by international communities who, by all ramifications, enjoy the
freedom within the new world order associated with developing states. Such
freedom is based on the doctrines of the equality of states and continuously
complements the same rights and privileges as those enjoyed by the older states.
One simple and important question will be asked at the beginning of Chapter Five
199 In Illinois v Kentucky (1991) 500 US 380.
200 Cambodia v Thailand ICJ Report (1962) p 22.

42

The Traditional Notion of State Sovereignty in International Law

in addressing the issues discussed and considered empirically. The question will
be in two phases: the former asks what constitutes the essence of state sovereignty,
and the latter inquires into the reasons for the compartmentalization of the whole
world into nation states.
It should be noted that most of the issues already examined are empirical
facts, methods, definitions, history, and analyses suggesting the political, social,
and cultural dimensions of sovereignty. It is therefore pertinent to put them into
perspective before conducting a legal examination and analysis in conformity with
the UN Charter, the most fundamental statutory document of the law of nations
that promotes state sovereignty.

1.13 conclusion
Although the term sovereignty can far more easily be described than defined,
some authors specify it as an order that governs the community of nations,
having uniform legal personality and an exclusive prima facie jurisdiction over a
population within a territory, with an injunction not to intervene in the affairs of
another state.201
During the old legal order, apart from the fact that sovereignty was considered
a privileged right of the strong nations, the question of the erosion of state
sovereignty scarcely existed: most member states of the World Bank and the IMF
were neither an independent state nor had self-government. The new world order
changed the entire perceptions of the notion of state sovereignty as most member
states became independent. The setting up of the United Nations as a global body
in the new world legal order may have reduced what could be described as the
consistent erosion of state sovereignty by powerful nations to the disadvantage of
the weaker states. Nevertheless, the League of Nations could not be said to have
been as competent or as effective as the United Nations in enforcing the doctrines
that guarantee the right to self-determination, independence, and the sovereign
equality of states or the injunctive principles of non-intervention that could erode
state sovereignty.
Although it appears that some of the trading and development alliances may
have limited the concept of sovereignty among states, there is a presumption
that international law in the new international legal order, including the Human
Rights Declaration, particularly with respect to the right to self-determination,
the UN General Assembly (UNGA) Resolutions 2625 and the UN Charter all
assume that sovereignty is an inherent right of states from which derogation may
not be allowed. The new international world order facilitated and encouraged the
201 Brownlie, I., Principles of Public International Law, Fifth edition (2001) p 289.

43

The Traditional Notion of State Sovereignty in International Law

new trend of acquiring state sovereignty that includes decolonization and other
forms of acquiring sovereignty. While it can be said that the acquisition of state
sovereignty is in itself difficult, considering the rigorous process associated with
independence and self-government for young and aspiring states, compliance with
the rules of international law requiring state and non-state actors not to perform
acts or threats likely to erode the sovereignty of another state appears to be even
more difficult than is acquiring the sovereignty in the first place.

44

Chapter 3

The Modern Application


of Sovereignty

he modern application of sovereignty originated from the Westphalia Peace


Conference of 1648, although it can be said that the actualization of the
decisions of the Peace Treaty commenced with the establishment of the League
of Nations; however, the contemporary notion of state sovereignty is deep rooted
and pragmatized in the UN Charter as the international legal order of nations.
Although there was a dramatic shift from the old and traditional to a modern
notion of sovereignty, the worlds economic activities have weakened what was
otherwise recognized as absolute sovereignty. This is a factor common to most
nations, because of the international trade and interdependence among sovereign
nations. The relationship between the growth of international trade, on the one
hand, and state sovereignty, on the other, can be described as somewhat complex;
in spite of this apparent complexity, the UN Charter, which epitomizes the modern
notion of sovereignty, has put restraints on state and non-state actors to observe
and respect state sovereignty.
The social, political, and economic ideologies of states were not intended to
be altered by the complexity and by processes of modernization, such as the
sophisticated techniques in communication, transport and electronics that
have vitiated inter-boundary demarcations.202 The relaxations of the traditional
notion of state sovereignty are meant only to remove barriers to world trade
and the transfer of technology,203 while the levels of national development in
social, economic, military, and political activities remain within the respective
competence of each independent state.204
The current sophistication in technology and imperative for world trade
notwithstanding, one of the essences of state sovereignty is the establishment
of international legal order that not only prevents the domination of the weak

202 Rostow, W.W., The Stages of Economic Growth, Cambridge Press (1960) pp 109-123.
203 Black, C.E., The Dynamics of Modernization: A Study of Comparative History, New York
Press (1966) pp 33-8.
204 Organski, A.F.K., The Stages of Political Development, New York Press (1965) p 222.

45

The Modern Application of Sovereignty

nations by the strong, but also creates and gives nations the capacity to engage in
world trade. The qualification and transformation of state sovereignty, including
its legal significance, to independent states gives the consent itself a sacred status
together with the respect and sanctity of a states economic sovereignty over its
natural resources. The Charter of the Economic Rights and Duties of States further
enhances the argument that nations inter-dependency on development and trade
does not vitiate the doctrines of state sovereignty as a fundamental international
legal order.
The modern notion of state sovereignty is, it is claimed, being enforced
by the UN, based on its Charter and Resolutions; the dominant players in the
international arena are sovereign states. The states possess inherent sovereign
powers; yet have conferred some of these sovereign powers, through delegation,
in an agency relationship to the World Bank and the IMF. Any attempt to vitiate
these doctrines could, it is alleged, result in the erosion of state sovereignty and
could also amount to the derogation of peremptory norms. This is not allowed in
international law.
Before a state became the main bearer of rights and responsibilities in
international society during the seventeenth and eighteenth centuries, empires,
kingdoms, duchies, and city-states shared political authority in Europe. Popes and
kings claimed and fought over the same people and territories. The patchwork of
overlapping authorities proved flammable following the Reformation that brought
about a clear boundary, separating religious and secular authority, including a
purely physical boundary.205 In response European rulers embraced sovereignty
as a means to maintain a basic level of order within individual countries and
in relations between countries, centred upon the Peace of Westphalia of 1648,
which recognized that states have certain inherent rights. These include political
independence and full equality under international law, including the conduct
of foreign policy without intervention that has now spread and become the
institutionalized norm, the rule of law in international law governing the entire
world.206 With the exception of a few countries today, after the conference in 1648,
much of the world changed from the vertical-imperial to the horizontal inter-state
model.207
Sovereignty has been a source of stability since its adoption as it fostered world
order by establishing legal protection against external intervention and provided
a platform for the negotiation of international treaties. It also contributed to the
205 Haass, Richard, The Responsibilities of Sovereignty.
206 Ibid., pp 2-3.
207 Falk R. and C. Black, The Future of International Legal Order: The Interplay of
Westphalia and Charter, Conceptions of International Legal Order Vol. 1 (1969) pp 32; 43.

46

The Modern Application of Sovereignty

formation of international organizations for the harmonization and promotion of


common interests, within the framework of international law.
It has been suggested that the principles of sovereignty with particular reference
to non-intervention doctrines should be adhered to by both the strong and weak
states. The attacks on the US of 11 September 2001 provided a clear demonstration
that weak states, too, can threaten international security since they may provide
safe havens for criminals and terrorists. Such examples of lawlessness abroad
threaten neighbouring countries and pose serious dangers for the world. For these
and other reasons, the essence and legal significance of state sovereignty cannot
be underestimated.
The legal significance of state sovereignty is deeply rooted in the doctrine of
sovereign equality208 and the self-determination209 of states that expands to
include individual rights, now further protected by the universal declaration on
human rights.210
The view is that one of the essences of state sovereignty is to enable the
individuals or citizens of a state who share common historical and ancestral
boundary to have freedom,211 dignity, equality, and other fundamental rights
in a peaceful atmosphere,212 supported by a counterpart principle of nonintervention.213 However, it has been suggested that these citizens rights are
individualistic yet delegated to the state that possesses the competence and
independence, and enjoys the counterpart principles of non-intervention for and
on their behalf. It has been argued that an important component of the protection
of citizens rights has always been an adequate display of the authority of states to
decide and act to the exclusion of other sovereign states.214

208 Articles 2 (1) UN Charter.


209 UNGA Declaration 2625 (XXV) Declaration on Principles of International Law
Concerning Friendly Relations and Cooperation Among States in Accordance with the
Charter of the UN.
210 UN Universal Declaration of Human Rights, 1958
211 Article 1(3) of the United Nations Charter 1945.
212 Article 1(2) of the United Nations Charter 1945.
213 Articles 2 (4) and 2(7) of the United Nations Charter 1945.
214 Schrijver, Nico, The Changing Nature of State Sovereignty, The British Yearbook of
International Law (2000) pp 69-70.

47

The Modern Application of Sovereignty

1.1 the essence and legal significance


of non-intervention

The concept of non-intervention can be seen to have emerged from the system
of sovereign nation states established by the Peace of Westphalia of 1648,215
occasioned by the concept of state sovereignty that within the territory of a
political entity the state is the supreme power and precludes any other state or
international organization from intervening in the political affairs of a state.
Woodrow Wilson at the 1919 Paris Peace Conference further proclaimed it for
the newly created states of central Europe and later extended it to encompass the
whole world.216 Commentators have stated that the essence and legal significance
of non-intervention institutionalized the principles of sovereignty and the right of
political communities to self-determination.217
There are strong views that the principles of non-intervention in the internal
affairs of member states is targeted only at the protection of human rights in
both the new world order and international legal systems.218 However, it has
been argued that this principle of non-intervention cannot be used to prevent
a legitimate international concern for human rights.219 Writers have further
argued that the balance between the principle of non-intervention and that of
international concern for human rights should be struck in favour of the latter,220
as the international community has a duty to act for the relief of human rights
abuses.221
The norm of non-intervention dominates the majority of international
relations and appears to have motivated the US in their initial non-intervention
in World Wars 1 and II,222 including the non-intervention of the liberal powers
in the Spanish Civil War yet despite the intervention of Italy and Germany.223
It has nevertheless been firmly established into international law as one of the
central tenets of the United Nations Charter to underpin the emergent post-WWII
215
216
217
218
219
220
221
222
223

Westphalia Peace Treaty Agreement 1648.


Lansing, R., The Peace Negotiations; A Personal Narrative (1921) p 87.
Held, D., Democracy and Global Order, Cambridge University Press (1995) p 88.
Sperduti, G., The Protection of Human Rights and the Principles of Non-intervention (1989)
p 1.
Vincent, R.J., Human Rights and International Relations (1986) p 127.
Franck, T. and M. Rodley, After Bangladesh: The Law of Humanitarian Intervention by
Military Force, American Journal of International Law (1973) pp 67; 290.
Ramcharan, B.G., Humanitarian Intervention: A Gulf in the Charter, Peace Magazine
Sept/Oct. (1991) p 10.
Hazard, J.N. and J.W. Wenceslas, 58 American Journal of International Law (1964) p 952.
Ramsbothan, O. and T. Woodhouse, Humanitarian Intervention in Contemporary Conflict
(1996) p 35.

48

The Modern Application of Sovereignty

peace,224 binding the laws of the international system in the new world order
with the under stringent guidelines residing in the United Nations. Similarly, the
norm of non-intervention seems to have amplified and justified the doctrines of
sovereign equality of all nation states in the world.225
In addition to the UN Charter, sovereign equality was confirmed in many
subsequent UN resolutions, notably the Declaration on the Inadmissibility
of Intervention in the Domestic Affairs of States and Protection of their
Independence and Sovereignty,226 where rather than intervention friendly
relations and cooperation amongst states were encouraged in accordance with the
UN Charter on 24 October 1970.227
One of the essences and legal significance of non-intervention consists in
maintaining and strengthening international peace founded upon freedom,
equality, justice, and respect for fundamental human rightsthe paramount
importance of the Charter of the UN in the promotion of the rule of law amongst
nations.228 Also, it has been suggested that other purposes of the UN can only be
implemented through faithful compliance with the doctrines of non-intervention
in the domestic affairs of member states, regardless of the changes in economic
and political affairs of the state.229
The Declaration on Principles of International Law Concerning Friendly
Relations and Cooperation Amongst States in accordance with the Charter of the
United Nations is predicated on international peace and security of the world, to
be achieved by:
a. Promoting the unity and solidarity of member states;
b.

That States shall refrain from the threat or use of force against the
territorial integrity and political independence of another state that is
inconsistent with the UN Charter;

c.

That States should settle their differences in such a manner that it will not
endanger international peace and security;

d.

To eradicate all forms of colonialism and imperialism;

e.

To encourage political and diplomatic cooperation among member states;

f.

To protect the cultural and religious beliefs of members in accordance


with the UN Charter and Universal Declaration of Human Rights;

224
225
226
227
228
229

Walzer, M.J., Just and Unjust War (2000) pp. 86-9.


Article 2 (1) UN Charter.
UN Resolution 2131 [XX] of 21 December 1965.
UNGA Resolution 2625 [XXV] of 24 October 1970.
Brownlie, I., The Basic Documents in International Law Fifth edition (2001) p 27.
Ibid., pp 27-8.

49

The Modern Application of Sovereignty

g.

The principles of equal rights and self-determination of peoples;

h.

The principles of sovereign equality;

i.

The principles not to intervene in matters within the domestic jurisdiction


of member states.230

The United Nations have demonstrated willingness and enthusiasm as the


worlds referee and regulator in the realization of these objectives; however, it
places greater emphasis on the sovereign equality of nations, which denotes that:
a. States are juridically equal;
b.

Each state enjoys the rights inherent in full sovereignty;

c.

Each state has the duty to respect the personality of other states;

d. That the territorial integrity and political independence of states


are inviolable;
e.

Each state has the right to develop or choose its political, social, economic,
and cultural system.

To a large extent, some authors are of the opinion that the UN Charter has not
only succeeded in stabilizing the jurisprudence of international law, but is also
considered as the statutory grounding of the Laws of Nations.231 This view might
be sustained, considering the ability of the UN to impose sanctions on erring
member nation states. It could be asked how the United Nations is able to enforce
compliance with the Charter. The answer may be found in the enforcement
powers of the UN, which includes diplomatic isolation, trade embargo and military
action, starting from the lowest degree of aggression in diplomacy and persuasion
through to military action.232

1.2 enforcement powers of the united nations


Although it has been said that those instrumental in framing the charter of the
United Nations did not explicitly confer upon the UN the powers to impose
political or territorial settlements on states in performance of the task of
maintaining international peace, never the less the UN has come under increasing
pressure to assert more authority in resolving various conflicts in the world.233 But
230 Ibid., pp 31-3.
231 Baehr, Peter R. and Leon Gordenker, The United Nations at the End of the 1990s, Third
edition, (1999) p 166.
232 Berridge, G.R., Return to the United Nations: UN Diplomacy in Regional Conflicts, (1991)
p 37.
233 Subedi Surya P. The Doctrines of Objective Regimes in International Law and the Competence of
United Nations to Impose Territorial or Peace Settlements on States (1994) pp 162-169

50

The Modern Application of Sovereignty

has the UN succumbed to the pressure of asserting more authority in settling both
internal and external conflicts?
This question may not be properly addressed without first examining some
selected roles played by the UN enabling it to sustain the worlds confidence.
Firstly, the view reflected by the UN Charter is that each state is sovereign and
independent, thus the new worlds organization could not itself be a government;
nor did the San Francisco Conference leave any doubt to this effect. The new
United Nations that replaced the League of Nations was mandated to produce and
supervise order in the world, to foster welfare and, very specifically, to maintain
peace and security.
The United Nations Charter consists of rules for an organization of states
and for the limits of action on the part of their governments. Jurists describe the
Charter of the UN as a multilateral convention, a binding treaty that makes new
law in the form of legal obligations, binding on states and accepted as such by their
governments as law.
Although Article 41 of the UN Charter made no provision for the enforcement
of sanctions mandated by the Security Council, the original understanding of
those drafting of the Charter appears to have been that if economic and diplomatic
sanction failed, then the Security Council could authorize military action.234 The
UN has both conciliatory and coercive powers through the Security Council,
exercised only after the parties to a dispute have failed to settle;235 the UN with
the cooperation of member states is able to impose sanctions on erring member
states. The Security Council of the UN has the legal capacity to use armed forces
placed at its disposal236 by members to enforce compliance with its resolutions.
However, under Chapter VI of the UN Charter, it cannot employ coercion, as it
is legally limited to persuasion. Despite this, it has the right to take other strong
decisions or action where there is a threat to peace.237 The sanctions may be in the
form of economic and diplomatic sanctions,238 military actions,239 or suspension
from the organization.240
Unlike the League of Nations, pragmatic steps were taken to ensure the
sustainability of the United Nations by institutionalizing the body and promoting
234
235
236
237
238

Andreas, F L., International Economic Law (2003) pp 715-6.


Article 41 of the UN Charter 1945.
Article 44 of the UN Charter 1945.
Article 39 of the UN Charter 1945.
UN Resolution 1333 of December 2000 demanded that the Taleban comply with
Resolution 1267.
239 Un Resolution 917 adopted on 6 May 1994, authorizing the Organization of American
States to restore democracy in Haiti by military action.
240 Chapter VII of the UN Charter 1945.

51

The Modern Application of Sovereignty

the capability or mechanism by member states to enforce penalties for noncompliance with the rules binding on all nations, including the powerful ones.241
There is no doubt that the UN has performed creditably well in encouraging
compliance with the provisions of the Charter relating to the sovereignty of
states.242
For instance, the extraordinary circumstances under which the UN responded
to the North Korean attack on South Korea243 led to the inevitable conclusions
that it was a genuine collective measure envisaged by the Charter,244 as was the
sanction imposed on Libya,245 Iraq and Afghanistan246 including the roles played
in Somalia,247 Sierra Leone248 and Liberia;249 these examples provide empirical
evidence not to show the extent of the states enforcement powers, but the
successes recorded by the organization.250
The state sovereignty pragmatically developed within the framework of
the United Nations emphasised non-interference as a cardinal principle for
independence, protection of human dignity, and sustainability of peace and
security.251 It can be observed that most of the present members of the United
Nations are former colonies that gained political independence through direct or
indirect active participation in the United Nations. In 1945, more than 750 million
people lived in non-self-governing territories; by 1998, in spite of population
increases, the number has decreased to the two million who live in the remaining
seventeen dependent states.252 Perhaps if not for the United Nations, most of
these nations may not have gained their independence as early as they did.253
241 UN Resolution 670 adopted by the UN Security Council of 25 September 1990
condemning Iraqs invasion of Kuwait.
242 Baehr and Gordenker, op. cit., p 122.
243 Nanto Dick. North Korea Chronology of Provocation, 1950-2003 (2003) pp3-16.
244 Acheson, Dean, The Korean War 1950-1953. (1971) p 6.
245 UN Resolution 748 of 31 March, 1992 which imposed an armed embargo on Libya;
UN Resolution 883 of 11 September 1993 that tightened sanctions on Libya. History
of UN Sanctions on Libya.
246 Cockburn, Alexander and Jeffrey St. Claire, The Terrorist in the Mirror: Grievances
and Consequences.
247 UN Resolution 1510 of 13 October, 2003.
248 UN Resolution 1508 of 19 September 2003.
249 UN Resolution 1521 of 22 December 2003 concerning Liberia.
250 White, D.N., The United Nations and the Maintenance of International Peace and Security
(1990) p 15.
251 Gordenker, L., The United Nations at the End of 1990s Third edition (1999) p.123.
252 Ibid., p 120.
253 UNGA Resolution 1514 (XV) of 14 December 1960: renewed several years until 22
November 1988that necessary measures should be taken to eliminate colonialism by
the year 2000.

52

The Modern Application of Sovereignty

A milestone of major importance of the UN and one of the reasons that has
continued to enhance the relevance of the institution particularly among the
former colonies, who are greater in number, was UN Resolution 1514 adopted by
the General Assembly aimed at eradicating colonialism. Eighty-nine delegates
representing eighty-nine states voted in favour, while none voted against and nine
states abstained. It was agreed that by the year 2010, the second and latter decade,
eradication of colonialism in the world would have been completed.254 On 9 July
1999, the special committee on the situation with regard to the implementation of
the Declaration on the granting of independence to colonial countries and peoples
stressed the need to dispatch periodic visiting missions to non-self-governing
territories in order to facilitate full, speedy and effective implementation of the
Declaration.255 Apart from political sovereignty,256 as has been exhaustively
discussed, one of the essences of state sovereignty is the economic sovereignty of
independent states.

1.3 the essence and legal significance


of economic sovereignty

The economic sovereignty of independent states almost defies definition, yet


the elementary explanation, according to the debate, is that a state is allowed
to choose, develop and determine the goals of its economic activities within its
territorial borders. However, considering the worlds new economic trend towards
globalization, the achievement of these objectives have been described as mere
conjecture. Globalization has frequently been discussed as a counterpoint to
national economic sovereignty.257 It is commonly asserted that globalization has
eroded national sovereignty and that it has rendered territorial borders obsolete;
states are against their wishes forced to adopt neo-liberal economic policies
inconsistent with their cultural and social policies specific to their citizens.258
The other view is that sovereignty itself is a complex term with four different
concepts: the recognition of sovereignty is the acceptance of a given state as a
member of the international community, which in most cases is relatively
uncontroversial. The Westphalia Peace Treaty of 1648 on sovereignty is based
254 UN Resolution 1514 (XV) on 14 December 1960; UN Resolution 1514, for the end of
colonialism; UN Resolution 55/146 declaring that colonialism must end by 2010.
255 UN GA/COL/3017 Press Release, 25 May 1999; GACOL/2999
Decolonisation Committee.
256 UN GA/SHC/3753 Press Release 28 October 2003: Ensuring Rights of
Self Determination.
257 McConnachie, Alistair, The Seven Principles of Sovereignty.
258

53

The Modern Application of Sovereignty

on the principle that one sovereign state should not interfere in the domestic
arrangement of another, whereas another school of thought opines that sovereignty
is the capacity and willingness to control flows of people, goods and capital in
and out of a state. Domestic sovereignty is the capacity of a state to choose and
implement policies within its territories.259
Notwithstanding the controversies generated by the differing views of
commentators, the current thesis examines the essences and legal significance of
economic sovereignty from the perspective of the UN Charter, public international
law, customary international law, and General Assembly resolutions. The basic
socio-economic needs of populated developing countries and the proclaimed
international justice by the new regime of sovereignty after the demise of the
League of Nations cannot be complemented by financial and technical assistance
in the form of foreign aid alone without the economic sovereignty that will
encourage free standing and free trading.260 It is not enough to establish a norm
of foreign aid that might jettison economic sovereignty;261 this is already a rule of
law that is part and parcel of self-determination.
Economic and political sovereignty are linked:262 the principles of selfdetermination and that of permanent sovereignty over natural resources are
accepted principles of jus cogens, a body of rules that proscribes conducts regarded
as fundamentally unacceptable by international society.263 The view is that the jus
cogens rules form part of the peremptory norms of the highest rank in international
law regarding prohibited conduct; they assume that economic sovereignty rights
are inviolable.264 The right of peoples and nation states to permanent sovereignty
over natural wealth and resources in the interest of national development was
affirmed by the United Nations Assembly Resolution 1803 (XVII) of 14 December
1962.265
Sovereignty is not just an independent right for states to conduct selfgovernment of their choice,266 but also by virtue of that right, they freely determine
their political status and freely pursue their economic, social and cultural
259 Kreshner, Stephen, Sovereignty: Organized Hypocrisy (1999) in Quiggin, John op. cit.
p2.
260 Collingwood, R.G., The Idea of History (1956) pp 315-6.
261 Black, Eugene R., The Diplomacy of Economic Development and Other Papers (New York
1963) p 23.; Kelson, H., The General Theory of Law and States (1945) p 29.
262 Hannum, Hurst, Autonomy, Sovereignty and Self-Determination: The Accommodation
of Conflicting Rights, University of Pennsylvania Press (1990) p 15.
263 Bartelson, Jens, A Genealogy of Sovereignty, Cambridge University Press (1995) p 141.
264 Jenks, Wilfred, as described in Hannum, Hurst, op. cit. p 14.
265 UN Resolution 1803 (XVII), 17 UN GAOR Supp (No17) at 15 UN Doc A/5217
14/12/1962.
266 Umozurike, Oji, Self-Determination in International Law (1972) p xi.

54

The Modern Application of Sovereignty

development.267 To emphasize the degree of importance attached to this doctrine,


UN concern with dependent territories led to the inclusion of Chapter XI, Article
73, entitled Declaration Regarding Non-Self-Governing Territories in the Charter,
providing for their economic rights and sovereignty over natural resources.268 It
can be suggested that the literal interpretation of Article 73 of the Charter of the
UN, Declaration of Non-Self-governing Territories, impliedly entitles a nationstate irrespective of its political status to economic sovereignty.269
The right to economic sovereignty has been made a sacred trust that all
members of the UN are expected to promote in good faith for everybody in the
world, particularly the Non-Self-Governing territories.270 However, the meaning
of economic sovereignty is largely contingent upon the text in which it figures;
the importance of international trade and economic interdependence of states,
including delegating some sensitive sectors of a nations economy to the World
Bank and the IMF, has introduced controversies into economic sovereignty, as
an essentially contested concept. The reliance of developing countries on the
World Bank and the IMF, substantially funded by the developed nations, with
the superiority and highly technically advanced developed nations, on the one
hand, and the economically developing nations abundantly endowed with natural
resources on the other, increases the agitation and controversies surrounding
economic sovereignty, claimed by many authors in this era of neo-liberalism
as theoretical rhetoric.271 However, these perceptions have also been seriously
contested by the positivist272 who believes and relies on the concept according to
the UN Charter and on public international law, which has sanctified economic
sovereignty as a fundamental right of states.

1.4 sanctity of economic sovereignty


It has been suggested that economic sovereignty is sacrosanct, given the religious
terminology adopted by Article 73, of the UN Charter: the interests of the
inhabitants are paramount and the administrators should accept as a sacred trust
the obligation to promote to the utmost within the system of international peace
and security to ensure the will of the people by implication in economic matters.
267 Werner, Levi, Contemporary International Law: A Concise Introduction, Westview Press,
(1991) p 186.
268 Pomerance, M., Self-Determination in Law and Practice (1982) pp 14-15.
269 Ofuatey-Kojoe, W., The Principles of Self-Determination in International Law (1977) p 105.
270 Articles 73, Chapter XI of the UN Charter 1945.
271 Ofuatey-Kojoe, W., op. cit., p 106
272 Pang, Zhongying, Globalization v Economic Sovereignty, China Daily 2 December 2005.

55

The Modern Application of Sovereignty

The new international economic order is said to have been ushered in during the
regime of economic sovereignty.273 However, the economic sovereignty doctrine
does not pre-empt inter-state cooperation or international economic and social
cooperation already provided for in Article 55 of the UN Charter.274 The Article
encourages cooperation among members of the UN, including dependent states,
necessary for peaceful and friendly relations based on respect for the principles of
equal rights and self-determination, to promote among others:
a
higher standards of living and conditions of economic and social progress
and development;
b

solutions to international economic, social, health, and related problems,


including cultural and educational cooperation;

universal respect for and observance of human rights and fundamental


freedoms for all without distinction as to race, sex, language or religion.275

Various specialized agencies such as the World Bank and the IMF established by
inter-governmental agreements have wide international obligations, one of which
is the requirement in Articles 55 and 63 of the UN Charter.276 Furthermore, in order
to ensure strict compliance with the provisions of the UN Charter regarding the
protection and non-exploitation of developed and developing countries alike, the
Article provides that the Economic and Social Council may enter into agreements
with any of the agencies referred to in Article 57, defining the terms on which the
agency concerned shall be brought into relationship with the United Nations and
such agreement shall be subject to General Assembly approval.
The popular argument in the debate over who controls the affairs of the World
Bank and the IMF ought to have been laid to rest with the requirement that the
Economic and Social Council may co-ordinate the activities of the specialized
agencies through consultations with and recommendations to such agencies
and through recommendations to the General Assembly and members of the
United Nations277 although the World Bank and the IMF are not creations of the
United Nations. The WB and the IMF see themselves as equal partners with rather
than as part of the UN system, particularly as the latters agreement with the WB
recognizes the World Banks status as an independent organization thus applying
its own rules, contained in its own Articles of Agreement and following its own
policy.278
273
274
275
276
277
278

Bauer, P.T., Equality, Third World and Economic Delusions (1981) p 87.
Article 55, Chapter IX, of the UN Charter 1945.
Ibid.
Article 57 of the UN Charter of 1945.
Article 63 (2) of the UN Charter 1945.
Tomasevski, K., Development Aid and Human Rights, (1993) p 31.

56

The Modern Application of Sovereignty

The agreement between the WB and the UN envisages consultations and


exchanges of views, prohibits recommendations addressed to the WB contrary
to the provisions of Article 63 (2) of the UN Charter without prior consultation,
and includes the pledge by the UN to refrain from recommendations with respect
to its lending policy, terms and conditions of the loan.279 However, the view is
that the independence of the WB, equally enjoyed by the IMF, does not place
the institutions outside the United Nations system280 as these bodies enjoy all
of the privileges and immunities of international organizations under the United
Nations devoid of commercial and profit motives.
Proponents of human rights are of the view that the meticulous provisions
regarding non-self-governing territories is not meant only to guarantee economic
sovereignty to dependent states, but also to protect and sustain the economic
sovereignty of weaker and developing nations vulnerable to the exploitation
of their natural resources.281 The literal interpretation of Article 73(a) is that it
provides inter alia that the United Nations should ensure that dependent states
which it has been suggested include developing nationsare treated with due
respect regarding their political, economic and social freedoms, and protection
against abuses.282 The word against abuses used in the Charter has been suggested
to mean protection against exploitation. The notion of economic sovereignty is
not only to prevent exploitation but for states to have the capability to determine
their internal and external economic programmes.283
The reasons for the United Nations emphasis on the economic sovereignty
of states should be examined. States cannot be said to be independent without
economic sovereignty,284 as the doctrine of economic sovereignty is synonymous
with self-determination. The issue of economic sovereignty was said to have been
overlooked, as the nationalist movements of former colonies were more interested
in political power and administration of government than the economies of
their respective states. Soon after they obtained political power, the economic
rights of those independent states, including the non-self-governing, have
been consistently abused. This led to the redefinition of state sovereignty in the
light of the circumstances of economic sovereignty over natural resources; selfdetermination is not a mere expression of opinion juris, but the law of jus cogens.
279 Article 1, Agreement between the WB and the UN, 16 UNTS (1947) p 346.
280 Ibid., pp 31-32.
281 Stuart, D., Reconciling Non-Intervention and Human Rights, United Nations
Chronicle, on-line edition, Vol. XXXVIII No. 2 (2001) p 1.
282 Article 74 UN Charter.
283 Bibhu, P.R., Is Economic Sovereignty An Answer? Features of Nagaland.
284 Schachter, O., International Law in Theory and Practice, (1982) pp 114-21.

57

The Modern Application of Sovereignty

It was further viewed that the denial of such an inherent right of sovereignty
would defeat the purposes of civilization and the protection of human rights. It
was considered to be, for instance, as if the torturer had become like the pirate and
slave trader before him: hostis humani generis, an enemy of all mankind.285
The UN General Assembly, in consideration declared that: The right of peoples
and nations to permanent sovereignty over natural wealth and resources must
be exercised in the interest of their national development and the well-being of
the people of the state.286 In exercise of the above rights Libya in 1973 and 1974
promulgated decrees purporting to nationalize all of the rights, interests and
property of Texaco Overseas Petroleum and California Asiatic Oil Company. The
Tribunal upheld the reliance of Libya on the import of the Charter while demanding
the immediate, adequate and prompt payment of compensation. The argument of
the plaintiff that the UN resolution was not of a binding nature and should not
be relied on by the defendant was rejected.287 The free and beneficial exercise of
the sovereignty of the peoples and nations over their natural resources must be
furthered by the mutual respect of states based on their sovereign equality.288
The UN Declaration on the economic sovereignty of states firmly occasioned
the introduction of the New International Economic Order (NIEO) as confirmed
in the 1974 Declaration of the Charter of the Economic Rights and Duties of
States. For instance, in exploitation of mineral and natural resources in developing
countries before this time, agreement with the natives was based on traditional
concession agreements; the multinational corporations merely made a token
payment to the locals, if they wished. The illiterate Elders and Kings who had
only an unclear impression of what they were asked to sign, signed most of these
concession agreements; thus, they signed away their natural wealth and mineral
resources, a factor that in no way improved their standard of living.289
The approach of the US and the UK during the debate on Resolution 1803 has
been commended by many authors, who consider the arguments for themselves
and on behalf of other foreign investors of capital to be very neutral and
balanced. They sought an amendment to the effect that owners of foreign capital
should be paid immediate and appropriate compensation in accordance with
international law and good faith in the event of expropriation. The UK and the
US maintained also that the payment of compensation should be obligatory and
not at the discretion of states,290 while the developing states took the stand that
285 Graham, L., Securing Sovereignty through Agreements (2003) p 1.
286 UN Resolution 523 (VI) of January 1952.
287 Texaco Overseas Petroleum v Libya Arab Republic, 17 ILM 1 (1977) p 389.
288 UN Resolution 1803.
289 Buell, R.L., International Relations, Holt and Company, New York (1929) pp 397-8.
290 Schwebel, op. cit., p 466.

58

The Modern Application of Sovereignty

compensation should be paid only in accordance with the national domestic law:
a measure, they claimed, in the exercise of their state sovereignty.291
It appears that Resolution 1803 was ambiguous. However, commentators are
of the opinion that the developed nations and the developing ones reached an
agreement on the principles through memorandum of understanding.292 The
agreements reached by the developing and developed states resulted in the
modification of Resolution 1803 in November 1966,293 to the effect that the rights
of all countries, in particular, the developing countries, are observed to secure
greater participation and reasonable dividends in enterprises that are partly or
fully owned and operated by foreign companies, including giving attention to the
developmental needs of the indigenous people of the developing countries.294
This Resolution was said to be equally ambiguous and deficient in clarity, yet
since the developing nations were in the substantial majority at the General
Assembly, the developed nations could do no more than to use their technical
know-how as a weapon to coerce the developing countries into submissionnot
for negative purposes, but for their mutual benefit.295 However, the next major
resolutions on permanent sovereignty further reaffirmed the earlier position
to the effect that the application of the nationalizations carried out by states,
particularly by the developing countries, was an act of sovereignty in order to
secure and protect their natural resources The resolution also implies that each
state is entitled to determine the amount of compensation payable; any dispute
should be settled according to national legislation.296 No reference was made to
international law, prompting the charter for a new economic world order, which
necessitated the Charter of economic rights and duties of states with Article 2
reflecting the ambitions of the developing countries.297 This resolution was about
to be rejected. Nevertheless, for Banco Nacional de Cuba v First National City Bank
concerning a claim for four branches of the bank nationalized in Cuba, the court
held that compensation would be decided on grounds of equity and international
law where no adequate provision was made by local legislation.298
291 Lowenfield,. op. cit., p 408.
292 Gess, K., Permanent Sovereignty over Natural Resources, 13 International and
Comparative Law Quarterly (1964) p 398.
293 UNGA modified Resolution 1803 of 25 November 1966.
294 UNGA Resolution 2158 of 25 November 1966.
295 Weintraub, S., Economic Coercion and US Foreign Policy (1982) p 4.
296 UNGA Resolution 3171 of 17 December 1973 reaffirms and clarifies Resolution 1803
of 1962.
297 Garcia-Amador, F.V., The Proposed New International Economic Order: A New
Approach to the Law Governing Nationalization and Compensation, 12 Lawyer of
Americas (1980) p 1.
298 National Bank de Cuba v National Bank of New York, 431. F.21.919720 394, 399-402.

59

The Modern Application of Sovereignty

The view is that prior to Resolution 1803, the Traditional Concession


agreements were the order of the day as locals were content with the petty cash
given to them by the MNCs,299 the communities, oblivious of their inalienable
rights or economic sovereignty over the natural wealth and resources in their
territory, perhaps thought that the multinational corporations were doing them a
favour as no participation interests or negotiations were made with multinational
corporations.300
In a Traditional Concession agreement, the conceding state appears to play
only a minor role except for permitting the concessionaire access to minerals in
the form of mining rights, in return for the payment of a nominal land tax and a
modest share of the financial rewards of the projects; these were expressed initially
in the form of production-based royalties and later, in the form of a mixture of
royalties and taxation.301 The concession agreements made no reference to
territorial water boundaries; there was no grant of offshore concession licences,
yet the MNCs were tapping into resources while paying nothing at all for land
concessions.302 Contrary to the intention of paragraph 6 of the text of Resolution
1803 of 14 December 1962, none of the concessionaire territories was developed
except only that necessary for the exploitation and delivery of the products.303

1.5 economic sovereignty after resolution 1803


The view is that Resolution 1803 of the UN General Assembly declaration not only
enlightened the states, but also induced and facilitated the awareness of economic
sovereignty over their wealth and natural resources.304 The feature is incidental
to and a twin-sister of political sovereignty and independence for self-governing
territories, originating the Joint Venture agreements in the petroleum sector.305
The Joint Venture agreement orchestrated by the awareness of UN Resolution
299 Toriguain, S., Legal Aspects of Oil Concession in the Middle East Lebanon, Hamas Kaine Press
(1972) p 28.
300 Etikerentse, G., Nigerian Petroleum Law, Macmillan Publishers (1985) p 38.
301 Ely, C.N., Changing Concepts of the Worlds Mineral and Energy Development Laws, (1975)
p 43.
302 Zhiguo, G., International Petroleum Contracts: Current Trends and New Directions (1994)
p 12.
303 Chiati, A.Z., Protection of Investment in the Context of Petroleum Agreements
(1975) ILM pp 1210; 1227-28.
304 Fabricant, R., Production Sharing Contracts in Indonesian Petroleum Industry, 16
Harvard International Law Journal (1973) p 303.
305 Crommelin, M., The Mineral and Petroleum Joint Venture in Australia (1986) p 65.

60

The Modern Application of Sovereignty

1803 created a new dimension in the legal order306 where host states demanded
participation in production with the aims of financial benefits307 and technology
transfer, including infrastructural developmental projects for the States.308
Although the Joint Venture system was first introduced into the Middle East
in 1957, in an agreement concluded between Italian ENI and two Egyptian State
Companies, the birth of the agreement heralded other developing states, who
failed to perceive it as a right until UN Resolution 1803.309 Most of the MNCs who
already had the concession agreements in the oil sector were either compelled to
re-negotiate,310 or to face nationalization.311 It was suggested that Libya did not
exercise caution in nationalizing the defendants interest, taking into consideration
the Charter of the economic rights and duties of states.312
The argument that this Charter is intended only to protect the developing
countries313 perhaps might be difficult to sustain.314 For instance, in the
petroleum industry, the emergence of modern technology throughout the world
has identified the need for a close relationship between the two parties, each of
whom brings different bargaining chips to the negotiating table. On the one hand,
there is the host state or its agent, possessing the title to the petroleum resource
and, on the other, the MNC with the requisite skills and capital essential for the
exploitation of the product. Here is the type of interdependence envisaged by
the Charter of economic rights and duties of states. The declaration of a states
rights over her natural wealth and mineral resources is meant to protect human
dignity and further to re-affirm the established sovereign equality of states with

306 Omoregbe, Y., The Legal Framework for Production of Petroleum in Nigeria (1987) p. 273.
307 Thompson, A.R., Sovereignty and Natural Resources: A Study of Canadian Petroleum
Legislation, Valparaiso University Law Review, Vol. 1 (1961) p 284ff at 290.
308 Zakariya, H.S., New Directions in Search for Development of Petroleum Resources in
Developing Countries, 4 Natural Resource Forum (1976) at p 545.
309 Zakariya, H.S., Sovereignty over Natural Resources and the Search for New International
Economic Order (1980) pp 75-84.
310 Asante, S.K.B., Restructuring Transnational Mineral Agreements, 73 American Journal
of International Law (1979) p 359.
311 Texaco Overseas Petroleum v Libya (1978) 17 ILM 1 where the plaintiff, the
government of Libya, nationalized the defendants interest, alleging that it was in the
national interest.
312 UNGA Resolution 3281 of 12 December 1974.
313 Kinsella, S., Protecting Foreign Investment Under International Law; Legal Aspects of Political
Risk, New York: Oceana Publications Inc. (1997) p 128.
314 Walde, T., Stabilizing International Investment Commitments: International Law
versus Contract Interpretation, CEPLMP Professional Paper (1994) pp 13; 21.

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The Modern Application of Sovereignty

the fundamental purpose of maintaining and achieving international peace and


security.315
It has been observed that the UN Resolutions on permanent sovereignty over
natural resources is not a positive law; it was seen at the time as an attempt to
record and perhaps shape the international customary law that protects individual
rights and the development of the region where natural resources are obtained.316
The debate at the UN General Assembly317 reflected the division on foreign
investment, which remained ambiguous until the declaration of the rights and
duties of states.318
Similarly, Resolution 1803 gives the host states no unqualified contractual
benefits, to the disadvantage of the investor. In Saudi Arabia v Arabian American
Oil Company (ARAMCO) involving a conflict within the transportation agreement
granted to Saudi Arabian Maritime Tankers Ltd to transport Saudi oil extracted
from the concession area. The Tribunal held, inter alia, that the very sovereignty
of the state gave it the legal power to grant rights that it prohibits itself from
breaching (through the stabilization clause in the agreement) until the end of the
concession period.319 Before Resolution 1803 and the Charter of the economic
rights and duties of states, according to the opinion of observers, the intrigues
were unhelpful to sustaining international peace and security. For instance, the
emergence of the Hull formula was as a result of the seizure of American citizens
properties in Mexico even before the promulgation of their 1917 constitution. A
claims commission was established in 1927 by both governments to examine the
expropriation of US citizens properties; up until 1938 no claim had been paid,
resulting in the US Secretary of State at that time opening up a discussion with
Mexico as to the way forward.
The claim of the Mexican government was that they were not liable to pay
compensation for a sovereign act that would benefit their citizens. The US
government saw this as confiscation and not as expropriation as prescribed by
international law. Mexico contended further that there is no rule of international
law, in practice or in theory, making obligatory the immediate payment of
compensation or even deferred compensation for the expropriation of a general
and impersonal matter such as that accomplished in Mexico for the purposes of land
315 Greenwood, C., Contracts in International Law: The Libyan Oil Nationalizations, 53
British Yearbook of International Law (1982) pp 27; 41.
316 Gantz, D., New Forms Negotiation and Compensation for Nationalized Property, 71
American Journal of International Law (1977) p 474.
317 17 UNGA Resolution 1803, 14 December 1962, Annexes, Vol. 1. Agenda, No. 39 at p 59.
318 Schwebel, M., The Story of UN Declaration on Permanent Sovereignty over Natural
Resources, 49 ABA Journal (1963) p 463
319 Saudi Arabia v Arabian American Oil Company, (1991) 27 ILM p 117.

62

The Modern Application of Sovereignty

redistribution for the benefit of every Mexican. Mexico claimed that the political,
social, and economic stability of Mexico depended on its citizens receiving the
expropriated land; further, there was no urgency to pay compensation.320 The
attitudes of developing countries towards nationals and firms from developed
nations may be seen as hostile. The exploitation by MNCs of the Middle East
of their resources through concession agreements may have contributed to the
economic sovereignty through resolutions governing the duties and rights of states.
After the declaration of UN Resolution 1803, the treatment of aliens (or, more
accurately, foreign-owned companies or MNCs) became more highly controversial
than most other issues associated with divergent views in international law.321 The
controversies stem from a difference of approach between those states considering
that there is an international minimum standard of treatment which must be
accorded to aliens by all states irrespective of how they treat their own nationals,
on the one hand, and those arguing that aliens may qualify only for national
treatment, for instance; the treatment equal to that given to the citizens within the
states concerned.322
The views advanced further by the developing countries, particularly in the
area of expropriation quite common with the euphoria of political independence
and economic sovereignty, were according to their argument predicated thus:
that international law requires the host states to accord only national treatment to
aliens; that national law governs the rights and privileges of aliens in host states;
that national courts have exclusive jurisdiction over disputes involving aliens, who
may not seek redress by recourse to diplomatic protection by their country of
nationality, and that international adjudication is inadmissible for the settlement
of disputes with aliens.323 This argument, originating in Latin America as a result of
a plethora of litigations with the US, became adopted by all Latin-American states,
to the extent that some of them inserted it into their respective constitutions,324 or
used it as a springboard to negotiate any treaty.325
Similarly, the Latin-American governments and their state-owned companies
insisted that international agreements or contracts must contain the Calvo clause,
320 Lowenfeld, A., International Economic Law (2003) pp396-8.
321 Texaco v Libyan Oil at p 36 (supra), Saudi Arabia v Arabian American Oil Company at
117 particularly at p 119. supra. Also Schea op. cit. pp 12-3.
322 Harris, D.J., Cases and Materials on International Law, Fourth edition (1991) pp 493-4.
323 The Calvo Doctrine, named after Carlo Calvo, former Argentinian government official,
Sixth Edition (2000).
324 Donald, R S., The Calvo Clause; A Problem of Inter-American and International Law
and Diplomacy.
325 Garcia-Mora, M., The Calvo Clause in Latin American Constitutions and International
Law, MARQ Law Review (1950) pp 205-7 can be found in op. cit. p 11-2.

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The Modern Application of Sovereignty

obliging aliens to submit any dispute to the local authorities of the host country,
prohibiting the alien from ensuring diplomatic protection for alien investors
under any circumstances, and insisting that national law and national courts shall
govern and have jurisdiction respectively.326 Observers are of the view that the
doctrine provides simply that aliens are subject to the treatment and obligations
equal to nationals. Article 25 of the Nicaraguan constitution; Article 19 of the
Honduras constitution; Article 45 of the Salvadorean constitution; Article 12 of
the Costa Rican constitution, and Article 14 of the Peruvian Civil Code of 1914:327
many of these constitutional provisions have been reversed, according to the
survey carried out by some authors,328 yet have already created the impact and
apprehension which necessitated the declaration of UN Resolution 3281 on the
Charter of Economic Rights and Duties of States supported by nearly all of the
developed nations.329
Also, observers are of the view that the developed nations were not treated in
a friendly manner by the developing nations who heavily relied upon the former
for the provision of technical skills and capital for the development of their states.
The US government took the position, for the sake of peace in respect of Latin
America that the Calvo doctrine requires merely that local remedies be exhausted,
a requirement in conformity with international law.
However, the question remains whether local remedy will satisfy the
international minimum standard of justice. The US view of what constitutes
a denial of justice is broader and wider than is the definition of justice by the
application of Calvo doctrine in the Latin-American justice system.330 One
example is the North American Dredging Company case (United States of America
v United Mexican States), where the US government asserted a claim for $233,000
on behalf of a US corporation for breach of contract in dredging Mexican ports.
The contract provided in its Article 18 that the US Company would be considered
as a Mexican for the purposes of all matters concerning the contract and that no
326 Branch, H.N., and L.S. Rowe, Mexican Constitution Compared with the 1857
Constitution, Annals of American and Social Science Vol. 71 Supplement (May 1917)
ppI-V; 34-50.
327 Westly, R., The Procedural Malaise of Foreign Investment Disputes in Latin America:
From Local Tribunal To Fact-finding, 7 Law and Policy in International Business (1975) pp
813; 823.
328 Doak, B. and E.E. James, International Commercial Arbitration in South America.
329 Barnhart, N.E., Citizenship and Political Test in Latin America Republics during and
after WW II, Hispanic American Historical Review Vol. 42 No. 3 (August 1962) pp 297332.
330 Garcia-Mora, M., Comment; The Calvo Clause: Its Current Status as a Contractual
Renunciation of Diplomatic Protection, 6 Texas International Law Forum (1971) pp 28990.

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The Modern Application of Sovereignty

diplomatic intervention would be permitted. The Mexican Commission held inter


alia that the Calvo clause is applicable unless there is any evidence suggesting that
the clause is repugnant to international law. The Commission, however, cautioned
that if the intention of resorting to a Mexican Tribunal was to delay or deny
justice, then it would indeed be repugnant to general principles of international
law.331 The Commission eventually found no miscarriage of justice occasioned
by the adoption of the Calvo clause; commentators have written that it justifies
the pragmatic application of sovereignty, but at the inception of the application of
the clause, the highly industrialized nations led by the US and Britain were yet to
come to terms with the application of the clause.332 Analysts argue that the Calvo
doctrine merely re-echoed the principles of non-intervention;333 the equality
of states (all states are juridically equal, as equal members of aninternational
community),334 and respect for the social, cultural and national laws of member
states335.
In borrowing the Calvo doctrine as a principle of general application, Article
2 of the UN Charter on Economic Rights and Duties of States declares that
laws governing the nationalization and expropriation of property are those of
nationalizing states and not of international law.336
Not yet done with developing countries (the Third World, as it was then called)
the Brazilian constitution reserved mining, exploration and production activities
to Brazilian-controlled firms,337 although this has now been amended to permit
foreign operations as long as the firms are established under Brazilian law and with
their headquarters in Brazil.338

331 Norberg, C.R., Current Issues in International Commercial Arbitration: reported US


v United Mexican States, 12 Journal Intl Bus (1989) pp 86; 91.
332 Grigera, N., Arbitration in Latin America: Overcoming Traditional Hostility, 5 ARB
Intl (1989) pp 137; 140.
333 UNGA Resolution 3281 (XXIX) 18 May 1972 of the Charter of Economic Rights and
Duties of States; Articles 2 (4), 2(7), of the UN Charter; Article VI Section 10 of the
World Bank Articles of Agreement.
334 Article 10 of the UN Charter of the Economic Rights and Duties of States.
335 Article 7 of UN General Assembly Declaration: Charter of Economic Rights and
Duties of States.
336 Daly, J., Has Mexico Crossed the Border on State Responsibility? Foreign Investment
and the Calvo Principles in Mexico after NAFTA, 25 St Marys Law Journal (1994)
pp.1147; 1186-87.
337 Article 176 of the Brazilian Constitution.
338 Schneiderman, D., Constitutional Approach to Privatisation: An Inquiry into the
Magnitude of Neo-Liberal Constitutionalism, 63 Law of Contemporary Problems
(Autumn 2000) p 83.

65

The Modern Application of Sovereignty

These cases in Latin America (who claimed that they are entitled both to
freedom from interference in domestic policy and to the same degree of respect for
internal sovereignty as are the US and the highly industrialized area of Europe),339
in Africa and especially in the Middle East may have necessitated the UN General
Assembly Resolutions concerning friendly economic relations to maintain
international peace and security. Similarly, there was a spate of nationalization
issues instigated by the WB and the IMF designing a policy towards member states
that appears to abuse their independence and sovereignty status.
Although this policy was applauded by some nations, there appear to be no
provisions in the constituent documents conferring states with such sovereign
power; this is especially the case when the WB and the IMF have not been appointed
as arbitrators by the states concerned as provided among other items in Articles
21 and 22 of the International Centre for the Settlement of Investment Disputes
(ICSID). This requires not a unilateral decision or solution, but an administrative
Panel to settle disputes among contracting members, with representatives or
experts appointed by each member of the proceedings. The policy appears to be
effective in controlling abuses of independence and state sovereignty. Nevertheless,
by allowing this to continue, there is a tendency that the institutions could overstep
and dictate their conditions to borrowing member states.340 The effects on state
sovereignty of the dictation of conditions can therefore not be underestimated.

1.6 wb and imf policy on nationalization disputes


The credit rating of states that nationalize foreign companies without compensating
them was very low as fears were entertained over their willingness satisfy their
obligations over loan agreements. The financial institutions whose capital bases are
substantially made up of contributions from large donor nationswho, incidentally,
are victims of state nationalizationare apprehensive of the willingness of these
states to comply with international agreements. Thus, barriers may exist towards
their developmental programmes.341
For instance, before Independence in Algeria, the economy was almost solely
dependent on Europeans, who employed over 90 per cent of the workforce
in private foreign investments. The FLN socialist government in 1962, after
Independence, nationalized all European firms, resulting in mass exodus of the
Europeans from the country. Although companies operating in partnership with
Algerian nationals were allowed to stay, the payment of compensation to the
339 Schneiderman, op. cit., p 5
340 Subedi, op. cit., p 36.
341 Article 1 (2) of IMF Articles of Agreement; Article 1 (3) of WB Articles of Agreement.

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The Modern Application of Sovereignty

nationalized companies was completed only in 1974. The World Bank, which
always followed a reasonable and consistent policy on the nationalization of
property based on accepted principles of international law, declined processing
loans to Algeria when their economy was in bad shape.342
The WB also rejected similar applications from the United Arab Republic and
the Republic of Congo, with a charge that loans can be given only to countries
that nationalized where there is willingness, and pragmatic steps are taken, to
reach a fair and equitable payment of compensation.343 Comments have been
made that the US Congress influences the WB and the IMF since most of the firms
nationalized in the 1960s and 1970s are US-owned. Even though the US vetoed at
least nine loans, the situation later became contradictory; the institutions criteria
on the granting of loans were based on past records and credibility with regard to
the willingness to make repayments. This was a consistent approach by the WB,
meant to guarantee the efficient utilization of the available scarce resources of the
institution.344
The argument that the WB and the IMF may have taken sides with the US over
the non-lending of money to countries that confiscated foreign firms rather than
use the term nationalization are said to be in conformity with business practice
and lenders obligations: they are normally supposed to undertake a credit check
before loans are granted.
Observers have noted that all of the formulae introduced to work out an
amicable modality on the payment of compensation on nationalized property did
not in practice work very well until the UN General Assembly resolutions that
ushered in a new international economic order, while Latin American countries
adopted the Calvo doctrine. This has assumed a position that under international
law, no alien has rights greater than those of the nationals. Some states took the
doctrine further by requiring foreign owners of land or commercial property to
become incorporated as a state company by renouncing all manner of protection
from the home states.345 The other side of the argument, considered as the Hull
formula, was a Western view very popular and consistent with international
law, protecting the rights of foreign investors with corresponding rights and
obligations of host states.346 The theme of the formula is that in the event of a
foreign companys nationalization, prompt, adequate and effective compensation
must be paid. The contemporary political economy has rendered these debates
irrelevant as 90 per cent of socialist countries have amended their laws to enable
342
343
344
345
346

Mason and Asher, The World Bank since Bretton Woods, (1973) p 747.
The WB Group; Policies and Operations: IDA and IFC, IBRD (1969) p 31.
Sanford, J.E., in IBRD and IDA Yearbook of the United Nations Vol. 26 (1972) p 316.
Shea, D., Ominous Politics (1984) p 102.
Hackworth, G., Digest of International Law, Vol. III (1942), p 655.

67

The Modern Application of Sovereignty

them to acquire access to World Bank and IMF funds to resuscitate most of their
economies, otherwise in almost irredeemable poor condition.
Developing states are those now begging the industrialized countries to invest
in their states. Unsurprisingly, there is insistence on bilateral investment treaties
(BITs) conferring protection from unlawful interference with property interests
and assuring compensation in accordance with the standards of international
law. In most cases the BIT provides that any direct or indirect taking of the
investment must be for public purposes, non-discriminatory, and accompanied
by prompt payment, adequate and effective compensation in accordance with the
due process of law and the standards of international law. BITs are a sovereign
act requiring the WB and the IMF to be conferred with such sovereign powers by
states; however, among the states themselves is no requirement of any conferment
to exercise their inherent sovereign power. Recent developments suggest the BIT
given prominence by the US347 is now being commonly used by developed nations
to protect their investments in developing countries.348 In contrast to the possible
interference of the WB and the IMF through their policies, the direct involvement
of states has the expected and required legal validity.
The BIT programme was initiated in 1981, designed to encourage and protect
US investments in developing countries. The treaty started as an integral part
of the US effort to encourage Cameroon and other friendly countries to adopt
macroeconomic and structural policies that would promote economic growth,
consistent with the US international investment policy that global economic
development must be left to the mechanism of market forces to determine.349
The model BIT provides that where certain defined disputes arise between a
party and a national or company of the other party, including disputes as to the
interpretation of an investment; where the dispute cannot be resolved through
negotiation, it may be submitted to arbitration in accordance with any dispute
settlement procedure to which the national or company and host country had
previously agreed. The disputes may also be submitted to the International
Centre for Settlement of Investment Disputes (ICSID) for binding arbitration.
Exhaustion of local remedies is not required; parties can also enforce contractual

347 Bergmann, M.S., Bilateral Investment Protection Treaties: An Examination of the


Evolution and Significance of the US Prototype Treaty, 16 NYU J Intl L& Pol. (1983)
p 1.
348 UNTAD recent developments in International Investment Agreements IIA MOINTOR
No.2 (2005) United Nations New York and Geneva 2006 pp 3-11.
349 Reagan, R., Letter of Submittal; Department of State Washington, 6 May 1986.

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The Modern Application of Sovereignty

agreements in the domestic courts of either party. This model text has already
been experimented with in a BIT between the US and Cameroon.350
The provisions of the US model BIT are now being applied by most developing
countries just to attract foreign investment. One of the main features of the
investment model agreement is that either party shall be accorded fair and
equitable treatment and shall enjoy full protection and security of investment in
accordance with both national domestic and international law; neither party shall
impose performance requirements as a condition of the establishment, expansion
or maintenance of investments owned by nationals or companies of the other
party which require or enforce commitments to export goods produced locally
or state that goods and services must be purchased locally or impose other similar
restrictions; nevertheless, state law must be obeyed.351 These actions were taken to
respect state sovereignty and to respect the human rights of the investors towards
sustainable economic development and peace in the world.

1.7 charter of the economic rights


and duties of states

The fundamental purpose of the Charter is to promote the establishment of a new


international economic order based on equity, sovereign equality, interdependence,
common interest, and cooperation among all states, irrespective of their economic
and social systems, to create conditions for:
a. The attainment of wider prosperity among all nations and of a higher
standard of living of all peoples;
b.

The promotion by the entire international community of the economic


and social progress of all countries, especially developing countries;

c.

The encouragement of cooperation on the basis of mutual advantage


and equitable benefits for all peace-loving States willing to carry out the
provisions of the present Charter, in the economic, trade, scientific, and
technical fields, regardless of political, economic or social system;

d. The overcoming of main obstacles in the way of the economic


development of developing countries;
e.

The protection, preservation and enhancement of the environment,


mindful of the need to establish and maintain a just and equitable
economic and social order through:

350 Investment Treaty between Cameroon and the US, Senate Treaty Documents, 99-22
signed 26 February 1989.
351 Cameroon v United States of America BIT, Making of American Trade Agreements.

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The Modern Application of Sovereignty

i.

The achievement of more rational and equitable international


economic relations and the encouragement of structural changes
in the world economy;

ii.

The creation of conditions which permit the expansion of trade


and intensification of economic cooperation amongst all nations;

iii. The strengthening of economic independence of developing


countries, and
iv. The establishment and promotion of international economic
relations, taking into account the agreed differences in the
development of the developing countries with their specific
needs.352
It would appear that the UN Declaration on economic sovereignty for states
opened doors and windows for the economic liberation of developing countries,
the majority of whom are borrowing members of World Bank and the IMF. The
resolutions re-affirmed the principles of the self-determination and sovereign
equality of independent states, hence the subsequent Charter that promotes
international cooperation towards mutual benefits and achievements in the area of
the economic, political and social development of all people in the world. To this
end, the development of every nation rests primarily upon the commitments of
its state and people to cooperate with other states and international organizations,
with improved international economic relations.
The emphasis on improvement of friendly international political and economic
relations might have been predicated on the aggression of some developing
countries hostile to multinational corporations operating in their territory. An
instance is found in the Texaco Overseas Petroleum v Libyan Arab Republic case,
where the Libyan government promulgated decrees purporting to nationalize
all rights, interests and property of Texaco Overseas Petroleum Company and
California Asiatic Oil Company that were granted fourteen Deeds of Concession
for the exploration and sale of petroleum products. The companies objected to
the decrees, claiming that such action by the Libyan government violated the
terms and conditions of their Deeds of Concession. However, exercising their
rights under their Deeds of Concession, the companies requested arbitration and
appointed an arbitrator. The Libyan government refused to accept arbitration,
claiming inter alia that the disputes were not subject to arbitration because
nationalizations were acts of state sovereignty exercised by virtue of Resolution
1803 (XVII) of 14 December 1962.353
352 UN Resolution 3082 (XXVIII) of 6 December 1973.
353 UN General Assembly Resolution 1803 (XVII) of 14 December 1962.

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Although the Libyan government lost in the matter and were made to pay
adequate compensation, observers saw the Libyan act as one of aggression
inconsistent with UN Resolution 2625 dealing with friendly international relations
and cooperation among nations. This case generated considerable controversy;
still, it aided the development of international economic relations and public
international law, as will be seen in Chapter Seven of this thesis, where the
argument will be further developed.
A similar situation is found in AGIP v the Popular Republic of Congo, where
the government nationalized the assets of AGIP in breach of the stabilization
clause in their Concession agreement. In response to the claim filed by AGIP,
the government of the Popular Republic of Congo claimed that the stabilization
clause in the Concession agreement affects the state sovereignty powers by virtue
of UN Resolution 1803 (XVII) dealing with sovereignty over natural resources and
the regulatory powers of the state in relation to nationals and foreigners. However,
the Tribunal declared the clause valid and enforceable under international law.354
There are legion of such cases seen by observers as acts of aggression by
developing countries; hence, they view the Charter of economic rights and duties
of states as not only fundamental, but also necessary for the maintenance of
international peace and security. Chapter 1 therefore deals with fundamentals of
international economic relations that shall be governed by the following principles:
a. Sovereignty, territorial integrity and political independence of states;
b.

Sovereign equality of all states;

c.

Non-aggression;

d. Non-intervention;
e.

Mutual and equitable benefits;

f.

Peaceful co-existence;

g.

Equal rights and self-determination of peoples;

h.

Peaceful settlement of disputes;

i.

Remedying of injustices which have been brought about by force and


which deprive a nation of the natural means necessary for its normal
development; Fulfilment in good faith of international obligations;

j.

Respect for human rights and fundamental freedom;

k.

No attempt to seek hegemony and spheres of influence;

l.

Promotion of international social justice;

m. International cooperation for development, and


354 Agip v Popular Republic of Congo, (1982) 27 ILM p 117.

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The Modern Application of Sovereignty

n.

Free access to and from the sea by land-locked countries within the
framework of the above principles.355

One important factor to note here is that every state has the sovereign and
inalienable right to choose its own economic system as well as its political,
social and cultural systems in accordance with the will of its people without
outside interference, coercion or threat in any form,356 as a standard principle of
international law and regulations in the Articles of Agreement of the World Bank
and the IMF.357
From the discussions above, it can be argued that economic sovereignty
is one of the fundamental criteria of state sovereignty, as every state has the
primary responsibility to choose, implement and promote its economic, social
and cultural activities towards their desired developmental goals without any
coercion and condition which might be inconsistent to their social and cultural
beliefs.358 For example, Article 32 of the UN Charter that provides that: no state
may use or encourage the use of economic, political or any type of measures to
coerce another state in order to obtain from it the subordination of exercise of
its sovereign rights.359 The economic coercion has two principal effects: either to
crush the states into political submission or result in the economic dependence of
the sending states.360

1.8 qualification and transformation of sovereignty


The view currently is that state sovereignty that was an exclusive preserve of
Kings, Emperors and Dukes, later transferred to the states after the Westphalia
Peace Conference in 1648 and now dominated by the individuals within the
territorial boundary of a state, limited by the peoples general will, according to
the prophecy of Realist philosophers.361 State sovereignty is therefore said to have
been transformed and qualified because the government of the state that claims
355 UN Resolution 3281 (XXIX) of 18 May 1972.
356 Ibid, Chapter 2.
357 Articles 2 (4) and 2 (7) of the UN Charter 1945,
Articles IV Section 10 of World Bank Articles of Agreement,
Articles 34 of International Finance Corporation Agreement,
Articles V Section 6 of International Development Association (IDA) Articles of Agreement.
358 Articles 7, Chapter 2 of Charter on Economic Rights and Duties of States.
359 Articles 32, Chapter III dealing on Common Responsibility towards the International
Community, UN Resolution 2749 (XXV) of 17 December 1970.
360 Lillich, RB., Economic Coercion and Reprisal by States, Virginia Journal of International
Order Affairs Vol. 31 (1975) p 366.
361 Jean-Jacques, R., The Social Contract and Discourses (1973) pp 163ff at p 178.

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The Modern Application of Sovereignty

sovereignty cannot behave in a way that contradicts the very purposes for which
the international community respects and protects sovereignty. In order for a
state to assert the claim of sovereignty, the acts of its government, irrespective of
legitimacy, must conform to the expected norms in the society.362
The argument is that international law on the acquisition of state sovereignty
paradoxically represents more diverse interests; it includes pressure to adopt a
norm or principles more favourable to numerous people than a fortuitous overlap
of the interests of a few powerful people.363
The argument is predicated on the point that sovereignty is the peoples
sovereignty and not the sovereigns sovereignty.364 Thus, state sovereignty means
accountability to two separate constituencies, internal populations and external
populations; the inability to protect citizens within the internal territory will
obviously affect the external population, which is likely to threaten international
peace and security. States are therefore required to provide aid and life-supporting
assistance, possibly including food and health care, for the majority of its citizens
that are either incapacitated or unable to afford basic life necessities. Britain has
been voted as one of the leading countries in terms of complying with human
needs on humanitarian grounds.365 During negotiations at the Bretton Woods
conference, the negotiators were not oblivious to such controversies over possible
misuses of sovereignty; the WB and the IMF commenced operations only when
the Articles of Agreement were ratified by the 44 initial member states.366
The convergence of formal authority in the hands of a small ruling elite, the
government, through international organizations or any other body, except
through transparent democracy, has elicited or contributed to an inherently
unstable system. The highly personalized nature of neo-liberalism where the
majority of the nations wealth is found in the hands of a few powerful citizens
creates situations where disagreements over specific issues, such as unemployment,
inadequate health care and the introduction of other reform measures by the elites,
can lead to disproportionate consequences for the respective national community
or the international communities at large.
It has been commented that the approach adopted by the US in withdrawing
temporarily from the International Labour Organization (ILO), with politicization
as one of the justifications for withdrawal, appears to be the legalistic method to

362
363
364
365
366

Locke, J., Second Treaties of Government in Two Treaties of Government (1982) p 187.
Brad, R.R., Governmental Illegitimacy in International Law (1999) pp 10-12.
Annan, K., Concept of Sovereignty, The Economist 352, (18 September 1999) pp 49-50.
Den, F., Protecting the Dispossessed: The Evolution of Doctrines and Practice (1993) pp 1-2.
de Vries, G.M., The IMF in a Changing World 1984-85 (1986) p 123.

73

The Modern Application of Sovereignty

protect the few elites that control the economy of states.367 The argument is that
an international organization with a populist agenda threatens the sovereignty
of developed nations, particularly the US: it withdrew from the United Nations
Economic Science and Cultural Organization (UNESCO) on similar grounds to
their withdrawal from the ILO.368
International organizations can influence state sovereignty in a negative or a
positive respect, depending on the political ideology of the state in question. A
states economic sovereignty in a neo-liberal economy is therefore determined by
a group of elites such as the MNCs, who chart the economic policy of the state.
This approach is likely to create the unequal distribution of economic power
among the nations of the world; the use of that economic power as a weapon
in inter-state relationships might affect the independence of sovereign states in
international law.369
It can be said that the intergovernmental organizations now shape the entire
worlds citizens daily economic activities through the technical removal of all
boundary barriers to state sovereignty.370
The creation of the present system of multilateral economic institutions,
e.g., the World Bank and the IMF, appears to have encouraged and facilitated a
cohesive financial culture and economic growth based on market forces. This
approach leads us to examine whether global institutions like the WB and the
IMF can exercise state sovereignty powers in the name of international financial
institutions, and as a specialized agency of the United Nations.

3.9 applicability of ultra vires


It does appear that state sovereignty is an exclusive preserve of independent states,
yet states do not exercise the powers alone. Because of complex inter-dependence
among nation states, the WB and the IMF as non-state actors are due to exercise
sovereign powers only to the extent conferred by these states.371 Economic
development and its sustainability are among the purposes of conferring sovereign
powers on the institutions, although there are still some economic activities based
367 Department of States Bulletin, Vol. 30 No. 2037, (April 1980) pp 65-66; ILM Vol. XIV
No. 2083, February 1984 at 1582-1584.
368 US State Department Bulletin, Vol. 84. No. 2083 February 1984 at pp 41-42; ILM Vol.
XIV No 6 November 1975 pp 1579-1585.
369 Bartram, B., The United States and the Politicizations of World Bank: Issues of International Law
and Policy (1992) p 7.
370 Danaher, K., The World Bank and the International Monetary Fund (1999) pp 42-44.
371 Keohane, R.O., and Nye, J.S., Power and Independence: World Politics in Transition (1989)
p 31.

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The Modern Application of Sovereignty

on national domestic directive principles of states that are not conferred. Policies
with the tendencies to creep into these areas may also be considered as ultra vires.
The exercise of sovereign powers by these institutions is clearly set out in
their Articles of Agreement for the common goals of member states. A lack of
compliance with the Articles of Agreement and unauthorized expansion of the
sovereign powers through their policies may not only be considered ultra vires, but
may also constitute a potential and systematic threat to the political and economic
sovereignty of some members.372 It nevertheless suffices to mention here that the
exercise of sovereign powers by the World Bank and the IMF are at the invitation
of member states for their common benefits.
While it has been said that states are subjects of international law, it appears that
non-states actors such as the World Bank and the IMF are grouped under the same
categorization. In theory considered as specialized agencies of the United Nations
with special privileges and immunities, they are also subject to international
law and derive their powers and legitimacy under the international plane from
member states as cooperative institutions, in technical terms.
However, there are two important issues that might be observed while the
institutions are carrying out the functions assigned to them by states: firstly, the
applicability, scope and effects of the doctrine of ultra vires in respect of their acts
and secondly, the binding effects of policies over which they have the power373
or the competence in accordance with the Articles of Agreement or international
treaties.374 Commentators have claimed that the exercise of sovereign powers
by the WB and the IMF must not be only for the benefit of the member states;
they must be consistent with the express agreements or the constitution of the
organizations.375
As a prelude to a conclusion, it can be said the essence and legal significance
of state sovereignty are to protect and enhance individual rights and selfdetermination of a state within its territory following an international norm of
non-interference in the domestic affairs of another state. While the sovereignty of
states emphasises the fundamental rights of individual and state self-determination,
political autonomy, policy autonomy, non-intervention and internal authority as
a peremptory norm of international law, an unauthorized derogation from these
372 Areelza, J., The Dual Character of EC Supranationalism: The Expansion of EC
Sovereignty, Jurisdiction Working Paper 1995.
373 Osieke, E., Unconstitutional Acts in International Organizations: The Law and
Practice of ICAO, 28 ICLQ (1979) p 1.
374 Laaterpacht, E., The Legal Effects of Illegal Acts of International Organizations, (1965) pp 889.
375 Osieke, E., Ultra Vires Acts in International Organizations: The Experience of the ILO,
48 BYIL (1974-5) p 259.

75

The Modern Application of Sovereignty

concepts or the proclivity by another state to interfere in the domestic affairs of


another, even as a neighbour-state, without first obtaining written consent could
amount to an erosion of state sovereignty. States sometimes share these sovereign
powers with the international organizations; the sovereign rights of international
organizations are, however, limited to the extent of delegated sovereign powers by
the states. The United Nations, based on its powers derived through the Charter,
has taken some pragmatic steps to ensure that states and, by implication, nonstate actors do not interfere and erode the sovereignty of other state.376 The UN
response on the North Korea attack, and the sanctions imposed on Libya during
the Lockerbie bombing and on Iraq during the invasion of Kuwait can be said to
be an example of the UNs role to prevent state sovereignty from being eroded.
Similarly, the UN attached a considerable amount of importance to the
economic sovereignty of states, particularly with respect to the resources from
the territory of another state to prevent domination and enhance the principles
of self-determination.377 States that do not have sovereignty over their natural
resources may be assumed vulnerable to the possible erosion of their sovereignty.
At the Bretton Woods conference, it appeared that the negotiators took
cognizance of the principle of state sovereignty, the basic law of all nations, in
drafting the Articles of Agreement that established the extent of the conferring
states sovereign powers on the World Bank and the IMF.
While some of the essence and legal significance of state sovereignty is to
enhance the doctrine of self-determination, to prevent domination, slavery and
the wars prevalent before the norm came to stay, the Articles of Agreement are
meant to draw a line such that state sovereignty may not be eroded. Apart from
the Articles of Agreement acting as a check on the activities of the institutions,
they are also seen as evidencing the legality of the institutions possession of
sovereign powers, which ordinarily should be the exclusive preserve of the
independent states.
It can be argued that the exercise of sovereign powers by the World Bank and
the IMF are not derived from the Articles of Agreement alone; Article 104 of
the UN Charter makes an express grant of powers to international organizations,
including international treaties, along the principles of international law under
which the institutions were established. Generally, states have inherent sovereign

376 Article 1 (2) of the UN Charter, UN Resolution 2625 (XXV) of 24 October 1974
on Principles of International Law Concerning Friendly Relations and Cooperation
amongst states in accordance with the Charter of the United Nations.
377 UN General Assembly Resolution 1803.

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The Modern Application of Sovereignty

powers,378 but the WB and the IMF as international organizations established by


these states379 under international law can perform these powers.380

3.9 conclusion
The essence of the legal significance of sovereignty seems to be self-determination
in political, economic, social and cultural objectives, although sovereignty may
go beyond the recognition of collective states rights; sovereignty may pass
to the electorates at the individual level who confer these rights on the elected
governments. While the essence of sovereignty can be said to be independence,
the legal significance can also be described as rights based on self-determination
with which other states are precluded from interfering.
The doctrine of sovereignty that became the world order commenced from the
Westphalia Treaty of 1648 after over 30 years of war, because of the need for world
peace and security. The transformation and qualifications continued. Although
some developing countries took undue advantage during the course of reforms
in the application of the doctrines of sovereignty, the issues were nevertheless
resolved by the UN, who delivered the new world legal order with its declarations
essentially based on the UN Charter.
The achievements and successes recorded by the doctrine of state sovereignty
underplayed the chequered history and difficulties during the period of its
evolution, qualification, transformation, and reforms. The effects of state
sovereignty are that: states are precluded from interfering in the domestic affairs
of another state; the frequent wars which were prevalent before the realization
of the concept ceased; it can be claimed that the notion of state sovereignty has
promoted a relatively sustainable peace and security in the world. Although the
effects of state sovereignty are well appreciated by the independent states, there is
still a need for cooperation among states and the prevention of events that led to
the Great Depression of the 1930s and thence to the establishment and delegation
of some specific sovereign powers to the WB and the IMF.

378 Crawford, J., The Creation of States in International Law (1979) pp 23-4.
379 Arab Monetary Fund v Hashim and Others (1990) 1 All ER p 690 where the court held
inter alia that the Arab Monetary Fund has international legal personality
380 Reparation of Injury Case, ICJ Report (1949) p 178.

77

Chapter 4

Political and Economic


Background to the WB and the IMF

he journey to the Bretton Woods conference, leading to the exciting and


well-crafted World Bank and IMF, started long before 1944 when they were
eventually established. The final draft and decision to establish the institutions
was reached in June 1943 with the USSR representing most Communist
countries, with a political and economic ideology different from that of the US
and other countries whose ideologies were based either in a neo-liberal or a
mixed economy.381 The active involvement of the USSR towards the end of the
negotiations led to the change in the names of the institutions, agreed before their
participation, from Inter-Allied Bank to World Bank and Inter-Allied Stabilization
Fund to International Monetary Fund. The reasons for these changes hinged on
the attribute of state sovereignty and world peace.382
Disturbed by the unregulated former economic order, particularly the
unhealthy competition amongst states with the attendant consequences on
barriers to world trade, the World Bank which after establishment had five
affiliates: the International Bank for Reconstruction and Development (IBRD);
the International Financial Corporation (IFC); the International Development
Association (IDA); the Multilateral Investment Guarantee Agency (MIGA);
the International Centre for Settlement of Disputes (ICSID), and the IMF were
established and institutionalized with permanent structures and conferred with
the limited inherent sovereign powers of states.
Before the commencement of the institutions, the need for states to guide their
inherent sovereign powers led to the promulgation of the code of conduct for the
states and the institutions in the Articles of Agreement. The code of conduct was
a topic raised by the USSR when the State Department of the US raised the issue
of the conditionality to be attached to the use of the IMF resources, along with the
need for members to surrender a portion of their sovereign powers with respect to
foreign exchange rates and regulations in order to enable the IMF, in particular, to
381 Horsefield, K.J., The International Monetary Fund 1945-1965 Vol. 1 (1969) p 33.
382 Harrod, R.F., The Life of John Maynard Keynes (1951) p 443.

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Political and Economic Background to the WB and the IMF

be effective.383 The WB and the IMF were established to prevent the recurrence of
the events that led to the stock market crash of the 1929 that in turn led to the great
depression thence, substantially, to WW II.384

4.1 the great economic depression


The great depression actually started on 29 October 1929 when virtually the
whole world suffered an enormous downward drop in output and a total decline
in employment. The US, Britain, Canada, and France, formerly the largest world
economies, lost their real economic output and income per capita dropped
below 29 per cent in most of these nations.385 There are several explanations and
indices which contributed to the great depression, but the most common was the
confluence of too many short-sighted and contributory factors, originating in the
US,386 including central bank policies, historical factors, and political decisionmaking.
The 1929 stock market crash was the beginning of the Depression. Before
the crash, the stock market had been an important source of funding for major
industries. There was a realization that it was cheaper to borrow and invest in the
stock market (margin investing) as stock worth of $10,000 could be bought for
only a $1,000 down payment and the rest borrowed. This unrealistic approach
of artificially low interest rates and a false booming economy led individuals and
organizations to stretch their resources further than ever and invest in over-priced
stocks, thereby resulting in soaring mergers and acquisitions.387
This speculative frenzy on the stock market reached its peak on 3 September
1929 when the US dollar and the pound started competing. The US market had a
greater volume of trade than others due to the reduction in the value of the dollar
in order to attract higher exports.388 Although this could not save the situation
because the US banks had already made substantial loans to individuals and
organizations for them to invest in stock markets and other forms of businesses, the
UK now started experiencing crises. In fact, in the 1930, there were over 60 failing
banks in one month; fear gripped depositors across the country with no hope
for redemption. America witnessed the largest bank failure at the time because
383
384
385
386
387

Federal Reserve Bulletin Vol. 30 (1944) pp 436-7.


Horsefield, K.J, p 3.

Lowenfeld, F.A., International Economic Law (2003) pp 500-1.


Gylfason, T., Credit Policy and Economic Activity in Developing Countries with IMF Stabilization
Programs (1957) pp 1-5.
388 Ron, C., What caused the Great Depression of the 1930s.

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Political and Economic Background to the WB and the IMF

of its expansion into money market in the UK.389 Depositors were not insured,
many losing all their life savings; other organizations lost their money and could
not finance their activities; everyone linked to the bank now had their businesses
completely paralysed, including the banks themselves. Purely for this reason and
no other can it be argued that the money supply, which refers to the total amount
of money in circulation, should grow at the same rate as the economy: any faster
is considered as inflationary, while any slower is can be seen as deflationary. These
constitute part of the reasons informing the establishment of the Bretton Woods
institutions.390

4.2 collapse of peace and security


The Depression of the 1930s was not only economic, but also caused social and
political catastrophe throughout the world, with the US worst affected. It is not
a delusion to suggest that the world was divided into two blocs. Even within one
bloc, competition was very unhealthy. For example, while France and Britain,
belonging to the same bloc, were seen to engage in protectionism to safeguard
their respective colonies, particularly with respect to raw materials, France and the
US were seen as close allies of the UK.391
In fear of instability and insecurity, the highly industrialized nations responded
to the crisis within their domestic jurisdictions by imposing high tariffs on imports,
with the hope of increasing demand for domestically produced goods and raising
revenue from imports. The means included border restrictions on trade through
tariffs.392
This method, unfortunately, backfired. A fall in imports created unemployment
in other countries, which in response quickly invoked protectionism; the
consequences were of unemployment in the US and other industrialized nations.
Many fruitful trading relationships disintegrated; the depressed local or domestic
economy could not cope with the trend, thereby creating total insecurity. The
major concern of the industrialized nations was resumption of world trade that
had plummeted to less than 18 per cent because of the competitively high tariffs
intended to protect domestic industries.393
389 Nichols, P.M., Economic Dimensions in International Law: Comparative and Empirical
Perspectives (1997) pp 235-240
390 Ibid., p 3.
391 Gathorne-Hardy, G.M., A Short History of International Affairs, 1920-1939 (1968) p 75.
392 Trebilcock, M. and R. Hawse, Qualitative Restrictions in The Regulation of International
Trade (2001) p 29.
393 Jackson, J.H., International Economic Relations, Cases and Materials, (1977) pp396-398

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Political and Economic Background to the WB and the IMF

Factors which can be alleged to support the collapse of peace and security
within citizens of the nations include the over-estimated economic euphoria
of the 1920s; the monetary policy pursued by the Federal Reserve in the period
1930-1933; the sudden rise of global protectionism leading to the collapse of world
trade; the lack of an adequate social and unemployment insurance; the lack of
social security, and the fact that the welfare programme gave people neither peace
and the feeling of security.394 As the misery continued amid dwindling incomes,
business failure soared. Most European nations, who had not yet recovered from
World War I, were worst hit.395
It was therefore a time of massive insecurity among peoples and governments,
contributory to the tensions that brought about World War II. Ironically, the
extensive and massive military expenditure for the war provided the economic
stimulus that ended the depression in the US and in other countries, even though
some were still ravaged by war.396

4.3 the impact of reform on world trade


The steps taken in order to cure the Depression had a serious impact on
international trade, unpalatable for domestic economies too. The protectionist
measure had its own disadvantages, as it reduced the volume of international trade.
The imposition of tariffs, setting quotas on foreign imports and other restrictive
measures equally attracted a negative response from other nations. It is therefore
argued that this alone is sufficient to create political, economic and social barriers
to trade.397
However, despite these measures, including other government regulations
and massive public works in the US especially to promote speedy recovery,
unemployment and economic stagnation continued with 20 per cent of the
workforce without jobs until the outbreak of World War II in 1939. The reform
produced economic, political and social rivalry amongst nations; it also
encouraged under-cutting and intrigues that also contributed to Word War II,398
but it can be said that state sovereignty was sacred and rigidly guarded. There

394 Layth, op. cit .p 8.


395 Jackson, op. cit.
396 Swados, H., The American Writer and the Great Depression (1966).
397 Snyder, F. and P. Slinn, International Law of Development: Comparative Perspectives (1987)
p 41.
398 Swado, op. cit. p 2.

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Political and Economic Background to the WB and the IMF

were no cooperative economic and developmental institutions to dilute the


apprehensive aggression of states in protecting their sovereignty.399

4.4 the positive effect of world war


ii on the us economy

The beginning of WWII ended the Depression in America. As the request for a
supply of arms flooded the country it generated multiplier effects; other sectors
began the journey towards recovery as the war continued in Europe. Soon after the
US entered the war in 1941, the Depression ended completely, while in Germany
the economic distress which brought Adolph Hitlers rise to power in 1933
provided the Nazis with public works projects for the expansion of ammunition
production; this in itself revived Germanys failing economy in 1936.400
Finally, while it can be argued that the Great Depression started in the US
because of weakness, imbalance, a boom mentality and speculative euphoria
occasioning the stock market crash, other nations which depended on and saw
the US as a pace setter had little choice other than to fall into a slump.
The chronological foundation of the effects of the impacts experienced at the
end of World War I informed the decision to plan during World War II, thus ahead
of the post-war era, leading to what we know as the Bretton Woods institutions.

4.5 the urge to establish the institutions


The urge to establish these institutions was born out of the post-WWI experience
yet during WWII. Stakeholders wanted no repeat of the post-WWI experience,
and so determined to design a blueprint removing the possibility of a further
world economic crisis; more importantly, the fall in the prices of raw materials
orchestrated the revaluation and devaluation of exchange rates.401
Countries likely to win WWII constituted two committees, namely, the White
Plan: named after Harry Dexter White of the US, and the Keynes Plan, named after
John Maynard Keynes of the UK, as early as in 1941, to fashion ways of preventing
a recurrence of the earlier events. The Keynes Plan suggested an international
clearinghouse under an umbrella of a union equivalent to that of a central bank,
where exchange rates will be fixed and can only be changed with the express
399 Mohammed, B. Unorthodox Reflections On The Right To Development in Snyder F. and P.
Slinn, op. cit. p 87.
400 Ibid., p 3.
401 Horsefield, J.K., The International Monetary Fund, 1945-1965 Vol. III (1969) p 119.

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Political and Economic Background to the WB and the IMF

permission of the governing body of the union.402 The White Plan recommended
what are today called the World Bank and IMF, with a number of purposes, vetted
and aggregated into Articles of Agreement by delegates to the conference in
New Hampshire, US. Although the drafts made by Keynes and White remained
secret and were made public only in early 1942, when the French and Canadian
authorities contributed to the intergovernmental mechanism enjoyed today by
the institutions.403
The consultation was expanded by the US government to other countries
towards achieving wider and greater acceptance by prospective member states.
To this end and at the insistence of the US, a series of inclusive meetings were
held where the two committees harmonized their recommendations towards
the planning of the conference. The most urgent task was to encourage most
members to accept the constitution of a single central regulatory body to ensure
and enforce compliance with the rules of law, with particular respect to exchange
rate regulations likely to affect the free flow of world trade.404
Surprisingly, the meeting was well attended, considering the fact that the war
had not actually ended because besides the US, Australia, Belgium, Brazil, Canada,
Chile, China, Cuba, France, Greece, India, Mexico, Norway, the USSR, the
Netherlands and the UK, countries at the inaugural drafting meeting, were all still
deeply involved in WWII. In this exclusive meeting, the all-inclusive meeting was
planned; the participants equally proceeded to Bretton Woods in New Hampshire
to meet other delegates. Those who attended the Atlantic Charter meeting where
the preparatory meeting was held proceeded from there to the Bretton Woods
Conference for an enlarged meeting involving many other countries. It has been
observed that the charting of a new world economic order started from the point
of the decision of the select few who decided to meet the larger congregation at
Bretton Woods.405
At the conference, there were substantial trade-offs and negotiations towards
reaching a compromise for the benefit of most countries, including those not in
attendance at the conference.

402 Robertson, D.H., The Post-War Monetary Plans, Economic Journal Vol. III (1943) p 358.
403 Havnevik, K., The IMF and the World Bank, Seminar Proceedings (1987) p 9.
404 Gold, J., The International Monetary Fund in International Law, IMF Pamphlet Series
No. 4, Washington DC (1965) p 8.
405 Ibid., p 9.

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Political and Economic Background to the WB and the IMF

4.6 negotiations at the conference


In order to ensure the success of the conference and the enthusiasm to extract
maximum commitments from the delegates, the US and the UK modified some
recommendations in the draft paper of the WB and the IMF. The draft paper also
contained an undemocratic voting arrangement where the US would maintain
the majority and veto voting power to block any decision which might not
be in the furtherance of the sustaining of the organizations: the headquarters
of the institutions were to be sited in Washington DC; national debt was to be
redeemable only in gold; the gold could be convertible only into dollars; all
exchange rates were to be fixed only in dollars. The result would have been a dollar
global hegemony.
However, it was it was finally decided that the number of votes controlled
would depend on the amount of resources contributed towards the establishment
of the institutions. Of course, it was clear that the US, not ravaged by WWII, would
be the only country able to make substantially greater contributions than other
countries. It should be noted that the war mostly affected Europe; none of the
countries in Europe would have been able to afford the contributions that the US
were willing to make at the time.406
According to views expressed by some commentators,407
The US played a unique role for the establishment of the IMF. It undertook
crucial responsibilities as guarantor of the fixed exchange rate system, but
their intense interest sometimes bordered on proprietary interest. More
than any other member, the US has viewed the IMF as an instrument of
its foreign policy.408
The veto power over major policy decisions has been an important
instrument in the hands of the US. The proximity of the IMF headquarters
to the US Treasury has also added to the day-to-day influence of the host
country.409
This view may be biased because most industrialized countries in Europe
reaped the benefits of the institutions from the outset, including the permanent
occupation of one the chief executives. Considering that Marshall Plan was to
406 Ibid., p 12.
407 Danaher, K., Ten Reasons To Abolish the World Bank and the IMF (2001) p 27; Korner, P.,
The IMF and the Debt Crisis: Guide to Third World Dilemmas (1987) pp 1-3.
408 Houtven, L.V., Governance of the IMF: Decision Making, Institutional Oversight, Transparency
And Accountability, IMF Publication (2002) p 42.
409 Ibid.

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Political and Economic Background to the WB and the IMF

commence immediately, it seemed self-evident that the position of the chief


executive of the World Bank, designed to handle such a function, should be held
by the US to maintain impartiality and accountability. This explains why the
leaderships of the institutions have been alternating between Europe and the US,
and why the president of the World Bank has always been American, viz:
World Bank Presidents/CEOs from inception:
Eugene Meyer ( June 1946-December 1946).
John J. McCloy (March 1947-June 1949)
George D. Woods ( January 1963-March 1968)
Robert S. McNamara (April 1968-June 1981)
Alden W. Clausen ( July 1981-June 1986)
Barber B. Conable ( July 1986-August 1991)
Lewis T. Preston (September 1991-May 1995)
James D. Wolfensohn (1995-June2005)
Paul Wolfowitz ( June 2005-present).
All the past and current chief executives of the World Bank are citizens of the
US whereas the IMF CEO/Managing Director is dominated by Europeans, viz:
Camille Gutt, Belgium, 6 May1946 to 5 May 1951
Ivar Rooth, Sweden, 3 August 1951 to 3 October 1956.
Per Jacobsson, Sweden, 21 November 1956 to 5 May 1963.
Pierre-Paul Schweitzer, France, 1 September 1963 to 31 August 1973.
H. Johannes Witteveen, the Netherlands, 1 September 1973 to 16 June 1978.
Jacques de Larosiere, France, 17 June 1978 to February 1987.
Michael Camdessus, France, 16 January 1987 to 14 February 2000.
Horst Kohler, Germany, 1 May 2000 to 4 March 2004.
Rodrigo de Rato, Spain, 7 June 2004 to the present.
The apparently uneven composition of the leadership of the institutions
perhaps is likely to create concern as to the applicability of sovereignty equality of
member states within the institutions.

4.7 dominant and facilitating influence


at the conference

Credit should be given to the US for initiating and undertaking the leadership
role towards establishing these institutions;410 however, throughout WWII they
envisaged a post-war economic order enabling them to penetrate markets that
410 Houtven, L.V., op. cit. pp 41-42.

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Political and Economic Background to the WB and the IMF

had been previously closed to other currencies. Trading blocs as well would open
up opportunities for foreign investment for the US corporations by removing
restrictions on the international flow of capital, so in as much as the US helped the
worldwith the assistance of the UKit was equally to their advantage because of
their necessity for a market for their corporations. 411
They set out many ambitious goals for the post-war period even before they
entered into WWII. That is why it was alleged that the US affirmed the right for all
nations to have equal access to trade and raw materials in the Atlantic Charter, thus
even before the Bretton Woods conference. The US called for freedom of the seas,
their main principal foreign policy since Britain and France had threatened their
shipping policy in 1790, the disarmament of aggressors, and the establishment of a
wider and permanent system of general security.412
However, because the UK and France had been economically exhausted by the
war they were naturally forced to accept the US leadership; this was even more
pressing when the UK and France needed to finance their respective domestic
production in order to boost their international trade and raise foreign exchange.
In fact, even before WWII they realized that they could not compete with the US
in an open marketplace and attempted to create their own market bloc to force out
the US. The watered-down free access clause entailed a loss of face for the UK and
France, before they signed the Atlantic Charter.413 The US took advantage of this
weakness and broke up the world-wide trading empire that had been dominated
by the UK in the nineteenth century.414
A devastated UK had no choice because two world wars had destroyed their
major industries; they were forced to import foods and other raw materials for
production except coal. They had no choice but to ask for 3.8 billion dollars in
aid in 1945, to which the US agreed, also renegotiating the loan thereafter. The
next major world trading country after the UK was France, with whom the UK
had for nearly two centuries clashes of interest in both the old and the new world
economic order as they tried to protect their colonies from the extreme capitalism
of the US.415
While France was apprehensive about its sovereignty, particularly with the
protection of its colonies from outside intervention, a humbled France asked
the US for a loan of one billion dollars in 1945 and in return promised to curtail
411 Young, J.P., Developing Plans of an International Monetary Fund and World Bank,
Department of State Bulletin Vol. XXIII (1950) p. 786.
412 Ibid., p 4.
413 Bordo MD and Eichengreen BJ A Retrospective on Bretton Woods System (1993) p. xi.
414 Scammell, op. cit., p 201.
415 Gathorne-Hardey, A Short History of International Affairs 1920-1939, Fourth edition
(1968) pp 263-65.

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Political and Economic Background to the WB and the IMF

government subsidies and currency manipulation that had given its exporters
advantages in world trade.416
The US has, therefore, politically and economically subordinated in recent times
nearly the entire world with the crash of the Soviet hegemony in Eastern Europe.
The confluence of these favourable political circumstances: the concentration of
power, the cluster of shared interests and ideas, and the political hegemony of the
US provided the task of establishing the Bretton Woods institutions and managing
the world economy with the common aim of preventing a third world war, led to
the peaceful and the new world economic order. The facts above can therefore
explain the reason for the domination of the US during the conference. However,
in drafting the Articles of Agreement of the organizations, all nations were given
the same equal sovereign status in accordance with the UN Charter.417

4.8 the articles of agreement


The participants and the delegates drafted the Articles of Agreement of the two
institutions at the conference after intense negotiations, lobbying, bilateral
agreements and compromise. Whereas the reasons for the establishment of the
institutions have been discussed above, this section of the study discusses the
Articles of Agreement that spelt out clearly the purposes and functions of the
organizations as agreed at the conference. As previously mentioned, due to the
observation raised by the USSR with respect to both the code of conduct and
the issue of state sovereignty, the Articles of Agreement specifying the object
clauses and the modus operandi were drafted and ratified before the institutions
commenced their activities.

4.9 the imf


The Articles of Agreement were adopted at the conference on 22 July 1944 and
entered into force on 27 December 1945. They were amended on 28 July 1969
by a modification approved by the Board of Governors in Resolution No. 314, adopted 30 April 30 1976 and subsequently amended again on 11 November
1992 by a modification approved by the Board of Governors in Resolution
No. 45-3, adopted 28 June 1990.418 It can be argued that because the IMF is the
416 Ibid., p 4.
417 Articles 1 (2) of the UN Charter.
Brownlie, I., Principles of Public International Law, Third edition (1979) p 287.
418 Selected decisions and documents of the IMF, concerning the Articles of Agreement,
p 1.

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Political and Economic Background to the WB and the IMF

more technical and highly complex organization of the two institutions, at the
conference, greater effort and attention were paid to the IMF actually because it
is a vehicle for engineering international trade. Apart from clearly defining the
purpose and functions of the institutions, features such as the conditions for
quota subscriptions; obligations regarding exchange arrangements including
surveillance over exchange arrangements; par value and separate currencies
within members territories; the operation and transactions of the fund status, and
immunities, which also includes the extent of their limitations and jurisdiction,
are also clearly defined.419
The purposes of the IMF as unambiguously elucidated in the Articles of
Agreement are:
(i) To promote international monetary cooperation through a permanent
institution that provides the machinery for consultation on international
monetary problems;
(ii) To facilitate the expansion and balanced growth of international trade, and
to contribute thereby to the promotion and maintenance of high levels
of employment and real income and the development of the productive
resources of all members as primary objective economic policy;
(iii) To promote exchange stability, to maintain orderly exchange arrangements
among members, and to avoid competitive exchange depreciation;
(iv) To assist in the establishment of a multilateral system of payments in
respect of current transaction between members and in the elimination
of foreign exchange restrictions that hamper the growth of world trade;
(v) To give confidence to members by making the general resources of the
Fund temporarily available to them under adequate safeguards, thus
providing them the opportunity to correct maladjustments in their
balance of payments without resorting to measures destructive of
national or international prosperity, and
(vi) In accordance with the above, to shorten the duration and lessen the
degree of disequilibrium in the international balances of payments of
members. The Fund shall be guided in all its policies and decisions by
the purposes set forth in this Article.
The application of these purposes has been properly guided to conform to
the principles of public international law, which provided a soft landing for the
developing nations to accept and ratify the Articles of Agreement. However, it
has been argued, as will be demonstrated, that adequate safeguards has been
interpreted to include meddling in the internal affairs of member states; such a
419 IMF Articles of Agreement adopted on 22 July 1944.

88

Political and Economic Background to the WB and the IMF

move does not appear consonant with the contemplations of the principles of
sovereignty in public international law. Some provisions have been included to
check any possible incursions into such an area guarded by public international
law.420
The essence of these functions of the institutions with permanent structures,
lacking in old economic order when states were at liberty to determine their
exchange rates, is to maintain international peace, thereby preventing wars caused
by the previous unhealthy competitive currency depreciation. Any areas likely to
be ambiguous were clearly detailed and simplified in the Articles of Agreement,
for instance, the par values arrangement,421 operations and transactions of the
Fund,422 special drawing rights, quotas and termination of participation.423
The Articles of Agreement established a three-tiered department within
the institution, consisting of the Board of Governors, Executive Board and the
Managing Director who presides over the affairs of the institution;424 they owe
no allegiance to any individual or authority except the Fund.425 This provision
was inserted to obliterate any partiality or undue influence on those charged
with the responsibility of running the permanent institution426 and who serve as
coordinators and advisers to member states on monetary and financial problems.
The member states are obliged to inform them of any problems regarding their
balance of payment accounts. This requirement of notice to the Fund of any
financial or monetary problems is a statutory requirement.427 The code of conduct
is meant to impose legal obligations on member states to prevent repetition of
the causes of the Great Depression and of World War II. This explains why it is
mandatory in the original Articles of Agreement for a member to accept all of the
obligations under the Articles of Agreement before full membership is accorded.428
It is therefore not a question of choice but a compulsory requirement,429 as is the
carrying out of the exchange policy as provided in the Articles of Agreement.430

420
421
422
423
424
425
426
427
428
429
430

Articles 1(v), 2(4) and (7) of the UN Charter.


Article IV (4) IMF Articles of Agreement
Article V (1)-(12) IMF Articles of Agreement
Articles III, VIII, XV and XXVI IMF Articles of Agreement.
Article XII, IMF Articles of Agreement
Article XII (4) IMF Articles of Agreement
Dam, Kenneth W., The Rules of the Game: Reform and Evaluation in the International Monetary
System (1982) pp 13-40.
Article VIII (5) of the IMF Articles of Agreement.
Articles XX (2) and XXXI (2) of IMF Articles of Agreement
Article IV (4)(a) IMF Articles of Agreement.
Article IV (3) of IMF Articles of Agreement.

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Political and Economic Background to the WB and the IMF

Code of Conduct for Member States


As has previously been mentioned, the removal of barriers to world trade is the
primary function of the IMF. It is the cardinal function as every member state
depends on international trade to generate foreign exchange and provide reserves
for their state. Therefore, the orderly and peaceful transaction in foreign exchange
will be to the advantage of all and sundry. For this reason the code of conduct has
been established and enshrined in the Articles of Agreement to ensure compliance.
Firstly, the Articles of Agreement provide that no member state shall without the
approval of the fund impose restrictions on the making of payments and transfers
for current international transactions431 and engage in any discriminatory currency
arrangement except as approved by the Fund.432 It has been argued that once any
member ratifies the Articles of Agreement there is no going back with respect to
the code of conduct.433 All payments in connection with foreign trade, current
normal business transactions, short-term and long-term banking facility services,
payment due as interest on loans and as net income from other investments, and
moderate remittance for family living expenses are defined as payments for current
transactions; members are restricted from interfering with such transactions as
it may likely create a barrier to world trade.434 However, members are entirely
free to regulate the movement of capital within their territories. Scholars have
argued that this is discriminatory; it may have been inserted as a compromise for
Britain, apprehensive lest large depositors of capital sought repayment of their
investments at the end of WWII. Hence, there appears to be no legal control on
capital movement in the Articles of Agreement.435
Secondly, it is mandatory for member states to pay their contributions to
the Fund, the quotas. The amount of quotas contributed helps to determine
the eligibility to access to the Funds resources before economic and political
considerations come into play. Apart from this, member states are required to
subject themselves to an obligation to pay interest and repay the principal in
accordance with the conditions as be set out in Article V of the original Articles
of Agreement dealing with adequate safeguards to the resources of the Fund in
granting loans.436

431
432
433
434
435

Article VIII (2)(a) IMF Articles of Agreement


Article VIII (3) IMF Articles of Agreement.
Lowenfeld, A., The International Monetary System, Second Edition (1984) pp 80-9.
Edwards, Richard W., International Monetary Collaboration, (1985) pp 394-6.
Gold, J., Internal Capital Movements under the Law of IMF, IMF Pamphlet Series No
21 (1977) pp 16-17; 43-45.
436 Article V of the IMF Articles of Agreement.

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Political and Economic Background to the WB and the IMF

The code of conduct includes some behavioural standards in international


financial matters; exchange rate stability; orderly arrangements; the avoidance
of competitive exchange, and a regime of international payments with simple
convertibility of currencies and freedom from exchange restrictions. These
are viewed as essential to the attainment of full employment and promoting
world trade and international investments, dissimilarly to in the past when
national economic policies adopted restrictive measures that created barriers to
international trade and investment.437
Members were made to understand that the arrangement was not just an
emergency agency to meet the temporary needs associated with the aftermath
of war; the IMF is a permanent institution requiring international cooperation
since it shares the exclusive sovereignty of states with respect to foreign exchange
regulation. It can be said that at the establishment of the institutions, particularly
with respect to the IMF, foreign exchange regulations and international interest
rates take precedence over national interests.438439

4.10 the world bank


Four affiliate agencies were established later, i.e., the International Finance
Corporation (IFC) in 1956; the International Development Association (IDA)
in 1960; the Multilateral Investment Guarantee Agency (MIGA) in 1988, and
the International Centre for Settlement of Investment Dispute (ICSID) in 1960.
The original reasons for the establishment of the WB are, though, to provide the
means and power adequate to provide the capital necessary to aid economic
reconstruction of the Allied countries, to facilitate rapid and smooth transition
from a war-time to a peace-time economy, and to provide short-term capital
necessary to increase the volume of world trade. The full participation of the USSR
occasioned the removal of the term Inter-Allied with its replacement as World
Bank, which, in effect, removed the discriminatory perception of the intended
name. The establishment of the affiliate agencies are not at variance with the
original purpose, yet for the purposes of this study references shall be made to the
World Bank only.
Furthermore, the establishment of this institution was as a result of a
compromise by the US with the major European trading nations to allow the
establishment of the IMF, the main aim of the conference at Bretton Woods. The
437 de Vries, G.M., The IMF in a Changing World 1945-85 (1986) p 15.
438 Ragnar F. On the Need for Forecasting a Multilateral Balance of Payment, American
Economic Review, Vol. 37 No. 4 (September 1947).
439

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Political and Economic Background to the WB and the IMF

future reconstruction of areas of the Europe still experiencing war dominated


the concerns of European countries, whereas the regulation of foreign exchange
to encourage international trade and eliminate barriers to world trade was the
concern of the US.440
France and Britain, the strongest trading nations close to the US, were initially
of the opinion that there would be no level playing field, given the devastation
of Europe during the war. A need for a permanent institution to regulate foreign
exchange transactions in international trade and remove the barriers associated
with it, alongside a corresponding institution whose duty would be to offer loans
and engage in reconstruction of the war-torn areas, particularly the Western Europe,
therefore became apparent. The decision to address the issue of reconstruction of
war-torn areas in the Western European nations resulted in what is today known
as World Bank. 441As has been already mentioned, it is alleged that it became
apparent, through an unofficial memorandum of understanding, that the US
who were not intended to benefit immediately442 and were to make substantial
contributions towards the share capitalshould become chief executive of the
World Bank, whereas the IMF should be headed by a European.443
The success of the Marshall plan and the strict compliance with the code of
conduct in the Articles of Agreement with particular reference to state sovereignty,
quickened the acceptance of the institutions by non-members.444 The World Bank
demonstrates a capacity unusual among international institutions: to break loose
from a well-established ideological framework of a lending pattern, which can be
regarded as quixotically generous.445
Functions and Purposes
The purposes of the World Bank are:
To assist in the reconstruction and development of territories of
members by facilitating the investment of capital for productive purposes,
including the restoration of economies of destroyed or disrupted by war,
the reconstruction of productive facilities to peacetime needs and the
encouragement of the development of productive facilities and resources
in less developed countries.;
440 Keynes, M.K. Treatise on Money, Vol. II (1930) pp 219; 223.
441 Marquette, Heather, The Creeping Politicisation of the World Bank (2004) Vol.32
p.413-430
442 Shonfield, A., The World Bank in The Evolution of International Organization (1966) at p 231.
443 Borchardt, Knut and Christopher Buchhein, The Marshall Plan and Key Economic Sectors
(1991) pp 410-451.
444 Article IV, Section 10, and IBRD Articles of Agreement.
445 Lowensfield, op. cit., p 231.

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Political and Economic Background to the WB and the IMF

To promote private foreign investment;

To promote the long-range balanced growth of international trade and the


maintenance of equilibrium in the balance of payments;

To arrange loans made or guaranteed by it in relation to international loans


through other channels so that the more useful and urgent projects will be
dealt with first, and

To conduct its operations with due regard to the effects of international


investment on business conditions in the territories of member states.446

4.11 marshall plan


The political, economic and legal background of the WB would be incomplete
without the mention of the Marshall Plan, named after General George C. Marshall,
Chief of Staff, American Army and later Secretary of State and also known as the
Economic Cooperation Act of 1948 (ECA).447
It created confidence in the organizations, helped to feed the starving and
shelter the homeless; at the same time, it helped stem the spread of Communism
and put the European economy back on its feet.448 Thus, the success of the
Marshall plan gave the entire world the confidence and zeal to remain steadfast
with the institutions even when certain policies not necessarily or expressly
stated in the Articles of Agreement were being implemented. The euphoria of the
success of the Marshall Plan underscored the positive or negative impacts or the
implication of the institutions policies for the sovereignty of borrowing and nonborrowing states.
World Bank after the Marshall Plan and Reconstruction in Europe
The question to be asked here is whether the focus of the World Bank remained
the same after the reconstruction in Europe. There have been arguments that the
present economic order was never anticipated at the time the institution was
established, particularly with reference to the numerous developing countries
who, at the time when the institutions were established, were still being colonized
by Britain and France, yet circumstances changed when most of the developing
countries obtained independence.449
446 Article 1(1)-(V) World Bank Articles of Agreement.
447 Wexter Immanuel The Marshall Plan Revised: The European Recovery Programme in Economic
Perspective (1983) p. 10
448 Ibid., p 4.
449 Musgrave, D.T., Self-Determination and National Minorities, (1997) pp 127-9.

93

Political and Economic Background to the WB and the IMF

Apart from reconstruction of war-torn areas and providing infrastructure, the


WB under its Articles of Agreement was expected to finance on reasonable terms
productive projects for which other financing was not available. After extensive
an survey, they started marketing and tempting some developing countries to ask
for loans, which they were initially not enthusiastic to accept, for the purposes of
building dams and bridges, and putting into place the infrastructure for the supply
of electricity to enable the low-income countries to export raw materials such as
rubber, crude petroleum products, timber, cotton, and cocoa.
In conferring sovereign powers on the institutions, the member states as
evidenced by the Articles of Agreement require the organizations to respect the
international character of their functions by limiting their powers to the enabling
instruments.450
Lending Policies and Criteria
Apart from undertakings made by the recipient states that the money borrowed
for the purpose of accomplishing the Marshall Plan would be refunded, no further
guarantee was required to secure a loan from the WB. The Bank introduced
certain measures aimed at recovering the money owed by the BMS, even though
such new methods were not included in the Articles of Agreement. The IDA
and IFC were strengthened to perform a wider array of functions despite the
private circumstances in which they were set up. It is alleged that at the point
of commencement of this programme of lending marked the end of the era of
division of labour between the WB and the IMF.
The two sister institutions are seen in political and economic circles as performing
similar functions. They have experienced the most varied and profound changes
and innovations in all of their activities, yet the basic legal documents governing
the activities of the WB and IMF still remained unchanged. Except for the creation
of new affiliates such as the MIGA, IFC and IDA, there exist certain difficulties in
adapting the old legal text to changing circumstances, including the membership
of newly independent states.451 Policies covering the difficulties occasioned by
the changing circumstances, not even contemplated by the promoters of the
institutions and thus not provided for in their legal framework, were put in place
by the institutions management teams to enable them to allocate efficiently
the scarce available resources. The original focus and agenda of the institutions
changed after the Marshall Plan because the highly industrialized and trading
nations, the leading members of the institutions, were saturated with liquidity and
450 Article III of the IBRD.
451 Shihata, I., The World Bank in a Changing World, Vol.1 (1991) p 7.

94

Political and Economic Background to the WB and the IMF

capital inflow. As regards the sustainability of the institutions, the focus is now
directed towards the developing countries.

4.12 structural adjustment lending


Throughout the negotiation period at the Bretton Woods and the Articles of
Agreement it was nowhere mentioned that loans could be obtained to either pay
debts or to service debts, notwithstanding the interpretation of the Executive
Directors at the insistence of the US that the WB programmes are not restricted
to specific long-term projects but are also for economic reconstruction, the
reconstruction of monetary systems, and long-term stabilization loan.452 The
structural adjustment programmes and policies of the WB and the IMF may have
been created to protect and promote the efficient allocation of the available scarce
resources due to an increase in requests for funds and technical assistance by
developing countries, including the countries in Eastern Europe formally part of
the Soviet Union.
It can be said that the amalgamation of international finance and economic
cooperation implied equal cooperation between the developed and developing
countries; it thus departed from the old world economic order, where the weaker
countries depended on the industrialized ones to the formers disadvantage. This
apparent change in views led to the willingness on the part of other countries
to allow the US and Britain at the outset to assume the leadership roles in the
establishment of the institutions. It does appear that the institutions are presumed
to have been built on the principles of sovereign equality, a deviation from former
practice riddled with domination of the weaker states and divisions along the lines
of socialist and capitalist blocs.
The original intentions of the founders of the institutions were not for the
industrialized nations to maintain dominant positions or rigidity but to pursue
a more experimental approach. It was a supreme act of faith intended to give
countries the freedom to pursue their macroeconomic policies with only a minor
and limited sacrifice of their national sovereignty with respect to exchange rate
regulations.453

452 Ibid. p 23
453 de Vries, op. cit, pp 11-12.

95

Political and Economic Background to the WB and the IMF

4.13 conclusions
After careful examination of the entire process, it can be argued that the imbalances
or lapses in the selection of heads of the institutions are insignificant, compared
with not having the institutions at all. The purposes of the institutions are set out
in their legal frameworks, considered as international treaties. Prominent amongst
these purposes was the shift away from colonization and a determination to help
establish the self-determination of countries in line with the principles of the UN
Charter.454 Another visionary objective in the formation of these institutions
was a desire for human security, a concept that included universal economic and
social well being; the promotion of higher standards of living; full employment
and conditions of economic and social progress, and development in all member
states.455 In concluding this section, it can argued that while critics allege that the
institutions promote policies at variance with the tradition during the Marshall
Plan, there are also arguments in favour of these policies,456 as long as they are not
in contravention of the UN Charter.457
The veracity of this assertion will be examined in the next chapter. It has equally
been claimed that the institutions exercise little or no threat to its members, yet
there is nearly 90 per cent of compliance with their policies with no instrument
of coercion. Members realize the extreme importance of the institutions; whether
as lender of last resort or first call, access is given to members to the resources
of the institutions.458 In examining the powers of the institutions and how these
powers evolved or were acquired, some rules, laws and factors will be examined.
In addition, the position of the law of international organizations within which
these institutions fall will also be examined and analyzed; due regard will be given
to judicial pronouncements and decided cases.
The institutions, established under the principles of cooperative society,
obtained all requisite loyalty from member states. In some instances the Articles
of Agreement direct the member states to promulgate laws that promote and
respect the activities of WB and the IMF in relation to the areas contained in the
Articles of Agreement.459
The institutions were established in order to prevent the events that led to the
stock market crash of 1929, thence to the Great Depression that distorted the Old
454 Articles 1 and 2 of the UN Charter.
455 UL Haq, M., The UN and The Bretton Woods Institutions, (1995) p 3.
456 Muuka, Gerry, N., In Defence of IMF and WB: Conditional Ties in Structural
Adjustment Programmes, Journal of Business in Developing Nations (1998) Vol.2 Article 2.
457 Articles 2(4) and (7) of the UN Charter.
458 Gold, J., IMF History, (1945) Vol.1, pp 328-9.
459 Article IX Section 10 of the IMF Articles of Agreement.

96

Political and Economic Background to the WB and the IMF

Economic Order. However, the member states who promoted these institutions
were not unmindful of the principles of state sovereignty and non-intervention
in the affairs of another states, hence the Articles of Agreement evidenced all
agreements and decisions reached during and at the conclusion of the negotiations
at the Bretton Woods conference. Although the institutions have always been
headed by the US and Europe since inception, it is expected that the heads will
respect the sovereignty and international character of the member states. Any
action contrary to that will erode the sovereignty of the borrowing member states.
In line with these principles of state sovereignty, the US ceased before the end of
the Marshall Plan to hold overriding powers, yet the institutions became part of
the most powerful organizations in the world.

97

Chapter 5

The Powers of the World


Bank and the IMF

he WB and the IMF, although they exercise sovereign powers conferred


on them by member states, have the legal personality that enables them to
perform the exclusive restricted assigned sovereign acts.460 Apart from acquiring
legal personality under international law, their economic influence and that
of members of the Paris Club and the G8, most of whom are members of the
UN Security Council, attracts loyalty and goodwill to the institutions.461 An
international legal personality is accorded to the institutions by international law
to enable them to exercise the conferred sovereign powers such as execution of
contract, acquisition of movable and immovable properties.462
The events of the 1930s and the willingness on the part of most member states
to prevent the recurrence of the stock market crash and the Depression leading
to one of the major causes of the Second World War may have contributed to the
loyalty, unique privileges, and immunities, including the unconventional powers,
enjoyed by the WB and the IMF. The unconventional and non-legal powers of
the institutions are far more compelling than the conventional powers generally
conferred on international organizations by international law.
Also, it appears that the influence of these non-legally binding but intimidating
factors has a greater impact on the borrowing member states (BMS), as the
majority of the BMS are not members of the UN Security Council, Paris Club or
the G8; some of the annual budgets of the BMS may not even match two per cent
of the institutions resources.

460 Reparation Case ICJ Report, (1949) p 174.


Lauterpacht, E., The Development of The Law of International Organizations by Decision of
International Tribunals, 152 Hague Recueil (1976) p 4.
461 Feuerstein and Parry, The Status of International Organizations, (1980) p 21.
462 Article IX (2), VII (2) of IBRD; Article VIII (2) of IDA Articles of Agreement; Article
VI (2) of IFC Articles of Agreement; International Tin Council v Amalgamet Inc. 524
NYS 2d (1988) p 971,
Arab Monetary Fund v Hashim and Others (1991) All ER p 871.

98

The Powers of the World Bank and the IMF

5.1 economic influence


First of all, over 184 sovereign subscribers back up their financial strength.463 The
Annual Budget of the institutions is sometimes ten times the annual budgets of the
majority of the developing countries. They are the key provider of development
finance, in which the private sectors decline to invest because of the huge capital
requirement.464 Their net income and capital are substantially increased, while the
profits made through grants to members, particularly loans to developing countries,
are believed to carry a higher risk and the interest charged is concomitantly high.465
Particular reference needs to be made to the mandatory contributions made
by all member states to the institutions, called Member States Quotas. In the
original Articles of Agreement, these contributions could be made partly in gold
and partly in member states currencies.466 In the amended Articles of Agreement,
the contributions are made in freely convertible currencies.467 Following the
amendment in January 1999, quota contributions stood at $250 billion.468 Under
the General Agreement to Borrow (GAB) and the New Arrangement to Borrow
(NAB), the IMF put in place an ad hoc arrangement to raise more money from rich
countries, should the need arise, for the immediate use of large amounts of money.
The US, Britain, Germany, Japan, Belgium, Sweden, Canada, Netherlands, France,
and Italy fall within the first category arrangement, the GAB; the arrangement
includes even some developed and developing countries considered rich enough
to assist in the scheme of raising money in the case of emergency. These include
Denmark, Finland, Malaysia, Hong Kong, Australia, Kuwait, Saudi Arabia,
Luxembourg, and Singapore in the second category.469
It should quickly be noted here that when Saudi Arabia and Kuwait were made
the special members of the NAB, while they were still none democratic Nations.470
The stark reality is that most poor nations do not have access to sustainable
financial services, whether savings, insurance or credit; they apply to the Bretton
Woods institutions, their only hope: even when they apply directly to the private
sector, it refers them to the institutions.471
463
464
465
466
467
468
469

Article 3 World Bank Articles of Agreement; Article 3 IMF Articles of Agreement.


Griffith-Jones, S., Governance of the World Bank.
Kupur, D., Processes of Change in International Organizations.
IMF, Articles of Agreement, Article III(b) (3).
IMF Articles of Agreement, Article 3(iii)
Lowenfeld, A., International Economic Law (2003) pp 511-2.
Paul, A.V. and G. Toyoo, The Changing Fortunes: The Shaping of International Money Order
(1992) p 28.
470 Lowenfeld, A., International Economic Law (2003) p 559.
471 Anan, Kofi, Building Inclusive Financial System: Donor Guidelines, The World Bank
Publications, December 2004 Part 1, p 4.

99

The Powers of the World Bank and the IMF

It is in this respect that they are also able to influence Foreign Direct Investment
(FDI), globalization, and the elimination of world trade barriers.472 With the
subscription of shares with respect to the WB, the mandatory contribution of
quotas, it is now becoming a tradition that the institutions, as well as their regional
and branch offices in member states, now have offices in member states Ministries
of Finance. The view is that since no corresponding privilege is given to MS over
the IMF accounts, their dominance over MS will still continue.

5.2 the influence of the paris club and the g8


There is nowhere in the Articles of Agreement of the two institutions where these
bodies are recognized or mentioned; however, they are informal organizations of
creditor countries with no permanent office or established code of conduct. The
Paris Club and the G8 are comprised of highly industrialized countries, which
meet sporadically to review cases of debtor countries defaults on loans extended
to them by the institutions. The ad hoc nature of these informal organizations
and no permanent office for their operations suggest that debt rescheduling is
an extraordinary event. Were it to be institutionalized, debtor countries would
be undermining the sanctity of the contract, hoping to obtain relief instead of
working hard to put their country on a sound footing. The Paris Club has its focus
on medium-term and long-term loans owed by sovereign states to other sovereign
states, to agencies of government or to intergovernmental organizations such as
the WB and the IMF. In discussing debt relief for any country the group considers
first whether the country involved has put in place any mechanism, such as reform,
to relieve itself of the situation that led to the borrowing of money, where the issue
is based on the adjustment of the balance of payment. It is therefore viewed that
debt relief is applicable only if the debtor country adheres to the discipline of
adjustment.473
There is a view that most policies of the World Bank and the IMF originate
from this powerful informal body.474 For instance, the Paris Clubs decision on
debtor countries of 20 June 2006 regarding the rescheduling of debt relief became
a blueprint for the WB and the IMF.475 However, the claim of the Paris Club is
that it proposes no economic programme relating to adjustment, but makes debt
relief contingent upon compliance with a stand-by arrangement with the IMF,
472
473
474
475

Ibid., p 7.
Lowenfeld, A., International Economic Law (2003) p 625.
Ibid, p 626.
World Bank Press Release No. 2006/301/AFR; World Bank/IMF Press Release 10 July
2006; IMF Press Release 12 April 2002.

100

The Powers of the World Bank and the IMF

usually involving borrowing in the upper credit tranches and subject to very strict
conditions.476 It should be noted that where there is no stand-by arrangement or
strict reform in the form of conditionality in place, the Paris Club may not be
favourably disposed to granting debt relief. This is to ensure prudent use of the
resources made available either through private sector borrowing and guarantee
or a loan directly from the Bretton Woods institutions.
An examination of the activities of the Paris Club indicates that they exercise de
facto powers within the institutions and determine the conditions applying to the
borrowing member states.
The Articles of Agreement of the WB and the IMF denounce interference in the
political affairs of member states,477 but comments have been made that political
considerations form an integral factor in considering whether a state is eligible for
debt rescheduling or outright cancellation of debt, as democracy forms one of the
major considerations in granting the institutions facilities to any country.478
The contributions of the Paris Club, according to scholars, can be viewed
from three perspectives it helps to enforce compliance with stand-by regulations,
encourages reforms including adjustment programmes, and shows a willingness
to assist the developing countriesas long as they comply strictly to the reform
guidelines and conditions towards sustainable development.
Finally, the Paris Club, founded in Paris in 1956,479 is an informal group
of creditor countries with no permanent members; they function under the
principles of general consensus and burden sharing. Their real influence was not
felt until the 1980s and the early 1990s, with the concurrence of the debt crisis in
most of the worlds developing countries. The view is that it is one of the most
important debt relief agencies for the less-developed and developing countries,
focusing on rescheduling terms, their evolution, and the explanation of how
they are applied to concessional bilateral aid debt and non-concessional bilateral
debt, including the distinction. The Paris Clubs decision on tsunami-devastated
nations regarding debt delay and cancellation is also reflected in the policies of the
institutions.480 Furthermore, it also discusses the implementation of the reform
agenda with the aim of ensuring compliance with stand-by arrangements. The
powers and influence of this group on the Bretton Woods Institutions is therefore
not in doubt.481
476 Ibid., p 625.
477 Article IV Section 10 World Bank Articles of Agreement.
478 IMF Press Release on Zimbabwe 7 July 2004; IMF Press Release 17 September 2006.
479 Lowenfeld, op. cit .624-625
480 World Bank Press Release 7 January 2005.
481 Club de Paris.

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The Powers of the World Bank and the IMF

5.3 the influence of the group of eight (g8)


Each year the Group of Eight (G8), comprised of the leaders of the eight richest
countries (the US, the UK, France, Germany, Canada, Japan, Italy, and Russia),
meet to agree on their course of action on major global issues, with particular
focus on economic issues. Initially formed in 1975 to discuss the oil crisis, the G8
wields considerable political and economic power over international institutions,
controlling 48 per cent of the votes at the International Monetary Fund (IMF) and
46 per cent of the votes at the World Bank. In addition, the G8 countries include
four of the five veto-holding members of the United Nations Security Council and,
in 2000, controlled over two thirds of the global economy. The G8 has become
one of the most important international policy-making bodies, with officials and
ministers from G8 countries meeting regularly throughout the year outside of the
annual summits.482
However, the G8 maintains fierce secrecy and limited public documentation,
releasing only a single communiqu after each summit. Despite its considerable
power and influence, the G8 is an informal club with no official designation and
is not accountable to anyone. The G8 has often expressed concern for the poor,
reiterating such sentiments as this, released at one of the first meetings in Tokyo:
We are deeply concerned about the millions of people still living in conditions
of absolute poverty.483 This statement was made by the G8 members over their
concern to improve the living conditions and economic activities of the borrowing
member states. They intervene when the borrowing members debts are becoming
unserviceable, leading to stagnation of their economies. However, they repeatedly
take actions that exacerbate those conditions.484
Apart from their influence as industrialized countries, arguments point to the
fact that since the majority of its members are equally members of the UN Security
Council, political considerations, prohibited to the WB and the IMF, are likely to
be applied to enforce loyalty to the values of the industrialized countries. Also,
it is being argued that because they freely operate independently without any
subjective rules requiring the compliance of a particular guideline, they undertake
coordinated intervention in instances where it is agreed that such intervention
could be helpful and pose no economic problems to debtors and creditors alike.485
The involvement of this group is said to be humanitarian even though there are
contrary arguments. One fact that cannot be denied is that members of the G8
482
483
484
485

G8 Talking Point.
Sunderland, L., Agenda for G8 Meeting in Tokyo, 18 January 2006.
Ibid.
IMF Survey, 13 June 1983 p 171.

102

The Powers of the World Bank and the IMF

are the highest donor countries, with most MNCs coming from the countries of
the group.
Apart from debt rescheduling, the G8s influence extends to export promotion,
development assistance, military debt, and the cancellation or imposition of
sanctions on defaulting or erring member states through formalized institutions
such as the WB, the IMF or the UN, where the majority of G8 members occupy a
Security Council seat. Also, favourable debt relief or cancellation from the G8 can
constitute a benchmark for similar treatment from other creditors.486
The view is that this group can initiate unconventional moves to amend the
Articles of Agreement of the WB and the IMF, it is equally on this strength that
critics of the institutions assume that the G8 exercises control over the Bretton
Woods institutions. The answer to the question as to who controls the Bretton
Woods institutions can be inferred from these analyses above. Apart from
adopting reforms as set out in the performance criteria or conditionality, another
form of pressure for debt relief, including political considerations, is lobbying. For
example, there was an intensive lobby from Nigeria to her creditors for debt relief,
which eventually became a reality.
The group referred to as the G8 is seen as retaining a name that already has
acquired an identity; it does not, though, follow that the countries involved are
merely eight: it may exceed that number. For instance, Nigerian creditors referred
to as being in the G8 or Paris Club number nineteen. This group of 19 are members
of the Paris Club and they unanimously agreed to write off 60 per cent of the debt
owed by Nigeria as follows: United Kingdom, eight billion dollars; France, 6.25
billion dollars; Germany, 5.29 billion dollars; Japan, 4.45 billion dollars; Italy,
1.98 billion dollars; the Netherlands, 1.71 billion dollars; the US, 984.5 million
dollars; Austria, 571.75 million dollars; Belgium, 608.2 million dollars; Denmark,
571.75 million dollars; Finland, 3.99 million dollars; Spain, 249.5 million dollars;
Switzerland, 201 million dollars, and the Russia Federation, 36.97 million dollars.
The group agreed to cancel 60 per cent of these debts at a meeting held in Paris
after an intensive lobby by the debtor country, Nigeria.487

5.4 the legal framework


The legal framework of the WB and the IMF are founded in the Articles of
Agreement regarded as international treaties. In an examination as to the effects
of non-compliance with these treaties or international agreements, even if the
Articles of Agreement can be viewed as a bilateral agreement, it must be asked
486 Sunderland, L. Op. cit p.24
487 Okonjo-Iweala, N., Nigeria to Pay 12.4 Billion Dollars Debt.

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The Powers of the World Bank and the IMF

what the effects of default may be. On the other hand, if the Articles of Agreement
are viewed as multilateral agreements, what are the effects of non-compliance or
withdrawal from such commitments, particularly when they have been ratified?
By the time these questions are answered, an inference would have been made as
to the institutions possessing the powers to direct and impose policies which must
be complied with by the borrowing member states.
Bilateral and multilateral treaties are regulated by international law. The Articles
of Agreement are regarded as treaties and states are bound by them488 (pacta sunt
servanda).489 Also, because a treaty (which in this case denotes the Articles of
Agreement in accordance with Article 26 of the Vienna Convention of 1969) is
binding, a member cannot invoke the provisions of its own internal law to avoid
unfavourable obligations or to escape its responsibility under any provisions in
the Articles of Agreement;490 this very fact makes the institutions very powerful.
The principle of compliance with a treaty or international agreement has been
amplified and confirmed by the courts.491
The Articles of Agreement are viewed as more powerful than the internal laws
of member states in the concurrent areas where there are inconsistencies; new
entrants to the institutions by various decisions of courts of competent jurisdiction
are bound by the Articles of Agreement. For example, in the decision in Federal
Republic v The Netherlands, popularly known as the Continental Shelf Case, although
the Federal Republic of Germany claimed that they had not ratified the provision
of Article 6 of the Geneva Convention, yet the court held that they were bound
by it.492 Scholars reasoned that states cannot question or refuse to abide by the
policies or Articles of Agreement of the institutions493 hence it is not common to
find States disputing the contents of the Articles of Agreement of the institutions.
However, it has been argued that minor disagreement will be interpreted in good
faith.494 The provision in itself gives the Bretton Woods institutions legal powers
over old and new members. Also, for the following reasons, the view is that it is
difficult for a state to renounce its membership on account of uncomfortable
policies of the institutions.

488
489
490
491
492

Article 2 Vienna Convention on the law of Treaties 1969.


Article 26 Vienna Convention on the Law of Treaties 1969.
Article 27 Vienna Convention on the Law of Treaties 1969.
Polish Nationals in the Danzig case PCIJ Reports, (1931) p 12.
Federal Republic of Germany v The Netherlands (North Sea Continental Shelf Case)
ICJ Report (1969) p 3.
493 Articles 2-4 The Hague Convention for the Protection of Cultural Property in the
Event of Armed Conflict (1954).
494 Article 31 of the Vienna Convention on the Law of Treaties 1969.

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The Powers of the World Bank and the IMF

When the states commitments are still pending, for example, if they have been
unable to repay loans, and even when they are not borrowing member states, it is
still difficult to denounce the institutions on account of their policies. The general
view, statutorily defensible, is that a change in policy or inconsistency in the affairs
of the institutions cannot be relied upon as grounds for not complying with a
treaty or international agreements.495
Even where a successor of a state is not part of the original agreement of its
predecessor, the state is bound by the agreement of the predecessor, as long as
they had the capacity to enter into the agreement at the time when they did so.
It is thus immaterial whether a successor government is in total agreement or
understanding with its predecessor when the membership came into existence.
The obligation of the previous government is held over to the next; in this way the
institutions will continue to have overriding powers over such a state.496
There are powers derived from bilateral and multilateral treaties, including
those deriving from a states economic influence, and the goodwill and universal
acceptance of their activities, particularly among the industrialized nations. Most
of these happen to belong the Paris Club, the G7, (or G8, with the inclusion of
Russia), with some also being members of the UN Security Council with veto
powers. Furthermore, it is a principle of law that newly-created states are bound
by the obligation of the successor;497 in addition, another principle is that the UN
can enforce from non-members the observance of a universal custom reached by
multilateral conventions.498
With this avalanche of authorities, the institutions are legally protected in
the power they wield, and examination reveals that they are the most powerful
intergovernmental organizations. This section of the study is meant to highlight the
difference between these institutions and international organizations by revealing
the latent yet prominent features lacking in the other international organizations.
Under normal circumstances, the powers of international organizations are limited
only to the powers attributed to them by member states. This is the rule of thumb:
they are not competent to generate their own powers. In contrast, the Bretton
Woods institutions have been said to be evading opposition whenever they exceed
those powers attributed to them by states.499

495
496
497
498
499

Article 62(2) UN Charter; Article 2(6) of the UN Charter


MacLean, R.M., Public International Law, Third Edition (1994) pp 157-9.
Article 12 Vienna Convention of on the Law of Treaties (1969).
Article 2(6) of the UN Charter
Schermers, H.G., and N.M. Blokker, International Institutional Law (2003) para.209
p 155.

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The Powers of the World Bank and the IMF

5.5 elastic interpretation of the legal framework


A lack of clarity as regards the legal framework of the WB and the IMF and of
guidance in sovereign delegated powers, coupled with consistent reliance on an
elastic interpretation of the implied powers including a statutorily established
agency to regulate the relationships between member states and the two
institutions, have been observed as the remote causes of the excessive powers of
the World Bank and the IMF.500
There is still controversy as to whether the powers delegated in a particular
and specialized sector of a sovereign member state within the legal framework of
the institutions amounts to ceding, alienation, transfer, authorisation or merely
powers delegated by states; such could constitute an element of surrender of their
sovereignty with respect to the sector or purpose for which the institutions were
established. The combination of possibilities may cause confusion and obfuscate
the domestic policies of the member states in a situation where neither side can
determine the extent and the limit of the powers exercised by the institutions.501
The degree to which states retain part of their sovereignty with respect to a
particular sector of an economy are, furthermore, not expressly stated in the
Articles of Agreement except in the area dealing with non-interference with the
political activities of member states. It is therefore argued that the states do not
have irrevocable powers even where the institutions have been observed to stretch
their activities beyond the conferred powers.502

5.6 universal acceptance of the aims and


objectives of the institutions

It will suffice to add that the universal acceptance that finally gave overwhelming
support and power to the institutions commenced from the initiation of the
institutions by the UK and the US. This later grew to incorporate the participation
of approximately forty-four countries at the conference stage in Bretton Woods,
New Hampshire, in the US. The number has further grown to an astonishing
184 sovereign nations, bringing its annual budget to greater than those of ten
500 Sarooshi, D., International Organizations and the Exercise of Sovereign Powers (2005) p 29.
501 Bradley, C., The treaty power of American Federalism, 97 Michigan Law Review
Report (1997-1998) p 390; Ku, J. The Delegation of Federal Powers to International
Organizations: New Problems with Old Solutions, 85 Minnesota Law Review (20002001) p 71ff at p 72; Denza, E., Two Legal Orders: Divergent or Convergent? 48 ICLQ
(1999) p 257ff at p 259.
502 Sarooshi, op. cit., p 29.

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The Powers of the World Bank and the IMF

countries combined.503 The universal acceptability of the institutions appears to


have created a sense of inferiority and lack of confidence in economically weaker
countries, which in turn paves the way for them to absolve policies made by the
institutions.504

5.7 exercise of the sovereign powers of states


Sovereign power unequivocally resides with states; however, these powers are
presumed conferred or delegated to the international institutions once the state
becomes a member, although it is argued that the manner, extent and limits
of such conferred or delegated powers to the World Bank and the IMF are still
subject to controversy.505 Bilateral and multilateral agreements and other
international treaties are said to be powers delegated to and conferred upon the
institutions, and are binding on the members. In the Advisory opinion case, the
court held that treaties with international organizations are express statements in
constituent instruments to which, although very complex, states are bound by the
agreements.506
The granting, conferment and delegation of the powers as a result of the treaties
with institutions may by express or implication bind new member states regardless
of their non-participation at the time the treaties were concluded.507 It has been
held that international institutions (the WB and the IMF) are not restricted to
those powers that are expressly delegated or conferred by member states; they also
posses implied powers that enable them perform common functions.508 However,
it has been statutorily provided that treaties cannot bind third parties without
consent, a customary international law applying mutatis mutandis to sovereign
states.509 These general principles do not apply to specialized organizations
such as the Bretton Woods institutions, where a sovereign state assumes the
503 de Vries, D.M., The World Bank in a Changing World 1945-85 (1986) p 3.
504 Global Apartheid and the African Debt Crisis in the Nigerian Newspaper Thisday of
04 January 2005.
505 Jessup, P.A., Modern Law of Nations (1968) pp 18-19.
506 Legality of the Threat or Use of Nuclear Weapons, ICJ Reports (1996) p 64ff at p 79
para.25.
507 Sato, T., Evolving Constitutions of International Organizations (1996) p 230; Riesman, W.M.,
The Constitutional Crisis in the United Nations, AJIL (1993) p 83.
508 ICJ Report in Reparation of Injury case (1949) p 174ff at p 184; Klabbers, J, An
Introduction to International Institutional Law (2000) p 65; White, N., The Law of International
Organizations (1996) p 129.
509 Article 34 of the Vienna Convention 1969 on the Law of Treaties. Chinkins, C., Third
Parties in International Law (19993) pp 11-2.

107

The Powers of the World Bank and the IMF

rights and obligations in accordance with the Articles of Agreement and other
legal frameworks that exist at the establishment and the commencement of the
institutions.510 The application and subsequent admission of a member to these
existing institutions creates prima facie legal effects on the powers of the World
Bank and the IMF, and on the rights and obligations of the member states.511
The acceptance of the implied powers of these institutions may if not properly
managed erode the sovereign powers of member states. Furthermore it has
been argued that organs of international organizations must confine themselves
to the jurisdiction as prescribed by the enabling instruments;512 for this reason
it has been advised that implied powers must be construed and limited within
the context of the express powers in order to achieve the main purpose of the
institutions. Powers conferred on these institutions are, it has been claimed,
revocable,513 while in the case of transfer of powers over a specific purpose they
are generally considered as irrevocable.514 The latter has been constantly applied
and is given an inelastic interpretation penetrating deep into the sovereignty of
member states.
The perception that states exercise concurrent powers with the WB and the IMF
has been argued to exist only where the state concerned already has strong financial
economic policies, including its not being a consistent and perpetual borrowing
member state. Most borrowing member states come within this category. They
cannot contest the powers of their creditors even when these are exceeded.
Only a sound economic policy and dynamic economic growth, it has been
argued, can categorize and demarcate the difference between transferred and
conferred powers to the institutions; otherwise, in applying their policies, these
terms can in practice be interchanged. Based on these arguments, the institutions
are regarded as Agents of the states who conferred on them the powers, even
though they are specialized agents of the UN and as such bound to its policies and
decisions.515

510 McNair, A., The Law of Treaties (1961) pp 262-269.


511 Sarooshi, D,. International Organizations and the Exercise of Sovereign Powers, (2005) pp
20-21.
512 Ibid., p 23.
513 The French Law of Agency and Distributorship Agreements (1976) p 24.
514 Sarooshi op. cit., p 66.
515 Brownlie, I., Principles of Public International Law Sixth edition (2003) p 659.

108

The Powers of the World Bank and the IMF

The powers are said to flow from the agency relationships516 between principal
and agent in the municipal law of contract and international agreements517
between two legal personalities in international law.518 The resistance to the
powers of the WB and the IMF are on the decrease, once an agreement in the
form of a treaty is ratified by the parties concerned; whether between states or
international organizations and MNCs, parties are bound by the decisions of the
parties to whom powers are delegated.519 It has equally been argued that consent
by states over delegated powers given to international institutions or within
member states establishes an agency relationship; implied powers ordinarily flow
from there. This increases the powers of the international organizations which the
WB and the IMF are privileged to enjoy as international institutions.520

5.8 powers as agents for the member states


The member states are considered as principals to the institutions who are equally
considered as agents of the former and who have been given express and implied
powers to carry out the functions as indicated in the legal framework, i.e., the
Articles of Agreement, on their behalf. It will be of note to mention here that powers
already given by the principal to the agent cannot be rescinded through estoppel
or repudiated after the act must have been performed the agent. The powers of
the institutions are legally binding and enforceable because of the presumptions
in law that an agency relationship existed between the member states and the
organizations. It has further been argued that this distinct legal concept existing
under international law promotes dominance over member states521 with the tacit
endorsement of International Court of Justice.522 The institutions exercise powers
over those member states who delegated the powers to them. The presumptions

516 Edlow International Co v Nuklearna Elektrarna Krsko, US District Court, Columbia,


(1977) 63 ILR p 100 at 103.
517 Williams v Shipping Corporation of India, US District Court, Eastern District Virginia,
(1980), 63 ILR p 590 at p 596.
518 Chinkins, C., Third Parties in International Law (1993) p 115.
519 Dayton v Czechoslovak Socialist Republic and Others (1986) 79 ILR p 596; Attorney
General of Israel v Kamiar (1968), 44 ILR p 197 at 249.
520 Sereni, A., Agency in International Law, 34 ILR (1940) p 638 at 645.
Gregory, W., The Law of Agency and Partnership, Third edition (2001) p 97.
Seavey, W., The Rationale of Agency Seventh edition (1996) pp 14-21.
521 Brownlie, I., Principles of Public International Law, Sixth edition (2003) p 659.
522 Sarooshi, op. cit., p 33.

109

The Powers of the World Bank and the IMF

are that the decisions of the institutions represent the collective acts of a sovereign
state, thus their actions are viewed as state acts recognized in international law.523
However, the presumptions that the powers of the institutions are unfettered
and irrevocable can be seen as doubtful because the Vienna Convention on the
Laws of Treaties provides for the right of unilateral termination of the agency
relationship, if under certain conditions.524 Notwithstanding the proviso that
empowers states to exercise unilateral powers over termination of agency
relationships, states rarely exercise this option. To this end, it has been observed
that powers delegated to the institutions are rarely contested even where it is
presumed that the institutions have exceeded their express and implied powers.
Perhaps it appears that the institutions possess legal powers even greater than
those delegated to it, 525 yet a critical look at the legal framework, including the
doctrines of state sovereignty,526 the UN Charter,527 and its General Assembly
declarations,528 suggests that the institutions may not legally possess more powers
than did the states who delegated the sovereign powers to them.

5.9 powers under public international law


The World Bank and the IMF are founded under public international law;
therefore, they possess powers within the arena where they were established. The
powers possessed under the principles of public international law equally assume
a corresponding duty that the institutions, as an obligation, are meant to honour.
Furthermore, their powers under this section include the status of the institutions,
their domestic and international legal responsibility, the privileges, and the
immunities, including the judicial advisory opinion and judgements of courts of
competent jurisdiction. It should be noted that the examination of their powers
under this section includes opinions expressed by legal authors, opinio juris and
works of highly qualified publicists and customary international law; all are said
to constitute the source of the powers of the institutions. The powers possessed
by the WB and the IMF through any of the above sources are necessary to enable
523 Crawford, J., The International Law Commissions Articles on States Responsibility; Introduction
and Text and Commentary (2002) pp 110-113
524 Article 56(2) Vienna Conventions on the Laws of Treaties 1969.
525 Kelson, H., The Law of the United Nations (1951) p 329; Simma, B., The Charter of the
United Nations (2002) p. 819; Gazzini, T., NATOs Coercive Military Activities in the
Yugoslav Crisis (1992-1999) 12 EJIL (2001) p 415.
526 Brownlie, Fifth edition op. cit. p 557.
527 Articles 1(2) and 2 (7), UN Charter.
528 UN General Assembly Resolution 2625 (XXV) on the Declaration on Principles of
International Law concerning Friendly Relations and Cooperation among States.

110

The Powers of the World Bank and the IMF

them to perform the functions for which they were established. The question that
may arise for scholars of international law concerns how the WB and the IMF are
able to carry out their functions both in the domestic and the international arenas.
This question is deeply necessary in the light of the fact that in ordinary parlance
only states are subjects of international law.

5.10 domestic and international legal capacity


Generally, for it to be subject to international law, a member must possess the
attributes of a state529 since a state is the primary subject of international law.530
Although the WB and the IMF are classified as subjects of international law with
the attributes of a state in public international law, the enabling power of the
institutions stemmed from the Articles of Agreement and ratified by members,
regarded as international agreements or treaties. Therefore, the parties are bound
by them.531 However, it is argued that the institutions must not exceed the powers
as ascribed to them within the Articles of Agreement.532 The views are that since
the institutions are established under the principles of public international law, the
rights and privileges that are accorded to a state are equally extended to them;533
they enjoy both domestic and international personality and its legal capacity;534
in addition and for the effective performance of their functions they can enter into
contracts, such as the signing of leases or renting accommodation. The foregoing
implicitly entails that the existence of an international legal personality vested in
the international institutions referred to as in this study is not in doubt.535
The presumption is that the institutions, apart from having the powers to enter
into contract, will also be liable for any default on their part;536 although there
is no express grant of legal personality in their Articles of Agreement that does
not mean that they do not possess it.537 In a Reparation for Injuries case held by
529
530
531
532
533

534
535
536
537

Higgins, R., Problems and Process: International law and how we use it (1994) p 467.
Broches, A., International Legal Aspects of the Operation of the World Bank (1959) p 19.
Schermmer, G., International Institutional Law (2003) pp 58-62.
German European Parliament and Council of European Union ECR 2000, p 1.8524.
Jennings, R. and A. Watts, Oppenheims International Law Report Ninth edition (1992) p
16; Bowett, D.W., The Law of International Institutions (1982) p 13; Boderman, D.J., The
Souls of International Organizations, Virginia Journal of International Law (1996) Vol. 3
p 334.
Janis, M.W., An Introduction to International Law Second Edition (1993) p 176.
Bekker, H.F., The Position of Intergovernmental Organizations, a Functional Necessity: Analysis
of the Legal Status and Immunities (1994) pp 56-57.
Higgins, R., op. cit. p 19.
Broches, A., (1995) op. cit. p 19.

111

The Powers of the World Bank and the IMF

the ICJ in 1949, the court, in discussing the United Nations, held inter alia that
an international organization was intended to exercise and enjoy rights which
can only be explained on the basis of possessing a large amount of international
personality and the capacity to operate within an international plane. The court
further said that at present the supreme type of international organization could
not materialize if it is devoid of the powers of international legal personality.538
The nexus between the institutions and the individual member state is legally
binding, beginning from the point of ratifying the Articles of Agreement, which
are regarded as a treaty and regulated or governed by public international law,
thus equally providing for the rights and obligations of each contracting member
state.539 The institutions powers of formulating policies are said to have originated
from the fact that they are derived from the text of the agreement which they are
bound to obey;540 this remains the case unless public international law is excluded
ab initio from the time of becoming a member of the international organization,
where a different perception of the legal nature of the arrangements is conceived
by either the adopting state or any other system of law. Otherwise, the general rule
is that agreements between the institutions are of an international nature, such
as the two under discussion, fall under and are within the remit of international
law.541
The legal arguments in this discussion are based on the two institutions (the
World Bank and the IMF) being established in accordance with the rules and
procedures of public international law. Their status in the international community
is regarded as a reflection of their position in the legal regime commonly called
public international law. There are two different approaches that complement
each other in this regard; one is that the institutions each possess international
legal personality.542
Although not specifically stated in the Articles of Agreement establishing
the two institutions, as has previously been mentioned this international legal
personality has been derived from the ability of the institutions to function
independently of the members, and to act as separate entities in the international
community. The two institutions enter into international agreements another
common criterion for establishing international legal personality.
538 ICJ Report (1949)
539 Schermer, op. cit. p 895.
540 Seyersted, F., Applicable Law Between Intergovernmental Organizations and Private Parties
(1967) p 440.
541 Schermmers, op. cit. p 1123.
542 Skogly, S.I., The Human Rights Obligation of the World Bank and The International
Monetary Fund (2001) pp 66-73.

112

The Powers of the World Bank and the IMF

The institutions international legal personality implies that they have rights and
obligations according to international law, although not the full set of rights and
obligations as pertaining to states. However, the International Court of Justice has
confirmed that intergovernmental organizations are entities with legal personality,
and that this carries with it an obligation to operate within the boundaries of
international law.543 Non-member states are also bound by the international law
under which the institutions were established; the powers of the institutions
are reflected in the Articles of Agreement to the extent that states were directed
from the intention of the IMF provisions that domestic laws should be made to
enforce and promote the ideals of the organizations particularly with respect to
regulation of foreign exchange.544 The concern to create lasting peace and security
historically began in 1919 at the Versailles Peace Conference that formed part of
the considerations regarding the legally binding nature of the institutions.545

5.11 specific legal nature of a world bank agreement


The assumption is that looking at the legal nature of the World Banks agreements
with member states, as a whole they implicitly negate any inference that the
agreement belongs within the sphere of municipal rather than international law;
in addition, there is a specific provision of these agreements which expressly
negative such an inference in Section 7.01 of the Banks loan regulations.546 The
section provides inter alia that the rights and obligations of the Bank and the
borrower under the loan agreement and the bonds shall be valid and enforceable
in accordance with their terms notwithstanding the law of any state or political
division thereof to the contrary.547 Given the above, the general view is that all
relationships or agreements entered into by member states and the institutions are
international agreements,548 and a member cannot invoke municipal law to avoid
its international obligation or defend a violation.549
Where non-member States enter into agreement with the World Bank,
municipal law may not, it is claimed, be applied. The mere fact that an agreement
has been concluded with international institutions suggests that public
international law applies. However, when a non-member state is requesting a loan,
543 Ibid., pp 69-72.
544 de Vries, M.G., op. cit. pp 9-11.
545 Archer, C., International Organizations Second edition (1992) p 3.
546 Broches, op. cit. p 344.
547 World Bank Loan Regulations, Section 7 01, of 15 June 1956.
548 Article 27 of the Vienna Convention on the Laws of Treaties.
549 Jenks, C.W., The Proper Law of International Organizations (1962) p 180.

113

The Powers of the World Bank and the IMF

the rule is that it must be guaranteed by a member state. No such situation had
yet arisen up to the beginning of 1996 or to the time of this study to prove this
view and theory necessary.550 During the evolution of public international law, the
fact that a non-member state cannot submit itself to international law is no longer
current or evident.551 It can be summed up that all these factors to a large extent
contribute to the impetus and over-confidence of the institutions in implementing
and promoting policies in the form of various kinds of programmes.552
The conferment of legal personality on international institutions is so unique
and convenient to all and sundry that even regional institutions such as the
European Bank for Reconstruction and Development (EBRD) established
through the Agreement, adopted on 29 May 1990,553 applies international law
among EU and non-EU member states.554 Usually, in the event of the institutions
not possessing a particular right, the institutions under a general obligation will
respect the host state, which will generally oblige any request towards facilitating
the work of the institutions, whether or not the state is a member.555 Where
permission cannot be obtained to carry out a specific project that will benefit the
majority of the nationals from the host state, the institutions can still go ahead
with such projects. The view is that states are under obligation to grant recognition
and legal personality to international organizations, for example, in the Reparation
for Injuries case mentioned previously, the detailed discussion of the House of
Lords of the UK and the decision in the International Tin Council case,556 where it
was held inter alia that in spite of the legal personality status not being expressly
recognized by the treaty establishing the organization, it does exist.557
The World Bank Articles of Agreement made mention of the institutions
possessing legal personality, but no mention was made to international legal
personality. Thus, the Bank shall possess full juridical personality, and in particular
the capacity to contract, to acquire and dispose of the immoveable property and
to institute legal proceedings.558 The express mention of this provision in the
Articles of Agreement does not include international legal personality, literally
550 Head, J.W., Evolution of the Governing Law of Loan Agreements of the World B and Other
Multilateral Development Banks (1996) pp 214-314; Oral interview with World Bank Staff
in Washington DC.
551 Ibid., p 224.
552 Ibid., p 223.
553 Skogly, op. cit. p 30.
554 Head, D., (1996) op. cit. p 230.
555 Schermmers, op. cit. p 1690.
556 House of Lords Judgement 26 October 1989, (ILM) p 670.
557 ILM, Ibid., p 670.
558 Article VII (2) World Bank Articles of Agreement.

114

The Powers of the World Bank and the IMF

meaning that it gives the Bank rights only within the domestic or municipal legal
system, using simple or literal legal rules of interpretation.559

5.12 inspection panel


The Inspection Panel is a quasi-independent body of the WB created in 1993560
as a mechanism for holding the WB accountable for violation of its policies and
procedures. The Panel examines the safeguard policies and procedures that set
guidelines for project design, appraisal and implementation, including involuntary
resettlement as a result of project sites, environmental assessments, natural habitats,
and indigenous people in order to mitigate any negative social and environmental
impact that might occur as a result of WB-financed projects.
The policies and procedures of the Bank, though, defines the jurisdiction of
the Inspection Panel; the decision as to whether a complaint has merit or the
required standard to be investigated by the Inspection Panel lies with the Banks
Board of Executive Directors.561 Although the Inspection Panel procedures are
straightforward,562 the Bank sometimes may decline to accept the decision of the
Panel. For example, in 1995 the Bank accepted the first report of an Inspection
Panel in Tanzania that denied the claimants request that IDA financing was not
available on reasonable terms; the second report on a similar claim that was
affirmed by the inspection report was denied by the Bank.563 Also, the Inspection
Panel upheld the complaint in respect of the Taparica Resettlement and Irrigation
project in Brazil in 1997, yet the Executive Board of the Bank declined to uphold
the decision of the Panel and instead approved the action plan for the project.564
The Inspection Panel has been claimed as effective in some cases; for example, the
WB and the IMF improved their policy on information disclosure system with
outreach to critics and NGOs at the insistence of the Inspection Panel.565 When
legitimate and valid claims are denied, the complainants are powerless because
the decisions of the Executive Board of the Bank are final: there is no provision
for a judicial review of the WBs decisions, considering also the privileges and
immunities they enjoy from their constituent documents.

559
560
561
562
563
564
565

Broches (1959) op. cit. p 21.


IBRD Resolution 93, 10 September 22, 1993.
World Bank Operational Manual and Procedures, BP 17.55, January 1999.
Clark, D.L., A Citizens Guide to the WB Inspection Panel, Second Edition (1999) pp 15-18.
World Bank 1996 Annual Report on Portfolio Performance Fiscal Year 1995.
World Bank Annual Report 1998.
World Bank Annual Report 2002.

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The Powers of the World Bank and the IMF

5.13 conclusion
In conclusion and given that the institutions were set up under international law,
they are conferred with the powers to exercise sovereign power by member states
that possess exclusive inherent sovereign powers, although the institutions by
virtue of their being subjects of international law possess domestic and international
legal personality including non-conventional or non-legal powers. Their policy of
having an Inspection Panel made no provision for judicial review, enabling them
to assert greater authority over member states. There is a general presumption that
the institutions will comply with the rules of international law and due process
when acting under the powers and the advantages of their privileges with member
states, as non-compliance with the due process in wielding the legal and non-legal
powers could erode the sovereignty of the borrowing member states.
The special privileges and immunities of the institutions were not conferred
merely for their status as international organizations, but because they are
presumed to implement policies not commercially oriented; acting otherwise
would amount to exceeding the sovereign powers conferred on the institutions
by member states, thereby eroding the latters state sovereignty. Finally, it can also
be argued that the powers of the institutions are not only limited to the extent of
sovereign powers conferred or delegated to the institutions through the Articles
of Agreement; they are also limited by the principles of international law and the
UN Charter, both of global applicability.

116

Chapter 6

The Relationship Between the


WB, the IMF and Member States

he powers exercised by the WB and the IMF in the recent times have brought
their relationship with member states under scrutiny. There remains a general
presumption that the institutions possess international legal personality and the
capacity to exercise sovereign powers;566 however, it appears that their exercise
of sovereign powers is limited to the powers conferred on them by the member
states. This is because the exercise of sovereign powers which appear not to lie
within the parameters of their constituent documents, may amount to erosion of
state sovereignty.
The exercise of those sovereign powers said to be in conformity with their
constituent documents complements the principles of state sovereignty and right
to self-determination.567 It can be said that the institutions relationship with states
is based on an agency relationship, the delegation of power or on the transfer of
limited specific sovereign powers.
This chapter will analyze all of the options, including the legal implications
for states of membership of these institutions. It appears that the exercise of state
sovereign powers are not controversial,568 yet there is growing concern whether
the institutions are able to restrict themselves to acting within the Constitutions
of the organizations such that they do not erode the sovereignty of the borrowing
member states who actually conferred on them the sovereign powers they exercise.
It can be said that some of the sovereign powers exercised by the WB and the
IMF are conferred by the member states. Although there are provisions in their
constituent documents that members and member states can withdraw569 and be

566 Article 104 of the UN Charter.


567 Oseike, E., The Legal Validity of the ultra vires Principle in International Law, 77 AJIL
(1983) p 239.
568 Namibia Case ICJ Report (1971) p 45; IBRD and the IMF v All American Cable and
Radio Inc. (1953) FCC, US. 22 ILR p 705.
569 Articles XXVI IMF Articles of Agreement: Articles VI Section 1 World Bank Articles
of Agreement.

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The Relationship Between the WB, the IMF and Member States

suspended570 from the institutions but there is none that provides for member
states to revoke the conferred sovereign powers when they are exceeded by the
institutions. This observation raises the issue of irrevocability of the institutions
sovereign powers once they are conferred. This chapter examines the revocability
and irrevocability of sovereign powers conferred on the WB and the IMF.
Although it can also be said that there are various types and degrees of conferment
of sovereign powers, the difference lies on the ability to revoke or withdraw and
the principles of international law.
State sovereignty has been argued to be an essentially contested concept,571
jealously guarded by states to protect the national economic sovereignty and
integrity of its territories.572 However, due to unavoidable necessities and growing
needs in societies together with the absolute inter-dependencies of states in the
area of international trade, either on the basis of comparative advantage, acquisition
of mineral resources or technology and equipment, including improved economic
and diplomatic relations, the desirable condition for states to surrender a little of
their sovereignty with respect to a specific section of a subject to World Bank and
the IMF has been created.573
This argument will elicit the examination of the implication of state membership
of the WB and the IMF that under international law are grouped among nonstates actors. It has been suggested that membership of states to non-state actors
such as the WB and the IMF under international law limits the sovereignty of a
state;574 The extent to which state sovereignty is limited may, though, be found
in the Articles of Agreement relating to the particular section of specific duty,575
provided that the provisions are clearly self-explanatory and unambiguous so as
to avoid partial interpretation in favour of the stronger party.576 In the absence of
the clarity of international agreements such as the articles of agreements of the WB
and the IMF, the most sensitive issues concern who in fact exercises the discretion
of interpreting the grey areas; what are the intelligible principles to be adopted and
whether the aim of establishing the institutions, arising from the need to avoid a

570 Articles XXIII Section 2 IMF Articles of Agreement: Articles VI Section 2 World Bank
Articles of Agreement
571 Sarooshi, D., International Organizations and the Exercise of Sovereign Powers, (2005) p 3.
572 Weisbrot, M., The Case for National Economic Sovereignty.
573 De Vries, G.M., The IMF in a Changing World, 1945-85 (1986) p 12.
574 Hass, E.B., International Integration: European Union and the Universal Process; International
Organizations (1961) pp 366-92.
575 Article 1 World Bank Articles of Agreement; Article 1 IMF Articles of Agreement.
576 Gunther, G. and K.M. Sullivan, Constitutional Law, Thirteenth edition (2000) p 354;
Article 2 Section 1, of the American Constitution.

118

The Relationship Between the WB, the IMF and Member States

further crisis such as the one that precipitated the Great Depression of 1930s that
led to the Second World War, has been justified.
When it comes to the measure of sovereignty to be surrendered to the
institutions, it should be clarified who determines the extent for the institutions to
be able to carry out their functions unhindered and avoid conflicting claims which
might lead to either a total loss of state sovereignty or a complete breakdown of
international legal order.577 The latter question will be comprehensively elucidated
and analyzed in Chapter Seven of this thesis. The courts have held, inter alia, that
the instruments establishing organizations shall be read in conjunction with their
guidelines so as to determine where to draw a solid line.578
As the debate over accusation and counter-accusation regarding the WB and the
IMF rages on with respect to the usurpation of state sovereignty by the majority of
the NGOs, it becomes highly pertinent to elucidate, to establish the nexus, and to
analyze the exercise of sovereign power that lies within the exclusive purview of its
member states by the WB and the IMF. The issue as to whether the policies of the
institutions have legal validity may depend on the level of their compliance with
their constituent documents. At the end of the chapter, two issues would have
been determined, the legitimacy of their exercise of sovereign power on the one
hand, and the limits of state sovereignty, on the other.
It would appear that the exercise of sovereignty power by the WB and the IMF
may have either been conferred on them by the member states through the use of
a term such as: grant of power; ceding of power; transfer of power; delegation of
power; and assignment of sovereignty; power might suggest a permanent ceding
or the ineligibility of states to revoke the power. This will definitely denote legally
transferring state sovereignty over certain activities where the states can also
exercise concurrent powers with the WB and the IMF to an exclusive jurisdiction
of the institutions. The above terms are merely used interchangeably. While it can
be said that the use of any of the terms is immaterial because they all suggest a
voluntary counterpoint to national sovereignty, the use of the terms conferment
and delegated suggests not only that the parties can exercise concurrent
jurisdiction over a particular subject matter, but also any of the parties can revoke,

577 Industrial Union Department AFL-CIO v American Petroleum Institute (1980) 487
US p 60.
578 American Power & Light Co. v Security and Exchange Commission (1967) 329 US
p 90.

119

The Relationship Between the WB, the IMF and Member States

withdraw,579 cancel,580 or terminate581 the very membership that gave rise to the
obligations in exercising sovereign power.582
A preliminary point can be made to the fact that mere membership of the
institutions already establishes agency relationships between the states and
the institutions.583 The agency relationship arose because the acts, yet to be
performed, are Constitutionally designed for states to perform, and the states are
not prohibited from delegating these acts to the institutions, individuals or any
other non-state actors.584
With the existence of an agency relationship between the WB and the IMF, four
legal issues will be examined and analyzed. The condition for the existence of an
agency relationship under both international law and domestic law and the effects
on state sovereignty must be investigated to determine who the third party is, in
accordance with the law of agency. The position of the Paris Club in the light of its
apparent position as the main donors and perhaps the de-facto regulatory body of
the WB and the IMF in agency relationship must be established. The consequences
of implied powers, whether reasonable or unreasonable, by the WB and the IMF
in exercise of sovereign powers need to be clarified. In other words where the
institutions adopt an elastic interpretation formula or exceed their powers as
provided in the Articles of Agreement, the effects on state sovereignty will also
be analysed.
An agency relationship appears to exist between the WB, the IMF and the
member states, on the one hand, with the now-disclosed apparent influence of the
Paris Club, on the other, as a distinct legal concept under international law.585 In a
number of cases, the International Court of Justice has recognized the existence of
international agency relationship between states and states:586 for instance, there is
the case of international agency that exists between Switzerland and Liechtenstein
where, under a series of treaties concluded after WWI, Switzerland assumed
responsibility for the diplomatic and consular representation of Liechtenstein,
the protection of its borders, and regulation of its customs within the borders. It
is dated 29 March 1923.587 The decision of the European Economic Area (EEA)
Joint Committee was, inter alia, that an international agency relationship existed.
579 Article XXVI IMF Articles of Agreement.
580 Article XVIII IMF Articles of Agreement.
581 Article XXIV IMF Articles of Agreement.
582 Article 54 Vienna Convention 1969.
583 Chikins, C., Third Parties in International Law (1993) p 115.
584 Brownlie, I., Principles of International Law (2003) p 334.
585 Sarooshi, D., International Organizations and Their Exercise of Sovereign Powers (2005) p 33.
586 Higgins, R., Report on Commission of the Institut de Droit International (1995) p 334.
587 Sarooshi, op. cit. p 33.

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The Relationship Between the WB, the IMF and Member States

Switzerland merely acted as agent to Liechtenstein in respect of the economic


area.588 Also, in the case of France v United States of America, concerning certain
American nationals in Morocco, the US claimed that France was interfering
in the affairs of another country, the court held, inter alia, that the rights of
France were as defined under the Protectorate Treaty of 1912; under this treaty,
Morocco remained a sovereign state, but it made an arrangement of a contractual
character whereby France undertook to exercise certain sovereign powers in the
name and on behalf of Morocco and in principle over every matter concerning
the international relations of Morocco.589 It can be argued that the decision of
the court presumed the existence of international agency relationships in these
two cases, the exercise of sovereign power by Switzerland over Liechtenstein
and France over Morocco are legitimate. Two states are concurrently exercising
sovereign power over another nation-state. Similarly, the WB and the IMF possess
international legal personality just as do the states that possess domestic legal
personality;590 a contractual agreement or an instruction by either of these two
competent bodies can create a status of an international agency governed by the
law of agency relationship between the principal and the agent.591
The rights and duties592 including obligations arising from the contractual
agreement593 or in this case, Articles of Agreement, appear not to be overly
favourable to the member states assumed to be the principals.594 Apart from the
usual authority given to the institutions, the latter can widen their powers through
the doctrines of ostensible or implied authority; as agency of necessity, it might
give them the legal capacity to interpret the Articles of Agreement elastically,
possibly in their favour against the member states. The weight attached to consent
in international law in relation to agency law is higher than that of domestic law
because of the principles of non-intervention and self-determination that are
the major attributes of the laws of nations.595 While the principal in domestic
agency law may be bound and liable if the agent exceeds his actual or implied
powers,596 in international law, there must be consent to the establishment of an

588
589
590
591
592
593
594
595
596

European Economic Area Joint Committee Decision No 182/1999 of 17 December 1999.


France v US (1952) ICJ pp 185; 188.
Reparation for Injuries Case ICJ Report 1949 p 179.
Treitel, G.H., An Outline of the Law of Contract, Fifth Edition (1995) pp 275-97.
Head v Filley, (1869) 4 Ch. App. 548; Bultwick v Grant (1924) KB 483.
Turner v Sawdon (1901) 2 K B 653; Delaney v Staples (1992) 1 AC 687 at 692.
Beatson, J., Ansons Law of Contract, Twenty-eighth Edition (2002) p 663.
Sereni, A., Agency in International Law, 34 AJIL (1940) p 638.
Jewsbury v Newbold (1857) 26LJ 7 HL 802.

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The Relationship Between the WB, the IMF and Member States

agency relationship in the form of a treaty or Articles of Agreement.597 Consent is


a pre-requisite in international agency relationships. Although no specific form is
required, it can be express or implied,598 yet the principal must be disclosed. This
is dissimilar to the situation in domestic national law, where it is permitted to have
an undisclosed principal.599
The requirement for consent as a pre-requisite for an agency relationship
in international law may have been because of the liability imposed by the
responsibility of states,600 and the apprehension of the developing countries: it
was one of the bases adopted in Mandate and Trust territories against the free
will of the inhabitants.601 While consent in international law must be obtained in
writing, there are some exceptions where a states consent can be presumed. For
instance, on 4 November 1979, radical Iranian students seized the United States
Embassy complex in the Iranian capital of Tehran, taking about 63 American
citizens hostage; three more American citizens at the Iranian Foreign Ministry
were also taken hostage, prompting the US to expel Iranians living in the US, halting
oil export from Iran, and freezing Iranian assets and investments. After attempts to
rescue the hostages, unsuccessful due to equipment failure, which led the Iranian
government to enter into negotiations with the US government and with Algeria
as a mediator, the government of Iran demanded the de-freezing of its assets and
investments as a condition for the release of the US citizens. The public statements
issued by the Iranian government officials602 suggesting support for the hostages
were seen as consent to the militants as agent to the state. The Iranian government
as the de facto state were internationally responsible.603 In international law
consent is a states responsibility. The inability of a state to prevent the actions of
the militants does not according to the argument of Iran vitiate the liability on the
acts of its citizens in her territory.604

597 Gregory, W., The Law of Agency and Partnership, Third Edition (2001) p 97; Brownlie, I.,
Principles of Public International Law, Sixth edition (2003) p 643.
598 Seavey, W., The Rationale in Agency, 29 Yale Law Journal (1919-1920) p 859.
599 Welsh Development Agency v Export Finance Co (1992) BCLC 148 at p 173.
600 Articles 13 International Obligation in force for a State: Report of International Law
Commission, Doc. A/56/10 November 12 2001
601 Nauru v Australia ICJ Report 1989 cited in Bowett, Eur J Int Law (1994) pp 89-101.
602 Lee, R., The History Guy: Iran-US Hostage Crisis (1979-1981) pp 1-4.
603 United States Diplomatic and Consular Staff in the Tehran case, ICJ Reports, (1980)
pp 3-29.
604 Tehran case (supra)

122

The Relationship Between the WB, the IMF and Member States

The responsibility of states is not limited to restitution or damages of a penal


character to those acting on its behalf, who bear criminal responsibility for
violations of human rights and international law; also, judgements have been
given against states for the failure to apprehend and punish persons guilty of
criminal acts against aliens.605 It is not a responsibility for states to pay damages to
foreign subjects or states for acts of insurgents and rioters provided due diligence
was observed606 and the states may not act to shield the perpetrators from
prosecution.607
In analyzing this case and relating it to the relationships of the WB and the IMF
as agents to the states, it would appear that some policies are not included in the
Articles of Agreement, but consent to their conditionality will be presumed as
having been given by the states. However, the consistent objection and criticisms
by most borrowing member states and NGOs perhaps vitiates the legal validity of
their policies on conditionality, which has been in practice for more than a decade.
Perhaps one of the similarities between domestic law of agency and that of
international agency law might be ratification by conduct in domestic agency
law.608 A lack of persistent objection in international conventions cannot absolve
a state from compliance with the decision. Similarly, a State cannot claim erosion
of state sovereignty by the WB and the IMF on policies arising from an implied
interpretation of the Articles of Agreement of the institutions without consistent
objections.609 Some commentators are of the opinion that the Bretton Woods
institutions may not have breached the provisions of the Articles of Agreement
since acts are ostensibly authorized by states.610

605 Oppenheim, L., International Law, (1963) p 355.


606 Australia v US, (AJ, 10 (1916) Special Suppl. P 306) in Ibid p 364: In December 1915,
during WWI when the US were still neutral, an Australian submarine fired upon an
American merchantman flying the US flag in the Mediterranean. The US government
demanded an apology for the deliberate insult to its flag and punishment for the
submarine commander, including the reparation for the damage done as the act carried
out by the organ of government was considered as an act of an agent of the state.
607 United Nations Resolution 731 of 21 January 1992 on political and economic sanctions
against Libya for refusing to hand over her two nationals implicated in the bombing of
Pan Am flight 103 over Lockerbie, Scotland. The persistent and constant shielding of
her nationals from prosecution was seen as consent, even though the private Libyan
nationals actions were not authorized by the state, and they are consequently regarded
as agents of Libya.
608 Suncorp Insurance and Finance v Milano SPA (1993) 2 Lloyds Report 225 at 241.
609 Sappingto, David E., Incentives in Principal-Agent Relationships, Journal of Economic
Perspectives, Vol. 5, No. 2 (Spring 1991) pp 45-66.
610 First Sports Ltd v Barclays Bank plc. (1993) 1 WLR p 1229.

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The Relationship Between the WB, the IMF and Member States

It is immaterial for a state to deny liability simply because the purported act was
not specified in writing. The conduct of a group of people can be considered as a
sovereign act of the state if they are acting under the instructions or to the benefit
of the state, known to the state.611 The courts in a number of cases have held that an
agency relationship can arise in international law only where the principal has some
degree of control over the agent.612 Also, in the case of Prosecutor v Dusko Tadic
concerning the International Tribunal for the prosecution of persons responsible
for serious human rights violations in the territory of the former Yugoslavia since
1991 pursuant to Resolutions 808 and 827 of the Security Council requesting the
trial of the perpetrators, the court applied the effective control text as a ground for
states to establish agency with any group or persons.613 However, for the purposes
of this thesis it can be said that the state, theoretically614 or documentarily, has
effective control of the institutions through the Articles of Agreement that has
specified their functions. The Articles of Agreement therefore satisfy the effective
control text. Given the financial interest involved in the relationships between the
institutions and the states, it would be pessimistic to suggest that the states would
have control over the institutions, let alone effective. This issue will be considered
along with the examination as to whether the agency relationships between the
states and the institutions are revocable..
The rules relating to treaties between the WB and the IMF on one hand and the
member states on the other, are a means of enhancing legal order in international
relations and serving the purposes of the United Nations, as the consensual
nature of treaties done in good faith and the pacta sunt servanda rule are
universally recognized as important sources of international law.615 The argument
that international agency relationships with respect to revocation is similar to
domestic law where the principal can determine the agency616 may not in some
authors views apply to states in their relationships to the WB and the IMF because
of the debt commitments of the borrowing member states. Where states cannot
be compelled to remain as principals to the institutions,617 the magnitude of the
debt portfolio of some borrowing member states might constitute a strong barrier
to their theoretical unilateral power of revocation of the agency.
611 Crawford, J., The International Law Commissions Articles on States Responsibility, Introduction
Text and Commentaries, (2002) pp 110-113.
612 Nicaragua v United States of America, ICJ Report (1986) p 14.
613 Prosecutor v Dusko Tadic, Case No IT.94.I. 7 May 1997.
614 Article 8 of ILC on States Responsibility 2001.
615 Preamble, Vienna Convention on the Law of Treaties, 1969.
616 Guyenot, J., The French law of Agency Distributorship (1976) p 67 in Sarooshi op. cit.
p 40
617 Staubach, F., The German Law of Agency and Distributorship (1977) p 24.

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The Relationship Between the WB, the IMF and Member States

The states can exercise these fundamental rights of termination and


withdrawal618 of agency only when their financial obligations with the institutions,
would have been satisfied. Similarly, there is no provision in the Articles of
Agreement of the institutions suggesting that they are irrevocable.619

6.1 the difference between the wb, the imf


and other international organizations
and their member states

This clarification is necessary because of the heated debate over the assertion
of authority of the institutions, on its members that do not necessary to other
institutions and their members. Few authors are of the view that even though there
exist separate legal entities between principal and agent, in consensual relationships,
together with effective or theoretical control of the agents, that international
agency relationship might not exist between international organizations and their
member states except with non-member states.620 Other authors take the light
and medium positions, and argue that there is a presumption against an agency
relationship between an international organization and its membersyet with few
exceptions.621
The views of the former are predicated on the fact that when a member state
signs an agreement that confers sovereign power on an international organization,
it is consenting to the exercise of power by the institution as equal members, not
as agents to the states that might have entitled them to change their legal rights
and obligations.622 Proponents of this view are apprehensive of liabilities that
are not intended, since an agent can alter the legal rights and obligations of the
principal. Some English courts adopted this view.
For instance, J.H. Rayner v Department of Trade and Industry concerned an
international organization established by treaty in 1956 and currently constituted
by the International Tin Agreement (ITA) made between several sovereign
states, including the UK, with their headquarters and principal office in London.
When carrying out its activities defined under Articles 6 the ITA, which includes
618 Articles 41, 42 and 59 of the Vienna Convention on the Law of Treaties 1969.
619 Bartos, M., International Law Commission Debate, Yearbook of International Law
Commission (1964) vol. 1 p 38.
620 Maclaine Watson v Department of Trade and Industry (1989) 80 ILR P 39 AT 114, J.H.
Rayner Ltd v Department of Trade and Industry (1989) 3 WLR 969. The judgements
in these cases are of the views that there cannot be existence of agency between an
organization and its members.
621 Shihata, I., The World Bank in a Changing World (1991) p 312.
622 Brownlie, I., Principles of Public International Law, Fourth edition, (1990) p 688.

125

The Relationship Between the WB, the IMF and Member States

the purchase and sale of tin on the London Metal Exchange, its dealings at the
Exchange were suspended due to the fact that they owed several millions of
pounds to many creditors.
An action was brought against the international organization, sovereign states
which include the UK jointly and severally, by the numerous creditors. The
member sovereign states of the organization, in their defence, denied liability for
the huge debt, which was not made known to them until the present action.623
The court held inter alia that they were not the principal of the organization but
members of the organization and as such no separate action should be brought
against them in their capacity as principals; further, that there was no principle
of international law authorizing an international organization to be sued jointly
and severally,624 and that rule can be found only in domestic law, where going to
the extent of lifting the corporate veil of the company would be necessary.625 The
court further held that international organizations do not create partnerships or
agency and principal relationships, but memberships.626 This decision has been
applied in most British courts.627 The courts afforded sovereign immunity to all of
the member states of the organization.
The difference may perhaps be as a result of damages, which any of the sovereign
states may be asked to pay; a judgement obtained jointly and severally can be
executed against either of the parties in parts or in full. The UK as host of the
headquarters of the organization would have been the first casualty.628 A similar
principle was adopted by the House of Lords in the case of Arab Monetary Fund
v Hashin, where an action was brought by the Fund against the Director-General
who was alleged to have embezzled the sum of $50 million. The court declined
judgement for the Arab International Monetary Fund on the grounds of a lack of
agency relationship and international legal personality.629
The other side of the argument is that the WB and the IMF are special
organizations with their acts creating and enhancing the development of
international law. There are agency relationships between member states and the
623 Marson, G., The Origin of the International Personality of International Organizations
in the United Nations, International and Comparative Law Quarterly Vol. 40 No. 2 (April
1991) pp 4043-424.
624 J.H. Rayner v Department of Trade (1990) AC p 418.
625 Salmon v Salmon and Co. (1897) AC 22 The court applied the principles in this case to
reach their decision.
626 Maclaine Watson v International Tin Council, (1989) Ch. 253 at p 257.
627 Maclaine Watson v International Tin Council (1988) Ch 1 at p 23.
628 Hill, Jonathan, International Corporations in English Courts, Oxford Journal of Legal
Studies, Vol. 12,(Spring, 1992) pp 135-148.
629 Arab International Monetary Fund v Hashim, (1991) AC 114.

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The Relationship Between the WB, the IMF and Member States

Bretton Woods institutions because most of the functions of the institutions are
sovereign acts recognized by the worlds legal order, as the exclusive jurisdiction of
the sovereign states within their territories.630 Also, the WB can act as an agent to
the borrower for the purpose of purchasing convertible currency for the purpose
of a loan agreement.631 The agency relationships that exist between the WB, the
IMF and their members do not need microscopic examination. The Articles of
Agreement of the WB and the IMF are res ipsa loquitur.
The WB promotes private foreign investment by means of guarantees
or participations in loans and other investments made by private investors;
when private capital is not available on reasonable terms to members, the WB
supplements the investment by providing, on suitable conditions, finance
for productive purposes out of its own capital funds raised by it and other
resources.632 This implies that the institution can raise funds from a third party for
the purposes of achieving its purposes. An agency relationship is therefore already
created. Similarly, the WB guarantees for members loans from MNCs either
through developmental capital investments or outright funding for a specific
project.633 This equally entails dealing with the third party with the consent of the
member states.
With respect to the IMF, the Articles provide also that facilities shall be
provided for members from the general resources of the Fund raised by the pool
of quota subscriptions of members representing 75 per cent of their own currency
contribution into freely convertible currency that members will be able to use.
The Article further provides that, during a scarcity of a members currency, the
Fund will only act as an intermediary to borrow money from either within or
outside members territory.634 There is already an implied authority for the Fund
to raise a loan from a third party. There is no impediment within the Articles of
Agreement for the IMF to borrow money from private sources, but the conditions
that may be imposed by the private lender may alter the duties and obligations
of the member states; the latter may possibly be anxious to borrow the capital to
correct an inequilibrium in their balance of payment account.635
From the analysis of Article 1 of the World Bank and the IMF Articles of
Agreement, indicating that funds could be raised under favourable conditions
from other sources to fulfil their obligations, can be said to have, by implication,
legally created agency relationships and thus the following can be suggested:
630
631
632
633
634
635

Al-Rfouh, Faisal, Protection of National Sovereign Rights under International Law.


Shihata, I., The World Bank in a Changing World, Vol. 3 (1991) p 311.
Article 1 (2) World Bank Articles of Agreement.
Article 1 (4) of World Bank Articles of Agreement.
Article VII (2) of IMF Articles of Agreement.
IMF Press Release No. 01/51, 7 December 2001.

127

The Relationship Between the WB, the IMF and Member States

The IMF has the power to exercise the state sovereignty to raise funds through
a private source on behalf of the states;
a. In dealing with a private person or company there is a probability of
the Fund waiving their immunity in compliance with US Exchange
commission rules which pre-empts state sovereignty and immunity for
intergovernmental organizations;636
b.

The rights, duties and obligations of the members states are likely
to be altered depending on commitments reached with the Fund
as intermediary;

c.

The express authorization for the Fund to approach a private person


(third parties) for resources on behalf of the member state already
establishes an agency relationship;

d.

There is a legitimate approval or conferment of state sovereignty on the


IMF to raise funds for the state from private sources that are presumed to
be third parties, and

e.

The agency relationship imposes an obligation on the agents (the WB


and the IMF) to act in the interests of the principals (member states) at
all times because of the fiduciary relationship that exists between the
principals and agents.

The argument that states membership of an international organization does


not create agency relationships can be rebutted where there is an established case
of de facto agency, as in the case of the WB and the IMF. A factual relationship
may arise in any situation. It does not depend on the nature of personality of the
organization or the Constitutional relationship between the institutions, but on a
factual relationship between the institutions and the member states.637 As there is
already implied or expressed consent, in certain instances the WB and the IMF act
as agents to member states.638 Implied consent can always be deduced from the
objectives of the institutions; for instance, the concept of monetary sovereignty in
international law demands that a state has absolute control over its currency, but
the joining of the IMF based on the Articles of Agreement already in existence
indicates that consent to regulate its currency so as for it to be consistent and
convertible to other member states currencies has already been granted.639 Finally,
636 United States Exchange Commission Rule 10 b 5 824 of 1943. Pre-empts immunity
on grounds of state sovereignty.
637 Amerasinghe, C.F., Principles of Institutional Law of International Organizations (1996)
p 353.
638 Shihata, I., Vol. 1 p 312.
639 Mann, F.A., The Legal Aspects of Money, Fifth Edition (1992) p 479.

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The Relationship Between the WB, the IMF and Member States

the argument is that all forms of agency relationships must be in conformity with
the provisions of the UN Charter and international law.

6.2 delegation of sovereignty to the wb and the imf


Delegation in this context occurs when the states ask the WB and the IMF to
perform a task on their behalf. The principle of delegatus non delegari applies in the
international delegation of power because states can delegate only those powers
on which they have the authority to regulate or legislate. Most scholars now adopt
the language of the principal-agent model theory to describe delegated powers.
Emerging trends in the world political economy have made the delegation of
powers to international institutions such as the WB, the IMF, the WTO, the EU,
and other intergovernmental agencies necessary and desirable. Although signs
of distrust among member states and international organizations have been on
the increase, the advantages of delegating power to international organizations far
outweighs the disadvantages, as long as the delegated powers are clearly spelled
out.640 Similarly, there is a presumption of a fiduciary relationship that exists
within an agency relationship between the delegating states and the financial
institutions.
It has been argued that one of the essences of the delegation of sovereign
powers is predicated on states; this is understood as being to avoid a bilateral
agreement with a higher coercive power that might affect a states sovereign
powers. Therefore, when faced with a problem, the solution would be to enter
into cooperative agreements either through a formal treaty or formal soft law in
which each party delegate to the cooperative the duty of performing specialized
functions. However, there is another side to the delegation of state sovereignty:
when sovereign power is delegated from domestic authority to international
organization, many problems might emerge, making the delegation of sovereign
power undesirable. This could be so particularly when the sovereign power is
delegated to undemocratic institutions by democratic institutions. The question
of desirability of delegated sovereign power to an international organization can
be answered only by balancing the costs and benefits, which will rise along with
measuring the consequences of limitation of sovereignty.
Most instances of delegation are considered worthwhile. The implementations
by international institutions are, however, sometimes shoddily achieved, and
640 This point was emphasised during the Maastricht Treaty: the ECs powers were said
not to have been delimited for clear interpretation; in Delegation of Powers and the
Fiduciary Principle by Giandomenico Majone; paper at the CONNEX Workshop,
Paris, 11 May 2005.

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commentators are of the view that without proper monitoring, international


organizations will dictate their policies to the principals who, under normal
circumstances, should dictate to the institutions.641 For instance, the states
conferred sovereignty powers on the WTO, the ILO and the International Atomic
Energy Agency (IAEA) for the regulation of specialized and technical matters;
recent developments show that these organizations are now dictating to member
states, a policy that requires interpretation by a specialist to states before adoption,
creating a bureaucratic tangle initially avoided by the state.642
The opinion has been stated that the most frequently cited example of
international delegation is probably the WTO. It imposes a large number of
burdensome rules on states, yet these rules were the products of a negotiated
agreement and were consented to by all member states.643
It has been argued that the controversies surrounding the delegation of
sovereign power is not so closely concerns the policy itself but the decision
process; it does not usually involve those who are to be affected by the policies.
The WTO Agreements made provisions for the involvement of a majority of
its members in the decision making of the policies.644 This explains why their
policies are not criticized in the same way as those of the WB and the IMF. The
IMF, for instance, provides three-fifths of its members holding eighty-five per cent
of the voting power (thus, most developed countries with large quotas) to take a
decision either with respect to their policies or an amendment of the Articles of
Agreement.645 The WTO Agreements give every member state the opportunity to
present the position of their states and relate it to the policies of the institutions.646
Member states have delegated express and implied powers to the Bretton Woods
institutions in order to secure the expert, credible and mutual advantage of member
states, including uniform compliance with the policy decisions in the specialized
areas delegated. There is a control mechanism for delegated acts of Parliament,
but a similar organization such as the EU rarely exceeds its limit, if only when the
check mechanism is ignored.647 In some states of the former Soviet Union there
641 Bradley, C., International Delegations, The Structural Constitutions and Non-SelfExecution, 55 Stanford Law Review (2003) p 1557.
642 Swaine, E., The Constitutionality of International Delegation, 104 Columbia Law
Review (2004) pp 1492; 1506.
643 Young, E E,. The Trouble with Global Constitutionalism 38 Texas Journal of International
Law (2003) pp 527 534-35.
644 WTO Agreement Articles XI; X.
645 Article 28 IMF Articles of Agreement.
646 Saskia, S., Sovereignty and the Age of Globalisation: Losing Control? (1995) pp 22-28.
647 Pollack, M.A., The Enquiries of European Integration; Delegation, Agency and
Agenda Setting in the EU, Journal of Common Market Studies (2003) Vol. 42, Issue 5, pp
1061-97.

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is a clear prohibition on the delegation of sovereign powers to individuals, unions


or organizations.648 In the case of the Republic of Lithuania, their Constitution
provides that the state shall participate in international organizations provided
these do not contradict the national interests and independence of the state.649
In states that allow the delegation of sovereign powers, strict compliance with the
limits of powers delegated is observed.650
The argument is that it is axiomatic to avoid a problem in delegation by providing
a clear and adequate standard for the agencies charged with administering the
delegated power so that no gap may exist that the agency could fill; in addition,
the agencies will execute more effectively the intentions of the requesting states
where misinterpretation has been prevented.651
There is a general presumption in international law that the mere fact that
sovereign powers are delegated does not mean that the states power with
particular reference to that subject matter is abdicated.652 To some extent, an
agency relationship between the states and international organizations with legal
validity or concept of legalization exists.653
Debates over the voluntary delegation of state sovereignty by the states can
prove heated as nationals imagine the implications for their national identities,
fundamental rights and democratic institutions. Those pro-IMF and WB who
are incidentally the elites in the governments of developing and developed
nations argue that they represent the best way forward for the world economy:
the institutions will promote sustainable development, remove all barriers in
exchange rates, foster the rule of law, and prevent unhealthy economic activities
that indirectly occasioned WWII.654
Similarly, membership of the institutions cooperative organizations would
seem to provide developmental aid when the need arises. This will facilitate, for
developing and developed countries alike, access to overseas markets. According
648 Article 73, Azerbaijani Law on the Constitution of 1978 amended 1993 provides inter
alia that the Azerbaijani Republic shall not alienate in any form the sovereign rights
exercised in its territory to other states or union or intergovernmental institutions.
649 Verdross, A., Theory of International Law 6 EJIL 91995) pp 41-43.
650 The latest Polish Draft Constitution framed by the Constitutional commission of
National Assembly permits the delegation of power, but only after deliberation by the
Parliament with a clear limit of such delegated power.
651 Wisconsin Legislative reference Bureau, January 2004, Vol. IV NO 1 p 1.
652 State v Wakeen (1953) 263 Wisconsin 401 concerning regulation of the sale of drugs
at Wisconsin State where the court held inter alia that the delegation of power does not
mean abdication of power completely by Parliament but is to be exercised concurrently,.
653 Abbott, K., The Concept of Legalization, 54 Int.l I. Org. (2000) p 401.
654 Caborn, R., Globalisation; What It Is And The Damage It Does in Colin Hines,
Localization of a Global Manifesto (2000) p 2.

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to this school of thought, because of the activities of the financial institutions,


including the WTO, in East Asia poverty declined and in Latin America inflation
sharply reduced, until the Asian economic crash in July 1997. These views were
expressed in justification of the exercise of state sovereignty by the WB and the
IMF.655
The other side of the debate held the opinion that the delegation of state
sovereignty to these institutions would blur the distinction between the foreign and
domestic national economies656 which might be integrated to global markets;657
all nationals and governments would find it harder to achieve security, prosperity
and well-being through purely national self-efforts, including social services for
the less-privileged in the state who might suffer a setback.658 It is also argued that
the surrender of sovereignty to the institutions will increase the developmental
gulf already existing between the developing and the developed countries in both
political and economic sovereignty.659
This approach can be supported by the membership of the UK or Germany of
European Union, where state sovereignty has been delegated to the Commission
that in turn, acting on the delegated power, promulgated a policy allowing the
free movement of capital, goods and services with a virtual removal of tariffs and
taxes within European territories. The argument is that the policy will benefit
the European countries with a large market economy, but might result in the
permanent incapacitation of the weaker European states, most of whom are
undergoing economic transitional changes because of the collapse of the socialist
economy as a result of the disintegration of the Soviet Union.
The argument in favour of an international organization concerns the obligation
imposed by the Articles of Agreement of the WB and the IMF as binding on
states subscribing to its membership. The implication of state membership to
these organizations is that state sovereignty is automatically conferred on the
institutions, to be exercised either exclusively or concurrently.
Certain legal issues might be examined in considering the delegation of
sovereignty powers to individuals, corporate bodies, and international organizations.
655 Hildyard, N., The World Bank and the States: A Recipe For Change, Bretton Woods
Project, (1998) p 15.
656 Balanya, B., Regional and Global Restructuring and the Rise of Corporate Power (2000) p 95.
This remark was made in respect of the WTO, with similar characteristics to those of
the Bretton Woods Institutions.
657 Barnet, R. and J. Cavanagh, Global Dreams: Imperial Corporation and New World Order
(1994) p 423.
658 Ambassador, R.H., Sovereignty; Existing Rights and Evolving Responsibility, Washington DC
(2003) p 6.
659 Goldsmith, E., The Case against a Global Economy, (1996) p 298.

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Whether the conferment of sovereign powers creates an agency relationship or


the institutions act only under delegated sovereignty powers, it is assumed they all
have binding effects on the parties.660 Similarly, the exercises of sovereign powers
under the two conditions are revocable, i.e., they can be withdrawn and terminated.
It has been argued that in the case of delegation, the state retains for itself the
right to exercise the sovereign powers concurrent with and independently of the
institutions exercise of sovereign powers.661
It appears that member states still maintain their status of principal whether the
relationship is determined by an agency relationship or the delegation of power.
The implication is that the institutions must strictly adhere to powers delegated
to them by the states. Exercise of sovereign powers of states by the institutions
does not constitute a total sacrifice of countries sovereignty unless the institution
exceeds a boundary: an action never approved by the parliament or member
states.662
Delegation of power is one of the processes through which states confer
sovereign powers on international organizations. There is a general presumption
that the Articles of Agreement of the WB and the IMF are instruments of delegated
sovereign power from member states to the institutions, specifying in clear terms
the purpose and duties of the institutions. With respect to the WB, the duties
delegated to it are clearly spelt out in Articles 1 (1) (5) dealing with the purpose
for which the institution was established in 1944. Similarly, Articles 1 (1) to (5) in
the IMF Articles of Agreement equally specifies the duties delegated the institution
by the member states. Observers are of the view that these Articles of Agreement
are international agreements or treaties under international law.
The states can exercise their power under the Vienna Convention to withdraw
or revoke the delegated sovereign power.663

6.3 revocation of delegated sovereign power


While it is legitimate for states to confer sovereign powers onto the WB and the
IMF through the delegation of the duties or functions as stated in their Articles of
Agreement, it therefore follows that states which gave the powers to the institutions
can either withdraw or revoke the powers.664

660 Dixon, M., Delegation, Agency and Alter Ego, Sydney Law Review 11 (1987) p 326.
661 Sarooshi, op. cit p 54.
662 Hudgins, L.E., The Myth of Surrendered Sovereignty.
663 Articles 37 Vienna Convention on the Law Treaties 1969
664 Articles 54-6 Vienna Convention on the Laws of Treaties 1969.

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The Articles of Agreement of the two institutions provides the circumstances


under which a state can exercise the power to withdraw or be suspended from the
institutions activities; in practice, though, these options are rarely exercised even
where the revocation of power will be clearly lawful if exercised by states. Most
international organization agreements give the member states unilateral rights
to terminate the agreements when the conferment of sovereign power is through
delegation.665
Theoretically, the power to terminate or determine sovereign powers conferred
on institutions are always in favour of the principal or states, as the case may be,666
yet it is rarely exercised by the states in respect of the WB and the IMF which are
distinct institutions providing economic benefits to the member states. It has been
argued that treaties can only be considered as a form of delegation if the party
that delegate equally has the power to revoke or withdraw from the agreements;667
these rights can either be implied668 or as expressly stated in the treaty.669

6.4 concurrent powers of the world


bank, the imf and states

There is a general presumption that the WB or the IMF shares its sovereignty
concurrently with the states; however, the issues that are likely to arise in this
scenario concerns a situation where there is inconsistency in their policies relating
to the subject of the delegation of state sovereignty, which one of them overrides
the other? It is held that even though the state has delegated its power to the
institutions, the states are not precluded from exercising competence over the
same subject matter; it can even exercise powers on a unilateral basis on the same
subject matter delegated to the institutions. The courts have held in many cases
that the fact an act is delegated to another body by a state does not preclude a state

665 Schemers and Blokker, N., International Institutional Law (2003) 92.
666 Article 64 International Civil Aviation; Article 31 Universal Postal Service Union;
Article 37.2 International Telecommunication Commission; Article 30 (a) International
Labour Organization: all stipulate that the member states have the unilateral right to
terminate its membership or withdraw the delegated power to the institutions on
giving the required notice.
667 Article 56(1) of the Vienna Convention on the Law of Treaties.
668 Brownlie, I., Principles of Public International Law, Sixth edition (2003) p 592.
669 Feinberg, N., Unilateral Withdrawal from an International Organization, 39 BYBIL
(1963) p 189.

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from liability arising therefrom or prevent the state from acting and correcting
anomalies arising from the delegation of duty.670
The fact that these powers are delegated to the WB and the IMF does not
preclude states from exercising sovereignty over the subject matter. For instance,
the member states of the UN conferred on the UN the power to enter into and
conclude a treaty on their behalf;671 yet member states can enter into bilateral or
multilateral treaties on the same matter on their own without reference to the UN.
A member state of the WB and the IMF can thus enter into a bilateral treaty with any
member of the Paris Club with special arrangements regarding debt forgiveness
and developmental aid similar to the arrangement with the institutions.
However, there are exceptions to this rule: the parties must have stated
expressly in the agreement that the power shall not be conferred on any other
group, either domestically or internationally. For this reason it has been observed
that the registration of a foreign company as a domestic company is not sufficient
to avoid liability under international law.672 States delegate sovereign powers to
international organizations on policies that are still being implemented at the
domestic level, for example, the state promotes policies for the protection of
human rights, education and other cultural and social services. These same sectors
are equally delegated to international organizations, which concurrently perform
similar duties to those of the states.
As a confirmation of the argument above, it can be observed that states engage in
developmental projects that have been delegated to the World Bank and states are
not prevented from borrowing money from other sources for the developmental
projects of their country. This can easily be said in theory while in practice it is
very difficult to participate in activities already delegated to the IMF.
The states have completely delegated the regulation of the exchange rates to
the IMF, although the central bank of each member state may have the expertise
to perform a similar duty. The design of the working relationships between the
states and the institutions makes it completely impossible for the state to have
dual relationships with either another group or state in the activities being carried
out by the IMF.673
In summary, while it may be claimed that state sovereignty is legitimately shared
by states and international organizations, the act limits the sovereignty of states.
The voluntary conferment of sovereignty powers from states to international
670 Lotus Case, France v Turkey, Permanent Court of International Justice, 1927 (1927)
PCIJ 3
671 Parry, C., Treaty Making Power of the United Nations 26 BYBIL (1949) p 108.
672 Chayes, A., The New Sovereignty: Compliance with International Regulatory Agreements
(1995) pp 225-27.
673 Sarooshi, op. cit. p 60.

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organizations vitiates the act of intervention in the affairs of another state in


international law. Similarly, the fiduciary relationship obtaining in an agency
relationship between a state and international institutions still exists when states
confer sovereign powers on the WB and the IMF.
There is a binding article of agreement between the states and the institutions,
thus conferment of sovereign powers onto the institutions cannot qualify as a
loose delegation of power. There are corresponding rights and duties for the two
parties in international law. Apart from the conferment of sovereign powers onto
the institutions through an agency relationship and delegation, states also confer
sovereign powers to international organizations through transfers.

6.5 transfer of sovereign powers to


international organizations

The degree and weight attached to transfer of sovereignty to international


institutions where these two institutions are grouped is higher than every other
method of conferring sovereignty powers by states on international institutions.
When sovereign powers are conferred on international organizations by transfer, it
might be very difficult if not impossible for the powers to be exercised concurrently
by states and international organizations.674 Such words as delegation, agency
and transfer to illustrate the conferment of sovereign powers to international
organizations are interchangeably used675 and they generate significant
controversy,676 but authors argue that the use of the word transfer definitely
suggests the irrevocability of the conferring of sovereign powers onto international
organizations.677
The approach adopted at the Bretton Woods Conference negotiated the
surrender of a portion of sovereignty with respect to the IMFs regulation of
exchange rates and balance of payment account; it may be considered a transfer of
sovereign powers to the institutions. Generally, there is a presumption that states
that confer sovereign powers on international organizations without securing
their right of unilateral termination of the agreement, or at least have the option
to withdraw from the agreement, may have contemplated partial or full transfer
of sovereignty powers to the organizations. In fact, in some cases states normally
674 Zoller, E., The Corporate Will of the United Nations and the Rights of Minority, 81
AJIL (1987) p 610.
675 Cassese, A., Modern Constitution and International Law (1985) p 331.
676 Sarooshi, op. cit. p 28.
677 Bradley, C., The Treaty Power and American Federalism, 97 Michigan Law Review
(1997-9) p 390.

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indicate expressly whether the conferred power is transferred or delegated.678


Article 11 of the Italian Constitution and Article 92 of the Netherlands Constitution
provide for the transfer of sovereign power to international organizations; even
though the court has interpreted the provisions in the case of Frontini v Ministro
delle Finanze to be consistent with the law-making powers of the EU, most authors
realize that the transferred powers still belong to the states who may exercise the
right of revocation before the international organizations invoke the principles of
estoppel.679
A similar decision was reached in the case of Rutili v Minister for Interior where
it was held also that transfer of sovereign powers to the states is for the EC to
accomplish the purpose for which it was established, while not absolving the states
from responsibility arising therefrom to their citizens.680 Members are presumed
to have the right of unilateral withdrawal even where the sovereign powers are
transferred to the international organizations.681
The conferment of sovereign powers on international organizations, which
suggests a partial or full transfer of state sovereignty, need not be expressly stated;
it can be inferred from the inability of states to exercise direct control over the
activities of the institutions. Also, the revocable or irrevocable nature of the
conferred sovereign powers agreed or implied between the states and international
organizations will reveal whether the conferred sovereign powers are transferred
or merely delegated.
It has been observed that transfer of sovereign powers to international
organizations is an extreme case of conferment of sovereign powers by states to
international organizations; although the use of the word is interchangeable with
agency relationship and delegation of power, the arguments of commentators
are that states lack the competence to transfer those core characteristics that
touch on the existence of states with a defined boundary and assumption of full
responsibilities on behalf of its citizens.682
678 Article 24 of the German Constitution provides, inter alia, that the state by legislation
may transfer power to international organizations. Similarly, Article 11 of the Italian
Constitution provides for transfer of power to international organizations. These words
(transfer, delegation and agency relationship) are interchangeably used yet it does
appear that transfer is more extreme in concept than the rest.
679 Frontini v Ministro delle Finanze, 2 CMLR (1974) p 372.
680 Rutili v Minister of Interior ECR (1975) p 1219.
681 Article 59 (1) of the Treaty establishing the European Constitution provides inter alia
that a member may decide to withdraw from European Union in accordance with
its own Constitutional requirements. In a draft establishing the EU submitted to the
President of the EU on 18 July 2003, CONV 850.
682 Toth, G.A., Legal Protection of Individuals in the European Community, America
Journal of Comparative Law, Vol. 28, No 3 (Summer, 1980) pp 509-513.

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The view is that transfer of state sovereignty to international organizations


is limited to the purpose of setting the international organization and does not
include the transfer of the entire states apparatus, which the electorates allowed
only the elected representatives to exercise jurisdiction.683 For example, the
transfer of sovereignty power to the EU does not abdicate the power of parliament
to make laws towards the welfare and protection of its citizens. It is claimed that
while it can be acknowledged that the international institutions exercise sovereign
powers as a matter of privilege only to the extent permitted by the treaties, they
must not be allowed to become involved in those areas not covered in the
treaties.684

6.6 facts in support of conferment of sovereign


power to international institutions by transfer

The view is that the inability of the states unilaterally to terminate the agreement
or exercise direct control on the affairs of the international organization suggests a
transfer of sovereignty power to international organizations, as the organizations
possess the sole rights to take decisions within the confines of the subject matter
agreed by the transferring body. The view is that in the case of the transfer of
powers to the international organizations, the states may not exercise concurrent
jurisdiction with the international organizations over a specific subject matter. For
example, states transferred their powers to the Dispute Settlement of the WTO,
although Article XV of the Marrakech agreement, which established the WTO as
an international organization, provides inter alia that members can unilaterally
withdraw from WTO,685 but the decisions of the WTO Dispute Settlement Body
are binding on members who are parties to the suits.686
Membership of the WTO therefore indicates that the states have submitted
their domestic jurisdiction to the DSB; they are required to abide by the treaty,
which requires them to accept the decisions of the appellate body of the Dispute
Settlement Body of the WTO as final.
The conferment of power under this category appears to be more advantageous
to the international organizations as settlement of disputes are provided within
683 Certain aspects or a particular subject matter can be transferred to the international
organizations, but not the entire domestic authority that has been delegated to the
officials of government by the electorates through the democratic process or any
accepted state practice where power is given to the elite group.
684 Weiss, F., Greenlands Withdrawal from the European Community, 20 Israel Law
Review (1985) p 282ff at pp 284-86.
685 Article XV of the WTO Agreement.
686 Articles 21, 22, and 26 dealing with dispute Settlement Understanding.

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the system and states are likely to succumb and comply to the decisions of the
body than outside litigation which might not only be expensive but more
complex. Similarly, international organizations are given greater powers when the
conferment of powers is done via transfer rather than an agency relationship or
through delegation.
Also in respect of the WTO Agreements, member states do not have direct
control over the activities of the institutions; this equally applies to the World
Bank and the IMF. Although they are less democratic than the WTO, the member
states do not have any direct control over the institutions. Observers are of the
opinion that states merely delegate the sovereign powers to the institutions, while
in practice, the attitudes of the states and the institutions suggest a conferment of
sovereign powers by transfer rather than by delegation.

6.7 transfer as a limitation on state sovereignty


There is a general presumption that the transfer of sovereign powers from states
to international organizations, while legitimate because of the capacity of the
states to either transfer or delegate their powers, limits the capacity of the state
sovereignty. It can be said that once sovereign powers have been conferred on
international organizations, the implication is that the international institutions
will become the only lawful place where acts relating to the transferred specified
activities can be carried out.
However, in carrying out such acts by international institutions, states have
been advised by authors687 to distinguish between partial transfer and full transfer
of sovereign powers. While some authors688 debate that there is a distinction
between partial and full transfer, some are of the view that all transfers of power
are partial, as the states can withdraw from the international treaties, together with
the fact that states still retain a residue of the sovereign powers. The argument is
that states cannot confer their sovereign powers in toto to international institutions
without a residue that they can be used to protect the electorates in the event of
abuse by the institutions. Nevertheless, the states and the international institutions
have abused this principle.689
It has been observed that in the case of the partial transfer of sovereign power
to international organizations, states are not required to give backing to the
687 Loewestein Karl. Sovereignty and International Co-operation, American J Intl Vol. 48 No. 2
(1954) pp222-244
688 Pollack Mark A. Theorizing the European Union: International Organizations, Domestic Polity
or Experiment in the New Governance, (2005) pp357-398
689 Van Gend en Loos v Nederlands (1963) ECR p1 at p 12.

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conferment of power through local or domestic legislation after signing the treaty
or the international agreement; in the case of the full transfer of power, the states are
required to give direct effects within their domestic legislation to the obligations
arising from membership of the institutions. For instance, the UK passed an act
adopting the EC Council Regulations as part of UK laws; the Councils Regulation
have a direct impact on the member states. The EU Directive 2002/95/EC of 27
January 2003 dealing with the recycling of waste was adopted by most member
states through their local legislation. In fact, Article 9 provides inter alia that
member states should bring into force the laws, Regulation and administrative
provisions necessary to comply with the Directive before 13 August 2004.690
In relation to the full transfer of sovereign powers to international organizations,
the institutions assume the power of a regimental or command structure where
Directives or instructions are given to the member states. For instance, in this
case it was not enough for the states to be given Directives on what to do or how
to it; they were given a time frame for effective compliance with the Council
Directives.691
By membership of the institutions, signing the treaties and accepting to be
bound by the decisions of the international organizations such as the World
Bank and the IMF, states have unilaterally limited their sovereignty. However, the
limitation of state sovereignty does not cover the international organizations if the
acts are ultra vires.
It has been commented that the transfer of sovereign powers entails removing
decision-making on matters ordinarily belonging exclusively to states to fall within
the exclusive decision-making power of the international organizations. Even
where states have a different interpretation on matters being considered by the
institutions, that of the institutions will prevail as decision-making is shifted to the
institutions in the case of transfer. The decisions of the European court are binding
on member states.692 While it can be argued that there is no law prohibiting
states from making laws on matters which it had conferred on the international
institutions, in multilateral treaties involving other member states, decisions of
international organizations such as the WB and the IMF might be considered more
binding than are interpretations of individual member states.693
690 Directive 2002/95.EC of the European Parliament and the Council of 27 January 2003
on the restriction of the use of certain hazardous substances, and recycling.
691 Article 9 of Directive Ibid and Article 10, which provide inter alia that the Directive
shall enter into force from the date of publication.
692 Gordon, R., The Strasbourg Case Law; leading cases from the European Human Rights Report
(2001) pp 3-6.
693 Costa v ENELI (1964) ECR p 585.

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Even though the full transfer of sovereign powers to international organizations


carries with it substantial responsibility and power for the institutions, it is said
that the test attached to full transfer is very high as it is likely to be subjected to
debate within the domestic jurisdiction before it is conferred on international
institutions. The argument of commentators that consent of the three arms of
government may be a prerequisite before there can be full transfer of sovereign
powers to international organizations may not be rebuttable; however, there is a
latent line in the legalistic interpretation between partial and full transfer.
While some authors are of the view that this is mere semantics, others have
stated that it shows not only the degree of conferment, but serve to buttress
the extent and degree of rights and obligations arising from such conferment of
sovereign power. Also, the control of the international organizations by the states
where the conferment is by full transfer may be limited, as states cannot exercise
direct control over the institutions. The international institutions legitimately
exercise these sovereign powers, together with interpreting the multilateral
treaties, which might be binding on the members.694
It can be said that the transfer of powers to international organizations is to
enhance specialization and create a comparative advantage among states by
pooling their sovereign powers into a single unit. Observers are of the view that
the need for Constitutional clauses providing for the limitations of national
sovereignty, pooling security sovereignty and transferring sovereign powers to
international organizations are not only for the benefit of the states because of the
principles of comparative advantage, but to achieve cooperation and peaceful coexistence among countries of the world and avoid the unhealthy competition that
led to the great depression of the 1930s.695
The issues relating to the transfer of sovereign powers to international
organizations, although they are clearly spelt out in some countries Constitutions,
have a clause that the institutions in exercising such powers must be guided by the

694 Foto-Frost v Hauptzollamt, ECR (1987) p. 4199, 4230; Article 234 of the EC addressing
the interpretation of treaties by international organizations where state sovereignty is
conferred on them through transfer, the court held inter alia, that national courts within
the European Union are obligated to adopt the same ratio decidendi in arriving at their
own decisions. This is a typical example of the full transfer of powers.
695 These appears to be the main reasons for the establishment of the WB and the IMF
to avoid the unhealthy rivalry among nations, particularly the developed ones, that
resulted in the great stock market crash of 1929 which in turn led to the great depression
of the 1930s.

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principles of international law and respect for the national legal order.696 Article 24
of the German Constitution 23 May 1949 provides, among others, that sovereign
powers shall be transferred to international organizations for the maintenance of
peace and collective security; the preamble to the French Constitution, Alinea 15,
provides inter alia that France shall accept limitation of its sovereignty if it is for
the purpose of promoting collective peace and security.697
Similarly in Austria, Article 9 of its Constitution provides that specific
sovereign power shall be transferred to an international organization provided
the activities of such intergovernmental institutions are regulated within the
framework of international law.698 However, in the case of Greece, Article 28 (II)
of their Constitution stating that the transfer of national sovereignty, which means
the limitation of its sovereign rights in favour of international organizations, can
be done only for the purpose of promoting national interest insofar as individual
rights and the foundation of government shall not be infringed, including respect
for principles of equality and under the condition of reciprocity among members
of the international organization.699
The views are that if these countries are seen to be cautious in transferring
sovereign powers to international organizations, that of East Timor clearly and
in unambiguous terms defined the limits upon international organizations in
exercising the conferred sovereign powers transferred from their state. Section 8
of the Constitution of East Timor provides inter alia that the Democratic Republic
of East Timor in transferring sovereign powers to international organizations
shall be governed by the principles of territorial integrity, principles of equality,
and the doctrine of non-intervention in the domestic affairs of another state,
including adopting general and customary principles of international law.700 It
can be argued that the Constitution of East Timor in relation to the conferment
sovereign powers by transfer appears to be consistent with the general principles
of public international law and the international legal order.
While the case of Greece emphasises the need to protect human rights in
transferring power to international organizations, that of East Timor places

696 Article 6 of the Chechnya Constitution of 12 March 1992 provides inter alia that
international organizations in carrying out the functions for which state powers are
transferred to it must take cognizance of the universal norm of international law and
restrict themselves to mutually beneficial acts as authorized by the treaty only.
697 Alinea 15, French Constitution of 27 October 1946 as reconfirmed in their Constitution
of 4 October 1958.
698 Article 9 paragraph 2 of the Austrian Constitution Amended on 1 July 1981.
699 Article 28 (II) Greece Constitution of 7 June 1975.
700 Section 8 of East Timor Constitution of 20 May 2002.

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emphasis on the total sovereignty of states with unambiguous reference to nonintervention and respect for the equality and integrity of states.701
There is a general presumption that the transfer of sovereign power to
international organizations limits the sovereignty of states only to the extent that
it affects merely the subject matter for which the organization was established and
with full and not partial compliance with the principles of public international
law. For instance, the Netherlands Constitution provides that the states can
confer by transfer the executive, legislative and judicial powers to international
organizations702 in pursuant to a treaty aimed at promoting the development of
the state and international law, provided that national legal order is respected.703
It can be observed that states have consented to the limitation of the exclusive
sovereign rights in order to obtain the benefit-associated membership of
cooperative (non-profit) organizations, styled intergovernmental organizations
or mere international organizations. However, states have insisted that all
participants in and members of international organizations must strictly adhere
to respecting the rules of international law. While states are willing to surrender
their sovereign rights to achieve some common benefits, they are equally anxious
to protect the territorial integrity of the state including the protection of sovereign
rights not surrendered.
Some observers argue that the transfer of sovereign powers to international
organizations is nothing other than surrender of political sovereignty. Scholars
have considered the continuing ceding of sovereign powers to the EU in this light
as a total surrender of state sovereignty.704

6.8 limits of exercise of transferred


sovereign powers

There is a general presumption that the powers of international organizations are


limited to the particular specific duty transferred to them.
There are controversies as to whether the World Bank and the IMF adhere to
the limits of the sovereign powers conferred on them. Similarly, it appears that the
conflict between the European Community and German Constitutional law with
701 Section 9 (1) of East Timor Constitution of 20 May 2002 provides inter alia in
transferring sovereign powers to international organizations, the government shall
consider compliance with the general and customary principles of international law.
702 Article 90 of the Netherlands Constitution of 17 February 1983.
703 Article 91 of the Netherlands Constitution of 17 February 1983.
704 Fellows, L., The Continuing Transfer of British Political Sovereignty to the European
Union, (2000) pp 1-8.

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respect to the ECJ Banana case provokes these views. The contentions of Germany
are that the regulatory arm of the EU has exceeded its scope by making laws that
affect the rights of individuals and businesses in Germany without authorization.
The court declined the contention of the EU that Germany has no jurisdiction
to challenge the Communitys act and further held inter alia German citizens as
guaranteed by their Constitution shall be protected irrespective of the sovereign
powers conferred on the EU. The court at page 79 of the judgement also held that
guarantee of a Constitutional standard cannot be dispensed with for the purpose
of giving legitimacy to EU Regulation 404/93 of 13 February 1993 relating to
common organization of the market in bananas where the Germany have voiced
its open distrust of the regulation and the legal protection offered by the ECJ.705 It
has been argued that the scope of sovereign powers conferred upon international
organizations are not only limited to the literal meaning of express provision of
the treaty or international agreement, but also do not flow with changes in the tide
unless properly authorized.706
The conferment of sovereign powers onto international organizations by
transfer is usually not implied as this elicits the surrender of the exclusive sovereign
rights of states, a result that is likely to alter their rights, duties and obligations. It
has been suggested that the actions of the international organizations must not
conflict with the purpose of the treaty establishing the institution.707
Apart from limiting state sovereignty, conferment of sovereign powers upon
international organizations by transfer might create an exclusive jurisdiction
for the organization in respect of the subject matter. For instance, the ECJ has
adopted this approach in many cases concerning the exclusive competences of
the EC and member states at the conclusion of treaties that bind all members.708
Commentators are of the view that there is an irrebuttable presumption that a
fiduciary relationship exists between the member states and the institutions;
however, the extent to which such obligations exist depends on the exact terms
of the transfer.
Perhaps it would appear that the exclusive competence of the organization to
exercise transferred powers gives the organization the interest and impetus to see
that the binding obligation is complied with by member states. For example, the EC

705 Maastricht case, CMLR (1994) p 57.


706 Frank, T., Delegating States Powers: The Effects of Treaty Regimes and Sovereignty, (2000)
p 279.
707 Matheson, M., United Nations Governance of Post-conflict Societies, AJIL (2000) pp
76-77.
708 Weiler, J.H.H., The Transformation of Europe, 100 Yale LJ (1991) p 2403.

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exercises exclusive jurisdiction in concluding certain treaties such as International


Agreements concerning services and the protection of intellectual property.709
The limits of the European Unions competences are governed by the principles
of conferral, and the use of the competences is governed by the principles of
subsidiarity and proportionality.710 However, under the principles of conferral the
EU shall act within the limits of the competences conferred upon it by the member
states in the Constitution or Articles of Agreement to attain the objectives set
out in the Constitution; competences not conferred upon the Union in the
Constitution remain with the member states.711 Furthermore, Article 2 of the
EC Treaty provides that the Community shall have as its task, by establishing a
common market and an economic and monetary union and by implementing
policies or activities referred to in Articles 3 and 4, to promote throughout the
community a harmonious, balanced and sustainable economic development,
raising the standard of living and quality of life including social cohesion and
solidarity among member states.712
The powers conferred on the EU can be said to constitute the transfer of
sovereign powers, yet the states could still regulate the internal affairs of the
country based on the same subject matter, although it might be suggested that in
the EC Treaty, external relations are subordinate to internal objectives. Article 23
(1) of the EC provides inter alia that the Community shall be based upon a customs
union which shall cover all trade and which shall involve the prohibition between
member states of customs duties on imports and exports and all charges having
equivalent effects, and the adoption of common tariffs in their relation with other
third countries.713 These powers transferred to the EC do not in any way prevent
the states from initiating policies aimed at protecting the fundamental rights or
protection of some member states citizens.714
The aim of the EC policy is similar to that of the WB and the IMF objectives.
The pooling of several sovereignties by the states for them to obtain power
within the European Union is similar to that of World Bank and the IMF and it
can be explained only by history. While the EC Treaty was all about economic
integration, the fundamentals were very political, providing peace and security for
all member states.715 However, while powers are given to the Union, the articles
709
710
711
712
713
714
715

ERTA case, ECR (1971) p 263.


Article 9 (1) of the Draft Constitution of the EU.
Article 9 (2) of the Draft Constitution of the EU.
Article 2 of the EC Treaty.
Article 23 (1) of the EC. Treaty.
ERTA case op. cit p 269.
Prof. Jan H. Jans, The Law of EU External Relations and the Draft Constitution
For Europe.

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The Relationship Between the WB, the IMF and Member States

in unambiguous terms provide that in exercising powers transferred or delegated


by the member states, there must be strict observance of the principles of
international law716 and its development including respect for the United Nations
Charter.717
The opinion is that while it can be argued that the World Bank and the IMF
have the capacity to carry out some functions ordinarily reserved for states, they
must have the capacity and competence718 to carry out such functions even where
the purported acts are for the development of the states, as the responsibility of
the international organizations lies within the international treaties.719 It can be
observed that the exercise of sovereign powers by the WB and the IMF will have
a binding effect if they actually had the competence and not only the capacity
to formulate policies.720 The power to perform any act by an international
organization is derived from the Articles of Agreement or the treaty only.721

6.9 conclusion
It can be observed that state sovereignty is an exclusive preserve of independent
states; however, non-state actors such as the WB and the IMF are conferred with
sovereign powers by delegation, transfer or establishment of agency relationships
to perform functions beneficial to member states.
The conferment of some state powers to these institutions legitimizes the
exercise of sovereign powers by the institutions, but the conferment in no way
limits the sovereignty of states except only to the extent of powers surrendered
by the member states on a particular subject matter. The weight attached to the
surrender of sovereignty depends on the degree of the conferral of sovereign
power. One matter is clear: the exercise of sovereign powers by the World Bank
and the IMF are duly authorized by the member states, but the controversies as
to the extent of the application of those powers, including the presumption of
implied powers on the expansion of their activities, will form the core discussion
of this thesis.
716 Article 4 of the EC Treaty.
717 EC Treaty, Draft Constitution, Articles 111-193.
718 Khan, D., The Legal Status of the Resolution of United Nations General Assembly, 19
IJIL (1979) p 552
719 Amerasinghe, C.F., Principles of the Institutional Law of International Institutions, (1998)
pp224-5.
720 Johnson, The Effects of the Resolutions of the General Assembly of the United Nations,
32 BYIL (1955-56) p 97.
721 Lauterpacht, E., The Development of Law of International Organizations by the
Decisions of International Tribunal, 152 Hague Recueil (1976-IV) p 447.

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Furthermore, while it can be argued that the exercise of the states sovereign
powers by the WB and the IMF are legal, perhaps the growing concern is whether
the institutions are able to confine themselves to the Constitutions of the
organizations where the delegated sovereign powers are expressed.722 Whether
the conferment of sovereign powers on the institutions occurs through delegation,
an agency relationship or the transfer of a specific sovereign power, there is a
general presumption that the institutions should confine themselves to acting
within the legal framework, which includes the Articles of Agreement.

722 Condition for Admission Case ICJ Report 1948.

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Chapter 7

The Controversies Regarding


the Operational Policies
of the WB and the IMF

he WB and the IMF are, just as are the states, subjects of international law.
Their legal obligations are based on international law; although they enjoy
an international legal personality similar to that of the states, they are regarded as
non-state actors and their functions are conferred by states, that are also, regarded
in the international arena as state actors.
As subject to international law, the institutions international legal obligations
are binding on them, including performing the functions for which they were
established within the parameters of their constituent documents and complying
with all of the rules and principles of international law when promoting their
policies. Their adherence to the prohibitive norms and compliance with
international legal obligations promotes and encourages the sustainability of and
respect for international law and legal order, also aimed at promoting peace and
security in the world.723
The existence of constituent documents suggests that the activities of the
global institutions are delegated by sovereign states; the powers to modify these
activities also lie with the states. The UN Charter, taking a cue from the Westphalia
Treaty of 1648, has imposed an international legal order or constraint upon states
and perhaps also upon international organizationsagainst interfering in the
internal affairs of another state. It can be said that activities not provided for in
the constituent documents are within the internal affairs of member states; given
this, it would appear that institutional policies that creep into the internal affairs of
member states erode the latters state sovereignty.
The topic for analysis in this chapter is whether the policies of the WB and the
IMF erode the sovereignty of the borrowing member state. To answer this, it is
pertinent to examine the international legal obligations of these institutions. This
chapter examines the legally imposed obligations by the Articles of Agreement,
723 Black, C.E., and Falk, R.A., The Future of the International Legal Order (1969) p. ix.

148

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United Nations Charter, UN General Assembly Resolutions and principles of


international law, including the promotion of policies consistent with the UN
family members and specialized agencies. Compliance with these legal obligations
and responsibilities724 complements rather than erodes the sovereignty of the
borrowing member states; on the other hand, an infraction of these obligations is
likely to erode the sovereignty of the borrowing member states.
One of the attributes of national sovereignty is a nations right to exercise
authority and implement its own law and policies over its territory. It is a cherished
and jealously guarded norm from the old international relations order to the new,
yet it raises great legal, political and ethical dilemmas. International organizations
conferred with powers to exercise those sovereign powers exclusively belonging
to states are obligated to conduct their affairs within the confines and the purpose
of the conferment.725 International policy-makers all over the world are haunted
by the imperative need to abide by sovereignty rules versus their responsibility to
member states within the international organizations.
The need for international organizations to conduct their affairs, including the
implementation of policies, within the Articles of Agreement is an obligation
aimed at protecting and respecting state sovereignty. Similarly, respect for
international agreements creates value in the international order and reduces the
rivalries entailed in power politics and mushrooming inter-state crises, through
the establishment of code of conduct and realization of international peace and
security.726 It can be observed that the WB and the IMF are legitimately created
and conferred with sovereign powers to further the common interests of member
states. Since their creation, they have had a significant, positive influence on
relations between states, creating an effective and friendly modality for the conduct
of international intercourse.727 Commentators view that since the institutions are
creations of and subject to international law, they must have international legal
obligationsall the more so since they are considered to be specialized agents of
the United Nations728 and can thus be endorsed, as the institutions are bound to

724 Reparation for Injury Case, ICJ Report, p 174; Bowett, D., The Law of International
Institutions, (1982) p362; Wright, Q., Responsibility for United Nations Officials, 43
AJIL (1949) p 95; Schermers and Blokker, International Law, (1995) p 1.
725 Michael, K., and Donald A. Sylvan, International Intervention: Sovereignty versus
Responsibility (2002) p viii-x.
726 Adelman, H., Theory and Humanitarian Intervention: Violence, Modernity, The
Nation State and Intervention in Ibid pp 3-4.
727 Bowett, D.W., The Law of International Institutions (1982) p 9.
728 Amerasinghe, C.F., Principles of the Institutional Law of International Organizations (1998)
p 225.

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implement policies not at variance with other policies of UN family members and
international law.
The arguments are that the institutions, must consistently comply with their
international legal obligations. The introduction of policies without due regard
for or consistency with the international legal obligations of the institutions may
erode the sovereignty of borrowing member states; this argument is predicated
on the view that the fulfilment of international obligations by the WB and the
IMF complements the sovereignty of states. It appears that the only method of
evaluating compliance with the institutions international legal obligations is
found in their Articles of Agreement, drafted to conform to the UN charter and
international law.
Also, the protection of state sovereignty in this regard largely depends on
the World Bank and the IMF, whose activities and modus operandi must be
confined within the Articles of Agreement and the general principles of public
international law.
It can be observed that sovereign powers are the exclusive preserve of member
states. Nevertheless, the conferment of these powers to the World Bank and the
IMF by whatever legal method does not preclude the institutions from adhering
strictly to the rules of international law under which they are created.
It can be argued that the creation of the institutions introduced stability in the
regulation of currency and exchange control in the international arena; however, it
suffices to add the opinions of some authors that the fact that the institutions are
universal organizations with a membership spread all over the world, considered
as specialized agencies of the United Nations justifies the assertion that their
obligations lie to a greater extent within the international arena. To this end their
policies must be towards serving and protecting the interests of the member states
that conferred on them sovereign powers in an impartial manner and without also
promoting only the interests of the executives of the institutions and a few member
states.729 Similarly, authors have posited that the entire policies of international
organizations must be based on law, as this will enable the respective domestic
national governments to co-opt such policies into their domestic national law.
Some states are even said to have in their Constitutions a review of the legality of
the policies or treaties of the international organizations before they are promoted
or implemented.730

729 Adamovich, A., Implementing the International Legal Obligations: Dilemmas for
National Constitutional Law, p 1.
730 Articles 62.2 and 140a (The Standing of International Treaties in Domestic Law) of the
Australian Constitution as altered on 31 October 1993.

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The international legal obligations of these international institutions includes


the respect for international agreements; the sovereignty of states and the rules
of international law; protection of human rights in the course of their activities,
and fulfilment of their obligations under the Articles of Agreement.731 These
obligations impose immediate duties and undertakings on the institutions to
exercise these without discrimination on behalf of the member states.732
Similarly, the views are that there are minimum obligations for the institutions
to maximize the available resources without exerting unnecessary duress and
constraints on member states.733 In support of this approach, it can be argued
that the institutions should adopt programmes aimed at protecting the vulnerable
states and, at the same time, promote the economic and social growth of these
states in order to conform with the object clauses and purposes of the institutions
as provided in the Articles of Agreement carefully drafted to respect and observe
the international character of the organizations.
While it can also be said that policies which are in conformity and consistent
with the international legal obligations of the institutions are not likely to erode
the sovereignty of borrowing member states, apparently because of the consensus
ad idem of the states and the institutions represented by the Articles of Agreement
before the policies were introduced and implemented. This approach distinguishes
between policies agreed before or at the beginning of the membership of the
institutions, on the one hand, and policies promulgated after the membership
agreement must have been signed, on the other. The former is consistent with
international legal obligations and general principles of public international law
whereas the latter is viewed as non-violent coercion that eventually results in the
erosion of the sovereignty of member states.734
The consensus ad idem between the member states and the institutions are
summarized in the Articles of Agreement; however, certain powers not expressly
stated may be implied through the various legal rules of interpretation where
there is an issue of ambiguity. The candid opinion of observers is, however, that
all policies of the institutions must have been agreed at the time of the initiation
of membership or, in worst event, democratically agreed, without necessarily
inflicting harm on the domestic, social, and economic affairs of member states.
It has been argued also that the special privileges and immunities conferred on
the institutions, essentially due to their creation under international law, themselves
create certain duties, responsibilities, and obligations. Non-performance, respect
731
732
733
734

Tomasevski, K., The Legal Case for Human Rights (1993) p 123-7.
Article 2 (1) of the Covenant: The Nature of States Parties Obligations 1990.
Tomasevki, K., The Economic Case for Human Rights, op. cit., pp 143-4.
Brown, Bartram S., United States and the Politicizations of the World Bank: Issues of
International Law and Policy; Aid as Coercion (1992) pp 53-7.

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The Controversies Regarding the Operational Policies of the WB and the IMF

and compliance, including the violations of these criteria, might result in the
erosion of state sovereignty.
As it has been argued that violation of international legal obligations exacerbates
the erosion of state sovereignty, then what are the international legal obligations
of the institutions?

7.1 obligations under the articles of agreement


The main questions centre upon the implications of the institutions Articles of
Agreement; the relevance of their Articles of Agreement in this discourse, and the
legal implications of Articles of Agreement. The implications of the institutions
implementing policies and performing functions not covered by the Articles of
Agreement but with the assumptions that the policies may likely enhance the
economic development of member states without a corresponding amendment
of the Articles of Agreement on state sovereignty must be determined. The final
and most important question concerns whether the policies of the institutions are
indeed consistent with the Articles of Agreement not necessarily the enhancement
of member states economic development.
The Articles of Agreement of the WB and the IMF are the first and most
fundamental documents that brought the institutions into existence under
international law. They stipulate the purpose, functions and the various rights,
duties and responsibilities of the institutions and member states. Perhaps, it can
be said that the Articles of Agreement of the WB and the IMF are international
agreements or treaties and are only interpreted under international law. In
other words, they are regarded as a binding agreement between two or more
persons, despite this fact, they go beyond binding agreements to the creation of
rights, duties and obligations between the member states and the institutions in
international law.
They are considered as constituting the enabling Act of the institutions that
confers upon them the sovereign rights to carry out their duties, representing
expressly the consensus ad idem of the parties. There is a candid view that the
Articles of Agreement are the bedrock of the institutions; just as the Memorandum
and Articles of Association of a registered limited liability company in domestic
law are seen technically as the de facto company, any act committed outside the
Memorandum and Articles of Association of a company are deemed ultra vires,
null and void.
Similarly, the Articles of Agreement of WB and the IMF, technically speaking,
embody all of the conferred sovereign powers and the extent of their application,
including the rights, duties and responsibilities of the institutions and member
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The Controversies Regarding the Operational Policies of the WB and the IMF

states. It has been argued that any act done outside the objects in the Articles of
Agreement of the two institutions constitutes a violation of the rules of sovereignty
of states.
Commentators have raised some issues regarding the limits and the extent of
the powers of intergovernmental institutions (the WB and the IMF). While some
are of the view that they may only perform such acts as expressly stated in the
statutes or Articles of Agreement and that acts not mentioned will be outside
their scope,735 others hold that the international institutions may, apart from the
functions expressly provided by the Articles of Agreement, perform acts which
are not precluded by their Articles of Agreement736 but enhance the achievements
of their purposes. An example is found in the Reparation of Injuries case, where
the court accepted the UNs capacity to perform acts not specifically or expressly
stated in the Charter as long as these are done towards the advancement of its
purposes.737
It appears that the ICJ contradicted itself in this decision on the interpretation
of Article 4 (1) of the UN Charter when it held in the Admission Case that the
Admission committee, the Security Council and the UN members may not impose
on admission of new members conditions not provided in the UN Charter.738
However, in 1980, the ICJ in the WHO and Egypt case,739 reversed itself and, inter
alia, affirmed the decision in UN Condition for Admission case that international
organizations are bound by their Constitutions and international law.740 With the
reversal of this case, it appears that the popular view is that the WB and the IMF are
not only limited to their Articles of Agreement, but are also limited to the object
clause and purposes for which they were set up.
Also, while the Companies Act or the law of the national legislation of
respective states governs the Memorandum and Articles of Association of limited
liability companies established under domestic law within the state, the laws
of international treaties and agreements under the canopy of international law
govern the Articles of Agreement of WB and the IMF. At the establishment of
the institutions in 1944, the functions of the institutions, although distinct and
related since they are meant to achieve similar fundamental purposes, showed a

735 Kelson, H., The Law of Nations: A Critical Analysis of Its Fundamental Principles (1950)
p 330.
736 Seyersted, F., International Personality of Intergovernmental Organizations (1964) 4
Indian Journal of International Law, p 22.
737 Reparation of Injuries Case (1949) ICJ Report p 180.
738 UN Condition for Admission Case ICJ Report 1948 p 64.
739 WHO and Egypt Case ICJ Report 1980 pp 87-90.
740 Ibid., pp 96-7.

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clear division of labour between the two institutions as mandated by the member
states.741
The view is that there is an irrebuttable presumption that the institutions are
committed to promote and formulate policies in accordance with the object
clauses in the Articles of Agreement. It can be observed that at the formation of
the institutions, member states consensually agreed on the roles to be performed
by each of the institutions, and any change to the express consensual agreement
without a proper consensual amendment742 will be viewed as moving the
goalposts, at the middle of the game, which may result in the violation of the
consensual express agreement.743

7.2 consent as a necessary ingredient


Consent and agreement are necessary ingredients to negating the presumption of
coercion or a unilateral decision of the institutions and threat to erosion of state
sovereignty. The principle of consent, good faith and the pacta sunt servanda rule
are not only universally recognized as fundamental ingredients of the Articles
of Agreement, but enhance the compliance with the principles of sovereignty
among member states.744 The consent to be bound by Articles of Agreement or
treaties by the signatures of states,745 expressed by an exchange of instruments746
or by ratification, acceptance or approval,747 including any form of documentary
expression of the consensus ad idem, negates the threat and violation of the
international legal obligations of the WB and the IMF.
The institutions cannot be accused of eroding state sovereignty through
their policies, it can be claimed, if the Articles of Agreement are amended to
accommodate the creative innovative policies not originally included in their
741 Article 1 of World Bank Articles of Agreement and Article 1 of IMF Articles of
Agreement clearly spelled out the functions of these two Bretton Woods institutions.
There is a clear distinction over the division of labour.
742 Section 2(7) of the UK Companies Act 1985, formerly European Communities Act
of 1972, dealing with the Articles and Memorandum of Association of Companies,
similar to the Articles of Agreement of the WB and the IMF, which makes provision
for procedures to be adopted before the Articles of Agreement can be amended.
Article VIII of the IBRD and Article XXVIII of the IMF. It appears that the Articles of
Agreement of the two institutions require an amendment to be carried out before new
reforms or policies executed by the organizations.
743 The Articles of Agreement of the WB and the IMF are similar to these Articles.
744 Brownlie, I., Basic Documents in International Law, Fifth edition (2002) p 270.
745 Article 12 of the Vienna Convention on the Law of Treaties 1969.
746 Article 13 of the Vienna Convention on the Law of Treaties, 1969.
747 Article 14 of the Vienna Convention on the Law of Treaties, 1969.

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Articles of Agreement. The Articles of Agreement of the institutions must be


amended to include changes and the institutions creative innovative policies
three months in advance before the policies can be legally implemented.748 This
provision not only suggests that the institutions do not have the legal rights to
implement policies not in the Articles of Agreement; it also suggests that sufficient
notice must be given to member states which might include their concurrences
in writing to avoid a claim of erosion of state sovereignty by the member states
against the institutions.
From the analysis of the institutions constituent documents, together with
the likely objective interpretation of Articles XXVIII (a) of the IMF and Articles
VI (2) of the WB providing for procedure for amendment, member states must
consent in writing, to the amendment of the Articles of agreements, before new
policies are implemented. This approach is similar to Section 4 of the Companies
Act 1985 and to Section 7 of the Business Act of 1985 which provides, inter alia, that
amendment of the Memorandum and the articles of that the companies must be
done by a Resolution passed by a majority of the shareholders.
However, as has been observed, the requirement of a majority of the shareholders
as provided in domestic law is different from the requirement in international law,
where every state is required to consent either to an alteration or to an amendment
of the Articles of Agreement. For example, in Ashbury Railway Carriage and Iron
Co. v Riche, the Memorandum and Articles of Agreement gave the company the
power to make and sell railway carriages; however, the directors entered into a
contract to purchase the concession to construct a railway in Belgium without
amending or altering its Memorandum and Articles of Association, similarly to
how the Articles of the WB and the IMF should be amended: by a resolution. The
court held that the contract was ultra vires and that the Articles and Memorandum
of Association were not amended to include the new roles of the company749.
The strong view is held by some that amendment does not include the consent
of states already part of an existing international agreement and not bound by the
agreement;750 however, states which became members after the amendment of
the treaties are bound by all of the amendments made before the commencement
of their membership.751

748 Article XXVIII of the IMF Articles of Agreement: Unless a shorter period is specified,
it shall not be less than three months before its commencement.
749 Ashbury Railway Carriage and Iron Co. v Riche (1875) LR 7 H.L. 653 (HL)
750 Amendment of Multilateral Treaties, Article 40 (40), and Article 30 (4) (b) of the
Vienna Convention on the Law of Treaties 1969.
751 Article 40 (4) (b) of the Vienna Convention on the Law of Treaties, 1969.

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The Controversies Regarding the Operational Policies of the WB and the IMF

It can be observed that there is an unequivocal obligation imposed on states


and international organizations that they must comply with the provisions of
international treaties or the Articles of Agreement.752
Considering the fact that the consent of member states is a fundamental
ingredient of the policies of the institutions, it has been argued that the WB and
the IMF must restrict themselves to the object clause or purposes for which the
organizations were established. Similarly, Section 5 (2) of the UK Companies Act,
formerly the European Community Act of 1972, provides inter alia that companies
possessing a domestic legal personality must restrict themselves to the object
clause.753 Companies of which the Memorandum and Articles of Agreement
purports to take all legal actions under the sun have been declared null and void
or ultra vires.754
In Cotman v. Brougham where the Memorandum of Association, closely
related to the Articles of Agreement of the WB and the IMF, of a rubber company
contained a statement of object or purposes enabling the company to carry on
almost every conceivable kind of business that a company could adopt. A question
arose as to the validity of the companys engaging in an underwriting arrangement
concerning the sales and purchase of shares in an asphalt company. The House
of Lords held inter alia that the transactions were ultra vires;755 however, under
international law, they would amount to the violation of or encroachment into
the sovereignty of member states. An international agreement that purports to
transfer every conceivable power to international organizations can be regarded
as a trusteeship agreement where the sovereignty of states is transferred to the
international organizations.
It can be argued that this scenario is not common except where the state
sovereignty is handed over to the United Nations in a democratic transition after
war such as the case of Liberia, Sierra Leone, Bosnia and Yugoslavia. The objects
or purposes of the WB and the IMF are quite clear and unambiguous, and may not
fall under the categories of doing every conceivable act: such might be considered
a violation of the principle of sovereignty.

752 Article 43 of the Vienna Convention dealing with obligations imposed by international
law and the law of Treaties, 1969.
753 Article 5(2) of the UK Companies Act 1985.
754 Gray, Hamish R., Cotman v Brougham and the Ultra Vires Rule, Modern Law Review Vol.
23 No.5 (1960) pp 561-3.
755 Cotman v Brougham (1918) AC p 514.

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The Controversies Regarding the Operational Policies of the WB and the IMF

7.3 the object clause and purposes of the institutions

7.4 the imf


The Articles of Agreement of the IMF adopted at the United Nations Monetary
and Financial Conference, Bretton Woods, New Hampshire, on 22 July 1944
entered into force 27 December 1945, but was amended on 28 July 1969 with some
modifications approved by the Board of Governors to Resolution 23-5 adopted
on 31 May 1968 with subsequent amendments and modifications approved by the
Board of Governors, plus the penultimate amendment of 1 April 1978 approved
by the Board of Governors in a Resolution 31-4 adopted on 30 April 1976 with an
effective date of 11 November 1992 by the modifications approved by the Board of
Governors in Resolution 45-3 adopted 28 June 1990, has not changed the purposes
and the object clauses of the institution for which the institution was originally
established.756
7.4.1 Assessment

of Compliance with the Object


Clauses or Purposes of the IMF

This section will examine and ascertain whether there is strict compliance with the
provisions of the Articles of Agreement with regaed to the purposes of the object
clauses in promulgating and implementing their policies.
Observers are of the view that the institution has performed very well in
relation to some of its object clauses.757 It has promoted international monetary
cooperation through a permanent institution that provides the machinery
for consultation and collaboration on international monetary problems in
accordance with the Articles of Agreement.758 Regional and branch offices have
been established in all member states territories in fulfilment of and compliance
with the provisions in the Articles of Agreement.
However, it can be argued that, some policies of the institution tend to
contradict some provisions in the object clauses. The Structural Adjustment
Policies (SAP), dealing with cuts in employment without providing an alternative
to the retrenched workers and their families introduced by the institution in the
late 1970s and early 1980s, appear to be inconsistent with the provisions of Article
1 (II) of the IMF Articles of Agreement which provides, inter alia, that high levels
756 IMF.
757 Keynes, J., The History of the IMF (1960) p 26.
758 Article 1 (I) of IMF Articles of Agreement.

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The Controversies Regarding the Operational Policies of the WB and the IMF

of employment and development of resources should be primary objectives of


economic policy of the institution.759
7.4.2

Interpretation of Articles of Agreement or


Treaty under General Principles of Law

Similarly, there are controversies over the application of Article 1 (v) of the IMF
Articles of Agreement which provides, inter alia, that the general resources of
the fund should be made temporarily available to members under adequate
safeguards, thus providing them with the opportunity to correct maladjustments
in their balance of payments without resorting to measures destructive of national
or international prosperity. Some authors760 are of the view that this provision
justifies the Structural Adjustment Policy (SAP) of the institutions; however, it
appears that the provision has been given an elastic interpretation based on which
some policies are promulgated and implemented. As long as the interpretations are
within the meaning and intentions of the Articles of Agreement, the institutions
cannot be regarded as violating the express international agreement in such a way
that this might result in the erosion of member state sovereignty.
Perhaps, it does appear that the term adequate safeguard has not only been
given a subjective, one-sided interpretation, but is elastically interpreted to include
policies which might have been rejected at the time of the registration of the
membership of a state. Some policies of the institutions, neo-liberal in character
and nature, are completely alien to some member states that are prevailed upon
to accept a given policy as a precondition to obtaining financial assistance from
the Fund.
For instance, the effects of the down-sizing of employment in public
corporations; the liberalization of an emerging economy as part of SAP; the
minimization of the role of states, and privatization, including the non-protection
of domestic industries and the other adjustment policies that include currency
devaluation and increased interest rates are, if effected simultaneously, devastating
to many developing countries, some of which fared better before their involvement
with the institution.
Commentators are of the view that policies which require the emerging
economies to open their borders or liberalize their economy towards globalization
without protecting the neophyte domestic or local industries are destructive of the
national and international prosperity of the member states and are thus contrary
759 Article 1 (II) of IMF Articles of Agreement.
760 Simon C and Mabbs-Zeno C C, Structural Adjustment and Agriculture: Theory and Practice
in Africa and Latin America. (1991) pp 139-141

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The Controversies Regarding the Operational Policies of the WB and the IMF

to the intentions of Article 1 (v) of the IMF Articles of Agreement.761 Also, it has
been commented that complete privatization and withdrawal of the states role in
public enterprise may not be totally appropriate; empirical evidence shows that
the Chinese economy, one of the most successful in the world, is regulated and
prodded by government Regulations and interventions.762 The study does not
cover the effectiveness of or justification for the policies; instead, it addresses the
legitimacy and legality of such policies, and whether they are in conformity with
the Articles of Agreement.
7.4.3

Application of Article 1 (v) of the Articles of Agreement

There are many controversies surrounding the interpretation of Article 1 (v) of the
IMF Articles of Agreement. While some authors are of the view that the provision
is unambiguous but elastically and subjectively interpreted by the institutions,
others argue to the contrary. Even where all of the legal rules of interpretation
are adopted, it can be argued that the policies must reflect and be restricted to
the provisions of the Articles of Agreement. Article 1 (ii) of the IMF Articles of
Agreement is emphatic on the institutions promoting policies that will enhance
high levels of employment and real income; therefore, policies, which militate
against the achievement of this objective, may not be in compliance with the
obligations imposed by the Articles of Agreement.
Critics have stated that while Article 1 (v) gives the institutions a free hand in
protecting the resources of the Fund, similarly to that which obtains in an ordinary
lender-borrower relationship in a business context, the policies and conditionality
for the loan must be such as may not be to the detriment of the real intention of
the Articles of Agreement.
In the light of the above, it is further argued that Article 1 (v) must not be read
or interpreted disjunctively from the other provisions in the Articles of Agreement,
as doing so might result in the loss of focus and possible encroachments into
the sovereignty of borrowing member states. Article 1 (v), slightly subjective in
theory but pragmatically regulated in practice, must be read and interpreted in
conjunction with the other provisions of the Articles of Agreement, particularly
with the aspect that guarantees full employment, a real income and a high standard
of living.763 Article 1 (2) of the IMF Articles of Agreement can be expanded further
to include the consideration of human rights in interpreting the term adequate
safeguards in the context of the cooperative society under which the institutions
were established. Perhaps it can be suggested that since the institutions are set
761 Article 1 (v) of the IMF Articles of Agreement.
762 Redding G R The Spirit of Chinese Capitalism (1993) pp8-10
763 Article 1 (2) of the IMF Articles of Agreement.

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The Controversies Regarding the Operational Policies of the WB and the IMF

up as a cooperative society, the term adequate safeguards may have a moderate


interpretation to include some social and humanitarian conditions and not strictly
as market forces, as it is currently interpreted and designed.
Most policies of the institutions are based on the application and interpretation
of Article 1 (v), which fall under the object clauses and purposes of the Fund. It
can be argued that it is permissible and legal to impose any policy and condition
on borrowing member states. This is predicated upon the fact that there is no
measurement or regulation of the term adequate safeguard. At best, perhaps it
can be suggested that adequate safeguard should be interpreted to mean credit
checks, security or collateral commonly used between borrower and lender in
a normal financial transaction, but not so as to change the entire course of the
sovereign state through reform policies of the institutions. Similarly, there is an
underlying assumption that in interpreting the term adequate safeguard gives
the institutions some measure of discretion in formulating policies that will
guarantee the security and protection of the institutions resources; human rights
is a universal and global legal obligation which would have been taken into account
in formulating the policies and reforms, including the restriction of its policy to
the international character of the institutions and membership.
The combined meaning and definition of adequate and safeguard are
sufficient and protection respectively,764 perhaps it can be argued that the
institutions conditionalities, policies and reforms that compel the states to
abandon their Directive State Principles765 that guarantees certain basic social
amenities and the provision of employment. Some Directive State Principles
are not based purely on free market forces, but on some socio-economic factors
which demands that states should provide basic amenities at minimal cost. The
introduction of user fees for basic amenities may not have been contemplated
by the initiators of the Bretton Woods institutions as the meaning of the term
adequate safeguards perhaps is relied upon to introduce user fees for primary
basic amenities under structural adjustment policies.
764 Oxford Press School Dictionary (2002) p 9 for a definition of adequate and p 619 for a
definition of safeguard.
765 Directive Principles of States refers to Fundamental Objectives of States dealing with
the Government and its People, Political Objectives, Economic Objectives, Social
Objectives, Educational Objectives, Foreign Policy Objectives, Directive on States
Culture, Obligations on the Mass Media and National Ethics based on the principles
of self-determination and national sovereignty. In Nigeria this is provided in Chapter
II of the 1979 Constitution; in India it is contained in Part IV of the Constitution; in
England in the Bill of Rights 1689, US Bill of Rights 17 September 1787; Sheshadri, P.
Parliamentary Control Over Delegated Legislation (with Special Reference to the UK
and India (1974) p 166; Thompson Rhodri QC, UK Judicial Review and Public Law p 2.

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The Controversies Regarding the Operational Policies of the WB and the IMF

It can further be suggested that the interpretation of the term adequate


safeguards that do not respect the states Directive Principles and Objectives
erode the sovereignty of the state. While the term adequate safeguards permits
the institutions to adopt policy that could guarantee the safety of the scarce funds
and to prevent their abuse, the term cannot be said to permit the institutions
to formulate policies on every conceivable issue not even contemplated by the
initiators of the Bretton Woods institutions.766
Although the general principles of law frown on organizations and institutions
engaging in every conceivable activity without confining itself to the Articles of
Agreement and Memorandum of association, in Cotman v Brougham and J. H.
Farrar v D. G. Powles sharing similar facts, where the Memorandum of Association
are similar to the Articles of Agreement of international organizations, the first
companys Memorandum of Association was to deal with rubber were as the
second company was to deal with railway materials.
The internal workings of the companies in their Articles of Association included
doing all things in addition to their main object clauses; the House of Lords in a
unanimous decision held inter alia that implied or wide object clauses that allow
the company to do all things are null and void.767
However, while the general principles of law will restrict any policy not in
conformity with the main purposes of the organization, yet the term adequate
safeguard in Article 1 (v) has been interpreted elastically to accommodate
principles which tend to run contrary to the obligations imposed by the Articles
of Agreement. The institutions Articles of Agreement focusing on developmental
aid, human rights and socio-economic development can logically be argued to
constitute part of the global and national development; policies, which tend to
dissuade states from achieving this purpose, which is also fundamental in their
Directive Principles of States, may contribute to the erosion of their sovereignty.
The main purpose of the Fund as agreed by member states and expressed in
the Articles of Agreement is to regulate foreign exchange, promote exchange
stability and maintain orderly exchange rates, including the removal of exchange
restrictions that may as such hamper or create barriers to world trade, every other
provision is towards the achievement of and ancillary to the set objectives. For
766 All conceivable global issues which include judicial reforms governance issues, civil
service reforms, legislative reforms economic reforms including social educational
and cultural reforms not provided in the Articles of Agreement are addressed by
the institutions without taking steps to amend and legitimize those policies, thereby
bringing their respect for and compliance with state sovereignty and the principles of
state sovereignty into question.
767 Cotman v Brougham, (1918) A. C. 514; J. H. Farrar v D. G. Powles (1973) 36 MLR 270.

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The Controversies Regarding the Operational Policies of the WB and the IMF

instance, in Bell Houses Ltd v City Wall Properties Ltd, dealing with ancillary and
independent object clauses, analogous to the object clauses in the Articles of
Agreement, the plaintiff companys business was the acquisition of vacant land
and the erection thereon of housing estates. Its objects clauses as defined in clause
3 were, inter alia, to carry on trade or business of general, civil and engineering
contractors and any other business that is ancillary to the main object clause.
The court held, inter alia, that the business of financial transactions, which the
company involved, is itself not ancillary to the main object clause, but might stand
on its own as independent object clauses. Policies of an organization or company
must only support the main object clauses or act as ancillary to them.768
Similarly, an independent object clause or purposes of an institution cannot
transform ancillary power derived from the term adequate safeguards into object
clauses or main purposes, as can be seen in the policies of the institution, which
include: forced devaluation of currency of borrowing member states; privatization;
the forced retrenchment of workers, leading to massive unemployment; the forced
liberalization of trade769 unfavourable to the emerging economy of borrowing
member states; the removal of subsidies that boost the local production of
member states economy, and the introduction of user fees for education and
health services to enable the repayment of resources borrowed from the Fund770
have, according to authors, made the institutions assume that they appear more
as finance companies rather than as cooperative organizations set up mainly to
regulate foreign exchange and solve problems associated with balance of payment
accounts, with removal of those barriers that might hamper international trade.771
Perhaps it can be argued that the Structural Adjustment Policy, which includes
privatization, the minimization of the roles of states, and increased exports to
generate enough foreign exchange to service and pay for loans, were not covered
by the term adequate safeguard nor contemplated by the Articles of Agreement.
The Structural Adjustment Policy is fundamentally a micro- and macroeconomic issue that touches and changes the economy of a nation. The argument
that such economic issues could not have been covered by the term adequate
safeguard may be sustained, as it might be difficult to apply the various methods
of legal interpretation to arrive at the presumption of the SAP.
768 Bell Houses v City Wall Properties Ltd. (1966) 2 Q B. 656. The plaintiffs actions,
which were declared as ultra vires in domestic or national courts, would have amounted
to a violation of or encroachment on the sovereignty of states in international law.
769 Emeagwali, G., IMF Market Reform and Economic Crisis.
770 Fashoyi, T., Consequences of Unemployment and Impact of Structural Adjustment Policy of IMF
on the Population of Africa (1993) p 78.
771 Ariyo, A. and A. Jerome, An Appraisal: Privatizations in Africa (1999) pp 201-203.

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The Controversies Regarding the Operational Policies of the WB and the IMF

The Structural Adjustment Lending policy does appear to represents a


departure from the general rule of WB lending. The Articles of Agreement provide
that loans made or guaranteed by the Bank shall, except in special circumstances,
be made for the purpose of specific projects of reconstruction and development.772
Similarly, the object clause and purpose of the Bank as defined in the Articles
repeatedly emphasised investment for productive purposes for more than five
times; this indicates that the special circumstances are merely semantic in effect,
and intended to eliminate the feeling of rigidity in the Articles. It has been said
that special circumstances refers to the period of war.773 SAL and SAP can be said
to be illegal and ultra vires, the implication of which may amount to the erosion of
state sovereignty in international law. For example, the provision is res ipsa liquitur.
Article III Section 4 provides inter alia that Loans made or guaranteed by the
Bank, except in special circumstances, be for the purpose of specific projects of
reconstruction and development; however, in order to legalize other functions of
the institution, the Articles of Agreement should be amended. Similar argument
can be advanced in respect of IMF where SAP was never mentioned in its Articles
of Agreement.
The unambiguous emphasis on the regulation of foreign exchange and taking
care of disequilibrium in member states balance of payment accounts on a
short-term basis leaves no one in doubt that the founding fathers may not have
contemplated the present situation where the functions of the two institutions are
blurred. It can be observed the IMF was specifically set up to eliminate all forms
of barrier arising from foreign exchange that might inhibit or hamper the free flow
of international trade; for this particular reason member states were requested
and pleaded with to sacrifice a little of their sovereignty during the negotiations at
Bretton Woods.774
Authors have attempted to use the literal, golden and mischief rules of
interpretation, including the general principles of law governing implied powers
and ancillary object clauses, to justify the invocation of the SAP as not expressly
covered by the Articles of Agreement; to further the investigation, the more it
seems that the institution has violated the provisions of the Articles of Agreement.
However, it has been suggested that fundamental issues such as SAP would
have been evidenced in writing if such had been contemplated by the founding
fathers of the institutions, similarly to the decision in Tempest v Kilner where the
court determined, inter alia, the ambiguity of legal languages and interpretations,
772 Shihata, F.I., World Bank Legal Papers: Legal Question Relating to Adjustment Lending (2000)
p 377; Articles 1 of the World Bank Articles of Agreement.
773 Ibid.
774 De Vries, op. cit., p 123.

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The Controversies Regarding the Operational Policies of the WB and the IMF

including the implications of the Statutes of Frauds Act 1677 requiring some
fundamental issues to be in writing.775 In Cutter v Eagle Star Insurance, too, the
court held inter alia that literal interpretation of statutes encourages the draftsmen
to be precise, respects the word used by Parliament, and prevents Judges from
rewriting the law.776
Commentators argue that even had the golden rules approach been adopted,
the institutions would still not have arrived at the adoption of SAP. There is
no absurdity777 in the term adequate safeguard; however, assuming there is
absurdity, the use of mischief rules do not favour the presumption of the structural
adjustment policy that are likely not anticipated by the Articles of Agreement.
The adoption of the mischief rules approach would have revealed that Article
1 (v) is meant only to ensure that the borrowed resources of the IMF are paid
back by the member states. In the Heydons case, the court held inter alia that four
criteria must be considered before an interpretation of agreement or a statute: the
position of the common law before the agreement or Act; the mischief and the
defect that the common law could not cure; the remedy to cure the defects, and
the true reason for inserting the provision in the agreement or statutes.778 It can be
argued that none of these criterias suggests the SAP in the Articles of Agreement.
Also, in interpreting the meaning of adequate safeguards in Article 1 (v) of
the IMF Articles of Agreement, under the ejusdem generis rules of interpretation,
SAP may not have been contemplated by the founding fathers of the institution
rather the word that would have been appropriate under the ejusdem generis rules
of legal interpretation would have been adequate security or collateral which is a

775 Tempest v Kilner, (1846) 3 CB 249.


776 Cutter v Eagle Star Insurance (1998) 4 All ELR 417; Whitley v Chappell (1868) LR 4
QB 147; London and North Eastern Railway v Berriman (1946) AC 278. The courts
in all these cases held inter alia that literal interpretation should be given by courts in
statutes that are unambiguous. The Articles of the IMF appear not to be ambiguous;
the meaning attached to adequate safeguards should have been collateralthat is
synonymous with the borrower and lender relationship.
777 R v Allen, (1872) LR 1 CCR 367 where the principles of the Golden rules were
explained to the effect that where words used are ambiguous, an interpretation which
avoids an absurdity will be used by the court or an arbitration to resolve the Statutes.
778 Heydons case (1584) 3 Co Report p 7, where the court developed this principle at
a time when statutes were minor sources of law and drafting was not as precise as it
is today.

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The Controversies Regarding the Operational Policies of the WB and the IMF

synonymous language of borrower and lender.779 The views are that the obligation
to abide by the provisions of the Articles of Agreement is sacrosanct, including
strict compliance with the principles of international law. Commentators are of
the view that the part of Article 1 (v), which provides, inter alia, providing
them with the opportunity to correct maladjustments in their balance of payment
without resorting to measures destructive of national or international prosperity
suggests non-interference in member states social and cultural life, including the
non-distortion of their economic activities. This view is predicated upon the fact
that in 1945, up to the time of the collapse of the Soviet Union, if a commentator
had proposed any ideas and policies usually found within todays standard neoliberal toolkit, that person would have been distanced by the extreme Left, who
would frustrate the notions of neo-liberalism: that a market should be allowed to
make major social and political decisions; that corporations should be given total
freedom; that trades unions should be curbed or citizens given much less rather
than more social protection.
The argument of the commentators is that this culture and ideas at the time
were taken into consideration as checks and balances on the term adequate
safeguard in the Articles of Agreement.
When the IMF was created at Bretton Woods in 1944, its mandate during
the negotiation and interpretation of the Articles of Agreement was to help in
smoothing out temporary balance of payment problems and to regulate foreign
exchange so as to remove completely barriers to international trade.
Strictly speaking, it can also be argued that at the time the IMF and World Bank
were established, it was made clear at the time of the negotiation and even within
some provisions of the Articles of Agreement, these measures took the same
position: that they had no control over an individual governments economic
decisions, nor did their mandate include a licence to intervene in national
economic, political and social policies. Nevertheless, such a situation is found in
practice today through the structural adjustment policies (SAPs).780 It might be
pertinent to observe that the fears of the extreme left led by the Soviet Union

779 Grey v Pearson (1857) 6 HL Case 1, where it was held inter alia that the ordinary sense of
the word must be adhered to unless it would lead to absurdity; also, the court in Jones v
DPP (1962) 1 QB 273 held that it is a cardinal principle that you may not with extrinsic
aid attach a meaning to a word in a statute and the law should be interpreted in favour
of the person whose liberty is more threatened or who is in a more disadvantageous
position.
780 Kafka, A., The International Monetary Fund: Reform Without Reconstruction, Essays
in Intl Finance No 118 (1978) p.1

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The Controversies Regarding the Operational Policies of the WB and the IMF

against neo-liberal policies at the time of negotiation and drafting the agreement
have become reality.781
The argument by critics is that the IMF and the World Bank through their
policies against the interpretation of the Articles of Agreement has made neoliberalism emerge from its formerly most minor position to become the dominant
doctrine in the world today, which might not have been possible if the WB and
the IMF were in strict compliance with the Articles of Agreement. However,
proponents of assumed voluntary obligations from which perhaps the structural
adjustment policies would have emanated are of the view that most of the policies
under SAP are consistent with the purpose of the Bretton Woods Conference of
1944, but with the proviso that the policies should not be of general application as
each state must be treated on its own merits.
For instance, in 1997, the South Korean economy declined severely. The World
Bank and the IMF, at the invitation of South Korean government, intervened
through the structural adjustment policy (SAP). In 1998, the South Korean
economy under the assisted programmes of the institutions underwent enormous
changes: massive corporate bankruptcies; reduced levels of consumption;
increased unemployment due to the restructuring of corporations and financial
institutions, and a reduction in imports critical to their economy. However,
through successful economic reforms, the South Korean economy has regained its
vitality as evidenced by the decreasing exchange and interest rates, the increasing
stock market indices, and an improved current account balance. Back from the
hardship following the financial crisis, the recovery was so fast it enabled the
South Korean economy to become the tenth-largest world economy in terms of
GDP in the year 2004.782
Although the South Korean economy has a strong balance sheet in the corporate
sector, a stable macro-economic policy and in 2001paid off its IMF and World
Bank debt early,783 its geographic advantage of being a neighbour of China, the
worlds fastest growing economy, was a rare privileged opportunity and economic
advantage not available to other borrowing member states.
The institutions may not be so lucky as to achieve a similar success story with
some member states under their unilateral, voluntarily assumed obligations
in the implementation of structural adjustment policy entailing the external
781 De Vries, Tom, The International Monetary System, 54 Foreign Affairs (1976) p 577.
782 The elicited candid views of the interview of Byun Chul Yoo, Superintendent at the
Correction Bureau of the Ministry of Justice, Republic of South Korea, who is also
currently a PhD student at the Faculty of Law, University of Leeds, on 29 March 2006.
783 Mail Kluge. Korea Becomes Worlds Top 10 Economic Giant, IMF World
Outlook Published in July, 2004. May be found in http//news.empas.com/pint/
tsp/20060427n08770 visited on 29/04/2006.

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contributions in terms of the liberalization and encouraging of foreign direct


investment; privatization; the elimination of state control of public corporations,
and foreign investors participation in all sectors of the economy; these will, in
addition to completing economic reform, alter the customary social and cultural
activities of the member states.
The view of those not in favour of unilateral, voluntarily assumed obligations of
the institutions through SAP are against making the policy generally applicable to
member states and claim that indifference to the Articles of Agreement, not taking
into account their peculiar circumstances, may perhaps be justified, considering
the Mexico crisis of the late 1980s, where similar World Bank and IMF prescriptions
were made in South Korea with good results, to the astonishment of the world.
For example, in Mexico for nearly twenty years, almost every economic policy
mandated by the IMF and World Bank not provided or implied by the Articles
of Agreement but through their unilateral assumed obligations were followed.
Mexicos compliance with the IMF and WB policies was so rigorous and reliable
that the institutions lauded the country as a model student that other Latin
American countries would do well to emulate. Since Mexico adopted the WB
and IMF policies regarding trade liberalization, privatization, deregulation, and
the introduction of user fees for education at all levels, it has been observed that
Mexicos indifference to the policies of UNESCO, equally a specialized institution
of the United Nations and including fees for health services and other policies
to enable the repayment of the loans, poverty has increased and the countrys
massive debt burden has grown at a startling rate. Mexicos experience is typical
of other countries in Latin America, Africa and Asia, but this does not mean that
policies were implemented only in the developing countries. Britain, under the
Conservative government from 1979, undertook somewhat recommended or
borrowed neo-liberal policy of the institutions, justifying this with the single word
TINA, the acronym for There Is No Alternative.784 Observers are quick to add
that Britains implementation of full-blown neo-liberalism was not compelled by
the institutions yet was inspired by them.
The views of Mexico would have been different if these policies, made as
conditions for accessibility to Fund resources, had clearly been provided by the
Articles of Agreement or disclosed at the time of joining the institutions.
The questions agitating the minds of the critics of these policies concern the
essence of promoting policies that benefit only few people. This issue would not
have arisen if the policies had clearly been provided in the Articles of Agreement
as conditions for obtaining loans. The impact of the SAP Mexico felt it was coerced
784 George, S.A, A Short History of Neo-Liberalism: Twenty Years of Elite Economics and
Emerging Opportunities For Structural Change.

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The Controversies Regarding the Operational Policies of the WB and the IMF

to implement resulted in an astronomical level of inflation. Mexico sold more than


500 public companies, including the countys major telecom utility Telmax to MNC
that not only made approximately one thousand members of staff redundant, but
reduced drastically the wages of the nationals in comparison to those of foreign
workers; telephone calls that had cost 16 pesos per minute after the takeover by the
MNC then rose to about 115 pesos per minute: a seven-fold increase.
The situation of Mexico became desperate as unemployment grew at an alarming
rate. Over 12,000 businesses filed for bankruptcy and the number of families who
became trapped below the poverty line soared. What is more, Mexico felt insulted
by the attempts on the part of the WB and the IMF to shift onto it the blame for
the failure of all of the prescriptions and policies that it had been compelled to
implement not just for the sake of sustainable economic development, but for the
capability to refund with adequate interest the short-term loan in good time, thus
safeguarding the capital.785
It can be argued that this approach suggests that there are two competing
interests: one is the ability to carry on business as a money lender and take
adequate safeguards to protect capital and generate profits, and the other is under
a cooperative organization, to help member states with troubled economies
recover from their economic delinquencies so as to achieve sustainable
economic development.
The major donors to the institutions and countries where the reforms have
succeeded consider the programmes as consistent with Article 1 (v) of the IMF
Articles of Agreement; the implied or ostensible powers, contrary to their original
institutional ideology that it is a sovereign right, have entrenched neo-liberal
policies influenced by certain countries who had, even before the creation of the
institutions, adopted such as their own policy.786
Authors argue that neo-liberalism787 has become the major world religion,
with its dogmatic doctrines progressively and systematically introduced through
WB and IMF policies, encouraging foreign direct investment (FDI), globalization,
competition between nations, regions, and firms, including the separation
of the sheep from the goats, the men from the boys, the fit from the unfit and
the allocation of all resources, whether human, physical, natural, economic or
financial, to market forces that may not be in conformity with the Articles of
Agreement. This is particularly remarkable given that states were guaranteed to
retain their respective ideology at the negotiation stage at Bretton Woods and in
785 Danaher, K., Ten Reasons to Abolish the IMF and World Bank (2001) pp 43-47.
786 IMF Annual Report (2003) p 15.
787 Liverman, D.M. and S. Vilas, Neo-liberalism and the Environment in Latin America,
Annual Review of Environment and Resources (2006) p 2.

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The Controversies Regarding the Operational Policies of the WB and the IMF

sharp contrast to groups that share similar sentiments with the Soviet Union and
China before the collapse of the Communist bloc.788
It should be noted that while the proponents of SAP justify the policy
as constituting the proper interpretation of the term adequate safeguard,
opponents claim that the interpretation of the term in a subjective and elastic
manner is not within the contemplations of the Articles of Agreement and the
general consensus at the Bretton Woods Conference. Also the term would have
been interpreted without consideration of the principles of ejusdem generis rules
even in situations where Article 1 (v) is considered to be ambiguous, policy which
influences a state to abandon its non-harmful Socialist or Communist ideology
may fall within the contemplations of the initiators of the institutions. They also
argue that China, considered the fastest-growing economy in the world, did not
adopt a neo-liberal economic policy in order for it to succeed.789
The opponents argues that application of ejusdem generis, the last resort of
the legal rules of interpretation of agreements and statutes in cases of ambiguity,
suggests that the term adequate safeguards in Article 1 (v) of the IMF Articles
of Agreement would have entailed feasibility studies, with suggestions and
professional advice from the institutions including obtaining collateral consistent
with the practice of lending and borrowing.
Apart from the elastic interpretation of Article 1 (v) of the IMF Articles of
Agreement that might justify the structural adjustment policy (SAP), observers
are of the view that the policies perhaps may not have been consistent with the
object clauses and purposes of the institution as provided in Article 1, although this
has been briefly addressed above. The observation is, according to these observers,
predicated on the fact that privatization, one of the cardinal policies of the IMF
and the WB, with the consequences of creating unemployment and concentrating
wealth in a few people without adequately providing social services, is as such not
in conformity with the interpretation of the term adequate safeguards.
7.4.4

Overriding Obligations under the Articles of Agreement

The debate as to whether the IMF may indeed perform functions not expressly
covered in its Articles of Agreement has come under severe criticism by
commentators. Their views are predicated that pursuant to Article XX (2) (a)
of the original Articles, previously Article XXXI (2), each state upon joining the

788 George, S., A Short History of Neo-Liberalism and Emerging Opportunity for
Structural Change, a paper presented at the Conference on Economic Sovereignty in a
Globalizing World.
789 Lin J Y, The China Miracle, Development Strategy and Economic Reform (1996) p 7

169

The Controversies Regarding the Operational Policies of the WB and the IMF
IMF is required to certify in writing that it will comply with the provisions of the

Articles of Agreement and the obligations therein.790


In addition, states are required to bring into conformity or amend their laws
to enable them to perform the obligations under the Articles of Agreement, as
there is no defence to the allegation of policies or conduct inconsistent with or not
provided by the Articles of Agreement. Similarly, while it may be sacrosanct for
states to comply strictly and bring their laws into conformity with the obligations
under the Articles of Agreement, it therefore appears that institutions are equally
under strict obligations to implement and promote policies within the provisions
of the Articles of Agreement.791 The emphasized and overriding obligations
on members and the institution are stated as such in the original Articles of
Agreement792 were, it is claimed, to prevent interference in the members state
sovereignty.793 It can also be argued that the drafters of the Articles of Agreement
were not oblivious of the enthusiasm of the majority of the dependent states,
craving for independence, for the indirect support of the US, as the blanket powers
to the institutions without the Articles of Agreement would have aroused their
desire for complete independence and sovereignty.
Also, while it can be said that general principles of law may be applied in the
interpretation of treaties, Part III of the Vienna Convention on the Law of Treaties,
more appropriate with international agreement under international law, provides
for the observance, application and interpretation of treaties or international
agreements; as the principle of pact sunt servanda implies,794 every treaty or
agreement is binding and must be performed in good faith.
7.4.5

Interpretation of Articles of Agreement


or Treaty under International Law

The argument that the IMFs subjective and elastic interpretation of Article 1 (v) is
to further the US neo-liberal policy795 and to institutionalize their foreign policy796
within the borrowing member states may perhaps be misplaced, as the Fund
has a right to safeguard the resources transferred to them by the member states
790 Article XXXI (2) IMF Articles of Agreement.
791 Bernstein, E., USSR Took Costly Detour to IMF Association, 20 IMF Survey 337 of 18
November 1991.
792 Article IV (4) (a) of the IMF Original Articles of Agreement.
793 De Vries, G.M., The IMF in a Changing World 1945-85 (1986) pp 120-13.
794 Article 26 of the Vienna Convention on the Law of Treaties, 1969.
795 Houtven, L.V., Governance of the IMF, Decision Making, Institutional Oversight, Transparency
and Accountability: Competing Interest: The US, Western Europe, Japan and the Asian
Region, IMF Publication (2002) pp 41-43.
796 Ibid., p 42.

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The Controversies Regarding the Operational Policies of the WB and the IMF

governments. Although the SAP remains controversial and generates resentment


from time to time, it is hard to deny that those who provide assistance and loans
may legitimately take an active interest in the design of recipient countries
policies; however, the participation of the donor members in the economic
policies of member states must be clearly consented to and evidenced expressly in
the Articles of Agreement.
Similarly, the IMF in interpreting the Articles of Agreement must consider the
international legal order designed to maintain a system of order for the family of
nations,797 including the general principles of international law and, particularly,
the doctrines of non-intervention in the domestic affairs of member states as
unanimously agreed to be protected during the negotiation at the Bretton Woods
Conference before the first original 44 members signed the instrument enabling
the creation of the institutions.798
It can therefore be argued that Article 1 (v) of the IMF Articles of Agreement,
which provides, inter alia, that general resources of the Fund can be made available
to the member states under adequate safeguards may be interpreted in accordance
with the Vienna Convention on the Law of Treaties or international agreements.
This includes the Articles of Agreement of international organizations.799
The articles provide, inter alia, that the treaty shall be interpreted in good
faith in accordance with the ordinary meaning to be given to the terms of the
treaty in their context and in the light of its object and purpose.800 It must be
inquired whether structural adjustment policies (SAPs) come under the context
of ordinary meaning of the term adequate safeguard. It has been argued that
the combination of the principles of state sovereignty and the provision of noninterference in the political and economic or domestic policy of member states
suggests a recommendation on the obtaining of collateral and undertakings by the
borrowing states, instead of harsh policies which tend to have coercive measures.
Similarly, the general purpose, including the preamble, of a treaty shall, it is
claimed, be brought under consideration in interpreting a treaty.801 That being so,
it can be argued further that the institution established as a cooperative society
among sovereign, equal member states may lack the jurisdiction to compel the
compliance of SAP not expressly provided in the Articles of Agreement as a
condition for the granting of member states cooperative resources administered
by the IMF.
797 Black, C.E., The Dynamics of Modernization: A Study of Comparative History, (1966) pp
89-92.
798 Keynes, M., History of Political Economy, 1883-1946 (1946) Vol. 32, p 234.
799 Section 3 Interpretation of Treaties, Vienna Convention on the Law of Treaties, 1969.
800 Article 31 (1) Section 3 of the Vienna Convention on the Law of Treaties.
801 Article 31 (1) (a) Section 3 of Vienna Convention on the Law of Treaties.

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The Controversies Regarding the Operational Policies of the WB and the IMF

It can be observed that Articles 31 (3) (b) and (c) provide inter alia that practices
consistent with the treaty, including international law applicable in relation
between parties, must be applied in interpreting an international agreement or
treaties.802 The implication of this that interpretation of the Articles of Agreement
not consistent with the rules of international law may lead to absurdity; even
though the particular interpretation justifies the economic development of the
states, such still needs to be clearly stated in the Articles of Agreement before they
can be presumed legal.
It appears that the opponents of the SAP rely on Section 2, dealing with general
exchange arrangements, in support of their assertions. The section provides inter
alia that each member must notify the Fund if there are any changes in their
exchange arrangements and the policies it intends to apply in fulfilment of the
obligations under the Articles of Agreement,803 including the provisions that the
Fund shall not limit the right of members in adopting their exchange rates where
not inconsistent with the provisions regarding the use of the resources.804 It might
be argued that the examination of these provisions allows states to adopt their
policies, not necessarily where compelled to do so or when these are conditional
for obtaining the loan from the institutions. The fact that a specific function has
been assigned or delegated to the institutions does not preclude the states from
exercising jurisdiction over the same issue; although such issues already delegated
are no longer within the domestic affairs of member states, they still exercise
concurrent jurisdiction over the issue. Thus, the institutions are bound by the
principles of state sovereignty to limit their activities to those issues delegated
to them.
Under the rules of international law, however, proponents of the SAP also
rely on Section 3 of the IMF Articles of Agreement to justify its implementation.
The section provides that the Fund shall adopt policies on the use of its general
resources, including policies on stand-by or similar arrangements, and may
adopt policies covering special balance of payments problems; these will assist
members to solve their balance of payment problems in a manner consistent with
the provisions of the agreement such that they will establish adequate safeguards
for the temporary use of the resources of the institutions.805 While the argument
by some commentators is that this section must be read in conjunction with
Article 1 (v) of the IMF Articles of Agreement, including the general principles
of international law, the argument which might be sustained is that it should be
802
803
804
805

Article 31(3) (b) and (c) of the Vienna Convention on the Law of Treaties 1969.
Section 2 of the IMF Articles of Agreement.
Section 2 (c) of the IMF Articles of Agreement.
Section 3 of the IMF Articles of Agreement.

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The Controversies Regarding the Operational Policies of the WB and the IMF

applied mutatis mutandis with Articles 29, 30 and 31 of the Vienna Convention on
the Law of Treaties 1969 and Article 2 (7) of the UN Charter.
Commentators are of the opinion that SAP, which has almost become the
worlds common practice, as orchestrated by the twin Bretton Woods institutions,
may hardly acquire the statutes of international customary law because of frequent
and consistent criticisms of it made by the borrowing member states and elite nonintergovernmental organizations within and outside the industrialized nations.806
It can also be argued that the collateral, for decades synonymous with the lender
and borrower relationship, may include in addition to the execution of a bond
consign anticipated revenue guaranteed in advance to international creditors. This
approach has been common before and after the establishment of World Bank
and the IMF.807 It is for this reason that critics are of the view that SAP is not the
only alternative to the adequate safeguards of the IMF resources; however, they
are quick to add that the solution to or the cure for the criticism of the reform is
to amend the Articles of Agreement and include these 1980s reform programmes.
This view may also be predicated on controversies regarding the Special Drawing
Rights (SDRs) that almost factionalized the donor countries. The Articles of
Agreement were amended authorizing reserved assets for the institution itself,
which originally generated substantial controversies.808
It should be noted that the amendment of Article 1 (v) concerning stand-by
arrangement, extended arrangements and conditionality regarding SDR were
806 Tyrone, F., Impact of Adjustment on the Population of Africa, Canadian Journal of
African Studies Vol. 29 No. 3 (1996) p.507.
807 Hal, S. and J. Howell, The Problem of Sovereign Debt Restructuring (2000) p 1. Before the
establishment of the WB and the IMF, the US supported Britain, France and Germany
by lending them money; J.P. Morgan traded in External Debt through Brady bonds,
loans and Eurobonds. J.P. Morgan and Chase were heavily involved in advancing loans
to Brazil, Mexico, Russia, Venezuela, and Argentina without compelling the states
to adopt the SAP or a policy similar to it. J.P. Morgan is not an intergovernmental
organization; it has neither immunity nor special privileges yet it gives Secured and
Unsecured loans to sovereign states; Standish, M., Emerging Markets, Debt Fund
Journal (31 December 2005) pp 1-3; Williams Rhodes Report on the language of
lending that US banks adopt for Latin America with charges on anticipated revenue
and pre-paid penalties to encourage sovereign debtors to pay off their debt before
maturity. The IMF is a cooperative society where its members have sovereign equal
rights, thus policies that may enhance or encourage sustainable development among its
members are highly appreciated so long as they are clearly provided in the Articles of
Agreement as a condition for access to the resources of the institutions to which they
are ordinarily entitled as member states of the institutions.
808 The first Amendment Article XXV (3), Current Version Article XIX (3) IMF Articles
of Agreement.

173

The Controversies Regarding the Operational Policies of the WB and the IMF

accomplished to codify practices developed over decades without challenge,809


agreed and modified by majority of the members; no reference was made to the
SAP because of the controversies surrounding its application within the borrowing
member states.
It may be interesting to emphasise that the essential purpose of the international
monetary system is to provide a framework of facilitating the exchange of goods,
services and capital among countries, including the cooperation of member states
and the institutions to ensure orderly exchange rates and to promote stability with
due regard to the circumstances of each state,810 and avoiding policies that might
tend to produce erratic disruptions in member states.811
Perhaps it might be pertinent also, to make preliminary mention of the fact that
the Articles of Agreement of the IMF provide that the institution shall cooperate
within the terms of this agreement with any international organization and with
public international organizations having specialized responsibilities in related
fields. This suggest that the policies of the institutions must as such be consistent
with the policies of other UN specialized agencies.812
7.4.6 Conditions

Recognized by the Articles of


Agreement for the Use of IMF Resources

Article V, Sections 3 to 8 of the Articles of Agreement provide for the conditions


for the legitimate and legal use of the resources of the Fund, including the
penalty for the misuse of the resources. Apparently, it can be argued that none
of these provisions suggests the kind of policies implemented by the institutions
in Argentina, Brazil and Mexico, to name but a few. The conditions emphasising
the use of the resources of the institution are mainly to resolve problems relating
to the balance of payment account. This is in fulfilment of the obligations under
Section 1, which includes a prohibition from manipulating the exchange rates
or the international monetary system in order to prevent effective balance of

809 Article III (3) dealing with payment to the Fund when quotas are changed; Article
IV (4) concerning return to an exchange rate system based on stable but adjustable
par value; in Article XVII (2) dealing in SDRs was through the appropriate channels
proposed and amended. A similar step is required to legitimate the Structural
Adjustment Policies.
810 Article IV Section 1 (I) of the IMF Articles of Agreement
811 Article IV Section 1 (II) of the IMF Articles of Agreement. In addition both members
and institutions are required under them particularly with respect to an exchange
arrangement strictly to comply with the provisions of the Articles of Agreement.
812 Article X of IMF Articles of Agreement.

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The Controversies Regarding the Operational Policies of the WB and the IMF

payments adjustment or gain an unfair competitive advantage over the other


member states.813
It can be observed that the use of SDR, which facilitated the codification of
conditionality, is considered as the only legitimate interpretation of the term
adequate safeguards. Article V (3) clearly sets out these policies and conditions
for borrowing or purchasing from the IMF the currency of other members in
exchange for its own currencies, which are of course equally applicable to stand-by
arrangement. In practice, however, the SDR and stand-by arrangement are usually
not drawn upon by the developed nations, including Saudi Arabia and Kuwait, as
had been used as insurance to prevent the depression of the 1930s where so many
nations depended on the United States for relief.814
The criteria and conditions, which the member states are required to meet
before being entitled to the resources of the institutions, are as follows:
(a) The purpose for which it intends to use the resources of the institutions
in accordance with the Articles of Agreement;
(b) The member must represent that it has the need to use the resources of
the institutions because of its balance of payment account or the reserve
position or its development;
(c) The proposed purchase would be a reserve tranche purchase secured
by gold or other convertible currencies or assets held by the institution
or would not cause the institutions holding to exceed 200 per cent of
its quota;
(d) The institution has not previously declared to the applicant that the use
of the resources is ineligible;
(e) That member states do not channel the resources of the institutions to
projects or programmes other than those stated in the Letter of Intent
transparently approved by the Board of Governors as performance
criteria are a condition for a further loan;
(f) Article V (4) provides that conditions (iii) and (iv) may be waived. It
can be observed that the limit of drawing to 200 per cent has regularly
been waived, but the first two conditions may not be waived.815 However,
813 Section 1 (3) of the IMF Articles of Agreement.
814 SDR is the percentage of the quota subscription which the member states can withdraw
yet must replenish within a maximum of five years, whereas the stand-by arrangement
means a decision of the IMF by which a member is assured that it will be able to make
purchases from the general resources account in strict compliance with the terms of the
decision during a specified period up to a specified amount. Most industrialized states
do not draw on these facilities as they are kept as reserve or insurance.
815 De Vries, G.M., The International Monetary Fund, 1945-1965 (1969) Vol. 1 pp 23-24.

175

The Controversies Regarding the Operational Policies of the WB and the IMF

the institutions can examine whether the member states policies are
consistent with the Articles of Agreement and vice versa,816 and
(g) Specific tariffs and performance criteria were used as reasons to waive the
200 per cent limit on member states.
The type of conditionality and policies envisaged in Article 1 (v) of the IMF
Articles of Agreement have been firmly provided, as stated above,817 yet protracted
debate over the policies and conditionality of the institutions relates to those
conditions or policies not specifically mentioned in the Articles of Agreement.818
Article V (3) (b) was amended to legalize these conditions and policies. It is
interesting to note that while the concept of conditionality and the modus operandi
are provided in the amended Articles of Agreement, the SAP,819 while part of the
conditionality in todays political economic architecture, was neither mentioned
nor specified among other criteria mentioned in the Articles of Agreement.
7.4.7

The Structural Adjustment Policy

It must be asked how it is possible that SAP has remained a mere guideline after
some decades of practice and what the difficulties in legalizing the doctrines
associated with the structural adjustment policies consist in.
It can be argued that collateral and guarantee should be considered as adequate
safeguards, as it would appear that the terms are synonymous, symmetrical, and
consistent with borrowing and lending. Perhaps it would also appear that the
delegates at the Bretton Woods Conference may have anticipated that policies
such as SAP, with the tendency to creep into the internal affairs of states, may
arise; to forestall such policies it was, at the insistence of the USSR, that it was
agreed that the constituent documents must be drafted and ratified before the
institutions could commence business.820 The claim that the SAP appears to have
some characteristics of command or coercion may be economically justified, but
it is not such as to have legal validity because of the tendency to encroach into the
internal affairs of member states.
As the need to maintain the par value system under the original Articles of
Agreement no longer prevails, developed countries, except for Italy and Britain,
who made massive withdrawals from the institutions in 1977, no longer need the
general resources of the IMF.821 It would appear that as the developed countries
816 Article V (3) IMF Articles of Agreement.
817 Gold, J., Conditionality, 2 IMF Pamphlet Series, No 31 of 1979 p 19.
818 Lowensfeld, A., International Economic Law (2003) pp 543-46
819 IMF Pamphlets Series 19 November 1976 p 7.
820 Horsefield, op. cit. pp 33-6.
821 De Vries G.M., The IMF In A Changing World 1945-85 (1986) p 149.

176

The Controversies Regarding the Operational Policies of the WB and the IMF

recovered from the economic depression of the 1930s, including the recovery of
Britain and Italy from their respective crises,822 the conditionality or the policy
and the clientele of the IMF changed; different guidelines not provided in the
Articles of Agreement were now being implemented for the developing countries.
Developing countries relied on IMF resources as their first, instead of their last,
resort to pay for their imports and to service external debts; they held a more
lax attitude towards exports as they heavily depended on finished products from
developed countries.823
The SAP, after so many decades in operation, appears not to have quickened
development in developing countries,824 whereas the Marshall Plan was very
successful within a few years of its introduction. It can be said that SAP policy has
no legal validity, as it appears to be inconsistent with the interpretation of the later
part of Article 1 (v) of the IMF Articles of Agreement, which provide inter alia in
providing funds to member states to correct the maladjustments in their balance
of payment account, measures which are such as to destroy the national and
international prosperity of the borrowing state should not be allowed. Perhaps this
analysis would be otherwise if the policies had been initiated by the states under
the principles of self-determination. In some cases rather than the first move for
the request of the loan originating from the states, the institution executes it under
conditions 825 that could never have originated from the states, as leaders could
lose the votes of the electorate after the impact of the SAP.
7.4.8 Financial

Weakness of the Developing Countries

The financial weakness of the developing countries led to their inability to negotiate
and insist on the application of Article V of the Articles of Agreement dealing
with conditionality for access to the resources of the institutions applicable to
the developing countries. The SAP, according to scholars, would have acquired
or assumed the status of customary international law because of its constant use
and practice by the WB and the IMF, yet there is consistent objection to and
disapproval of the policies, including the debate that the policies are non-violent
economic coercion.826
822 Harmon, D., The British Labour and the IMF Crisis (1997) p 213.
823 IMF Annual Report, Table 11.3 and 11.4 (2001).
824 Jorgenson, D., & J. Waelbroeck, International Monetary System and its Reform: a
paper prepared for the Group of 24 by a United Nations Project directed by Sidney
Dell 1979-1986 (1987) pp 162-67.
825 Eichengreen, B., & M. Michael, Liberalizing Capital Movements, IMF Publication
(1999) pp 7-9.
826 McDougal, M.S. and F.P. Feliciano, International Coercion and World Public Order,
Yale Law Journal, Vol. 67 (1958) p 792.

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The Controversies Regarding the Operational Policies of the WB and the IMF

The formulated guidelines specified the conditions and policies for the use
of the Funds resources by the developing countries;827 critics are, though, of
the view that the guidelines amount to illegality as some of them may affect
the independence and sovereignty of the borrowing member states. Finally, the
decision to formulate these guidelines not provided in the Articles of Agreement
was occasioned by the inability of the developing countries to redeem their debts
as and when due.828
The impact of the guidelines, particularly Guidelines 4 to 9,829 on the political,
economic, cultural, and social activities of the BMS, is not the major concern
of this studywhich is that the Articles of Agreement should be amended to
accommodate these policies and guidelines to mitigate the elements of coercion
or interference in the domestic affairs of member states.
It is, in one sense immaterial whether the functions of the institutions are for
the benefit of member states; their functions must be authorized by the Articles
of Agreement which constitute the legal framework and enabling instrument
evidencing voluntary consent of the BMS notwithstanding the impact of the
policies on the economic, political, social and cultural lives of their states.830
Commentators have observed that virtually all aspects of private and public life of
borrowing member states are regulated by the IMF, because the institution views
the primary attention and control within governance as improving the management
of public resources; achieving higher transparency; high public scrutiny, and
government accountability in fiscal management, including the restriction on
extraordinary expenditures;831 the introduction of user fees on essential services
leaves the borrowing member states with no role for their government other than
waiting for the execution of the policies of the institution.832
The scope of this study excludes the examination of the necessity and desirability
of the policies; rather, it addresses whether the policies are consistent with the
enabling instruments and Articles of Agreement establishing the institutions.
827 Research Report on IMF Conditionality 1980-1991 pp ii-iii; International Monetary
Fund 1972-1978 Vol. 2 p 1.
828 Regulation on the Use of the IMF General Resources and Stand-by Arrangement,
Decision No 6056-(79/38) of 2 March 1979.
829 Use of the Fund General Resources Decision 6056 of 1979; IMF Decision 149 of 25
Issues of 2000;
Decision 7925 of 8 March 1985: touches on all aspect of economic, political, cultural and
social activities of borrowing member states (BMS) which are such as to justify the
fears of the critics that such guidelines are not procedurally included in the Articles of
Agreement and might thus violate the principles of sovereignty.
830 The IMF, Poverty Reduction and Growth Facility Operational Issues, PRGF 2000.
831 Ibid., IMF, PRGF 2000 paras13, 14 and 15.
832 World Bank Annual Report (1991) pp ii, iii and 1.

178

The Controversies Regarding the Operational Policies of the WB and the IMF

The questions generating controversies among the critics concern the extent of
that which, with the IMF and the WB performing such functions, what remains
for the states themselves to perform? Such inquiries may not have arisen if the
respective roles had been outlined or included in the Articles of Agreement of the
two institutions.

7.5 the world bank


Similar approach is taken in respect of the object clauses and purposes of the
World Bank. The argument is that whether the conferment of powers onto the
WB occurs through an agency relationship, transfer or delegation, its functions
and activities are limited by the Articles of Agreement. The obligations under the
Articles of Agreement are sacrosanct as is evidenced in the surrender and the limit
of the inherent sovereign powers of member states within specific subject areas.
It can be argued that the WBs compliance with its obligations under the Articles
of Agreement not only complements and respects the sovereignty of states; in
addition, it eliminates the imagined threats and apprehensions of the borrowing
member states regarding the erosion of their state sovereignty. The main objective
of the WB is to aid development by providing capital on a long-term basis under
the conditions provided in the Articles of Agreement.
It can be observed that while the IMF through its Articles of Agreement
provides for loans to be made available to member states on a short-term basis,833
the WB by its own Articles of Agreement emphasize specific projects and deals
with private sectors within the territories of member states.834 The institutions
have blurred this distinction without their having resorted to the amendment of
the Articles of Agreement as provided in the constituent documents. The analysis
of this development is that the sovereign authority of member states as conferred
onto the institutions has been altered and has, by implication, thus occasioned an
infraction on their sovereign powers.
While the IMF emphasizes programme lending, the WBs emphasis is on
project lending with little attention to the less easily identifiable programme
lending. This approach is supported by the Articles of Agreement providing that
inter alia that the resources of the Bank shall be used exclusively for the benefit of
members with equitable consideration of projects for development and projects
for reconstruction835.
833 Articles 1 and V (3) of the IMF Articles of Agreement.
834 Articles 1 and III (I) of the World Bank Articles of Agreement.
835 Article III, Section 1 (a) of the World Bank Articles of Agreement.

179

The Controversies Regarding the Operational Policies of the WB and the IMF

It should be noted, as clearly observed by commentators, that there has been


a total shift towards programme lending that may not have been intended by
the Articles of Agreement of the WB; nevertheless, it is argued that programme
lending relates to specific projects for developmental programmes. This approach
is justified not only by the ejusdem generis rules of interpretation, but also by Article
III, Section 4(iv) of the WB Articles of Agreement, which provides inter alia that
loans made or guaranteed by the Bank shall except in special circumstances be for
the purpose of specific projects of reconstruction or development.836 The Articles
of Agreement envisage or presume as a general rule that loans made or guaranteed
must be for specific projects.837
It can be argued that the SAP, renamed Sectoral Adjustment Loans (SALs) by
the WB,838 was never mentioned anywhere in the Articles of Agreement.839 The
views are that the adoption of this policy represents a breach of the provisions of
the Articles of Agreement that lay emphasis on specific project lending840 thus the
SALs, later replaced by Sectoral Adjustment Loans (SALs) of the WB,841 are similar
in character to the IMFs SAP lending.842 There has been a continued criticism that
these policies, while potentially beneficial to the Donor countries, the reforms
are intended to encourage the borrowing member states to pay their debts. It
appears to be illegal, as they are not provided in the Articles of Agreement, while
constituting policies that may completely alter the ideology of member states.
In theory, while the functions of the WB and the IMF as permitted by the Articles
of Agreement are separate and distinct, further examination along similar lines
may confirm the critics arguments that the distinctions are in practice blurred;
such a situation might lead to the breach of the Articles of Agreement. The legal
argument is that in order to complement sovereignty or prevent its erosion, the
institutions should confine themselves to the enabling instruments or the Articles
of Agreement.
Observers are of the view that initially, the institutions restricted themselves
to and complied with the provisions of the Articles of Agreement relating to their
836 Article III, Section 4 (iv) of the World Bank Articles of Agreement.
837 Article 1 (iv); Article III Section 1 (a); Article IV Sections 3 (a) and (c), and Article V
Section 7 of the IBRD Articles of Agreement.
838 World Bank Fiscal Year 1998: Poverty-Focused Structural Adjustment Loans.
Operational Policies on Poverty Reduction.
839 Demery, I., M. Ferroni, C. Grootaert and J. Wong-Valle, Understanding the Social
Effects of Policy Reform, A WB Study, Washington DC (1993) pp 1-9.
840 Article III Section 4 (iv) of the World Bank Articles of Agreement.
841 World Bank 1998 Fiscal Year Report, Ibid.
842 Landell-Mills, J., Helping the Poor: The IMFs New Facility for Structural Adjustment,
A Report sponsored by the IMF, (1992) pp 2-22.

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The Controversies Regarding the Operational Policies of the WB and the IMF

roles;843 recently, however, the WB has shifted its focus towards governance and
population issues such as education, health care, population control, corruption
control including conditions of political activities, and programme lending, while
the IMF, contrary to the provisions of its Articles of Agreement, awards longterm lending through various adjustment lending arrangements and new facilities
similar to those of the WB. This situation appears to confirm the arguments of
critics that the functions of and distinctions between the institutions are somewhat
blurred.844
For instance, throughout the Articles of Agreement of the five groups of the
WB, there is no mention of lending in addressing the member states in difficulties
in their balance of payment accounts; this function is basically reserved for the
IMF.845 The WB commenced lending for periods of three to five years to address
balance of payment difficulties never provided for in its Articles of Agreement in
1980 when it started the SALs.846 It is interesting to observe that parts of the Banks
Memorandum when it started the SALs states inter alia that:
Lending for SAP is only justified if it is for a specific program of structural
adjustment to be supported to increase efficiency of resource use and improve
responsiveness of the economy to changes in economic conditions lending
for programs over a period of 3-5 years, which will require financial and technical
support.847
What this implies is that the WB may have deviated from its assigned roles
in the Articles of Agreement not only to lend for specific projects, either for
specific reconstruction and development, specific investment loans and specific
guarantees for a long period, and not to address balance of payment difficulties
for a short period.
Critics view the WBs approach to development aid as highly contradictory. For
instance, when it states that for specific projects guarantees or loans could be used
to finance imports for all kinds of materials except military hardware,848 yet under
its structural adjustment for loans to address the issues of the balance of payment
account it states that loans for this purpose cannot be used to finance imports.
Except for projects involving MNCs in BMS, it appears that the WB may have
843 De Vries, Barend A., Remaking The World Bank (1987) p ix.
844 Gold, J., The Relationship between the IMF and the WB, 15 Creighton Law Review
(1982) p 499. The inter-encroachments were never expressly consented to or included
in the Articles of Agreement at the various times of amendment, perhaps because of
pressure from critics that the two institutions should be merged.
845 Article 1 (i) (v) IMF Articles of Agreement.
846 Shihata, F.I., The World Bank Legal Papers (2000) pp 161-163 especially at p 163 para 2.
847 Memorandum Report of World Bank R 80-17; IDA/R80 22, 5 February 1980 p 2.
848 Memorandum Report of World Bank R80-17/1, 20 March 1980 p 3.

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The Controversies Regarding the Operational Policies of the WB and the IMF

shifted its emphasis from specific project long-term lending to general-programme


short-term lending. In support of this argument it may suffice to quote part of the
Memorandum presented to the Board of Governors by the Executive Directors
for consideration on 9 May 1980 indicating that:
Structural adjustment lending would be considered in those situations
where a serious deterioration in the balance of payment has occurred
or can be anticipated and where the deterioration is due principally
to factors which are not such as to be reversed easily or quickly
Countries balance of payment can be sustained with increase in
export and our willingness to formulate programs of structural
adjustment and allowing the borrower to finance imports.849
The reasons for this quotation may justify the fact that the WB has moved to
performing the roles of the IMF, thus rendering the distinction between them
blurred. The emphasis on programme lending and reformed Sectoral Adjustment
Loans (SALs)850 was aimed not only at solving balance of payment difficulties, but
also at refinancing and restructuring existing loans.851 It appears that this function
may be considered as ultra vires or an infraction of the institutions framework
as they hold no express mandate to embark on these policies. It may have been
different if they were refinancing specific existing projects or investments, but
certainly rescheduling debt, which may have occurred as a result of balance
of payment difficulties, and supporting interest rate swaps as a mechanism to
improve monetary and financial management are not within their purview
and mandate, given that they are intended only to finance specific projects and
investments. This assertion is also supported by Article 1 of the WBs Articles of
Agreement dealing with its primary purpose, and Article III, Section 4 (vii) which
provides, inter alia, that guarantees and loans made by the WB must be for specific
projects of reconstruction, development or specific investment usually carried out
by the IDA or IFC.852 The Board of Governors has some measure of discretion,853
but this discretion must be exercised so as not to jettison the distinction between
the WB and the IMF as regards performing functions not assigned to them without
firstly amending the Articles of Agreement. Contrary to the proponents of this
policy, the continuous practice and infraction of the Articles of Agreement may

849
850
851
852
853

Memorandum Report WB R-122 IDA/R80-83 of 9 May 1980 p 1.


WB Sectoral Adjustment Loan Report, 24 January 1986, (R86-9) p 34 para 4.
WB Interim Report on Adjustment Lending, R88-15, 25 January 1988.
Article III Section 4 (vii) IBRD Articles of Agreement.
Bittermann, H., Negotiation of the Articles of Agreement of IBRD, International Lawyer,
(1971) Vol. 5 No 1 p 76.

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The Controversies Regarding the Operational Policies of the WB and the IMF

never attract the status of international customary law, as there has been constant
and systematic criticism of the policies by scholars and NGOs.
There are certain controversies over the term specific projects. The WB, in an
attempt to justify its structural adjustment lending policy on balance of payment
accounts, argues that specific projects constitute sectoral lending that includes
monetary and financial management as a sector; development and construction
as a sector, and governance and poverty alleviation including heath care and
human development as a sector.854
It has been argued that the broad interpretation of specific projects by the
WB may lead to an infraction of the principles of state sovereignty. However,
the supportive law scholars argue that the term specific projects refers to
homogeneous investment such as the construction of dams, hydroelectric power
plants and other real sector developments either independently or in partnership
with the private sector. This view appears to be consistent with the Articles of
Agreement which, given the huge amount of capital involved, considered a longterm repayment period. A broader interpretation may also not offer the electorates
the opportunity to extract, ensure and enforce accountability from the leaders
they have elected, where the entire government policies will be directed by the
Board of Governors of the institutions who are not elected representatives of the
member states.
Contrary to the SAP and other conditions enforced by the WB in the 1980s,
the criteria for qualification to the access of WB facilities are that the project
must be for a specific project; the project must be for productive purposes, and
the project must be viable. However, the WB has under Article III Section 4
(vii), which provides inter alia that the loans are for specific projects except in
special circumstances, included non-specific projects as being covered by the
term except special circumstances. While interpreting the Articles of Agreement,
particularly Articles 1 (i) to (v) in conjunction with Article III Section 4 (vii) and
other external factors such as the term reconstruction of war-torn areas and
the Marshall Plan, including the nature of lending at the time, it may perhaps be
appropriate to suggest that the term special circumstances may in this context
not refer to micro-economic policies already assigned to the IMF, but to such
circumstances as relate to real structural development; this is because loans to
the micro-economic sector may occasion a complete departure from structural
permanent development and investment that will facilitate sustainable economic
development, and will encourage world trade and international peace and security.
The WBs interpretation of the term except under special circumstances,
interpreted in line with the functions assigned to the IMF, have now become its
854 WB Policies and Procedures, (1974) p 45.

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The Controversies Regarding the Operational Policies of the WB and the IMF

core functions, thus relegating to the background its functions expressly provided
in the Articles of Agreement.
The contribution of WB policies and programmes on long-term lending in
education and health, especially in the HIV-AIDS campaign, although tied to the
SAP, has been commended;855 the inability to amend the Articles of Agreement
to include these policies may, however, open a window or an era of gradual
interference in member states domestic affairs not covered in the Articles of
Agreement. For instance, the WBs policy in 1980 that the states should retreat
from economic life, and especially that agriculture should be liberalized and left
for market forces to determine,856 not only interferes with the affairs of those
states not favourably disposed towards the neo-liberal ideology and contradicts
the gestures or policies on health care and human capital, but might erode state
sovereignty, given that such measures have not expressly been agreed by members
and included in the Articles of Agreement.
It has, further, been observed that the WB, by virtue of Article 1 of the Articles
of Agreement, performs functions including inter alia guaranteeing loans, giving
loans for specific projects,857 and obtaining loans through private sources which
the borrower (a government or a private enterprise) is unable to obtain at the
market rates.858 However, the refinancing of existing loans to countries embroiled
in a debt crisis under programme lending coordinated with the IMF does not fall
within their mandate as provided by in the Articles of Agreement.859 The gradual
shift from the objects and authorized purposes may open another window that
might interfere with the respective sovereignty of the borrowing member states.
WB and IMF behaviour can be analyzed thus through a hypothetical analogy:
a good Samaritan drove a sick and dying patient to hospital in an emergency; the
good Samaritan held neither a valid driving licence nor, of course, insurance, but
he could drive very well. It is immaterial that he was helping to safe a life; he has
breached the law by driving the car while in possession of neither a valid driving
licence nor insurance.
Some of the policies of the institutions no doubt encourage and facilitate
economic developments; nevertheless, the Articles of Agreement should be
amended to include the new changes and developments, otherwise acting outside
855 Mosley, P., J. Harrigan and J. Toye, Aid and Power, The World Bank and Policy Based
Lending (1989) p 21.
856 Berg. A., Malnutrition: What Can Be Done? Lessons from World Bank Experience,
World Bank Publications (1981) p 6.
857 Articles 1 and III (4) of the World Bank Articles of Agreement.
858 Article III (4) (ii) of the World Bank Articles of Agreement.
859 De Vries, G.M., The International Monetary Fund 1972-1978, Vol. 2 (1985) p 955.

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The Controversies Regarding the Operational Policies of the WB and the IMF

the Articles of Agreement may amount to interference in the domestic affairs of


member states.
Although Article III Section 6(v) of the International Finance Corporation (IFC)
and Article V Section 5(iv) of the International Development Agency (IDA), parts
of the WB group, specify that the institutions are not limited to acting within the
express provisions of the Articles of Agreement; in addition, they have incidental
and implied powers. This approach is consistent with the general principles of
law, whereas the doctrines of sovereignty, the law of international treaties, and
the framework of principles of public international law limit the incidental and
implied powers.860 States are usually sensitive over the limit of powers conferred
onto international organizations, yet the fear of economic coercion or annihilation
prevents the member states governments from challenging policies considered
to be in non-conformity with the Articles of Agreement. However, the nongovernmental organizations (NGOs) are highly vociferous that the institutions
must not only act within the limits of Articles of Agreement,861 but they must as a
matter of necessity and in accordance with their Articles of Agreement cooperate
with other international organizations.
The NGOs are of the view that the SALs of the WB amount to an economic
weapon of coercion, simply because neither the programme of lending nor
interference in the governance and administration of member states is provided
for in the Articles of Agreement. They opine that the institutions stimulated
the appetites of the developing countries; however, a further claim is that
the institutions, having stimulated the appetites of the borrowing member
states, would have restricted a BMSs conditions for obtaining loans within the
public international law. The policy allowing the institutions to interfere in the
governance of borrowing member states may not be consistent with Article IV
(10) of the World Banks Articles of Agreement, which provide, inter alia, that the
Bank and its officers shall not interfere in the political affairs of member states, nor
shall they be influenced in their decisions by the political character of the member
or members concerned.862 Only economic considerations shall be relevant to
their decisions and these considerations shall be weighed impartially in order to
achieve the purposes stated in Article 1.863

860 Skogly, S.I., The Human Rights Obligation of the World Bank and the IMF: The Capacities of
International Organizations (2001) p 71, para 1.
861 Schemers, H.G., and N.M. Blokker, International Institutional Law: Unity within Diversity,
Third Revised Edition (1995) p 713.
862 Article IV (10) of the World Bank Articles of Agreement.
863 Ibid.

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The Controversies Regarding the Operational Policies of the WB and the IMF
7.5.1

Interpretation of Article IV (10) of the World


Banks Articles of Agreement

Many controversies have arisen over the interpretation of Article IV (10) of the
World Banks Articles of Agreement. The view of the WB is that governance is not
linked with member states political activities. They define governance as a mere
exercise of authority, control, management, and the power of government, which
includes the utilization of government power to manage the states resources
which thus has an impact on the social and economic life of the citizens.864 The
WB further considers the term governance as consisting in three interrelated
concepts: accountability, predictability, and transparency.865 Observers agree
that the Banks functions are related to governance; however, the issue here is to
identify the aspects of governance relevant to the WBs functions as understood
and consented to by the member states under its Articles of Agreement.
It appears to be difficult to determine the World Banks incidental powers,
without breaching the Articles of Agreement, over the governance, scrutiny and
control policy. This is in itself instructive of the fact that the institution is prohibited
from political considerations in dealing with member states. The line between
governance and political consideration is very latent;866 while it is good for public
officers to be accountable for their actions under the rule of law, the national or
domestic legal instrumentsand not the institutionsshould be allowed to correct
any anomalies.
It could, perhaps, be held that there are two possible interpretations of Article
IV (10) of the WBs Articles of Agreement: one interpretation is possibly to prevent
the institutions from interfering into a member states internal affairs, consistent
with the doctrines of state sovereignty and, by implication, consistent with Article
2 (7) of the United Nations Charter867 and similar to Article 15 (8) of the Covenant
of the League of Nations.868 The other interpretation may be the possible
prohibition of the politicization of the WB as the constitutional embodiment of
the functionalist principles within the WB Charter.869 The Charter does to some
extent protect members from interference in their domestic affairs by the WB. The
first part of the prohibition is in relation to the decision-making by the officers of
864 World Bank, Managing Development: The Governance Dimension. A Discussion
Paper, 1991. World Bank, Washington DC.
865 Skogly, op. cit., p 24 para 2.
866 Shihata, I., The World Bank in a Changing World (1991) p 81.
867 Article 2 (7) of the UN Charter 1945.
868 Article 15 (8) of the Covenant of the League of Nations.
869 Brown, Bartram, The United States and The Politicization of the World Bank: Issues of
International Law and Policy (1992) p 102 para 3.

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The Controversies Regarding the Operational Policies of the WB and the IMF

the WB, holding that political considerations should not influence their decisions
in granting loans to member states; the second is non-interference in the political
affairs of member states. It is logical to argue that Article IV (10) of the World Bank
Articles of Agreement is intended to protect the sovereignty and independence of
the borrowing member states.
The apprehension and doubts expressed during the negotiations stage of
the institutions at Bretton Woods may, it has been claimed, have prompted the
inclusion of this provision to appease members who feared that their sovereignty
may be eroded by the activities of the institutions; it was intended principally
as an assurance to the former USSR that not only would the institutions refrain
from interfering in the domestic or political activities of member states, but would,
further, not influence their political ideology.870 Concerning the IMF, a special
request was made to the member states for them to relinquish a small proportion
of their sovereignty with regard to the regulation of foreign exchange.871 These
assurances are further reinforced by the Articles of Agreement of the International
Financial Corporation (IFC) that provide, inter alia:
The Corporation and its officers shall not interfere in the political
affairs of any member nor shall they be influenced in the decisions by
the political character of the member or members concerned. Only
economic considerations shall be relevant to their decisions and
these considerations shall be weighed impartially in order to achieve
the purpose stated in this agreement.872
Article V Section 6 of the IDA has similar provisions prohibiting political
activities or the exercise of its influence in consideration of dealings with member
states.873 The plausible explanations for these provisions are that the institutions
should operate in accordance with the functionalist theory in the sense that all
decisions should be based on technical considerations and not on politics. The
WB supports this approach; the Executive Directors (EDs) have endorsed the
view that Section 10 of Article IV of the WB Articles of Agreement is a reflection
of the functional aspect of the Bank.874 The question remains as to what it was
that prompted the institutions to overlook this injunction in their structural
adjustment loans (SALs) and structural adjustment policies (SAPs). Article IV
870 Bitterman, H.J., Negotiation of the Articles of Agreement of the International Bank for
Reconstruction and Development, The International Lawyer, Vol.5 no. 1 (1971) at p 79.
871 De Vries, G.M., op. cit. p.97.
872 Article III Section 9 of the IFC Articles of Agreement.
873 Article V Section 6 of the IDA Articles of Agreement.
874 Letter of the General Council of the World Bank to the United Nations Secretariat on
5 May 1967 cited in the United Nations Juridical Yearbook (1967) p 121.

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The Controversies Regarding the Operational Policies of the WB and the IMF

Sections 1 to 7 clearly spelt out the types, the mode and conditions for obtaining
loans and guarantees, including possible penalties for breach of either loan or
guarantee agreements; there is no such thing as SALs or SAPs.
The positive injunction and directive that only economic considerations shall
be relevant to the decisions of the institution suggest that a substantial part of the
conditionalities not based on economic considerations that states were compelled
or coerced to adopt are such as to erode their state sovereignty. This argument
is reminiscent of the International Court of Justice (ICJ) advisory opinion on
conditions of admission where the court concluded that the UN members were
not juridically entitled to make their affirmative votes concerning the admission
of new states dependent on conditions other than those expressed in Article 4,
paragraph 1 of the United Nations Charter.875 The ICJ opinion says that only
conditions enumerated in the United Nations Charter shall be relevant.876 Article
4 of the UN Charter and the decisions of the ICJ are similar to Article IV (10) of
the World Banks Articles of Agreement to the fact that no conditions outside
the Articles of Agreement should be considered in the decisions of the Bank in
granting facilities to borrowing member states (BMS).
It can be observed that the injunction in Article IV Section 10 of the IBRD and
Article V Section 6 of the IDA Articles of Agreement has been further reinforced.
In order to maintain the impartiality of the institutions, together with protection
and respect for sovereignty of states, and to prevent the highly developed nations
from having undue advantage over the BMS, it is provided specifically that the
President, officers and staff of the Bank, in the discharge of their offices, owe
their duty entirely to the Bank and to no other authority. Each member of the
Bank shall respect the international character of his duty and shall refrain from all
attempts to influence any of them in the discharge of their duties.877 This provision
is predicated on the rules of international law, regarding the sovereign equality of
all member states, and to prevent the domination of BMS. The examination and
the analysis of the following issues will determine whether the institutions legal
obligations to be bound and comply with the Articles of Agreement in order to
complement the principles of state sovereignty are fulfilled. The issues are:
whether the WB and its staff comply with this provision; who the members
of Paris Club are; what constitutes their roles; whether they are recognized in
the Articles of Agreement; who controls the WB: the Articles of Agreement vests
control of the institution in the Board of Governors, who delegates powers to
875 Article 4, para 1, United Nations Charter.
876 Admission Case ICJ Reports 1947-1948 at p 63.
877 Article V Section 5 (c) of IBRD Articles of Agreement; Article VI Section 5 (c) of IDA
Articles of Agreement.

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The Controversies Regarding the Operational Policies of the WB and the IMF

the President and the executive directors to run the organization; whether the
institutions are subordinated to any other body; the constituent members of the
G8 and the Group of Ten; the role they perform; whether these roles are provided
in the Articles of Agreement or were ever discussed at the negotiation stage during
the Bretton Woods Conference in 1944.
The answers to these questions might determine the extent to which some
provisions in the Articles of Agreement achieve compliance from the institutions.
The Paris Club is an informal organization or forum of regulators and
creditor countries comprising a Chairman, usually a senior official of the French
Treasury;878 and a representative of each of the IMF, the WB, the OECD, and
the UNCTAD. These members are very powerful; their decisions, which include
economic and political considerations, are binding on the WB and the IMF
contrary to the provisions of the Articles of Agreement which provide, inter
alia, that the institutions shall owe no obligation or subjugate itself to another
authority except the Board of Governors.879 The decision to write off, reschedule
or recapitalize debts depends entirely on their whims and caprices.880 They assert
authority and influence the institutions in dealing with member states to rely on
political considerations, a feature that may also be in non-conformity with the
Articles of Agreement.881
It may be necessary to justify the fact that the Articles of Agreement recognize
the Board of Governors as the highest authority within the WB rather than the
Paris Club, as it is celebrated in recent times:
The Executive Directors are authorized by the Board of Governors
to exercise all the powers of the Bank except those reserved to the
Board of Governors by Articles V Section 2 (b) and other provisions
878 The Chairman of the Paris Club between 1978-1984, Michel Camdessus, became the
Managing Director of the IMF 1987-2000.
879 Article IV (10); Article V 5 (c) of the IBRD and Article VI Section 5 (c) of the IDA.
880 Klein, T., Innovation in Debt Relief: The Paris Club, 29 Finance and Development (March
1992) p 42.
881 Ibid. It should be noted that the temporary suspension of Zimbabwe from obtaining
assistance was due to the internal crisis in that country where it was alleged that the
farms belonging to the white farmers were unlawfully seized without the payment of
adequate compensation; also, it has been alleged that Zimbabwe converted some of
the resources obtained from the institutions in supporting the Tutsi War in the Congo
Republic. The stopping of developmental assistance to South Africa was based on
political considerations influenced by the Paris Club as the institutions can take almost
no major decision without its approval. Similarly, Poland became a member of the IMF
in 1986 and was able to reschedule its debts to the institutions through the Paris Club.
The foregoing appears to confirm the assertion that the institutions may have been
taking dictates from the Paris Club.

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The Controversies Regarding the Operational Policies of the WB and the IMF

of the Articles of Agreement. The Executive Directors shall not take


any action pursuant to powers delegated by the Board of Governors,
which is inconsistent with action taken by the Board of Governors.882
The Articles of Agreement and the institutions by-laws justify the argument
of the critics, most of whom are NGOs and academic scholars, that the roles of
the Paris Club and G7, including the Group of Ten, assert great influence on
both of the institutions and on borrowing member states and that this is illegal,
as no attempt has been made to regularize these groups roles in the Articles of
Agreement. Recently, debtor countries, instead of approaching the institutions
directly for debt relief, dealt with Paris Club through the campaigning of NGOs
and obtained debt relief. For instance, while some countries were considered
fit to receive outright debt relief, Nigeria brokered its debt with the Paris Club,
who then insisted that Nigeria pay off her debt with her excess crude oil revenue.
The Paris Club directs the WB and the IMF to implement decisions taken at its
forum.883
Contrary to the contents of the Articles of Agreement and doctrines of nonintervention and state sovereignty, the Paris Club dictates to the institutions on
conditions other than economic considerations concerning the member states
that qualify for debt relief.884 For example, the IMFs grant of debt relief to Mali
totalling $870 million was based on the decision of the Paris Club.885 While
this decision can be acknowledged, it suggests that there is a superior body that
controls, regulates and dominates the activities of the institutions contrary to the
principles of sovereign equality under which the institutions were established.
There is a growing concern as to the unofficial status afforded to the Paris Club,
whose membership now comprises nineteen creditor states governments, over
the sovereignty of the borrowing member states. The Articles of Agreement of the
WB and the IMF did not provide for the recognition of any body superior to the
WB or the IMF, apart from the Board of Governors.
The President, officers and staff of the Bank, in the discharge of their offices,
owe their duty entirely to the Bank and no other authority. Each member shall
respect the international character of his duty and shall refrain from all attempts
to influence them in the discharge of their duty.886
882 Article V Section 2 (b) of IBRD Articles of Agreement and Section 14 of the IBRD Bylaws.
883 Larry, E. and W. Patrick, The Guardian Newspaper, 20 December 2005.
884 Gordon, B., In Response to NGOs Campaign and Lord Gordon Brown requesting the
Paris Club to Write-off Nigeria Debt, UK HM International Development Finance.
885 IMF Press Release No 00/52, 12 September 2006.
886 Article V Section 5 (c) of IBRD Articles of Agreement; Article VI Section 5 (c) of IDA
Articles of Agreement.

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The Controversies Regarding the Operational Policies of the WB and the IMF

The involvement of the Paris Club in the activities of the institutions appears
inconsistent with the provision of the Articles of Agreement that the officers of the
Bank owe their obligation to the Bank and to no other authority as they are meant
to be controlled by the Board of Governors and the Executive Directors only.887 It
may also be held that the injunctive clause in the Articles of Agreement stating the
institutions should respect the international character of their duty is made in
reference to the sovereign equality of member states, as no state or member has by
virtue of the Articles of Agreement the privilege to control or dominate another.888
It can, therefore, be argued that the self-imposition of the Paris Club as the de
facto head and regulator of the WB and the IMF could amount to the erosion of
the sovereignty of the BMS. On 14 June 2006, the Paris Club expressed concern
that three new creditor countries, China, India and Brazil, who recently joined the
Paris Club, are lending at a very high interest rate, and that this might undermine
the debt relief policy of the unofficial body.
We want to dialogue with these new lender-countries India, China, Brazil to
explain why they cant have a free-ride attitude and lend for commercial purposes
to countries for which the international community is making considerable
efforts.889
The new loans from the institutions are currently awarded at higher rates
of interest because the new states that joined the Paris Club are demanding
commercial rates for their contributions and loans to the organizations; while this
may appear to be justified from their economic point of view, such a role as is now
being played by the Paris Club and new lenders have no legal validity and this may
likely undermine the sovereignty of the BMS.
It can be observed with respect to the G7, the group of seven industrialized
countries, that they pledged to intensify economic and monetary cooperation
and to use intervention in exchange markets to counter disorderly conditions, as
provided in Article IV of the IMF Articles of Agreement;890 the G7 in 1983 also
commissioned a Working Group to examine the ways to improve economic
policies891yet such a role was never assigned to them because the G7 has not
been recognized by the IMF Articles of Agreement.

887 Article V Section 5 of IBRD Articles of Agreement.


888 Ibid.
889 Comment made by Paris Club President Xavier Musca on the eve of the 50th
anniversary of the Paris Club on 14 June 2006.
890 Article IV IMF Articles of Agreement.
891 Report of Working Group and Statement by Central Bank Governors and Finance
Ministers of G7 Countries, 29 April, 1983, 12 IMF Survey ( June 1983) p 137.

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The Controversies Regarding the Operational Policies of the WB and the IMF

The G7 Countries set the tone for the expansion and broadening the SAP to
include democratization by the BMS as a condition for access to IMF resources.892
The G7 nations have an identity and characteristics similar to those of the Paris
Club; it includes the expanded Group of Ten, which includes the Netherlands and
certain other countries that were not democratized, but the WB and the IMF may
have been deluded because of the financial resources of the non-democratized
members.893 The latter have an equally assertive influence on the institutions;
it is generally accepted that he who lends must be allowed to participate in the
decision as to how the money is being spent, as well as to ensure both the safety of
the Fund and return on investments. The Articles of Agreement of the WB and the
IMF should be amended to accommodate these changing circumstances in order
to prevent an infraction of international law.

7.6 inconsistent approach


The institutions appear, through their policies, to encourage double standards
in dealing with member states. This double standard is further compounded by
non-adherence to the Articles of Agreement. For example, while other member
countries including those of the former Soviet Union are required to democratize
as one of the criteria for continuous business relationships with the IMF and the
WB,894 countries such as Kuwait, even before their voluntary democratization, and
Saudi Arabia895 were not put under such conditions. In fact, these countries, along
with the Paris Club and G7, are members of the inner caucus of the institutions
New Arrangement to Borrow (NAB).896 Such a double standard, including the
reference to democratization, is considered by some authors as interference in
the affairs of member states which has been prohibited by the WB Articles of
Agreement and including that of the IMF which provides that the institutions shall
be guided only by the purposes in Articles (1) to (5) in all of its decisions.
This revelation is taken from the considerations that:
The agreement provides that: the Bank shall make arrangement to
ensure that the proceeds of any loan are used only for the purpose for
which the Loan was granted, with due attention to consideration of
892 14 IMF Survey (October 1985) p 297.
893 General Agreement to Borrow (GAB) Executive Board Decision No 1289, 24th
Issue 1999.
894 Siri, G., The World Bank and Civil Society Development Exploring Two Courses of
Action for Capacity Building, World Bank Publication (2002) p 9.
895 Middle East Intelligent Bulletin Vol. 5 No. 8-9 (2003) p 1.
896 24 IMF Survey (3 July 1995) p 201.

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The Controversies Regarding the Operational Policies of the WB and the IMF

the economy and efficiency and without regard to political and other
non-economic influences or considerations.897
The controversy over political prohibition, economic considerations and
democratization as criteria for loan has generated a heated debate. Some
commentators argue that democratization and political and economic
considerations are intertwined and as such cannot be separated in the economic
development of states; they further argue that the literal interpretation of
the Articles of Agreement will lead to absurdity. There is some degree of
weight in this assertion, given the latent line between economic, political and
democratic governance.
The ideology of member states determines the relationships of these indices,
the degree of which depends more on whether the country is operating a mixed
economy, a socialist economy, or a neo-liberal or market-driven economy. Therefore,
it appears that it will be difficult actually to separate political considerations, which
include democratization and governance, from economic considerations; under
international law; however, political activities are regarded as the internal affairs of
member states. While this is the case, it is argued that this rule might be jettisoned
for the common interest of the cooperative intergovernmental organizations. This
approach is consistent with the proponents of examination of governance issues
as a pre-condition to obtaining assistance from the WB and the IMF.
In practice, the Bank adopts this approach; it expresses its position on the
relationship between political and economic activities as intangible, as is reflected
in its Reports:
Though the Bank is precluded from making or denying loans to achieve
political objectives, there is an obvious and necessary interrelationship
and inter-action between political events and conditions in any
country. The soundness of a loan depends fundamentally on the
financial and economic prospects of the Borrower. In so far as those
prospects may be affected by the conditions of political instability or
uncertainty in the Borrower country, those conditions must be taken
into consideration.898
Based on this, the Bank declined to grant the request of Poland until 1947, when
Poland obtained independence from the USSR and thus automatically improved

897 Article III (Section 5 (b) of the IBRD Articles of Agreement; Article V Section 1 (g)
of the IDA Articles of Agreement.
898 IBRD, Second Annual Report, (1947) p 17.

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its credit rating to the status of good credit risk.899 The Bank is fully cognizant and
not unmindful of the injunctions in its Articles of Agreement to the effect that
decisions shall be based only on economic considerations, but it has also come
to terms with the fact that political activity has a direct effect on the economic
and financial conditions of member states. The Bank maintained this position
even during the Marshall Plan, although commentators allude to this policy of
political considerations. Despite the WBs prohibitive injunctions and in respect
of the Cold War with the anti-Communism of Western against Eastern Europe,
it is, however, noteworthy to appreciate that these two concepts of politics and
economics are related and cannot be separated.900
Similarly to Article 1 (v) of the IMF dealing on adequate safeguard as a condition
for the use of Funds resources, Article IV (10) dealing with the prohibition of
political considerations in dealing with member states is quite controversial.
The Bank in an early phase of its existence recognized the link between political
and economic considerations; it must therefore be asked why it was unable to
amend the Articles of Agreement so as to prevent their consistent infraction.
Two extreme views may be advanced in analyzing these issues. Firstly, the
founding fathers of the institutions at the Bretton Woods Conference were not
oblivious to the fact that economic and political or democratic elements, including
governance, are intertwined. The purposes of promoting international peace and
respect for sovereignty, including the international law principles on the sanctity
of sovereign equality of states, may have been justified as a basis for financial
assistance to member states the prohibition of political considerations. Secondly,
the parties are bound by the Constitution or agreement, whether in international,
domestic or internal law. The ICJ in the Condition for Admission Case held, while
interpreting Article 4 Section 1, inter alia that the UN Selection Committee on the
admission of new members could not impose conditions not provided in the UN
Charter.901 Also, it is pertinent to note that the Articles of Agreement are treaties
or international agreements. Under general rules of interpretation, Article 31 of
the Vienna Convention on the Laws of Treaties provides that:
A Treaty shall be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the treaty in their
context and in the light of the object and purposes. 902

899

World Bank Loan to Poland Stymied, New York Times, 5 November 1947 at p 43, in
Brown, op. cit. p 128 para. 3.
900 IBRD, Third Annual Report (1948) p 14.
901 Condition for Admission Case ICJ Report op. cit. p 64.
902 Article 31 of the Vienna Convention on the Law of Treaties 1969.

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The Controversies Regarding the Operational Policies of the WB and the IMF

Also, as sovereignty is highly prized in international relations, intergovernmental


organizations have been advised to adhere strictly to the Constitution of the
organization, as such adherence will enhance compliance with the rule of law.903
That follows also that SAP, which includes the political conditionality policy
as a prequalification criterion to obtaining loans from the institutions, may be
considered illegal as it is in breach of the Articles of Agreement; it might affect
the sovereignty of BMS. The argument of the functionalist is that Article IV
(10) of WB Articles of Agreement is more analogous and similar to Article 4 (1)
than is Article 2 (7) of the UN Charter. In either eventuality, the point remains
that international organizations do not have the type of implied and ostensible
powers that are common and less rigidly guided in domestic law, because there
is no apprehension of the loss of state sovereignty. For the protection of state
sovereignty international law advocates that the WB and IMF international
agreements and treaties should bind parties as this reduces friction and conflicts
that may arise from misunderstandings. The strict adherence to the Articles of
Agreement, international agreements and treaties complements rather than
erodes state sovereignty.
That the provision of political neutrality of the Bank is drafted in absolute
language without authorization for exception in the Articles of Agreement904
is seen by observers as enhancing and strengthening the doctrine of the
sovereignty of states. This observation can be sustained with the corroboration
of other provisions, which in effect provide inter alia that the Bank shall respect
the international character of its duty and shall refrain from all attempts to influence
any of them in the discharge of their duties.905 The most important legal question
nevertheless remains whether this provision is respected. Again, it might be
necessary to address the issue of the international character of the duties of the
World Bank where these may have a link and relationship to the sovereign equality
of member states and state sovereignty, as will be discussed fully in the next section.
Proponents of strict adherence to international law by international
organizations are quick to suggest that no matter the interpretation or
construction of their Articles of Agreement to the contrary, the institutions are
bound by the principles, norms and the rules of international law under which
they are established.
The institutions consider, in the World Bank Articles of Agreement, the political
activities a prohibitive injunction said to be consistent with the principles of

903 Condition for Admission Case op. cit. p 63.


904 Shihata, F.I., World Bank Legal Papers (2000) p. 227, para. 3.
905 Article V Section 5 (c) of the IBRD Articles of Agreement.

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sovereignty and international law as legal obligation.906 Considering this approach


by the institutions themselves, then the legal question is whether the governance
issues of the institutions, which may, perhaps, be considered intervention in the
political affairs of member states not a direct contradiction and infraction of their
legal obligations.

7.7 public sector governance


It appears that the public sector governance issues policy of the WB and the IMF907
are similar to the political activities prohibited by their Articles of Agreement. The
difference between the governance issues and political activities exists in name
and mere semantics only. The governance issues of the WB involve monitoring
all sectors of government activities: micro- and macro-economic policies; entire
government expenditures in both economic and non-economic issues, and the
type and level of government expenditures (whether a democratic, social or
dictatorial government and the level of expenditures in social and cultural sectors).
Opponents of this policy argue that it might erode the sovereignty of borrowing
member states.
In its broad sense, governance includes the exercise of political powers and
the overall management of human, natural and economic resources [I]t covers
all the functions of government, which is a more modern word for governance
Clearly, the Bank does not have the legal right to oversee governance of borrowing
member states or to participate in governance. It is neither a World Government
nor World Police.908
Article IV (10) of the IBRD Articles of Agreement prohibiting interference in
the political activities of member states is not ambiguous; equally, neither is the
statement quoted above ambiguous. It must then be asked whether the infraction
of the Articles of Agreement is deliberate. Some of the legal questions concern
the consequences of exceeding the powers conferred upon the institutions where
the relationship between the states and the institution is based on the delegation
of sovereign power from the states. In international law, the act of deliberately
exceeding a consented, expressly delegated power could amount to the erosion of
state sovereignty.
906 World Bank, IDA, IFC: Policies and Operations, World Bank Document (1968) p 43.
907 Houtven, L.V. Governance of the IMF, Decision Making, Institutional Oversight,
Transparency and Accountability IMF Publication Pamphlet Series No 53 (2002) pp233.
Camdessus, M. Good Governance: IMF Role, IMF Publication (1999) pp v-12.
908 Shihata F. I. World Bank Legal Papers op cit. p 230 para. 1.

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The Controversies Regarding the Operational Policies of the WB and the IMF

This principle is also applicable where the conferment of powers onto the
institutions by transfer or the existence of an agency relationship.909
This governance issue is also one of the conditions for obtaining a loan from
the IMF.910 There is no doubt that good governance is important for countries at
all stages of development; the approach is to concentrate on those aspects of good
governance that are closely related to surveillance, transparency of government
accounts, effectiveness of public resource management, and the stability and
transparency of the economic and regulatory environment for private sector
activities which together constitute the solutions to partnership for sustainable
global growth.911
There are some great measures of truth in this assertion; however, applying
this policy of scrutinizing, auditing and monitoring all economic and noneconomic activities of member states governments without amending the Articles
of Agreement may lead to an infraction of the Articles of Agreement and the
doctrines of sovereignty of states.912 With the institutions performing such roles,
it must be asked what then remains for the states to do.
It can be argued that it is the responsibility of each national government to
address the issues of governance in accordance with state ideology, electoral
promises, fundamental objectives and the directive principles of state policy,
including political, economic, social, and educational objectives; these are not
elements within the remit of the institutions, as the WB and IMF by acting in
these areas will reduce the sovereign and independent states to trust territories.
This scenario is a daily occurrence in Nigeria, where the nations annual budget
has of late usually been presented to the institutions for endorsement in the
guise of economic reforms before it is even presented to the nations parliament
for approval.

7.8 Administrative And Civil Service Reform Policy


This section examines whether the World Bank and the IMF Administrative
and Civil Service Reform Policy (ACSRP) forms part of their mandates in their
Articles of Agreement; however, while the policy appears to be relevant to the
909 Sarooshi, op. cit. p 123.
910 Camdessus, op. cit. pp v-5.
911 Camdessus. Michel, IMF Managing Director, Legal Issues, Governance and the IMF:
Address to the United Nations Economic and Social Council on 2 July 1997. IMF
Pamphlet 1997.
912 UN Condition for Admission Case on interpretation of Article 4 (1) of the UN Charter
ICJ Report op. cit. p 64; Article III Section 5 (b); Article IV (10) of IBRD, and Article
V Section 1 (c) and Section 6 of IDA.

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The Controversies Regarding the Operational Policies of the WB and the IMF

successful implementation of the institutions programmes, the debate is whether


the implementation of the policy could have an effect on the sovereignty of the
borrowing member states.
The institutions are of the view that the engine of their policies lies within the
personnel management of human resources who are entrusted to implement
their policies in conjunction with the national policies, sometimes in the order of
priorities. For the implementation of their policies, therefore, it became pressing
that grants must be given for the reform of the civil service, after adequate research
was necessarily conducted in different regions such as Eastern Europe, Central
Asia, East Asia and Africa in general.913 As the WB moved away from project to
sectoral, non-project and balance of payment financing under SALs for the reform
of civil service, similarly to the functions being performed by the IMF,914 the IMF
countered by combining its statutory roles, limited to the regulation of foreign
exchange, to non-economic issues which can be classified as within the domestic
jurisdiction of member states.915
Scholars are of the view that it has become more axiomatic in the era of
privatization, cuts in employment, and increases and decreases in wages, including
anti-corruption measures, to enact the civil service reform in accordance with
the developmental changes; however, sector financing appears not to have been
delegated to international organizations as this is intertwined with the governance
of a state. Nevertheless, the civil services of the more advanced countries appear
to enjoy selection through merit, thus there is some reasonable insulation from
undue political influence; to some extent, furthermore, such countries engage
in training through workshops and courses and include adequate pay, all factors
aimed at promoting productivity and service delivery.
In the case of the civil services of the developing countries, there is claim that
they are politicized and underpaid, with senior servants lacking professional
depth: a combination more often resulting in inefficiency and corruption.916 The
claim that civil service reform917 is necessary for a market driven economy918 may
913 World Bank Annual Report 1992.
914 Civil Service Reform Loans to Brazil-Loan No. 4046-BR dated May 29th 1996,
Civil Service Reform Loan to Ukraine No 4118UA dated 15th November 1996.
Loan to Russia-No 4058 RU June 5th 1996.
915 Nunberg, B. Re-thinking Civil Service Reform: An Agenda For Smart Government
World Bank Publication No 86, (1997) p 3.
916 World Bank Assistance Report No 19211 of 27 April 1999.
917 World Bank Civil Service Reform FY and FY 00, 1980-1997; World Bank Working
Papers No. 2427; 2002; World Bank Annual Report 1999.
918 Shepherd, Geoffrey, Civil Service Reform in a Developing Country, Eleventh Annual
Anti-Corruption Conference in Seoul, Republic of Korea,25-28 May 2003 pp 2-3.

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The Controversies Regarding the Operational Policies of the WB and the IMF

indeed be valid, yet this measure appears to fall within the internal domestic affairs
of member states.
It can be observed that many borrowing member states have their own system
of civil service, modelled towards their customary and traditional concepts and
thus deep-rooted in the self-determination and sovereignty of states, particularly
with the acquisition of independence. The issue generating some controversy asks
whose civil service concept the institutions are adopting: whether it is the French,
British, US, Asian, African, Eastern European or Russian system. The adoption
of any of these systems as a condition for financial or technical assistance to be
granted to the borrowing member states appears inconsistent with the doctrines
of self-determination and state sovereignty.
It can be observed that in most countries, the civil service code is built on their
customs and tradition, religion, secularity, or the states political ideology; for
instance, the French administrative tradition has a culture of public power with
historical roots found in the Middle Ages or even earlier, in the Roman Empire.919
The French civil service system has been one of the most influential models
around the world for a number of reasons, notably, the French Revolution and
colonization, where the model intrinsically devotes a large role to the state. Most
countries in Latin America, Eastern Europe, the Middle East, and Africa adopted
this system.
The growth of the welfare state and state intervention grew at alarming rate up
to the late 1980s while today, at the insistence of the Bretton Woods institutions,920
civil service reform contrary to the doctrines of self-determination and the
sovereignty of the borrowing member states has become a recurring political
and conditionality slogan.921 There are now what appears to be serious emphasis
on reforms that include, inter alia, de-concentration, decentralization, increased
accountability, transparency, and internal and external control.922 The annual
budget discipline of states, the avoidance of budget deficits, and additional

919 Bouley, D., How Do Treasury Systems Operate in Sub-Saharan Francophone Africa?
IMF Fiscal Affairs Department, Working Paper No 02/58 (2002).
920 World Bank Sector Report, Reforming the Centralized States for Better Service, Stakes
and Challenges. 5 February, 2003
921 Lienert, I., and M. Jitendra, A Decade of Civil Service Reform in Sub-Saharan Africa,
IMF Fiscal Affairs Department, Working Paper No. 97/179, 1997.
922 World Bank Sector Report No 24384-SEN October 2003 Senegal: Decentralization,
Civic Engagement and the Challenges of Intergovernmental Relations Reform for
Better Service Delivery.

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emphasis on anti-corruption measures are among the main923themes, including


repositioning the institutions towards self-sustenance and the market economy.
It can be observed that certain states, alongside developing Commonwealth
countries, Francophone developing countries and Eastern Europe, found the
reforms to be quite awkward, particularly in the area of budgets. This issue has been
centralized with little or no accountability; even though in some cases corruption
may not have been involved, the system was riddled with inefficiency as civil
service staff members are entitled to automatic promotion without examination.
There was no sufficient debate before the institutions embarked on the reforms,
particularly for those Eastern Europe and Francophone countries who consider
the civil service as the primary employer. The basic education reform support
programme and public administration reform adjustment in Morocco,924 the
decentralization of civil service in Senegal,925 Fourth Poverty Support (FPS) in
Burkina Faso,926 and Second Poverty Reduction Support (SPRS) in Madagascar927
were all linked to conditions relating to civil service reforms. Funds were released
in some cases to enable the states to carry out the reform; in some cases, reforms
were set as a pre-condition before funds could be released for other projects.928
While some states were given the opportunity to reform their civil services,
in the case of Brazil, the institutions designed the civil service reforms for the
state, including the determination of the retirement age and severance packages
payable.929
There has been a growing concern by academic lawyers regarding the possible
influence of the WB and IMF civil service reform policy on the sovereignty of
borrowing member states. These concerns range from the legality of the policy to
the alleged non-violent coercion of member states. The legality of the policy raises
the issue of the equivalent meaning and consequences of ultra vires in international
law and coercion within the meaning of Article 2 (7) of the UN Charter.
923 World Bank Public Expenditure Reform Adjustment Credit, Vol. 1 of 21
December 2000.
924 World Bank Public Administration Reform in Morocco, Programme Doc. No. P7589MOR of 4 June 2004; World Bank Basic Education Support Program Project Appraisal
Doc. No. P3O721 7 January 2005.
925 World Bank Decentralization, Civic Engagement: Challenges of the Intergovernmental
Reform Sector, Report No. 24384-SEN of October 2003.
926 World Bank Burkina Faso: Fourth Poverty Reduction Credit Project Program, Doc.
No. 28293-BUR of 14 April 2004 .
927 World Bank Madagascar, Second Poverty Reform Adjustment, Program Doc. No.
32516-MAG of 9 June 2005.
928 World Bank Publication Administrative and Civil Service Reform, Out of France.
929 World Bank Policy Research Working Paper No. 3071, June 2003.

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It can be observed that the sovereignty of a state is a nebulous concept,


comprising many facets in both national and international spheres; the state
administrative bodies, judiciary, executive and legislature form that part of its
sovereignty sometimes referred to as jurisdictional sovereignty.930
This section examines whether the WB and IMF civil service reform policy lies
within or outside the jurisdictional sovereignty of the state. It may appear that the
erosion of state sovereignty can be determined only through examining the aspect
of sovereign powers conferred on the institutions. Critics are of the view that
the administration and civil service are in the spheres of the executive branch of
government not delegated to or conferred upon the institutions. The institutions
Articles of Agreement support this approach where no reference is made for
the institutions, as one of their object clauses, to oversee or overhaul services
in member states. However, while the Civil Service Reform policy (CSR) of the
institutions is being appreciated by some commentators, they express concerns
that the subject and policy is such as to fall within the domestic jurisdiction of the
state and that as such the policy is prohibited by the UN Charter.931
This approach is supported by the fact that the civil service operates within the
political ideology of the state; this depends on whether the country is Islamic;
dominated by Christians; secular, including whether the country is socialist, mixedeconomy or capitalist, and on the manifestos of the political party in government.
The civil services of each member state operates within the framework of the
domestic law to coordinate the internal activities of the state, as is sometimes
provided in the countrys Constitution and under what is generally known as the
civil service code, tailored towards the states self-determination ideology.
Some states consider the civil service not just as a productive centre, but as
serving as a socio-economic safety net meant to provide employment for the
working adult. The civil service has political underpinning although merit is one
of the primary criteria for recruitment; it suffices to observe that in some states
with heterogeneous tribes, proportionality and equity as criteria within the tribes
compete with qualification and merit.
For example, in Nigeria, the President is the head of the executive who, apart
from appointing the Head of the Federal Civil Service, delegates his powers to the
Federal Civil Service Commission; this will appoint other officers, including the
Permanent Secretaries who are the chief accounting officers of the Ministries.932

930 Martin, D., and R. McCorquodale, International Law, Cases and Materials, Fourth Edition
(2003) p 268.
931 Article 2 (7) of the UN Charter, SS Lotus Case (France v Turkey) PCIJ (1929) No 9.
932 Section 156 of Federal Republic of Nigeria Constitution, 1979.

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The Nigerian Constitution provides that the federal character shall be taken into
consideration in appointing officers into the federal civil service.933
There are similar provisions for states in the Constitution since Nigeria operates
a federal system of government; here, a commissioner is in charge of a Ministry
while the civil service commission of the state is in charge of the recruitment of
officers at the provincial or state level.934 The reference to the civil service and its
patent provision in the Constitution of the Federal Republic of Nigeria indicates
that it is a matter within the domestic jurisdiction of the state as her sovereignty,
represented by the Constitution, provides. Also, the interests of each of the tribes
in the country are protected by equal distribution of all of the vacant positions
among the tribes; this singular act promotes peace and security, as well as unity,
in the country. Given such an environment, attempts made by the institutions to
reform the civil service of Nigeria as it is provided in the Nigerian Constitution
could amount to an erosion of state sovereignty.
The position would have been different if the civil service were not provided for
in the Constitution, because the non-violent coercive civil service reform policy
of the WB and the IMF is equivalent to rewriting the Constitution for the state,
altering the consensus geo-political structure of the country, and sacrificing unity,
harmony, peace, and security within market forces. While this study does not
propose to examine the justifications for the reform it is, however, important once
more to emphasise that the Constitution of any country is the most fundamental
statutory document of that country that evidences the sovereignty of that state.
It can therefore be said that an infraction of that Constitution by an officer of
that country amounts to gross misconduct and is thus liable to impeachment or
dismissal; when breached by state or non-state actors, it amounts to an erosion of
the state sovereignty.
At the insistence of the IMF and WB, Nigeria, contrary to its socio-economic
policies, reduced the numbers of virtually all of the workers in public corporations.
They included even those firms that were profitable: the government sold them to
the private sector with little or no severance packages paid to the workers.935 The
Constitutional protection of the workers was sacrificed as a condition for the loan.
The reduction in the number of workers guaranteed a quick return on the security
and safeguarding of the institutions capital. Proponents of the civil service reform
are of the opinion that the reforms will save the government of Nigeria about
933 Section 157 (5) of the Federal Republic of Nigeria Constitution 1979. The federal
character means equitable and proportionate or equal opportunities to all tribes in
Nigeria. There are six geographical zones in Nigeria and appointments are shared
equally among these zones.
934 Section 178 of the Federal Republic of Nigeria Constitution 1979.
935 IMF Mission Statement Paper 25 March 2005.

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The Controversies Regarding the Operational Policies of the WB and the IMF

$30 million annually; other commentators are not seeking a justification for the
reforms as a majority has revealed that these are economically viable for a marketdriven economy. The emphasis in this case is whether due process was followed
in accordance with international law in discarding the domestic national law in
preference to discarding the policies of the WB936 and the IMF.
Similarly, it appears that the civil service reform policy is not consistent with
the International Covenant on Civil and Political Rights (ICCPR). Authors argue
that the civil service of most states reflects the tradition and cultural dimension of
the people.
Article 1 (1) provides inter alia that all peoples have the right of selfdetermination. By virtue of the rights they freely determine their political status
and freely pursue their economic, social and cultural development.937 The right of
self-determination even though synonymous with sovereignty, is equally available
to non-self governing and Trust territories, as can be seen from Article 1 (3) of the
ICCPR; this inter alia provides that:
[T]he States Parties to the present Covenant, including those having
responsibility for the administration of non-self governing and Trust
territories, shall respect and promote the realization of right of selfdetermination and shall respect the rights in conformity with the
provision of the UN Charter.938
It can therefore be argued that civil service reforms, which tend dramatically
to alter the civil service rules, some of which are provided in their countrys
Constitution, are in conformity neither with the ICCPR nor the UN Charter, as
the reforms could possibly be said to be in breach of Article 2 (7) of the Charter.
Similarly, when the WB team went to the former USSR in 1992 to determine
the legal constraint from planned economy to market economy, they demanded
from the government, contrary to the principles of non-interference that the USSR
should shift to a market economy; thus, legislators, after what critics considered
economic domination and coercion by the institutions, altered the Constitution.939
The amendment of the Constitution of the USSR only for the USSR to gain
access to the funds of the institutions cannot amount to consent, in mitigating the
elements of coercion because of the intimidating financial and economic influence
of the institutions. Commentators therefore argue that the presence of coercive
elements at the insistence of the organizations suggests an infraction of their
936 World Bank Civil Service Reform No 19211 of 1999; Nunberg, B., Rethinking Civil
Service Reform, World Bank Publication No 86 of 1997.
937 Article 1 (1) of ICCPR.
938 Article 1 (3) of ICCPR.
939 Federation of Russian Constitution 1993.

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Articles of Agreement and perhaps, too, of the doctrines of self determination and
non-intervention in the domestic affairs of another state.
Governance by the Bank has been jointly and severally argued by law academics
to be either illegal, as it is in breach of the institutions Articles of Agreement,
or a total breach of the principles of state sovereignty and international law
under which the institutions derive their legitimacy. Through such a policy, the
institutions have rewritten numerous countries trade and fiscal policies, labour
laws, health care and environmental regulations, procurement rules, and foreign
exchange laws, including a change in educational, cultural and social heritage.
The legal question concerns that which may be left, if anything, for the elected
government to do.
It can be said that one of the fundamental attributes of state sovereignty is
self-determination, including legislative roles primarily being imposed by the
WB and the IMF as a condition for states in obtaining their loans. On such as the
Commercial Banks, many of the conditions being imposed by the institutions
may be utterly unconnected with the repayment of loans; examples include Policy
Support Instruments (PSI) for low-income countries with no need to borrow
money. The PSIs have the characteristics of neo-liberalism which member states
are required to adopt even when they owe the institutions nothing; the policy may
threaten the sovereignty of states as it undermines the states legislative powers.
Commentators and academic lawyers have advanced strong reasons for the
criticism of the governance policies of the two institutions. This is particularly
the case with the Bank, where its Articles of Agreement in unambiguous terms
and instructively provide that the Bank and its members shall not interfere in the
political affairs of its member states.940
Nonetheless, the Bank now asserts that the quality of governance in
developing countries is within its jurisdiction. In 1989, the Bank explicitly raised
the issue of borrowing members for the first time. The Bank publicly called upon
African governments to become accountable to their citizens and the lending
agencies as long as the governance issue is concerned. It can impose conditions.
This policy enables the Bank and the IMF to impose their economic agenda and
political ideology on BMS.941
According to the Bank, its governance concerns extending from a broad
macro-economic policy structure into the role of governmental institutions that
administer the economic and non-economic sectors, including military spending,
and prioritising the resources of member state governments with a view adequately
to sustaining economic growth and ensuring returns on capital and investments.
940 Article VI Section 10 of the IBRD.
941 World Bank and India, Public Interest Research Group.

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There is a legitimate and sound argument in this assertion because it is hard to deny
any financier the opportunity to monitor his investment. It has been said that there
are many occasions on which a reformed government has enhanced economic
development, yet the most important legal issue is whether the institutions or the
citizens concerned should exercise this powerful state sovereignty.
The foundation of state sovereignty is built on self-determination, noninterventions and sovereign equality. The practice and imposition of a governance
issues policy by the institutions has been described by the commentators as being
not only such as to override the rights and duties of legislators in performing
their legal and legislative functions, but also such as to erode the whole notion of
state sovereignty.
It may appear that the institutions are merely playing the role of lender while
using its economic influence to pressurize and coerce the borrowing member states
into submission; this could be done in order to enable the institutions to legislate
on policies while focusing on the micro- and macro-economic, political, and
social objectives. Again, it can be argued that these conditions not only amount to
rewriting laws otherwise preserved for the legislators and the usurpation of power
of the policy-making organizations of the borrowing member governments; the
directive principles, fundamental state objectives, policies, and sovereignty of the
citizens is compromised.942
Those in support of these assertions observe that in order to implement the
governance policy, part of the WB and the IMF conditions, the government of India,
for example, was brought into submission to the extent of amending its Foreign
Exchange Regulation Act 1985; Companies Act 1956; Indian Trades Union Act
1926; Maternity Benefit Act 1961; Monopoly Restricted Act, and Electricity Supply
Act 1948. The legislators merely endorsed the draft received from the institutions,
signalling that institutions are the de facto legislators.943 There are, no doubt, some
measures of justification that changes precede according to the millennium; the
Articles of Agreement should nevertheless be amended to accommodate presentday realities to cure the illegality occasioned by the infraction of the Articles
of Agreement.
Some of the questions being asked by commentators include whether India still
enjoys some element of self-determination and sovereignty since the institutions
dictate most of its economic acts. Virtually all of the acts were amended at the
insistence of the institutions. This is similar to the practice in a Trusteeship
942 Kaval, M., Public Interest Research Group: India and the World Bank; Nigerian
Constitution 1979, Chapter II Sections 13-22 on Fundamental Objectives and
Directive Principles of State Policy.
943 Ibid., p 2 of 3.

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territory, even though India is a completely independent state. It might be


difficult to suggest that Indias sovereignty may have been eroded by that policy
and directive. Suffice it to say, however, that even a consented coercive policy of
international organizations on member states amounts to an infraction of the
latters state sovereignty.
It can be argued that, whether the conferment of power onto the institutions is
delegated or transferred or through an agency relationship, the WB and the IMF are
bound to limit their activities to within the confines of the legal framework. The
WB and the IMF are specialized institutions of United Nations, the sum of every
state in the world based on the sovereign equality of its members;944 the WB and
the IMF are even prohibited from interfering in matters falling essentially within
the domestic jurisdiction of states. It therefore follows that the institutions merely
exceeding sovereign powers delegated from states may not only be in breach of the
enabling instrument, but also of the principles of public international law.
There may be little harm, and possibly even good practice, in interpreting the
Articles of Agreement in line with present and future circumstances. Doing so
under the implied powers,945 though, such as to change economic circumstances
amounts to unilateral amending of the Articles of Agreement without adherence
to Article VIII of the IBRD Articles of Agreement, which provide inter alia that:
Any proposal to introduce modifications in this agreement, whether
emanating from a member, a governor or the Executive Directors,
shall be communicated to the Chairman of the Board of Governors
who shall bring the proposal before the Board. If the Board approves
the proposed amendment, the Bank shall, by circular letter or telegram,
ask all members whether they accept the proposed amendment.
When three-fifths of the members having eighty-five per cent of the
total voting power have accepted the proposed amendments, the
Bank shall certify the fact by normal communication addressed to a
member.946
The interpretation of this provision suggests that the Bank does not possess the
express or implied powers to implement policies or object clause and purposes
not provided in the Articles of Agreement without proper amendment of the
Articles of Agreement.
Article 4 (1) of the UN charter provides inter alia that membership of the
United Nations is open to all other peace-loving states that accept the obligations
944 Article 2 (1) of the UN Charter 1945.
945 Advisory Opinion Case ICJ Report (1949) p 172.
946 Article VIII (a) of IBRD Articles of Agreement.

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The Controversies Regarding the Operational Policies of the WB and the IMF

contained in the present Charter and, in the judgement of the organization, are able
and willing to carry out these obligations. The General Assembly of the UN asked
the ICJ to give an opinion on the question concerning the admission of a state to
membership of the UN by virtue of Article 4 (1). However, the court declined to
examine the necessity or justification for Article 4 (1); instead, it held that the
members are not legally entitled to make admission dependent upon conditions
not expressly provided in the Article. The affirmative votes, which the General
Assembly wanted to add as a condition for admission into the UN, were declared
as illegal.947 The decision of the ICJ appears to be consistent with the argument
that the institutions should restrict themselves to the Articles of Agreement in
formulating and implementing policies that are such as to affect fundamentally
the rights and obligations of borrowing member states.

7.9 counterfactual argument


Proponents of SAP and SALs argue that the prohibition on political activities and
as consideration for dealing with BMS as provided in Article IV (10) of World
Bank Articles of Agreement, Article V Section 6 of the IDA Articles of Agreement,
and Article III, Section 9 of the IFC Articles of Agreement are binding only on the
officers of the Bank and on the EDs and the governors that exercise voting powers
in the Bank on behalf of their countries.
Article IV (10) provides inter alia:
The bank and its officers while they shall not interfere in the political
affairs of any member nor shall they be influenced in their decision
by the political character of the member concerned, economic
considerations shall be relevant in their decisions.
Article V (6) of the IDA provides that while the Association and its officers
shall not interfere in the political affairs of a member or be influenced by the
political character of a member, economic considerations shall be relevant in their
decisions. Article III (9) of the IFC also provides that the Corporation and its
officers shall not interfere in the political affairs of a member or be influenced by
the political character of a member, economic considerations shall be relevant in
their decisions.
The argument is that since the Bank and its Officers, the Association and its
officers, and the Corporation and its officers only were mentioned in these
provisions, it therefore follows that the principles of expression unius est exclusio
alterius could be applied to support the suggestion that the Governors and the
947 Condition of Admission Case, ICJ 1948.

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The Controversies Regarding the Operational Policies of the WB and the IMF
EDs not mentioned in the Articles of Agreement are thus not bound by the

prohibitive order.
The literal interpretation of these provisions could lead to absurdity, although
the Governors and the EDs are certainly not officers of the institutions within the
meaning of the Articles of Agreement. Throughout the Articles of Agreement of
the three related institutions under one President, officers is used to refer to
staff that are appointed by the President but subject to the controls of the EDs.948
The argument that even if the political prohibition provisions do not bind the
governors and the EDs, the principles of non-intervention and state sovereignty
would certainly make it illegal for them to interfere in the political affairs of BMS
may be sustained.949
Indeed, the so-called political neutrality clause in the Articles of Agreement of
the Bank, often referred to as an article of faith, requires them to remain apolitical.
To intervene in the political matters of the member states would mean acting
against the principles of the sovereign equality of states and non-intervention in
the internal affairs of states embodied in Articles 2(1) and 2(7) of the Charter of
the UN.950
Also, under Article V Section 2, all powers of the WB are vested in the Board
of Governors who in turn delegate some of these powers to the EDs. Therefore,
the argument that they are not bound by the restrictions on the Bank may not be
totally logical and compelling, as the officers may equally be jointly and severally
liable for any breach of the Articles of Agreement.

7.10 is article

iv

(10) a sword or a shield?

It would appear that Article IV (10) of the Articles of Agreement of the WB is used
as both a sword and a shield by the institution. A broad interpretation may lead
to an infraction of state sovereignty. For instance, the institutions, against popular
opinion and also the United Nations General Assembly resolutions,951 failed to
decline to do business with South Africa and Portugal while they were practising
apartheid and colonial policies, respectively.
The Bank referred the UN to the provisions of Article IV (10), providing that the
institutions are prohibited from interfering in the political activities, as a defence
948 Article V Section 5 (c) WB Articles of Agreement.
949 Johnson, G.H., The Structure and Process of International Law, Essays in Legal
Philosophy, Doctrine and Theory (1983) pp 231-232.
950 Subedi, op. cit. p. 181.
951 Resolutions 2054A (XX) of 15 December 1965, UN General Assembly 20th Session,
Supplement No 14 United Nations Document A/6014.

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The Controversies Regarding the Operational Policies of the WB and the IMF

for engaging in business with South Africa and Portugal. The WB claimed that
the governance in these two countries formed an integral part of their political
activities and thus the denial of technical assistance based on their political
policies would have amounted to an infraction of the Articles of Agreement.952
Commentators are of the view that the claims of the institutions are valid: the
resolution of the UN General Assembly will encourage the Bank to consider
political rather than economic factors in granting loans to the borrowing member
states. Further, the UN General Assembly resolutions on 1 December 1966 asserted
that the WB should as a matter of public policy stop its business dealings with the
two countries.953
The reluctance of the institution to enact business with Poland was not at the
insistence of any body or group of persons. Events and correspondence between
the institutions and Poland suggest that the countrys political ideology and ties
with the USSR would have militated against the granting of Polands request for
financial and technical assistance; they were considered as a manageable credit
risk only after achieving their independence from the USSR. This demonstrates
that the WB chooses when to use Article IV (10) as a shield and when as a sword.
Most scholars associate themselves with the decisions of the WB in this regard
because the guidelines in Article IV (10) of the Articles of Agreement are analogous
to Article 4 (1) of the UN Charter. It has been interpreted thus: where the Advisory
Opinion on Conditions of Admission suggests that the General Assembly, the UN
Security Council, including UN Member States (UNMBS) are all limited in their
legal powers by the provisions of Articles 4 (1) of the UN Charter;954 it can be
firmly argued that the decision making of the Bank, its Conditionality and Policies,
are limited by Article IV (10) of the World Bank Articles of Agreement.
Articles IV (10) and 1 of the Articles of Agreement of the WB dealing the
purposes of the institutions provide inter alia that the Bank shall be guided
in all its decisions by the purposes set forth above (within the purposes of the
articles of Articles of Agreement); they are similar to those of IMF which, after
enumerating the purposes of the institutions in Article 1,955 concluded that the
Fund shall be guided in all its policies by the purpose set forth in this Articles.956
952 Shihata, I., The World Bank and Human Rights: An Analysis of Legal Issues and the
Records of Achievements, Denver Journal of International Law and Policies, Vol. 17 No. 1,
(1988) p 46.
953 ILM Vol. VI (1967) pp 150-153 especially at p 152.
954 Admission Case ICJ Reports, 1947-1948, p 64.
955 Gold, J., Political Considerations are Prohibited by the Articles of Agreement when
the Fund Considers Request for Use of Resources, IMF Survey, Vol. 10. 23 May (1983)
p 146.
956 Article 1 IMF Articles of Agreement.

209

The Controversies Regarding the Operational Policies of the WB and the IMF

These provisions emphasise the need for the institutions to operate within the
limits of the Articles of Agreement; as has previously been argued, it is easier to
ascribe implied or ostensible powers to corporations in municipal law than to
international organizations where states jealously guard their sovereignty.

7.11 conclusion
The legal framework of the WB and the IMF is based on their Articles of Agreement,
their object clause and purposes, including the extent and the limit of their powers
as stated therein. Whether the conferment of powers onto the institutions is
through an agency relationship, delegation, or the complete transfer of power by
member states, it is expressly evidenced by the Articles of Agreement, which in
international law is considered as a treaty or international agreement binding the
parties to it. Powers that are assumed and performed by the institutions without
authority in Domestic law are regarded as ultra vires957 and unconstitutional;958
in international law, however, non-adherence to, or a breach or infraction of,
the Articles of Agreement by the WB and the IMF is not only illegal,959 but may
amount to interference in the domestic affairs of member states and the erosion of
sovereignty of the BMS.
The obligations of the WB and the IMF under the Articles of Agreement are
not only fundamental but also sacrosanct. The Articles of Agreement are their
Grundnorm and the legal framework that brought them to existence. Their object
clause and purposes including their sovereign powers and the extent of these as
permitted or delegated and transferred by the BMS are provided therein. It is not
enough to suggest of the Articles of Agreement that the institutions policies have
moved on towards increasing changes in circumstances; the Articles of Agreement
should be unanimously amended to include those changes in circumstances.
It can also be observed that while the IMF relied on Article 1 (v), which provides
inter alia that the general resources of the Fund shall be made temporarily available
to members under adequate safeguards, to implement or direct to be implemented
policies that were not in the Articles of Agreement and has the tendencies of
eroding sovereignty of states; the WB disregarded Article IV (10) of its Articles
957 Haslund v City of Seattle (1976) 547, Second edition at p 1230.
958 Wade, H.W., Unlawful Administrative Action: Void and Voidable, 83 LQR (1967)
p 499; Denner, I., Judicial Review in Modern Constitutional Law, 46 Administrative
Political Science Review (1932) p 1079; Griffith and Street, The Principles of Administrative
Law: The Effects of Unconstitutional Action (1973) p 100.
959 ICAO Council Case (1972) ICJ Report p 46; Condition for Admission Case, ICJ
Report (1956) p 23; Voting Procedure Case, ICJ Report (1955) p 67.

210

The Controversies Regarding the Operational Policies of the WB and the IMF

of Agreement which inter alia prohibits the institutions from interfering in the
political affairs of member states. Observers see the governance issues policies
of the WB as the highest level of breach of the Articles of Agreement with direct
consequences of on the sovereignty of the BMS.
The variation, swapping and by implication merging of the functions of the
institutions, including the inability of the institutions to adhere and restrict their
activities to within the limits prescribed by the Articles of Agreement, without
amending the Articles of Agreement to legitimize the new roles is equally seen
by observers as an infraction of the Articles of Agreement with the consequences
of such the erosion of state sovereignty. For example, where the IMF decides to
perform part of the roles assigned to the WB, it must seek the express permission
of the member states through the amendment of the Articles of Agreement which
evidences the conferment of sovereign powers enabling it to alter its role as
originally assigned.
Finally, commentators are of the view that the SAP and SALs, with some
considerations other than the economic considerations, as required by the
Articles of Agreement negate the doctrines of the delegation of powers, agency
relationship and regulated guided-documented transfer of power, that requires
parties to remain within the sovereign powers that they are allowed to perform.
The subjugation of the institutions to the control of the Paris Club, which is not
recognized by the two Articles of Agreement, have been seen by commentators as
not only coercing the BMS by the powerful elite Group of Eight (G8), but could
also erode the sovereignty of the BMS. In fact, Article XII, Section 5 (c) of the
IMF Articles of Agreement provides inter alia that the staff shall owe their duty
entirely to the Fund and shall refrain from any outside influence except through
the channels recognised by the Articles of Agreement.960

960 Article XII Section 5 (c) of IMF Articles of Agreement and Article V Section 8 of
World Bank Articles of Agreement.

211

The Obligations of the WB and the IMF

Chapter 8

The Obligations of the


WB and the IMF

s well as the institutions obligations under their Articles of Agreement,


there is a general presumption that states and non-state actors are bound to
observe, respect and fulfil the obligations they have assumed in accordance with
the United Nations Charter,961 modified from the conception of the 1648 Peace
Treaty of Westphalia that institutionalized state sovereignty as an international
legal order.962 The WB and the IMF, in promoting policies that will enable them
perform their specified functions, are bound to observe the international legal
order based on the principles of the sovereign equality of all members.963

1.1. relationship among the wb, the imf and the un


This section establishes that the WB and the IMF are not insulated from the
rights, duties and obligations that flow from the UN Charter in respective of their
working agreements that exclude the UN from exercising a supervisory role or
interfering in the affairs of the institutions.964 The relationship agreement that
gave the WB and the IMF the status of independent organizations in New York
on 15 April 1948 was, however, modified by the UNGA resolution;965 it requires
that, in spite of the independent agreement, the institutions must have due regard
for the recommendations of the UNGA made in pursuance of the maintenance
of peace and security. It is interesting to note that the WB, in its annual meeting
during the same period, also passed a resolution adopting the resolutions passed
by the UNGA.966 The developing countries dominated the UNGA; the institutions
were apparently not disposed to implement their own resolutions and that of the
961
962
963
964
965
966

Article 2 (2) UN Charter.


Schachter, O., and C.C Joyner, United Nations Legal Order, Vol. I (1995) p 1.
Article 2 (1) UN Charter.
UNTS Relationship Agreement, Vol. 16, (1948) p 346.
UNGA Resolution 377(v) of 13 September 1951
World Bank Executive Directors Sixth Annual Meeting, 10-14 September 1951 at p 26.

212

The Obligations of the WB and the IMF


UNGA.967 This appeared to be more evident in the reluctance of the institutions to
comply with the UNGA resolutions requesting them to stop granting financial and

technical assistance to South Africa and Portugal because of the political regimes
of those countries.968
Some of the provisions of the Articles of Agreement of the institutions are in
conformity with the UN Charter, for example, the political neutrality in Article IV
(10) and Article 1(v) of the WB Articles of Agreement which provides inter alia that
the Bank shall be guided in all its decisions by the purposes provided in Articles
1 (v) 1 (5) with similar provisions in Articles 1 (1) 1 (5) of the IMF Articles of
Agreement; these provisions are analogous to Article 2 (7) of the UN Charter.

8.2. obligations under the un charter


The viewpoint is formulated from the likely interpretation of Article 2 (7) of
the UN Charter. It would appear that the policies of the WB and the IMF falling
outside the parameters of the constituent documents can be said to belong within
the respective domestic jurisdictions of member states.
The protection of state sovereignty and the prohibition of its erosion are deeply
rooted in the UN Charter, the infraction of which will constitute erosion of state
sovereignty. It appears that an obligation under the UN Charter prevails over an
obligation arising out of any other international agreement. This view is supported
by Article 103 of the UN Charter which provides inter alia that:
In the event of a conflict between the obligations of the members of the UN
under the present Charter and their obligations under any other international
agreement, their obligations under the UN Charter shall prevail.969
This provision can be read conjunctively with Article 25 of the UN Charter:
Members of the United Nations agree to accept and carry out the decisions of
the Security Council in accordance with the present Charter.970
They apply mutatis mutandi with the Articles of Agreement and policies of the
WB and the IMF. It can be argued that Article 103 of the UN Charter is binding on
all international organizations irrespective of the relationship agreement between
the UN and the Bretton Woods institutions; it therefore follows that a breach of the
UN Charter by the institutions in dealing with member states may automatically
result in an infraction of state sovereignty.

967
968
969
970

Mason, S. and R.E. Asher, The World Bank since Bretton Woods (1973) p 56.
UN General Assembly Resolutions 1654 (XVI) 27 November 1961.
Article 103 of the UN Charter.
Article 25 of the UN Charter.

213

The Obligations of the WB and the IMF

There is a controversy as to whether the obligation under the Charter could


override the obligation under the articles of agreement; The likely and sustainable
view is that some of the provisions of the charter, particularly the ones dealing on
non-intervention in another member state affairs are more compelling laws for
which derogation may not be allowed and they can be argued as hierarchically
superior than the Articles of Agreement and policies of the two institutions. Also,
it can be argued that the Articles of Agreement and policies of the WB and the IMF
must therefore be in conformity with those provisions of the UN charter regarded
as peremptory norms for which derogation may not be allowed.971
Nevertheless, the WB and the IMF are independent organizations with a
relationship agreement which provides inter alia that the WB and the IMF are
specialized agencies established by agreement among its member governments
and having wide international responsibilities as defined in their Articles of
Agreement, in economic and related fields, within the meaning of Article 57 of
the UN Charter; considering their specialized responsibilities, the institutions
are required to function as independent international organizations.972 They are
part of the global world that must respect and ensure that their policies are not
inconsistent with the UN Charter, based as it is on sovereign equality and noninterference in the affairs of member states.
The institutions and the United Nations recognize and appreciate the
independence of each organization, particularly with respect to non-interference
in the affairs of member states and prohibition in political activities;973 this
fact notwithstanding, the UN and by implication its Charter may qualify as a
Grundnorm around which international law revolves. Authors therefore argue
that it is imperative for state and non-state actors to subject themselves to the UN
Charter. However, even though the WB and the IMF consider themselves to be
special institutions among the other specialized institutions of the United Nations,
the fact remains that they shelter behind and enjoy privileges as specialized
institutions of the UN; this view is however acknowledged in the agreement.974
That being the case, as every state and non-state actor including non-members of
the United Nations is bound by it; the UN Charter 1945 also binds the WB and IMF.
The UN was not conceived as a legislative body yet its Charter, together with
the declarations, set the stage for the world legal order which must be followed
971 Danilenko, Gennady, International Jus Cogens: Issues of Law Making, 2 European
Journal of International Law (1991) pp 42; 44.
972 Article 1 (2) World Bank and IMF Relationship Agreement between the United
Nations (UNTS Vol. 16, (1948) p 346.
973 Agreement between IBRD and IMF signed in New York on 15 April 1948 cited as
UNTS Vol. 16 (1948) p 344.
974 UN Document E/C.120 of 22 July 1947.

214

The Obligations of the WB and the IMF

by state and non-state actors.975 For example, the Declarations of the Principles
of International Law Concerning Friendly Relations and Cooperation of States
in accordance with the Charter of the United Nations, adopted without dissent
in 1970, elaborates the major principles of international law in the United Nations
Charter 1945 particularly on the use of force, non-intervention in domestic affairs,
self-determination, duties of cooperation, and observance of the obligations and
the principles of sovereign equality. The WB and the IMF are meant to comply
with this declaration.976
Academic lawyers argue that declarations based on the interpretation of the UN
Charter are binding on all state and non-state actors alike and the International
Court of Justice including the statutes977 recognizes the declaration, based on
the UN Charter, as having the force of law.978 The WB and the IMF, with other
specialized institutions, cannot therefore insulate themselves from the UN
Charter.979
The UN Charter creates rights and obligations for every state and non-state
actor in the international arena. Article 1 defines in general, but in a precise and
unambiguous manner, the purposes for which the institution was set up, which
include state sovereignty, self-determination and international cooperation
in solving international problems; Article 2 provides a list of principles to be
promoted by the members to achieve the purposes stated in Article 1 of the
Charter. These principles include the recognition of the sovereign equality of
states and the non-interference in the domestic affairs of member states. The
wordings of these Articles, including the follow-up and declarations by the UN
General Assembly, indicate that the Charter has the force of a world Constitution
to which all international actors must be subject.980 This approach seems justified
with the provisions for enforcement and inducement of compliance, together
with the duties and obligations that flow from Chapter VII of the Charter.981
WB and IMF compliance with obligations under the UN Charter complements
rather than erodes state sovereignty.

975 Weil, P., Towards Relative Normativity in International Law, 77 AJIL,(1983) pp 413;
438; 440.
976 General Assembly Resolution 2625 (XXV) October 1970.
977 Article 38 of the Statutes of the International Court.
978 Advisory Opinion on Western Sahara, ICJ Report (1975) p 12.
979 Schachter, Oscar, United Nations Legal Order (1995) pp 5-7.
980 Fleischhauer, Carl-August, Inducing Compliance: in United Nations Legal Order (1995)
p 231.
981 Ibid., p 232.

215

The Obligations of the WB and the IMF

This section further examines whether the policies of the WB and the IMF
as indicated in World Bank and IMF policy documents982 are consistent with
Article 2 (7) of the UN Charter and other provisions that amplify respect for the
sovereignty of states. Just such as Article VI (10) of the WB Articles of Agreement
may be considered as a prohibitive provision, Article 2 (7) of the UN Charter is
equally presumed in that light.
The article provides inter alia that:
[N]othing contained in the present Charter shall authorise the
United Nations to intervene in matters which are essentially within
the domestic jurisdiction of any member states or shall require the
members to submit such matters to settlement under the present
Charter983
The debate is whether the IMF 1979 Guidelines on Conditionality
(IMFGC)984 which, apart from economic objectives permitted
by the enabling instrument, include domestic social and political
objectives, and the World Bank General Conditions Applicable to
Loan and Guarantees (WGCLG)985 are in breach of Article 2 (7) of
the UN Charter.
The criteria spelt out in the WB and the IMF guidelines for accessibility to
their resources are privatization; deregulation; democratization, and good
governance, which includes the strengthening of the rule of law and government
accountability; reforming the state and government institutions including a cut
in employment (downsizing the government workforce), a reduction in social
and cultural services and the introduction of user fees on health and education for
all categories of persons. The essence of these conditions is to facilitate the early
repayment of debts and safeguard the capital of the institutions. Critics are of the
view that the greater emphasis lies on the profits and safety of the capital than
on the actual sustainable development that might bring to an end the borrowing
saga.986 However, this fact does not fall within the purview of this study; the
982 Guidelines on Conditionality, Washington, IMF March 1979, Item 4; IMF Annual
Report, 1989 p 35; IMF PRGF 2000, para 4; World Bank General Conditions
Applicable to Loan and Guarantee Agreements, 1 January 1985, World Bank Annual
Report 1989-1999.
983 Article 2 (7) of the UN Charter 1945.
984 IMF Washington DC Guidelines on Continuality (1989) Item 4.
985 World Bank General Condition Applicable to Loans and Guarantees, 1 January 1985.
986 Tomasaki, K., Development Aid and Human Rights: A Quick Portrait of Development Aid
(1998) pp 12-14.

216

The Obligations of the WB and the IMF

circumstantial evidence compiled could, though, help to determine the motive


for the infraction of the Articles of Agreement and the UN Charter.

8.3 lending based on democratic criteria


The view of the WB is that there is a correlation between development and
democracy to the extent that they are insulated from self-determination, but
encourage economic growth.987 However, the contrary view is that democracy
lies at the centre of political activities characterized by the separation of the
legislature, executive and judiciary aimed towards self-determination, justice and
the protection of fundamental human rights under due process and under the
law.988
Critics of the policy argue that democracy in all senses of ramifications is not
a prerequisite to economic and developmental growth, including other forms of
educational and scientific development of the state.
This approach is supported by the fact that China, one of the fastest growing
economies in the world, cannot be said to be a fully democratic country, Similarly,
Saudi Arabia (a member of the GAB, a committee of rich nations that makes
extra contribution to the IMF in case of drastic need for funds), one of the richest
countries in the world, is not also democratic. Although democracy can serve
as a verifiable means for the allocation of scarce resources, it is not a condition
precedent to economic growth. The WB when dealing with the developing
countries and Eastern Europe also insists on a legal framework that will enhance
and encourage sustainable democracy as a condition for accessibility to financial
and technical assistance.989
The effects of this policy on the sovereignty of the borrowing member states
should be addressed. Also, assuming democracy is a prerequisite to economic
development it must be determined whether the institutions have the mandate
to legislate on it.
It can be argued that the policy is riddled with innumerable legal issues. Article
IV (10) of the WB Articles of Agreement prohibit the institution from interfering
in the political activities of member states; also, Article III of the IMF Articles of
Agreement provides inter alia that only economic considerations will determine
the eligibility to the access of the Fund. Similarly, the view that democracy is
synonymous with political activities and thus the two are inseparable may be valid.
987 Shihata, I., The World Bank in a Changing World, Vol. III (2000) p 141.
988 Ibid., p 143.
989 Shihata, F.I., European Bank of Reconstruction and Development: A Comparative Analysis of the
Constituent Agreement (1990) p 2, 41.

217

The Obligations of the WB and the IMF

But political activity in member states is also synonymous with their right to selfdetermination based on sovereignty and the sovereign equality of states that may
not have been delegated to the institutions.
It may also be pertinent to examine this policy in relation to the UN Charter
as it may have been established that the obligation of the WB and the IMF to the
UN Charter is not only mandatory: it is obligatory.990 It can be argued that apart
from the express exclusion of political considerations in dealing with member
states, those are at loss as to the origins of this condition. It is an accepted law that
international organizations cannot on their own add conditions not provided in
the UN Charter when dealing with prospective and existing members.991
For example, in the Conditions for Admission case, where the ICJ was requested
to interpret Article 4 (1) of the UN Charter dealing with the admission of new
members into the organization, the Article provides inter alia that membership
in the United Nations is open to all peace-loving states that accept the obligations
contained in the present Charter and, in the judgement of the organization, are
able and willing to carry out these obligations.992 Thus, authors are of the opinion
that there are five requisite conditions to be admitted to membership of the United
Nations in this provision, i.e., the applicant must be a state, be peace-loving, accept
the obligations under the UN Charter, be able to carry out these obligations, and
be willing to do so.993
An attempt by the committee to add conditions not expressly provided in
the Charter was declared not only illegal but also an infraction of the Charter.994
The Court further held that allowing such conditions not expressly provided by
the Charter conferred the organization with indefinite and practically unlimited
powers of discretion in the imposition of new conditions; thus, the purposes for
which the Charter was drafted would disappear.995 This notwithstanding, Article
2 (7) of the UN Charter makes it illegal for state and non-state actors to intervene
in matters within the domestic jurisdiction of another state.996
The answer to the second point is that even if democracy is a prerequisite to
economic development, it appears that the institutions lack the mandate to direct
or compel and coerce the states on such matters as impinge upon the internal
affairs of their state; as doing so may not only breach their Articles of Agreement,
but may also breach their obligation under the UN Charter. The powers of the
990
991
992
993
994
995
996

Shachter, O., United Nations Legal Order, op. cit. pp 2-3.


Condition for Admission Case ICJ Report (1948)
Article 4 (1) of the UN Charter
Sohn, L.B., Cases and Material on United Nations Law (1956) p 11 para. 3.
Conditions for Admission Case ICJ Report (1948) p 64.
Sohn, L., United Nations Law: Problems of Organizations (1956) p 12.
Article 2 (7) of the UN Charter; Schachter, O., and C. Joyner (1995) p 2.

218

The Obligations of the WB and the IMF

institutions are limited by their Articles of Agreement and there are no such roles
in their Articles of Agreement. Even if there were, the WB and the IMF would still
have been prevented from imposing conditions and policies not in conformity with
the purposes of the UN Charter, based as it is on principles of non-intervention
and the sovereign equality of states.
It can be said that the institutions obligations under the UN Charter are
unequivocal because, apart from the fact the institutions are specialized agencies
of the UN and notwithstanding the cooperation and independent agreement,997
many reasons point to the fact that in structural and organic stratification, the UN
is certainly higher than the institutions; It can also be argued that, where there are
inconsistencies in their Articles or Charters, that of the UN will prevail.
This approach can be supported by Articles 57 to 72 of the UN Charter998 dealing
with procedure and the coordination of the activities of specialized institutions
through the Economic and Social Council of the UN. The agreement between the
UN and the institutions notwithstanding, the Economic and Social Council has
the powers to regulate the activities of the WB and the IMF. This is because the
decisions of the UN are binding on non-members, while mentioning very little
about its supposedly specialized agencies.
For instance, Article 57 provides inter alia that the various specialized agencies,
established by inter-governmental agreements and having wide international
responsibilities, as defined in their basic instruments, in economic, social, cultural
educational, health and related fields, shall be brought into relationship with
the UN in accordance with Article 63; this in itself also provides inter alia that
the Economic and Social Council may enter into agreements with specialized
institutions and bring them into relationship, coordinating their activities with the
UN subject to the approval of the General Assembly.999
Similarly, in addition to the above views, it can be said that the institutions are,
with or without the Relationship agreement, not only bound to pay due attention
to Security Council decisions, but are bound to implement them,1000 as the UN
Charter prevails over other treaty obligations.1001 For instance, Article 41 provides
that
The Security Council may decide what measures not involving the
use of armed force may be employed to give effect to its decisions
997
998
999
1000
1001

UN, 16 UNTC (1948) p 346.


Articles 57-72 of the UN Charter.
Article 63 of the UN Charter.
Articles 41 and 42 of the UN Charter.
Shihata, I., The World Bank in a Changing World, Vol. II (2000) pp 29; 567-78.

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The Obligations of the WB and the IMF

and it may call upon members of the United Nations to apply such
measures...1002
Should the Security Council consider the measures above inadequate, it may
take action such as through land, sea and air force to enforce compliance.1003
The WB, the IMF and all other international organizations are required, with
no option to refuse, to carry out the decisions of the Security Council. Thus, it
is provided that the action required in support of the decision of the Security
Council for the maintenance of peace and security shall be taken by all members
of the UN or some of them as the Security Council may deem fit; such decisions
shall be carried out by the appropriate agencies.1004
This analogy falls outside the remit of this thesis yet it aids in supporting the
views expressed in this section that the institutions obligations under the UN
Charter are mandatory, as its provisions are based inter alia on sovereign equality
and respect for state sovereignty, non-intervention in matters within the domestic
jurisdiction of another state, and self-determination.1005

8.4 political reform policy


The political reform policy of the institutions has come under severe criticism
from most academic scholars, who view the policy as a deliberate usurpation of
the sovereign powers of BMS. An increasing and unprecedented wave of political
reform has become a condition of the institutions for financial and technical
assistance. The collapse of the former USSR has completely blurred the dichotomy
between the Communists and neo-liberal blocs; also, most regimes in Africa
were more dictatorial and had low quality micro- and macro-economic policies.
At the Halifax Summit of the G7 in June 1995, in the report of the Committee
of Canadian House of Commons for the agenda of the Halifax Summit and in
a draft resolution by a committee of Parliamentary Assembly of the Council of
Europe entitled from Bretton Woods to Halifax and Beyond, all recommended
the open involvement of the institutions in political reform that would encourage
sustainable development.1006

1002 Article 41 of the UN Charter.


1003 Article 42 of the UN Charter.
1004 Article 48 (1) and (2) of the UN Charter.
1005 UN General Assembly Resolution 2625 (XXV) of 24 October 1970.
1006 Parliamentary Assembly of the Council of Europe Report and Draft Resolution,
Seventh Committee on Economic Affairs and Development on the Bretton Woods
Institutions, Doc. 7256 17 Feb. 1995.

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The Obligations of the WB and the IMF

The emphasis was upon Central and Eastern Europe, with little on the
borrowing member states in Asia and Africa; there may have been checks and
controls through the reform and perhaps high levels of interest in charting a new
political ideology towards a neo-liberal policy.
While the institutions through the influence of the Paris Club and G7 (the
unofficial creditors of the BMS and de facto decision makers of the Bretton Woods
institutions) have been promoting this political reform policy with the recipient
states implementing them hook, line and sinker, it raises certain legal issues as to
the legal and practical meaning of state sovereignty under the UN Charter.
There is no doubt that the purpose of these political conditionalities and policies
is to safeguard the institutions resources, ensure repayment and move forward
with modernization, rather than, an erroneous belief, Westernization.1007 Critics,
however, disagree with this assertion. More importantly, WB lending for political
reform suggests, according to some authors, a re-colonization and concomitant
loss of state sovereignty of the recipient states because the concept is said to be in
direct opposition the injunction in Article IV (10) of the World Bank Articles of
Agreement and Article 2 (7) of the UN Charter.1008
The legal issues here include that of ultra vires which, if committed within
the national or domestic domain, may be void or voidable, depending on the
reasonableness of the implied powers; this doctrine when committed by states
and non-state actors in the international arena may constitute a breach and an
infraction of the doctrine of state sovereignty. This is because the sovereign act
may either not be expressly permitted to the international actors or it may have
been obtained by coercion similar to the case under consideration.
The claim by the institutions that they are entitled to formulate policies enabling
them to achieve the object clause and purposes as provided in their Articles of
Agreement may be sustained.1009 The fundamental doctrines of international law
of pacta sunt servanda and the law of the Vienna Convention provides, however,
that every treaty in force is binding upon the parties and must be performed in
good faith; neither party can invoke or rely on its internal laws as a justification for
its failure to comply with the treaty.1010
Article 2 (7) of the UN Charter is not ambiguous. The obligations of the
institutions are equally mandatory. It therefore follows that their political reforms
1007 Bush, W., in Wayne Anthony, New Hope for Prosperity through Economic and
Political Reform in the Broader Middle East And North Africa, Development Finance
Conference, Amman, Jordan, 18 May 2005.
1008 Handl, G., The Legal Mandate of Multilateral Development Banks as Agents for
Change towards Sustainable Development, 92 AJIL (1998) p 642.
1009 Reparation for Injuries Case ICJ Report (1949) p 184; Shihata, I., Vol. II, op. cit., p 158.
1010 Article 26 of the Vienna Convention on the Law of Treaties 1969.

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The Obligations of the WB and the IMF

constitute a breach of their Articles of Agreement, the UN Charter, and the


decision of the ICJ in Condition for Admission of New Members case.1011
It may appear that the pressing legal issues over the political reform of the
institutions are connected with the implication of the infraction of Article 2 (7) of
the UN Charter prohibiting intervention in the domestic affairs of member states.
While some authors are of the view that this provision amplifies the principles of
self-determination, the sovereign equality of states, and state sovereignty, others
argue that it is synonymous with self-determination and state sovereignty.
Two possible issues can be contemplated from these legal analyses: firstly,
whether the political reform policy of the WB and the IMF amounts to an infraction
of Article 2 (7) and by extension their obligations under the UN Charter; secondly,
whether an infraction of Article 2 (7) and by extension their obligations under the
UN Charter amounts to the erosion of state sovereignty.
Sovereignty is the totality of international rights and duties recognized by
international law as residing in an independent state.1012 Although it is not a
criterion for the creation of state or for statehood, it is the minimum amount of
autonomy which a state must possess before it can be accorded the status of a
sovereign state.1013 Where a states important policies are influenced by treaty or
another state, it may continue to function and enjoy the status of an independent
sovereign state, yet is merely said to constitute a state.1014 However, the right to
sovereignty belongs to the independent state and can be exercised by non-state
actors only when conferred upon them by the state. Authors have underplayed
the meaning and significance of the term sovereignty whereas the UN Charter
apparently highlighted its great importance as one of most fundamental principles
of international law guaranteeing and encouraging sustainable international peace
and security because of its deep roots in self-determination.
The argument that self-determination is synonymous with state sovereignty
can be sustained, as self-determination is considered one of the main purposes
and principles of the UN. The difference between self-determination and state
sovereignty lies only in semantics. Self-determination is twice emphasized in
Article 1 (2) of the UN Charter, which provides that the purpose of the UN inter
alia is to develop friendly relations among nations based on the respect for the
1011 Article IV (10) of the IBRD; Article III of the IMF; Condition for Admission Case ICJ
Report (1948) p 64; Shaw, M,. International Law, Fourth Edition (1997) p 81; Certain
Expenses of the United Nations, ICJ Report (1962) p 168.
1012 Reparation for Injuries Case ICJ Report (1949) p 174; Crawford, J., The Creation of
States in International Law (1979) pp 26-27.
1013 Hossain, K., State Sovereignty and the United Nations Charter (1964) p 227.
1014 Jessup, P.C., Modern Law of Nations (1949) p 43; Stanford Law Review Vol. 1 No. 3 (April
1949) pp 581-89.

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The Obligations of the WB and the IMF

principles of equal rights and self-determination of people and to take other


appropriate measures to strengthen universal peace;1015 it is also clear from
Article 55 of the UN Charter. This deals with international economic and social
cooperation; there is a presumption that states must be sovereign before they are
able to determine and create conditions suitable for them. The UN shall promote:
(a) Higher standards of living, full employment and conditions of economic
and social progress and development;
(b) Solutions of international economic, social, health and related problems
and international cultural and educational cooperation, and
(c) Universal respect for and observance of human rights and freedoms of all
without distinction.1016
Thus it can be observed that in elaborating these rather cryptic references in
the UN Charter, the UN General Assembly has elaborated a number of resolutions
and declarations that further sustain and institutionalize the principles of selfdetermination and the sovereignty of states, starting from the declaration on
principles of international law concerning friendly relations among states in
accordance with the Charter of the United Nations.1017 This declaration is deeply
rooted in the sovereignty of states and their self-determination and is essentially
based on:
(a) The principle that states shall refrain in their international relations
from the threat or use of force against the territorial integrity or political
independence of any state, or in any other manner inconsistent with the
purpose of the United Nations;
(b) The principle that states shall settle their international disputes by
peaceful means in such a manner that international peace and security
are not endangered;
(c) The duty not to intervene in matters within the domestic jurisdiction of
another state, in accordance with the Charter;
(d) The duty of states to cooperate with one another in accordance with
the Charter;
(e) The principle of the equal rights and self-determination of peoples;
(f) The principle of the sovereign equality of states;
(g) The principle that states (including non-state actors) shall fulfil in good
faith the obligations assumed by them with the Charter, so as to secure
1015 Article 1 (2) UN Charter.
1016 Article 55 of the UN Charter.
1017 UN General Assembly Resolutions 2625 (XXV) of 24 October 1970.

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The Obligations of the WB and the IMF

their more effective application within the international community as


would promote the realization of the purpose of the United Nations.1018
Contrary to some authors opinion that state sovereignty is found in speech
rather than in practice,1019 but great importance has been attached to the principle
based on the provisions of the Charter by the UN General Assembly and the
Security Council. This approach can be supported with the detailed analysis of
UN Resolution 2625 (XXV) of 24 October 1970.
This resolution is predicated on the fact that no state or non-state actor has the
right to intervene in the internal affairs of another state through political, economic,
or social coercion or threat to obtain any subordination. Similarly, every state has
an inalienable right to choose its political, economic, social, and cultural system
without interference in any form from another state or international organization,
as is being discussed.1020 Under the principles of sovereign equality, the resolution
includes that the states are juridically equal each state enjoys the rights inherent
in full sovereignty the territorial integrity and political independence of a state
are inviolable, and that each state has the right freely to choose and develop its
political, social, economic, and cultural system.1021
The first legal issue is whether the political reform of the WB and the IMF
amounts to an infraction of Article 2 (7) of the UN Charter and also whether
the political reform of the institutions can be considered as coming within the
meaning of matters within the domestic jurisdiction of another state.
The mandate of the institutions is based purely on economic considerations,
with emphasis on the regulation of foreign exchange. It was occasioned by the
agreement negotiated at the Bretton Woods Conference that the states should
relinquish a small portion of their sovereignty to achieve this particular objective.
It will thus facilitate international trade designed to be specifically and separately
performed by the IMF and not jointly and severally performed by the IMF and the
WB,1022 with conditions specified through performance criteria under SDR and
stand-by arrangements.1023
It can be observed that conditions attached to accessibility to a loan are clearly
provided in the Articles of Agreement, including the clear definitions and the
likely consequences in the case of default clearly provided in Article XXX of the
1018 Ibid.; Brownlie, I., Basic Documents in International Law, Fifth Edition, (2002) p 27-29.
1019 Knop K. Diversity and Self-Determination in International Law, (2003) pp30-34
1020 UN Resolution 2625 (XXV) of 24 October 1970; Brownlie, I., Basic Documents in
International Law, Fith Edition (2002) p 32.
1021 Ibid., p 33.
1022 De Vries, G.M., (1986) op. cit. p 98; Article 1 IMF Articles of Agreement.
1023 Article V (3) IMF Articles of Agreement.

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The Obligations of the WB and the IMF


IMF and also explained by the Board of Executive Governors.1024 The debate and

controversies regarding ad hoc policies alleged occasionally to have been induced


by coercion leading to the erosion of state sovereignty may never arise, as intending
borrowers would not only have enjoyed the privileges of determining the loan
policy before becoming a member of the institutions, but also have legalized the
policy in the Articles of Agreement constituting the fundamental legal framework.
The developmental projects and investments, including the rehabilitation of
infrastructures, are designed to be specifically and separately performed by the
WB; they are not designed to be jointly and severally performed by the WB and
the IMF. The conditions for accessibility to a loan are clearly and unambiguously
provided in the Articles of Agreement which inter alia indicate that the project
must be specific and viable, and that loans made available for a specific project
must be used for such project. They include the fact that the period for repayment
must be long term allowing some time for the gestation stage, including limitations
on guarantees and loans. Controversies likely to surround the policies that may be
riddled with coercion and erosion of borrowing member state sovereignty may,
because of the clarity and non-ambiguity of the provision, never arise.1025
The issue of division of the labour and classification of functions of the
institutions is said to devolve purely on the sovereign rights of the member states.
Critics of the obliteration of the distinctions between the two institutions suggests
that if there is a reason for the institutions to swap or fuss their functions or
perform the same jointly and severally, it will require the member states to amend
the Articles of Agreement either to merge the two institutions or to give them the
legal powers to vary their functions and purposes as provided in their Articles of
Agreement.1026
It can be argued that the political reforms of the institutions are within the
meaning of matters within the internal jurisdiction [of the institutions]. It
can be argued that the political reform of a state is a highly sensitive matter and
peremptory in nature thus from which derogation may not be allowed. Political
reform and self-determination are two sides of the same coin. They constitute a
fundamental right of any individual and state, considered inherent in international
law. In the light of the analysis, it can be said, that it is almost impossible to separate
self-determination from state sovereignty and that these fall into the category of
international law that cannot be derogated.1027
1024 Executive Board Decision No 155-(52/57) of 1 October 1952; Gold, J., IMF History
1945-1965, Vol. II, Chapter 23, p 6.
1025 Article III of World Bank Articles of Agreement.
1026 Article 1 of World Bank Articles of Agreement; Article 1 of IMF Articles of Agreement.
1027 Brownlie, op. cit. p 599.

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The Obligations of the WB and the IMF

There is a presumption that international organizations will not make rules


contrary to the notion of jus cogens because, in most cases where such an event
occurs, it is usually regarded as void since it will not only erodes state sovereignty
but, in addition, opposes the fundamental norms of international public policy.1028
There is a universally accepted principle under international law that policies and
treaties must not oppose the peremptory norms; political reforms instituted by
the WB and the IMF fall within the context of the self-determination and sovereign
rights of a member state.1029
For instance, in the period between 1944 and 1950, the major objective of the
WB was reconstruction; the main instrument was technical assistance, and the
dominant discipline was engineering and projects were based on the request and
needs of the member states. The IMF concentrated on the regulation of foreign
exchange and financing irregularities in balance of payment accounts over a short
and temporary period while any anomalies were corrected. In the 1960s, the major
objective of the WB was growth. Its main aim covered specific projects, and the
dominant discipline lay in financing these specific projects, whereas the IMF still
maintained its foreign exchange regulation.
However, the IMF unilaterally moved from the fixed exchange rates based on
convertible gold to par value flexible exchange rates; these gradually continued
into the early 1970s. The WB continued to concentrate on the basic needs of sector
investment and planning. From the 1980s there seemed no distinction between
the two institutions as both were engaged in adjustment loans, policy reform and
institutional development, with specified long-term loans with respect to the WB
and short-term loans with respect to the IMF.1030
There seem to be a shift in the development paradigms by the WB and the
unilateral variation of the functions and duties of the IMF without their first having
sought to amend the Articles of Agreement amount to a breach of the sovereign
rights of the member states. The shifts in development paradigms and greater
emphasis on programme lending than on project lending by the WB, and vice versa
by the IMF perhaps have no legal validity as they were contrary to the specifically
designed functions conferred upon them through an agency relationship, transfer
of power or powers or delegated by the member states.
The political activities of the WB and the IMF concern the sovereign rights of
member states that cannot be traded away even by the states themselves because of
their protection under the UN Charter and the UN General Assembly resolutions
1028 Crawford, J., The Creation of States in International Law (1979) pp 79-80; Bryers, Michael,
Conceptualizing the Relationship between Jus Cogens and Erga Omnes (1997) pp 219-290.
1029 Hannikainen, L., Peremptory Norms (jus cogens) in International Law (1988) pp 161-162.
1030 Stigliz, J., A Chance for the World Bank (2004) p 72.

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The Obligations of the WB and the IMF

and their acquisition of the status of a peremptory norm. It can be argued that
political reformation lies primarily within the domestic jurisdictions of the WB
and IMF member states; an attempt to compel or coerce such reformation will not
only erode the sovereign rights of borrowing member states; also, the institutions
would have breached their obligations under the UN Charter. In response to the
second issue, it appears that political reform by the institutions is in breach of
Article 2 (7) of the UN Charter.
All people have the right to self-determination as guaranteed by
the UN Charter and resolutions. By virtue of that right they freely
determine their political status and freely pursue their economic,
social and cultural development [I]t is a declaration of the right of
indigenous peoples.1031
Although political reform by the WB and the IMF may seem to have yielded some
measure of good results in the former USSR and other Eastern European countries,
the legal issue concerns whether the political reform policy of the institutions
are provided in their Articles of Agreement; whether the political reform policy
amounts to an erosion of the sovereign rights of states, and whether the political
reform policies of the institutions are in opposition to peremptory norms.
Economic assistance from the WB and the IMF to the former USSR and
Poland in the 1990s was made dependent on their political change. The two states,
because of economic assistance, cooperated with the institutions to the extent that
in 1993, the former USSR changed its Constitution at the prompting and under
the political reforms policy of the institutions.1032 The WB assumed it and the
IMF that the political reform in the Russia must begin with a new Constitution
to demolish the central apparatus system and institutionalize a balance of power
among the legislature, executive, and judiciary.1033
The current study does not question the justification for political reform in the
former USSR, but whether due process was observed, and whether it was done
out of the states own volition for self-determination within the context of her
sovereign rights and with no element of coercion and compulsion. The sound
economic growth of some countries with various political systems, such as China,
one of the twentieth fastest-growing economies in the world, does not truly
support the assertion that economic growth and sustainability depend largely on
political reformation or neo-liberal policies.1034
1031 Gibbs, H.G., The Erosion of National Sovereignty.
1032 Buenos, B., IMF Loans Must Be Linked to Reform Rules, Los Angeles Times, 4
April 1999.
1033 Ibid., p 2.
1034 Stigliz, Joseph, The World Bank Development Challenges in the New Century (1997) p 44.

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The Obligations of the WB and the IMF

The decisions to confer or apportion specific duties and functions to the two
institutions are said to be a sovereign right of member states. There is no provision
in the Articles of Agreement of the WB and the IMF that the duties and functions
one can be jointly and severally performed by the other, as has been the case
recently; the distinction between the functions performed by the two institutions
appears to be completely blurred.
The WB, designed to give loans for specific projects and investment over the
long term, now goes fully into project lending, refinancing for the payment of debt,
debt rescheduling; it includes loans for balance of payment accounts designed to
be specifically performed by the IMF and not jointly. However, the decision to
have these two institutions perform separate and distinct functions are sovereign
decisions and international agreements, an exclusive right of the member states;
by implication the sovereign decisions are within their internal jurisdiction,
thus it appears that the persistent and flagrant breach of these sovereign decisions
and international agreements may amount to the erosion of the sovereign rights
of states.
Their political reform policy appears to breach the institutions Articles of
Agreement, international legal order, Article 1 of International Covenant on Civil
and Political Rights1035 based on the doctrines of self-determination, and state
sovereignty including the provisions of the UN Charter.1036

8.5 constitutional review policy


For some reasons, particularly the social and political crises in the former USSR,
the institutions perceived a need for Constitutional review or amendment in
most of the region requiring Bank and Fund assistance for loans. This view is
predicated upon the fact that most member states legal systems which, of course,
required some modification, consists not only in its applicable rules, but also in
the processes through which rules are made to be applied; for the institutions
in charge of these processes, an adequate legal reform programme is not limited
to legislative, administrative and judicial reform but includes a Constitutional
framework that will sustain the economic reform.1037
According to the institutions, the challenge confronting most borrowing
member states is the achievement of a stable political and Constitutional order
that will promote development and reduce or eliminate corruption. The use of the
1035 Article 1 International Covenant on Civil and Political Rights 1966.
1036 Articles 1 (2) and 2(7) UN Charter.
1037 Shihata, I., Vol. III op. cit., p 248; World Bank Decision Sec M90-445, 6 April 1990; 2
World Bank Policy Reform Working Paper No 1414, 1995.

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The Obligations of the WB and the IMF

Constitution is as a supreme and fundamental law to regulate and limit the powers
of government and to secure the efficiency of such limitations in practice, with the
renewal of the electorates mandates through a credible electoral process to ensure
the transparency and safety of local and foreign investment.1038 All of these are
true of developing countries, yet some critics argue that the UK, one of the most
developed countries in the world, has no written Constitution. It is still a matter of
debate whether a Constitutional change enhances economic growth.
There is a great measure of truth that Constitutional provision might be the
optimum course for an emerging and transitional economy; the most legal issues
in this study are whether Constitutional review and amendment are within the
mandates given to the WB and the IMF, whether the Constitutional review and
amendment policy of the institutions comes under the meaning matters within
the domestic affairs of member state and whether the Constitutional review
and amendment policy of the institutions are not issues within the context of
the doctrines of self-determination. It can be said powers not conferred on the
institutions are within the internal affairs of the member state.
While some critics are of the view that Constitutional amendment is not
a prerequisite to development, some pro-neo-liberal theorists argue that the
IMF- and WB-instigated Constitutional changes in the former USSR in 1993 have
been working very well towards the economic sustainability of the country.1039
Under the new Constitution in Russia, state-owned public enterprises were
denationalised, and the government allowed most prices to float, according to
market forces although this occasioned hardship: the state was not used to a
market economy; the amendment of the Constitution set in motion a gradual
transition towards market capitalism at the insistence of the WB and the IMF
as a condition for receiving their financial and technical assistance.1040Some
authors argue that it is better to amend the Constitution as it gives the creditors
the required confidence, otherwise a crisis of confidence may erupt. This in turn
could influence financial and technical assistance:
Russia appreciates the assistance and contributions of the Bretton Woods
institutions and the US that made contributions through rules, procedures,
negotiations and compromises.1041
The WB and the IMF made Constitutional amendment and review as a condition
for a loan, also some BMS are told to completely change their constitution as
condition for assistance. For instance, Venezuela changed her Constitution in
1038
1039
1040
1041

Muna, Ndulo, Constitutional Making in Africa (1996) p 1.


Remington, Thomas F., Politics in Russia (2002) p 50.
Stigliz, J., Impact of Communism on Polish Economy and Culture.
White, S., Russia: Presidential Leadership under Yeltsin (1997) pp 57-61.

229

The Obligations of the WB and the IMF

December 1999 at the behest of the institutions,1042 and its doors are now open
to the market economy; this condition had been anticipated in all Latin American
countries.1043
Apart from the promotion of Constitutional changes and amendment towards
making the work of the organizations easier and, most importantly, the enabling
of a domestic institutional framework that will guarantee the safety of capital
and the return on the investment, there are situations where such Constitutional
changes have tended to work against the institutions, but they were quickly
stopped to prevent damages to existing relations between the member states on
the institutions.
For example, in Kenya, a new Constitution was drafted and waiting before the
legislature for debate and approval; it stipulated inter alia that the President could
no longer hold the power to incur debt, particularly any relating to the IMF and the
WB, without seeking the approval of the Parliament and a committee that would
comprise the local and tribal districts heads in the country. The reason for this was
that previous loans from the institutions were alleged to have been mismanaged. A
few days before the passing of the bill, however, the IMF announced that it would
stop all loan disbursement if the Constitution were put in place.1044 The arguments
of the institutions held that the reform would increase government expenditure
on overheads; it was unwieldy, and would increase inefficiency, including the
polarization of programmes.1045 The view is that international organizations
must respect the sovereign right and self-determination of member states as the
sovereign right resides with the people.
The EU Constitution was in 2005 rejected by French and Dutch voters in an
unprecedented shock to the process of European integration. State sovereignty
goes beyond sovereignty as represented by the state government to individual selfdetermination rights based on independence of states. The referenda revealed the
difference between what the people, on the one hand, and their political leaders,
on the other, wanted; an attempt by the EU Commission to override the decisions
1042 Library of Congress, Federal Research Division; Country Profile: Venezuela
Information Office.
1043 Vogt. J., MAS Victory in Bolivia Signifies Mandate for Change.
1044 USID/Kenya Annual Report FY 2004 ( JUNE 14 2004) pp 1-2; Turner, T. and S.B.
Leigh, Kenyans Rally For New Constitution: Kenyans wanted to end inter alia the
One-party system as allowed in the old Constitution, which made it difficult for the
Opposition to examine dealings between the Kenyan government and the institutions.
The WB and the IMF conditions were considered too harsh to bear. The institutions
opposed the creation of local government and district councillors for the citizens to
have the power to recall on grounds of non-performance.
1045 Ibid., p 2.

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The Obligations of the WB and the IMF

of French and Dutch voters may have amounted to an infraction of their state
sovereignty and is similar to what happened in Kenya.
The actions of the EU in most of her policies seem to be in conformity with the
peremptory norms of international law. The EU Parliament is directly elected by
people in member states and consequently fares better in terms of representation;
it can claim to be an institutional expression of the will of the people within the
limit of its operation, being effectively empowered by the member states.1046 The
policies and operations of the EU, particularly with reference to its Parliament, are
consistent with the well-established notion of the institutional embodiment of
popular sovereignty.1047 It can be argued that EU is the worlds only international
organization whose policies are actually empowered by the member states and
adheres to total submission to the sovereign equality of states. It could have been
expected that the WB and the IMF, the worlds international organizations, would
have done better in this regard.
It can be observed that the EU does not coerce any state to adopt its policies.
It adopts non-coercive consensus and deliberative methods that involve a
comprehensive debate not limited to the government, but including the peoples
of the member states.1048 Integration is achieved through deliberation;1049 the
policies of the institutions would still have been in place in Kenya if the peoples
Constitution had not been vetoed by the WB and the IMF through a coercive threat
that the loan agreement would be terminated if the Parliament passed the new
Constitution. The issue of the erosion of state sovereignty arises when consent
is obtained by the states through coercion and an ultra vires act; the threat issued
to Kenya to revert back to the old Constitution can be considered as coercion,
with all of the elements of eroding state sovereignty. Constitution is the most
legal basic document of a nation. WB and IMF policies that tend to creep into the
Constitutional affairs of another state are likely to erode state sovereignty.

8.6 world bank and imf judicial reform policy in bms


This section examines whether the judicial reform policies of the WB and
the IMF are part of the institutions mandates in their Articles of Agreement.
1046 Lord, C., A Democratic Audit of European Union (2004) p 128
1047 Rittberger, B., The Creation and Empowerment of European Parliament, 41 Journal of
Common Market Studies (2003) p 203.
1048 Esther, J., Deliberative Democracy (1998) p 110; Bessetta. J.M., Deliberative Democracy and
American National Government (1994) p 147.
1049 Corbett, R., The European Parliament (2000) pp 201-3; Hix, S., The Political System of the
European Union (1999) p 55.

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The Obligations of the WB and the IMF

Also, it examines whether the judicial reforms policies of the institutions can
be interpreted in the context of matters within the domestic jurisdiction of
member states. Apart from the examination of the competence of the institutions
to formulate policies on judicial reforms in borrowing member states territories,
there are two fundamental legal issues that may have the capability to undermine
the sovereignty of states.
The first is that they lend to states to reform their judicial system. The question
is whether the Articles of Agreement include lending for judicial reform as part of
the purposes and object clause of the institutions. If the answer is in the negative
what, then, is the implication of ultra vires in international law? The implications
must be analyzed of the gradual loss or varying of a conferred sovereign power,
which may have been delegated, transferred or established through an agency
relationship by member states according to the Articles of Agreement, without
the member states first requesting the amendment of the articles of the enabling
instrument to include the anticipated new role as regards the sovereignty of states.
Secondly, as well as lending for judicial reform, the WB and the IMF stipulate
judicial reform as a condition for lending towards other projects and programmes.
The question therefore is whether their judicial reform policies are part of the
conditions expressly provided in the Articles of Agreement.

8.7 brief overview of the world legal system


It should be noted that neither the United Nations nor any other international
organization was conceived as a legislative body. Their legal framework, other
than regulatory and governing instruments, contemplates that their objectives
and purposes would be carried out mainly through recommendations aimed
at improving the standard and quality of life, and sustaining world peace and
security. The authority to impose mandatory rules was, with some exceptions,
limited to the internal administration of the international organization; except
in the cases of international treaty, member states are free to accept or reject the
recommendations of international organizations.1050
There are considered to be four major legal systems in the world: civil law,
common law, customary law, and religious law, in a mixed or pluralistic system.
Most countries adopt and develop variations of each system, including its
traditional features to operate in a country as its own legal system. Among these
legal systems, the sensitive ones are those based on religion and customary law.
By virtue of the principles of self-determination, which apply even to non-self
1050 Schachter, Oscar, The United Nations Legal Order, Vol. 1 (2005) p 3.

232

The Obligations of the WB and the IMF

governing territories, no state can be compelled to adopt or abandon its legal


system, as long as this is not repugnant to natural justice.
A religious legal system emanates from the sacred texts of religious traditions
and in most cases purports to cover all aspects of life as a seamless part of devotional
obligations to a transcendent, imminent or deep philosophical reality. Under the
Islamic legal system, the primary sources of law are the Quran, the Sunnah, the
teachings of the Prophet Mohammed, and the Hadiths, the way the Prophet lived.
Jewish law is the legal system of the Jewish people developed from Biblical times
until the present date, yet this legal system is different from Christian Canon law,
developed during the Roman Empire and still has traits of ancient Roman law
that challenged the emerging monarchies. It developed into a coherent national
law or the civil law tradition of secular law in nearly the whole of Europe. Hindu,
Confucian and Buddhist law and legal theory, more common on the continent
of Asia, also have strong attachments to the religious law obligations covering all
aspects of life.1051
However, some states adopted the legal system practised by their former
colonial masters or, in some cases, with the admixture of their customary and
religious law. For instance, according to the new Afghanistan Constitution, it is
provided inter alia that although the state will abide by the Universal Declaration
of Human Rights and the UN Charter, it will not abide by any law contrary to
Islam even though some US principles1052 relating to democratic elections1053
were adopted.
Argentina has a mixture of US and the Western European legal system;
Australias law is based on the English legal system; Bahrain is based on Islamic and
English legal systems; Burkina Faso is based on French and Customary law; China
is based on the civil law system derived from Soviet and continental civil code
legal principles; Cambodia is based on Spanish law, but modelled after the US in
2004 at the behest of the WB and the IMF; Ghana is based on the English legal
system and customary law; Libya is based on the Italian legal system and Islamic
law; India is based on English common law, and separate personal law applies to
Christians, Moslems and Hindus; Nepal is based on Hindu legal concepts and
accepts English common law, and Nigeria is based on the English legal system
and customary law, while Islamic law to certain extent apply in the nineteen
northern states.
From the above analysis it can be suggested that a states legal system falls
within the context and meaning of self-determination and can be categorized
1051 Johnson, Marylin, Religious Legal Systems: Their Role in Comparative Law.
1052 US CIA Report, The World Factbook on Legal Systems.
1053 Afghanistan Constitution 14 January 2004.

233

The Obligations of the WB and the IMF

as constituting matters within the internal domestic affairs of another state, as


clearly intended in the UN Charter.1054
However, there are controversies raging over the capacity of the institutions
to delve into this arm of government, an element apparently not included in
their mandate. The explicit injunctions for the institutions not interfere with
the political activities of member states includes such interference as witnessed
in the civil service reform, legal reform, and judicial reform. Although the
institution advanced strong and convincing justification for the reforms, the legal
issue is whether they indeed have the enabling powers to implement policies in
those directions.
The institutions, particularly the WB, agree that the legal and judicial reforms
are not mentioned in their Articles of Agreement, but claim that reforms fall
within its mandate if a state requests of the institutions assistance in that area.1055
Similarly, they offer technical legal assistance to member states of which they
consider the system to be too weak and inefficient to enforce any judgement. The
institutions studied the various regulatory laws in developing countries, including
those of Eastern Europe, then introduced and provided funds under the name
of the Institutional Development Fund (IDF) in 1992 meant to harmonize and
change most of the regulations and laws that failed to promote market economy
policies. Ghana, India, Colombia, and Argentina received the IDF policy grant to
change most of their anti-monopoly, foreign arbitration and nationalization, bank
and foreign investment laws.1056
While some authors1057 are of the view that this policy may be necessary to
enhance the worlds economic activities, they hesitate, however, in admitting
that the institutions have the capacity to promote the policy. The activities of the
powers and the activities of the institutions are derived from the sovereign powers
delegated to them by the member states. If they exercise powers not delegated to
them by the member states in the Articles of Agreement, the question therefore
must arise from where they obtained such powers? They have no authority to act
on the subject, as they have exceeded their scope. For instance, in Haslund v City
of Seattle, where the city council imposed conditions not included in building
regulations but expected the applicant to fulfil them before granting permission
to erect 117 flats, the court held that the inclusion of the conditions not provided
in the building regulations amounted to an ultra vires act outside the scope of the
1054
1055
1056
1057

Article 2 (7) of the UN Charter.


Shihata, F.I., Vol. 1, op. cit. p 133, para. 1.
Shihata, F.I., Vol. II, op. cit., pp 144-145.
Danino R. Legal and Judicial Reform at the World Bank-A paper presented by Senior Vice
President of the World Bank, November 18 2004, Washington DC

234

The Obligations of the WB and the IMF

city councils authority.1058 It has been said that the compliance by the borrowing
member states of the conditions not provided in the Articles of Agreement
indicates the BMS consent to and legalization of policies and purposes not
provided in the Articles of Agreement. However, the popular and perhaps more
convincing arguments by some positivist theorists claim that the legal reform
policies of the institutions are ultra vires.1059
The ultra vires principle is considered in domestic national law as an act that
is void and therefore of no effect, being acts committed outside the scope of
authority. It can be argued that in international law, the unauthorized exercise of
sovereign powers by another state or non-state actor may be likely to amount to the
erosion of state sovereignty. Similarly, acts which states are compelled to perform
may erode their state sovereignty and may not acquire the status of customary
international law as it was considered temporal sovereign coercion.
The mere compliance with international organizations decisions does not
create the desired effects anticipated by Article 38 of the ICJ Statute, because
compliance with the institutions was obtained under anticipated or implied threats
of economic pressure and coercion.1060 Judicial and legal reforms policy may
come under Article 2 (7) of the UN Charter, because they were never expressly
delegated to the institutions. Nothing contained in this present Charter shall
authorise the UN to intervene in matters which are essentially within the domestic
jurisdiction of any state.1061 Similarly, it has been revealed that the WB and the
IMF cannot enjoy all of the international legal personality enjoyed by states. Apart
from the fact that their powers are limited by the Articles of Agreement, together
with the fact that Article 2 (1) of the UN Charter, which provides inter alia that the
Organization is based on the principles of sovereign equality of all its members,
made reference only to member states although not specifically excluding nonstate actors, the institutions exercise of sovereign powers are limited to the extent
conferred upon them by the states.
In the case of the WB, while Article 1 Section I to V set out the object clauses
and purposes, Article IV Sections 1 to 9 clearly set out the conditions for
guarantees;1062 provisions of currency for direct loans;1063 financial assistance to
1058 Haslund v City of Seattle (1976) 547 p 1230.
1059 Lauterpacht, E., The Legal Effects of Illegal Acts of International Organizations in International
Law (1965) pp 88-89.
1060 McDougal, M.S., and F.P. Feliciano, Legal Regulation of Resort to International
Coercion: Aggression and Self-Defence in Policy Perspective, Yale Law Journal, Vol. 68
(1959) p 1061.
1061 Article 2 (7) of the UN Charter.
1062 Section 5 Article IV WB Articles of Agreement.
1063 Section 4 Article VI WB Articles of Agreement.

235

The Obligations of the WB and the IMF

member states;1064 the general operations of the including the method of meeting
liabilities of the Bank in the case of default,1065 and miscellaneous operations not
specifically mentioned but guided and regulated.1066 Similarly, Article 1 Sections
(i) to (v) dealing with the object clause and purposes and Article V of the IMF also
set out conditions for granting of loans and the limitations.1067
The IMF Stand-by Arrangement that commenced from 1952 over the three- to
five-year loan duration with a nominal interest of 0.5 per cent per annum, and
the Extended Fund Facility (EFF) that has been implemented since 1974 with
a nominal interest similar to that of the stand-by arrangement with a similar
number of years as provided in the original and amended Articles of Agreement,
are presumed by scholars to be within the meaning of voluntary consent that, if
adhered to, will complement rather than erode the sovereignty of states.
However, the conditions pertaining to Structural Adjustment Facility (SAF)
introduced in 1986 and Enhanced Structural Adjustment Facility (ESAF)
introduced in 1988 with interest calculated at market rates for up to ten years1068
gives considerable emphasis to the view that structural elements, including
deregulated exchange rates and pricing policies not specifically provided in the
Articles of Agreement or in any agreement at the commencement of the activities
of the institutions, do not actually come within the context of voluntary consent.
There is a growing realization that the WB and the IMF Articles of Agreement
are, though very comprehensive, are generally inadequate to deal with all existing
matters including changes in circumstances in the future; therefore, in formulating
policies to address those issues not foreseen at the time of the agreement, it is
suggested that the Articles of Agreement become evidenced to reflect such changes.

8.8 consent by economic pressure and coercion


The view is that the very existence of constraint over circumstances amounts to
pressure on states to change their Directive principles and economic policies
may amount to economic coercion. Pressure may be a more appropriate term to
use in this sense, but as the issue concerns the inability of the BMS to exercise
discretion or resort to alternatives, coercion can be used not just to describe the

1064
1065
1066
1067
1068

Section 3 Article VI WB Articles of Agreement.


Section 7 WB Articles of Agreement.
Articles 1 (i) to (v) and Article IV Sections 1 to 9 World Bank Articles of Agreement.
Article 1 of the IMF Articles of Agreement.
International Monetary Fund Annual Report 1983-86.

236

The Obligations of the WB and the IMF

phenomenon at the threshold of extreme domination, but as a tool or weapon,


leading to an infraction of the Articles of Agreement. 1069
The above analysis is meant only to reveal that policies obtained by coercion
or pressure alter the rights and obligations of the member states; the omission of
such a step as amending the Articles of Agreement with due process may be likely
erode the sovereignty of the borrowing member states.
With the clarification of pressure and coercion, it will be pertinent to examine
the two categories of the legal and the judicial reforms policies of the WB and the
IMF, with particular respect to Latin America, Africa, Asia, and Eastern Europe.

8.9 lending for legal and judicial reforms


The WB with the cooperation of the IMF commenced in 1992 awarding loans to be
applied exclusively to legal and judicial reforms in member states.1070 Although
there is no authorization in the Articles of Agreement or any other enabling
instrument authorizing the reforms, the institutions argue that the reform will
enhance the performance of the institutions.
A countrys legal system, its law and Regulation as well as the processes and
the institutions through which they are applied, is vital for addressing corruption,
just as it is for solving conflicts, enforcing property rights and defining the limits
of state power. Laws and Regulation that delineate market-friendly policies are
powerful anti-corruption tools. The Bank has long been involved in helping to
design macro-economic and sector policies and laws through which they are
implemented in many countries. (World Bank)1071
Enforcement of anti-corruption legislation requires an efficient predictable and
accountable judiciary. In recent years the Bank has gained experience in judicial
reform, especially in Latin America and Africa and there is scope for other regions.
The Bank focused on training of judicial officers, selection and removal of Judges,
harmonizing pay scales; improve court administration and raising the standard of
legal education and Bar entrance requirements. (World Bank)1072
The Legal and Judicial reforms in Mozambique are too slow; the slow judicial
reforms threaten a pillar of the consolidation of the economic reforms underway.
(IMF)1073
1069 Osieke, E., The Validity of the Decisions of International Organizations, American
Journal of International Law Vol. 77, No. 2 (1983) p 252.
1070 World Bank Annual Report 1992.
1071 Helping Countries Combat Corruption: The Role of the World Bank.
1072 Ibid.
1073 IMF Press Release, 6 June 2003.

237

The Obligations of the WB and the IMF

The WB and the IMF were emboldened to follow these reforms to their logical
conclusion because of the collapse of the dictatorship in Latin America, and of
the USSR that led to the transformation of Eastern and Central Europe in the late
1980s and early 1990s. It was not difficult for the institutions to introduce legal
and judicial reforms in those countries where they had already commenced
administrative and civil service reforms; also, as most countries were moving
towards a market economy at the instance of the institutions, the efforts and
the technical assistance to enforce the reform became less expensive. However,
the institutions claims that mere theoretical and technical assistance without
developing an institutional base in practical terms might not sustain the reform.
This is based on the assumption that the IDF was introduced and Venezuela
happened to be the first country in the world to borrow funds specifically for the
institutional development of the legal and judicial sector.1074
8.9.1 Case

Study

8.9.1.1 Venezuela
Most Latin American countries, including Venezuela, have shifted from an
authoritarian to a democratic form of government. They had adopted the US
legal system to consolidate the still-fragile democratic reforms as they turned to
judicial institutions to enforce rules. Even before that period, their Constitution
established an independent judiciary; the roles of courts were marginalized; and
most Judges were appointed on a part-time basis, thus it has been said that in
many ways the judiciary symbolizes all that went wrong in the country. There were
political interference, institutional neglect, and the failure to provide a system of
justice to the vast majority of the citizens which amounted, according to the source,
to the most egregious manifestation of the collapse of the judicial sector. There has,
beyond disdain for the courts reflected in the citizenry, been the wholesale eclipse
of the fundamental role of Judges in the protection of human rights.1075
The WB and the IMF, given the above circumstances, felt that there was no need
completely to overhaul the legal and judicial system in Venezuela; they jointly
agreed that the sum of $60,000,000 should be given to the country for legal and
judicial reforms which they considered would enhance investors confidence and
lead towards sustainable economic growth. The institutions argument at that

1074 Shihata, I., Vol. II, p 128; Stigliz, op. cit. p 119.
1075 Venezuela Lawyers Committee for Human Rights, Halfway to Reform: The World
Bank and Venezuela Justice System.

238

The Obligations of the WB and the IMF

time was that economic considerations necessitated the granting of the loan to a
specific sector, i.e., the legal and judicial.1076
The questions arise whether the institutions indeed hold the mandate to give
loans in that sector, and whether the sector can be regarded as a specific project,
as was claimed by the institutions. Assuming that claim is sustained for the WB,
it must also be asked whether it can be sustained for the IMF, whose mandate
has no link with infrastructural development. If the institutions can influence
legislation through the reform of the Constitution, civil service reform, legal and
judicial reforms, then other aspects of the sovereign powers of the states may also
be exercised without the states express consent and agreement.
8.9.1.2 Peru
In late 1997, the WB not only approved and released twenty-two million US
dollars to Peru, but their legal technical teams redesigned the entire countrys
legal and judicial systems. Even after that, there was persistent interference by the
government of Peru into the judicial projects. This fact prompted the institutions,
particularly the WB, to announce publicly that it might stop the disbursement
of the loan if the interference continued. The disagreement eventually led to the
cancellation of the projects. It has been predicated on a grey area between what
the Peru government wanted, on the one hand, and the judicial design of the
institutions, on the other.
As the Bank formally cancelled the projects in September 1998,1077 the question
arises in matters concerning legal and judicial reform in states, which view should
override the other: the institutions, or the states? It is alleged that the legal and
justice system of Peru failed to meet the lowest basic international standard,
particularly through a lack of judicial independence and perhaps corruption and
inadequate training of staff; Peru asserted, however, that the modern international
rule required them to determine their own legal system. Therefore, they neither
considered the loan agreement, which provides that the institutions can suspend
the projects if the government interferes with the powers of the National Judicial
Commission, nor varied the rules designed to strengthen the independence of the
judiciary, as interference in their personal affairs.1078
The failure of the project in Peru would have been hastened by the noninclusion of the citizens in the design concepts, and the tone of the loan agreement
appears as a military-style command to the government.1079 The extent of the
1076
1077
1078
1079

World Bank Annual Report November 1992.


World Bank Working Paper July 1999.
World Bank Staff Appraisal Report for Peru No 17137-PE October 1997
Gino, C., Acting Ombudsman For Human Rights, Lima, Peru, May (1999) p 1.

239

The Obligations of the WB and the IMF

exercise and defence of state sovereignty depends largely on the government in


power. The government of Peru also felt that the designed WB and IMF legal and
judicial reforms concentrated powers on the members of the National Judicial
Service Commission rather than on the executive and legislature. According to
some others, the legal and judicial reforms handed over by the WB and the IMF
to the Peruvian authority for the latter to implement amounted to the institutions
rewriting the countrys Constitution; however, the irregularities would have been
resolved if the government had formed part of the institutions team designing the
reforms1080.
8.9.2 Legal

and Judicial Reform as Conditionality

Apart from the direct funding of legal and judicial reforms, the institutions also
use this sector as a condition or criterion for member states to acquire access to
technical assistance, guarantees or loans.
8.9.2.1 Nicaragua
The IMF approved a three-year loan under the Enhanced Structural Adjustment
(ESAF) for US$136million to support the governments economic programmes on
the condition that the legal and judicial sectors of Nicaragua were to be reformed
according to the precedent handed to them. The institutions required Nicaragua
to overhaul its legal systems including the decentralization of the administration of
justice; retraining of judicial officers, and rationalization of salary scales of judicial
officers; measures included a sustainable accounting system and the establishment
of an anti-corruption watchdog. They instigated the promulgation of laws
removing the restrictions on certain services monopolized by the government in
the area of utilities, originally an exclusive preserve of the government, and laws
establishing the collection of VAT not known to the country before the legal and
judicial reform policy insisted upon by the IMF.1081
8.9.2.2 Cambodia
In the cases of Cambodia1082 and the former Yugoslav Republic of Macedonia,1083
their respective economic growth is improving despite numerous setbacks, they
have fairly stable macro-economic policies, in spite of which they were asked to

1080
1081 IMF Press Release No 98/7 of 19 March 1998.
1082 IMF Public Information Notice (PIN) No. 04108 27 September 2004.
1083 IMF Mission Statement on Article IV on 5 June 2006.

240

The Obligations of the WB and the IMF

reform their legal and judicial sector as a condition for obtaining a loan from the
institutions.
With respect to these two countries, adjudged to be doing well by the
institutions, the question that may be asked concerns why they were indeed asked
to reform their legal and judicial sector. It can be recalled that non-performance,
weak economic conditions and inflation had been the major reasons for approving
a direct loan specifically for legal and judicial reform. The appalling economic
conditions in Nicaragua and other countries in Latin America, Eastern Europe,
Central Europe, and Africa were the major reason advanced by the institutions
for using legal and judicial reform as a condition for states accessibility for a loan
to service another sector, and not relating to legal sector. If these assumptions are
correct, why are the countries whose economies are responding to some reform
be compelled to reform their legal and judicial sector?
Most BMS have amended their laws or their Constitutions, undertaken
comprehensive legal and judicial reform, and civil service and legislative reform at
the insistence of the IMF and the WB, merely to acquire access to their resources.
This has been the case even when the institutions appear not to have a mandate
to do so within their Articles of Agreement. In the case of Ghana, since the year
2000, the economic conditions have improved; in 2004, the GDP reached 5.8 per
cent with an increase of US$1.8 billion, driven by agriculture in particular. This is in
sharp contrast to the past, when the GDP stood at minus 40 per cent. Nevertheless,
under the Heavily Indebted Poor Countries (HIPC) initiative, the IMF in mid2004, despite of such a spectacular performance by Ghana, insisted on legal,
judicial and civil service reforms as a precondition for access to the institutions
resources under the HIPC program.1084 This role assumed by the institutions in
this regard appears not, in their constituent documents, to have been delegated to
them by member states.
In the Expenses Case, the court made it unambiguously and utterly clear that
each organization must firstly determine the validity of its acts;1085 it has further
been said that each organization of the UN must as a matter of the highest priority
determine its jurisdiction.1086 The essence of territorial sovereignty is to encourage
international peace and security, in order for members to respect the sovereignty
of others. It can therefore be argued that international organizations that are
merely operating according to the powers delegated to them by the member states
must act within the limits of those conferred or delegated powers. In the decision

1084 IMF Public Information Notice No 05/107 of 9 August 2005.


1085 Certain Expenses Case ICJ Report (1962) 151.
1086 Judge Fitzmaurice in the Namibia case, ICJ Report (1976) p 203.

241

The Obligations of the WB and the IMF

in the UN Admission case the court held inter alia that the UN Selection committee
lacked the power to impose conditions not provided in the UN Charter.1087
Apart from the prohibition of political activities by the Articles of Agreement,1088
it also clearly provided that the institution should not be influenced by noneconomic considerations1089 in dealing with member states. The legal and
judicial reforms policy including the administrative and civil service reform of
the institutions may fall under the non-economic consideration prohibited by the
Articles of Agreement.
There are other policies of the institutions that appear not to fall under
economic considerations and may perhaps be interpreted to include matters
within the internal affairs of member states. One of such examples is the regulation
of member states national populations.

8.10 population control policy


Concerned with the growing rate of the worlds population and the attendant
consequences for scarce resources, including the ability and propensity of the BMS
to pay their debts, the WB1090 and the IMF,1091 stemming from the US government
announcement concerning the promotion of population control, introduced the
population control policy as a condition for BMSs to obtain financial and technical
assistance.1092
Although it has been argued that the IMF and the WB population policies have
not eradicated poverty in developing countries, it has also caused a negative impact
on certain age brackets;1093 however, the justification for population control by
these institutions does not fall within the remit of this study, because population
control is a methodology used to control through non-violent coercion or
counselling the type, location and the number of people that inhabit the earth.1094
The WB policies towards population growth, development and biodiversity in
developing countries through structural adjustment might be effective for the
1087 Condition For Admission Case, ICJ Report (1948) p 134.
1088 Article VI Section 10 of the World Bank Articles of Agreement.
1089 Article III Section 4 (iii), Articles V Section 1 (b) of IDA; Article III Section 5 (b)
of IBRD.
1090 World Bank Annual Development Report 1990; World Bank Population Control in
the Philippines, by Insight Staff, July/August 2002.
1091 IMF press Release No 02/29 of June 2002.
1092 World Bank and the IMF adopt Population Control as Condition Pre-requisite for
Giving Aid to Developing Countries.
1093 The UN, WB, IMF and Abortion, Interim Newspapers, February 1999.
1094 Ellul, J., The Technological Society (1964) p 348.

242

The Obligations of the WB and the IMF

purpose of distribution of their scarce resources, but it undermines cultural and


religious beliefs held under the principles of self-determination.1095

8.11 conclusions
To conclude this chapter it can be said that there is a legal obligation for the WB
and the IMF not to promote policies inconsistent with their obligations under
the UN Charter, and interpretation of the Westphalia Peace Treaty of 1648 on
state sovereignty. The UN, WB and IMF were not conceived as legislative bodies.
Their policies, tending to be coercive by implication as a result of making them
conditions of accessibility to the cooperative funds, ought to be recommendatory
in nature. The international legal order as embodied in the UN Charter protects
the sovereignty of states: political, Constitutional, legal and judicial, governance
and anti-corruption measures, including a population growth policy intended to
balance the mortality in a state, appears to be within the interpretation of member
states internal affairs in Article 2 (7) of the UN Charter.

1095 Neil, H.T., Examination of the Compatibility of World Bank Policies on Population in
the Third World, The Environmentalist Journal Vol. 18 No. 2 ( June 1998) pp 1-2.

243

Chapter 9

Conclusion and Recommendations

9.1 conclusion
The world economic disorder orchestrated by the great economic depression
of 1929, with repercussions into the 1930s and beyond, paved the way for the
establishment of the WB and the IMF, with a legal framework authorized by
states to allow the institutions to exercise a limited amount of sovereign power.
An unhealthy rivalry and competition among nations, together with unregulated
foreign exchange, left states to fix exchange rates at will, introducing tariffs with the
tendency to constitute barriers to international trade; and a lack of institutional
regulatory bodies to deal with all of these ills also contributed to the reason behind
the setting up of the institutions.
The Bretton Woods Conference in 1944 led to the realization of the objectives
of setting up of the institutions. At the Conference and during the negotiation
stage states which possessed sovereignty as an inherent right were requested then
pleaded with to relinquish a small portion of their sovereign rights in respect of
certain specified subject matters to the WB and the IMF both to enable them1096
to function and also to prevent recurrences of the events that led to the economic
depression of the 1930s. The argument that the institutions were designed to
further the economic interests of the US1097 perhaps cannot be sustained, as
Europe benefited more from the activities of the institutions during the Marshall
Plan.1098 Although the chief executives of the institutions since the inception have
always come from the US in respect of the WB and Europe in respect of the IMF,
the insinuation that they promote regional interests1099 is weakened by the fact
that conditions for obtaining loans are not only applied to other regions, but also
apply to some European countries, such as Eastern Europe.
1096
1097 Bertram Brown, op. cit. p 123.
1098 Harrod, op. cit. p 212.
1099 Bertram Brown, op. cit. p 123.

244

Conclusion and Recommendations

The institutions were established purely to enhance and improve the economic
activities of member states within a peaceful atmosphere. The legal framework
was, however, drawn up primarily to ensure the respect for and observation of
state sovereignty, as the institutions command enormous powers that may if not
controlled erode state sovereignty.
In spite of the legal framework represented in their respective Articles
of Agreement and that ought to limit the activities of the institutions and to
encourage, to facilitate the observance of and respect for state sovereignty, it
can be argued that their policies erode the sovereignty of the BMS through the
following circumstances.

9.2 articles of agreement


As has earlier been discussed, the Articles of Agreement of the two institutions
not only provide evidence that the institutions are conferred with the sovereign
powers to carry out their functions; they also provide the extent, the limit, and the
object clause of the institutions. Whether the powers exercised by the institutions
are conferred through an agency relationship, or the transfer or delegation of
power, the fact remains that the institutions may not exceed the powers conferred
upon them by the member states, which have only the inherent sovereign powers.
Although the institutions enjoy special, unique privileges and immunities, their
powers are limited to the extent of the sovereign powers conferred upon them by
the BMS. The WB and the IMF have exceeded the powers conferred by the BMS
through the infraction of the Articles of Agreement and have thereby eroded the
sovereignty of the BMS in the following areas:
The object clause and the purposes of the institutions as provided in the
Articles of Agreement of the WB and the IMF are clear and unambiguous. There
is no provision in the Articles of Agreement that their functions can be varied
or performed jointly and severally. The WB is to engage in specific projects such
as reconstruction, physical developmental projects, specific financial investments
and other high-capital infrastructural developments on along-term basis;1100 the
IMF is to regulate and control the abuse of foreign exchange and help members
solve any problems in balance of payment accounts as and when these arise.1101
Currently, though, there is no distinction between their functions.
The differences between the two organizations are completely blurred. This
has occurred without amendment by the member states of the respective
Constitutions of the WB and the IMF. The implications are that the institutions
1100 Article 1 World Bank Articles of Agreement.
1101 Article 1 IMF Articles of Agreement.

245

Conclusion and Recommendations

disregard and undermine the sovereign power of the very member states from
whom they originally derived their existence. The Articles of Agreement provide
areas where the institutions can vary their provisions without undergoing
amendment procedures yet could present the amendments to the members
for ratification.1102 Apart from these expressly stated areas, any variation of the
provisions of the Articles of Agreement without the due process and amendment
perhaps may erode the sovereignty of the borrowing member states.
The member states through the Articles of Agreement prohibited the
institutions from interfering in certain matters, considered to be within the
domestic jurisdiction or internal affairs of their states. For instance, Article IV
Section 10 provides inter alia that the Bank and its officers shall not interfere in
the political affairs of member states; also, the Articles of Agreement provide that,
apart from other economic considerations, the institutions shall be guided only
by economic considerations.1103 However, the institutions have not complied
with these provisions. Not only do the WB and the IMF interfere in the political
activities of member states; they also go to the extent of funding those activities
prohibited by the member states in their respective constituent documents.1104
The expansion in the activities of the WB and the IMF that have encroached upon
the borrowing member states fundamental directive principles of states has
absolutely no legal validity, as it erodes the state sovereignty.

9.3. united nations charter


The UN Charter can be said to be an example of classical international legal order
postulated to regulate the world of sovereign states; it is a modified version of
the Westphalia Treaty, which supports the system of the decentralized authority
of sovereign nation states as opposed to the central authority system emanating
from the Roman Empire that resulted in prolonged wars, and one of the main
fundamental objectives embodied in the Charter. With regard to this study,
the significant aspects of the UN Charter are the provisions of the sovereign
equality of states,1105 self-determination,1106 and the injunctive doctrines of nonintervention1107 in the affairs of another sovereign state.
1102 Article II (2) (b) of IBRD; Article II (2) (i) of the IFC; Article II 920 (C) of the IDA.
1103 Article 1; Article III Section 5 (b) of the WB Articles of Agreement; Article V, Section
1 (b) of IDA; Article 1 of IMF Articles of Agreement; IMF Concluding Mission
Statements, 9 February 2004.
1104 World Bank Working Paper 733, May 1995.
1105 Article 2 (1) UN Charter.
1106 Article 2 (2) UN Charter.
1107 Article 2 (7) UN Charter.

246

Conclusion and Recommendations

The Charter is vested with the responsibility of ensuring compliance with


the UN General Assembly1108 and the Security Council;1109 while these are not
legislative bodies, the UN, comprising these organs, is a global body. There is
an independent agreement between the UN and the WB and the IMF which, of
course, has been weakened by the most probable interpretation of Article VI of the
Relationship agreement; this requires the institutions have due regard for Security
Council decisions1110 and also in response the resolutions of the UNGA,1111 the
Board of Governors of the Bank1112 passed a resolution to have due regard for
the UNGA recommendations. Their declarations and resolutions are authoritative
evidence of binding international law;1113 it is therefore incumbent on the WB
and the IMF to comply with the provisions of the UN Charter, including the
declarations and the resolutions of the UN.
Similarly, although the Articles of Agreement constitute a valid legal instrument
between the institutions and member states, perhaps it can be argued that
hierarchically, the UN Charter appears to be a document superior to that of the
institutions. A similar argument can be made in reference to the declarations and
resolutions of the Security Council and the UNGA.
Within the UN Charter, the Grundnorm of classical international legal order,
the institutions obligations cannot be held as less sacrosanct. Some of the policies
of the WB and the IMF listed hereunder are inconsistent with the provisions of the
Charter as they are presumed to lie, rather, within the internal affairs of the BMS.

9.4 political/democratic reform policy


Similarly, the Articles of Agreement made no reference to this area of policy
as part of its object clauses or purposes, which is all the more disconcerting as
this policy falls under the internal affairs of member states. The policy is not in
conformity with the UN Charter. UN General Assembly Resolution 2625 (XXV)
on the declaration on principles of international law concerning friendly relations
and cooperation among states in accordance with the Charter which inter alia
provides that states do not intervene in matters within the domestic jurisdiction
of another state, governs the principles of self-determination and the independent
and sovereign equality of all states. No state may use or encourage the use of
1108 Article 10 UN Charter.
1109 Article 24 UN Charter.
1110 Article VI UN/WB Relationship Agreement.
1111 UNGA Resolution 377 (v) 13 September 1951.
1112 IBRD Sixth Board of Governors Annual Meeting September 10-14 1951 p 26.
1113 Oscar, op. cit p 4.

247

Conclusion and Recommendations

economic, political or any type of measure to coerce another state in order to


obtain any subordination or advantage.1114
The political and democratic policies of the institutions fall within the principles
of self-determination, under which the borrowing member states have the inherent
right to determine and decide internal measures for themselves without external
influence. It can be argued that those of the institutions policies of providing
funds specifically for political and democratic reforms and stipulating democratic
and political reforms as conditions for lending to the BMS therefore erode the
sovereign power of the BMS. Some of the democratic and political reforms in
Russia, Eastern Europe, Africa, and Asia1115(Pakistan) were carried out at the
insistence of the WB and the IMF.

9.5 reforms in domestic regulatory laws


Most domestic and regulatory laws, particularly those made to protect local
and industries and to offer affordable services, including performing some
social services within the member states territories, have either been amended
or completely abrogated at the insistence of the institutions. There is a sound
argument that economic revival and sustainable development depend on
harmonizing local or domestic commercial legislation with international law,1116
and that for a state to develop, the protectionist laws perhaps may be revoked;1117
however, the harmonization of states regulatory laws entails a total overhaul of
its regulatory bodies, remoulding the opinion of civil society, public attitudes and
some forms of legal training or retraining that require self-determined adaptable
cultural and customary rules not imposed by external institutions such as the WB
and the IMF. It can be argued that lending based on reforms in domestic regulation
and at variance with the will of the indigenous people may result in the erosion of
the sovereignty of the BMS.1118

1114 UN General Assembly Resolution 2625 (XXV) of 24 October 1974.


1115 Stigliz, op. cit. p 43.
1116 Friedman, L., Legal Rules and the Process of Social Change, 19 Stanford Law Review
(1979) p 791.
1117 Seidman, R., The State, Law and Development 77 (1978) pp 462-68.
1118 The legal framework for the Russian economy was designed and executed at the
insistence of the WB and the IMF-Legal Reforms Project (Loan 4035) of 21 June 1996:
funds were made available for the Russian Federation to review all the Protectionist
and Communist regulatory laws.

248

Conclusion and Recommendations

9.6. constitutional reform policy


Commentators are of the view that lending for Constitutional reforms, on the
one hand, and Constitutional reforms as a criterion for lending, on the other, are
necessary for the sustenance of economic and infrastructural development of
BMS.1119 However, the WB and the IMF Constitutional reforms policies in Kenya
and Russia has been said to be coercive,1120 although the institutions linked their
policy with the political reforms intertwined with the economic considerations
and development of member states.1121 It can be argued that the development
of states may not be intertwined with Constitutional reforms or the compulsory
necessity of states to have a national Constitution. This view is predicated on the
fact that UK, considered as one of the most civilized, economically developed,
and highly industrialized nations in the world, does not operate with a written
Constitution. Although this study does not question the justification for member
states adoption of the Constitutional form of government, it may nevertheless
be argued that decisions are presumed to fall within the doctrine of the selfdetermination of states; implementing the policy at the insistence of the WB and
the IMF perhaps amounts to coercion and it erodes the sovereignty of the BMS.
It can be argued that the WB and the IMF Governance issues and Civil Service
reform policies1122 deeply erode the sovereignty of the BMS. While the institutions
argue that the economic problems within the BMS may result from their excessive
regulation and surplus employment, which increases the costs of production and
has as its concomitant result low wages and pervasive corruption,1123 the fact
remains that the institutions do not hold the express mandate to compel member
states to reform their respective civil services.1124
Most member states civil services are fashioned in accordance with their
social and cultural beliefs. Their civil services are not specifically tailored
towards a market economy. Employment may, rather, be based on the equal and
proportionate representation of the cultural tribes in the state.1125

1119 Shihata, F.I., Vol. III pp 173-6.


1120 Ajani, G., Legal Transplant in Russia and Europe 43 American Journal of Comparative
Law (1995) pp 93-98.
1121 World Bank Policy Research Working Papers 3353 of June 2004 at p 4.
1122 World Bank Development Report 1995.
1123 Shihata, I., Vol. II p 297
1124 WB Working Paper Series No 945 1992; Civil Service Pay and Employment, WB
Publication 1991.
1125 Nigerian Constitution as amended in 1999.

249

Conclusion and Recommendations

The institutions governance issues and civil service reforms no doubt alter the
Civil Code1126 and the Constitution of the member states, including the social and
cultural life, which are non-economic considerations, thereby eroding the innate
sovereignty of states. There are some unavoidable justifications that administration
and governance may have a close relationship, yet it can also be argued that any of
such reforms should be carried out by the member states themselves and not at
the insistence of or under coercion from the institutions; such policy may come
under the doctrine of self-determination, where the states are free to choose any
form of civil service adaptable to their customs. The civil service reforms in Brazil
focused on computerization and modern personal management systems and not
only created unemployment,1127 but resulted in the states revising its directive on
state principles at the behest of the institutions.
The lending for governance issues, such as civil service and administrative
reforms, is not provided in the Articles of Agreement of the WB and the IMF.
Such interference amounts to an ultra vires act. It can be argued that breaching the
doctrine of ultra vires amounts in international law to the erosion of the sovereign
powers of states; the supposed sovereign acts which are ultra vires were never
delegated to the institutions in the enabling instruments. Similarly, it can be said
that the institutions imposition of civil service reform as the criterion for funding
other sectors of the countries economies suggests a lack of respect on the part
of the WB and the IMF for indigenous laws and constitutes intervention into the
internal affairs of the member states.

9.7 legal and judicial reforms policy


The legal and judicial systems of most member states have either been altered or
completely abolished at the insistence of the institutions. It may be assumed that
modernization and changes in circumstances require the overhaul of the legal
system; the process through which these rules and legal systems were changed
failed, however, to involve debates including and contributions from the member
states. The scripts were written by the WB and the IMF and simply presented for
adoption by the BMS.1128 The justification for legal and judicial reform is not in
question, as it might be necessary to change the judicial and legal system to bring
1126 Nigerian Civil Service Code 1985 and 1990: Employment is both based on merit and
divided among the multicultural tribes in Nigeria to avoid undue advantage for one
tribe against another.
1127 World Bank Discussion Papers No. 199 of 1993.
1128 Shihata, Ibrahim F., Judicial Reforms in Developing Countries, the Role of the World Bank Vol.
II (1995) p 147.

250

Conclusion and Recommendations

it into line with modernization. However, the process suggests coercion by the
institutions.
The reforms that may have occasioned the erosion of the BMS sovereignty are
executed through two methods. Under the institutions, Legal Technical Assistance
and Private Sector Development (PSD) loans are made to BMS on the condition
that legal and judicial reforms must be carried out by the state.1129 The policy
and criterion that states must reform their legal and judicial sectors are provided
in a number of financial and technical instruments that include adjustment
loans; investment loans; institutional development loans, and the financing of
imports. These had not been provided for in the Articles of Agreement.1130 The
fundamental reasons for the policy were apprehension by the private sector, and
the reluctance to invest in countries with a history of all-pervasive corruption
and a less transparent justice system than could be expected to protect foreign
investors.1131
The lending of funds was made specifically to BMS for the purposes of reforming
and harmonizing their legal and judicial systems to conform to international and
credible standards in order to encourage foreign investments and protect funds
loaned to the states. The object clauses and the purposes of the institutions
Articles of Agreement never included legal and judicial reforms as part of their
functions. The approach of the WB and the IMF that they may require such reforms
appears to be illegal; it has been utterly condemned by the ICJ in the Condition for
Admission case, where it was held inter alia that the Selection Committee of the UN
does not have the right to impose conditions not provided in the UN Charter.1132
Lending for legal and judicial reforms was carried out in Venezuela, Ecuador,
Peru, and Bolivia.1133 The complete abolition of their original legal and judicial
systems at the insistence of the WB and the IMF suggests the erosion of the state
sovereignty of these nations, particularly as they were not able to choose the legal
and judicial systems for themselves. However, the argument would have been
different if the member states had decided under their own volition to adopt a
foreign or presumed legal system. The fact that they were actually coerced to adopt
one suggests that their sovereignty was eroded.
The view expressed by commentators is that the institutions, claiming that
BMSs had inadequate legal protection which fact thus may hamper economic
1129 World Bank Group 3 and the Private Sector Development, Sec M 95-867, IFC/
SecM95-149, MIGA/Sec95-25, 4 August 1995.
1130 World Bank Policy Research Working Paper No. 1414, 1995.
1131 Bangladesh Financial Sector Adjustment Credit (Credit No. 2152-BD of 18 June 1990.
1132 Condition for Admission case, ICJ Report supra.
1133 World Bank Venezuela Project Loan No. 3514-VE of 30 December 1993; Bolivia
Judicial and Legal Loan No PPF825-1-BO of 19 August 1994.

251

Conclusion and Recommendations

development,1134 might have some element of justification, but that is not among
the issues examined in this thesis. The current study has examined inter alia
whether the institutions have exceeded the sovereign powers as conferred upon
them by the member states. The sovereign powers may have been conferred either
through the delegation of powers, an agency relationship or the transfer of power.
It can be argued that the institutions should confine themselves to within the
limits of the conferred powers as evidenced by the Articles of Agreement. Acts
done in excess of the conferred sovereign powers may amount to an infraction of
the doctrine of state sovereignty.

9.8 the role of g8 and the paris club


In accordance with the UN Charter,1135 the UN General Assembly Declaration
Resolution 2526 (XXV) of 24 December 1974,1136 including the Articles of
Agreement of the institutions, affirms the sovereign equality of states; no state is
superior to another. The Articles of Agreement of the WB provide inter alia that
the institution will respect the international character of its duties; control of the
institutions lies with the Board of Governors appointed by all of the member states,
and the institutions shall take no directives from any authority except the Board of
Governors.1137 The institutions have not complied with these international rules
provided in the UN Charter and the Articles of Agreement. The recognition of the
G8 and the Paris Club as de facto final authority over the affairs of and relationship
with BMS not only awards the G8 and the Paris Club the position as a superior
body; they dominate the BMS and erode their sovereign powers.

9.9 population control policy


This policy can be said to erode state sovereignty. Apart from interfering with the
duties of the national or state planning commission, it affects the individual rights

1134 Mesick, R.E., Judicial Reforms and Economic Development: A Survey of Issues, 14
(1) The World Bank Research Observer (1999) pp 117-118.
1135 Articles 1 (2) and 2 (7) of the UN Charter.
1136 UNGA Declaration on Principles of International Law Concerning Friendly Relations
and Cooperation among States in Accordance to the UN Charter, Resolution 2625
(XXV) of 24 December 1974.
1137 Article V Section 5 of the IBRD.

252

Conclusion and Recommendations

in some member states, such as those where the religion permits adherents to
marry as many as four wives.1138
The institutions, the WB and the IMF, in exceeding the sovereign powers
conferred upon them by member states, have invaded virtually every aspect of
life. Due process has not been followed in promulgating and implementing their
policies. Some of the essential reasons for establishing the institutions were to
prevent the recurrence of the events that led to the economic depression of the
1930s; to remove trade barriers, and to encourage world trade, with the common
interest of sustaining world peace and security.
The institutions have contributed in the development of the worlds economy,
from Marshall Plan, dealing with the rehabilitation of most industrialized states, to
improving economic activities in developing countries. However, the fundamental
problems are that due process of law is not followed in implementing those policies
not provided in the Articles of Agreement and evidencing the consent of states. If
these trends are nipped in the bud, the notion that international organizations
may be allowed to formulate policies not provided in the Articles of Agreement
may set a dangerous precedent, the result of which could be where states might
consider a creative, innovative approach of the institutions as domination. The
institutions were set up under international law. They are required to act under
international law. Therefore, the WB and the IMF must act within agreements in
order not to precipitate a crisis.

9.10 recommendations
The Articles of Agreement should be amended to include all of the innovative
creative approaches in order to legalize the policies. The fundamental limitations
placed for states and non-state actors by virtue of Article 2 (7) of the UN Charter,
the basic symbol of state sovereignty,1139 have consistently been breached by the
WB and the IMF.
The large majority of the borrowing member states of the institutions have
abandoned their political and economic ideologies, including their fundamental

1138 Islam Religion Permits Moslems to Marry Four Wives, the was a raging controversy
when this policy was introduced into Nigeria in the early 1990s at the insistence of the
institutions; however, even though the policy was rejected by the local people, who felt
the institutions were infringing on their rights, it nevertheless suggests that the state
sovereignty was indeed being eroded.
1139 Watson, J.S., Interpretation, Competence and Continuing Validity of Article 2 (7) of
the UN Charter, 71 AJIL (1977) p 60.

253

Conclusion and Recommendations

directive principles of states, at the insistence and under the influence of WB and
IMF policies.
As the borrowing member states are across Africa, Asia, Eastern Europe, Russia,
Latin America and Middle East, investigation and examination have revealed that
member states from the above countries have, under duress from the World Bank
and the IMF, amended or abandoned completely the political, social, educational,
and cultural ideologies and objectives that were originally based on the doctrines
of self-determination and sovereignty. Contrary to the specifically conferred
sovereign powers as expressed in the Articles of Agreement, virtually every aspect
of independent state sovereignty, ranging from the legislature, executive, and
judiciary to social matters, is being eroded by the institutions policies.
Given the ultimate cause of World Wars I and II and in particular WW II,
this could be an episode, rather than continuous contributions to international
law by successive administrators of the institutions, who would have ensured
that due process is adopted to amend the legal framework to accommodate
unforeseen circumstances and the creative, innovative policies of the institutions.
Already, African leaders during the meeting of the New Partnership for African
Development (NEPAD) and the Council of African Ministers of Finance, who
met recently in Maputo, are protesting the high-handedness of the institutions
policies and disproportionate voting powers.1140 If these trends are allowed to
continue, they portend danger and may encourage strong reactions such as the
precipitation of a crisis or revolution from the majority of the borrowing member
states. Such a potential danger explains why some leaders are asking for the reform
of the two institutions.1141
The ultra vires policies implemented by the WB and the IMF in the BMS are
deprecations that reduce the legality of the legal framework, as well as the
perceptions of the founding fathers of the institutions and the development
of international law. Although some member states that are clearly in need of
funds might continue to obey the ultra vires policies, in the long term, given the
1140 Olokun, Aluko, Why Africa Should Protest Reduced Powers in the IMF and the World
Bank, Nigerian Guardian Newspaper, 14 August 2006.
1141 Blair, A., UK Prime Minister, Blair Urges United Nations and World Bank Reforms,
BBC News, Friday, 26 May 2006 17:59GMT; id., Reform of International Monetary
Fund Necessary, The New York Times, Tuesday, 15 August 2006; Brown, Gordon, UK
Chancellor of the Exchequer and Chairman of the IMF in a meeting held in the IMF
Headquarters in Washington DC on 2 October 2006, called for the reorganizations and
the overhaul of the institutions policies, in communiqu of IMF Board of Governors
2 October 2004, IMF Annual Meeting 2004; Danaher, Kevin, Ten Reasons Why the IMF
and the World Bank should be Abolished (1999) pp 3-12; Rainer Falk, The Reform of IMF
NGO Strategy Workshop, Washington DC, 6-8 October 2001.

254

Conclusion and Recommendations

perceptions of the NGOs, some authors and some world leaders, who expressing
resentment at some of these policies, the institutions might be sharpening the
edges of resistance and disorder in international law.
To summarise: it can be recommended that the WB and the IMF should be
bound to limit their policies to within those powers conferred upon them by the
Articles of Agreement, as this will sustain the rule of law in international relations
and further enhance the progressive growth and development of international law.
Due process as provided in the Articles of Agreement should be adopted before
any changes or new initiatives are promoted, as this will mitigate the presumption
of the erosion of state sovereignty.
The borrowing member states, in the majority in the member states, are spread
across the globe. The voting pattern of the institutions should be democratized
so as to create a sense of cohesion and belonging similar to that within the WTO;
this will reduce apprehensions regarding domination by the few shareholders and
substantial donors.
Also, the position and nomenclatures of the G8 and the Paris Club, which are
not mentioned or provided in the legal framework, should, if they are to remain,
be regularized in the Articles of Agreement. This is because these groups as they
are currently constituted, their activities and decisions, negate the principle of the
sovereign equality of all states, where the international law presumes all states to
be juridically equal.

255

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Index
Absolute Sovereignty 19, 45
adequate safeguard 6, 158, 160, 161, 162, 164,
165, 169, 171, 194
Agreement between IBRD and IMF
signed in New York xix, 214
Amendment of Multilateral Treaties,
Articles 40 (40) and Articles 30 (4) (b)
of Vienna Convention on the Law of
Treaties 1969 xix
Arabian American Oil Company xvii,
xxviii
ARAMCO xxviii
Article 24 of German Constitution xix
Articles of Agreement of the International
Financial Corporation (IFC) 187
Artificially Induced Accretion 38
axiomatic 131, 198
Bolivia xxvii, 230, 251
borrowing member states (BMS); BMS
98, 178, 188
Calvo doctrine 64, 65, 67
Calvo Doctrine 63, 272
Cambodia xiv, 42, 233, 240
Cameroon v United States of America xiv,
69
capacity of states 29
Capacity of States 434
Civil Service Reform; CSR xx, xxiii, xxvi,
xxviii, 197, 198, 199, 200, 201, 203, 277,
279
Commonwealth of Massachusetts v State
of New York xiv, xvi, 37
concurrent powers 108, 119, 134
Condition for Admission xiv, xxiv, 147, 153,
194, 195, 197, 210, 218, 222, 251
conferment of sovereign powers 118, 133,
136, 137, 139, 144, 147, 211

conferred sovereign powers 3, 6, 7, 10, 98,


118, 137, 142, 152, 252, 254
cultural heritage 28, 30, 42
delegated sovereign power 5, 129, 133
Delegation of Power; delegation of power
3, 10, 117, 119, 129, 131, 133, 136, 137, 245;
Delegation of power 276
delegation of powers 8, 10, 14, 129, 211, 252
Denial of Justice; denial of justice 64
Directive State Principles 160
domestic jurisdiction 2, 7, 9, 15, 50, 138, 141,
198, 201, 202, 206, 216, 218, 220, 223, 224,
232, 235, 246, 247
Domestic jurisdiction 400
Domestic Jurisdiction; Domestic jurisdiction 266
Economic Community of West African
States xxviii
EC Treaty xix, 145, 146
elastic interpretation 5, 12, 106, 120, 158,
169, 170
essence of state sovereignty 3, 8, 43
fragmented empires 24
general presumption 9, 22, 116, 117, 131, 133,
134, 139, 143, 147, 212
human dignity 20, 52, 61
implied powers 106, 107, 108, 109, 110, 120,
121, 130, 146, 163, 185, 206, 221
infraction 3, 12, 149, 179, 182, 183, 192, 194,
196, 197, 202, 203, 205, 206, 208, 209, 210,
211, 213, 217, 218, 221, 222, 224, 231, 237,
245, 252
inter alia 5, 15, 20, 29, 37, 38, 57, 62, 65, 70,
77, 112, 113, 114, 119, 120, 121, 126, 131, 137,
138, 140, 141, 142, 143, 144, 145, 153, 155,
156, 157, 158, 161, 162, 163, 164, 165, 171,
172, 177, 179, 180, 181, 182, 183, 184, 185,
187, 189, 194, 195, 199, 203, 206, 207, 209,

291

Bibliography
210, 211, 213, 214, 216, 217, 218, 219, 220,
222, 225, 230, 233, 235, 242, 246, 247, 251,
252
International Tin Agreement xix, xxviii,
125
Investment Treaty between Cameroon and
the United States of America, Senate
Treaty Documents, 99-22 signed 26
February 1989. xix
judicial legal hegemony 28
legal and judicial reforms 234, 237, 238, 239,
240, 242, 250, 251
legal validity 2, 5, 10, 11, 12, 68, 119, 123, 131,
176, 177, 191, 226, 246
Legal Validity 117, 286
lender and borrower 6, 173
locus classicus 5
Maastricht Treaty xix, 129
Mandate territories 22, 25
mere conjecture 53
Montevideo Convention 13, 19
native administration 23
neo-liberal policy 167, 170, 221
New International Economic Order xxix,
58, 59, 61
Nicaragua xvi, 124, 240, 241
Non-aggression 71
non-self governing territories 232
Paris Club 98, 100, 101, 103, 105, 120, 135,
188, 189, 190, 191, 192, 211, 221, 252, 255,
276, 278, 284

Peru xxvii, 239, 240, 251


political reform 220, 221, 222, 224, 225, 227,
228
Political Reform 221, 271
prohibiting external interference 21
Roman Empire 18, 20, 34, 199, 233, 246
speculative frenzy 79
stand-by arrangement 100, 101, 173, 175, 236
Stand-by Arrangement xxiii, 178, 236
state and non-state actors 12, 44, 45, 214,
215, 218
strengthening international peace 49
Structural Adjustment xxii, xxviii, xxix, 96,
157, 158, 162, 163, 174, 176, 180, 236, 240,
260, 278, 285
subjective interpretation 8
transfer of sovereign power 137, 139, 143
Treaty establishing the European Constitution xix, 137
under the suzerainty 21
Venezuela xxvii, 173, 229, 230, 238, 251
voluntary consent 178, 236
Westphalia Treaties of 1648 xix
Yugoslav Republic of Macedonia 240
14 IMF Survey (October 1985) p 297 xix,
192

292

Appendix

Appendix
In other to make this book more reader friendly, the World Bank, IMF, Vienna
Convention on the Laws of Treaties and United Nations Constituent documents
have been made as appendix to this book.

IBRD Articles of Agreement


(As amended effective February 16, 1989)
Introductory Article

The International Bank for Reconstruction and Development is established and


shall operate in accordance with the following provisions:
Article I

Purposes

The purposes of the Bank are:


(i) To assist in the reconstruction and development of territories of
members by facilitating the investment of capital for productive
purposes, including the restoration of economies destroyed or
disrupted by war, the reconversion of productive facilities to peacetime
needs and the encouragement of the development of productive
facilities and resources in less developed countries.
(ii) To promote private foreign investment by means of guarantees
or participations in loans and other investments made by private
investors; and when private capital is not available on reasonable terms,
to supplement private investment by providing, on suitable conditions,
finance for productive purposes out of its own capital, funds raised by
it and its other resources.
(iii) To promote the long-range balanced growth of international trade
and the maintenance of equilibrium in balances of payments by
encouraging international investment for the development of
the productive resources of members, thereby assisting in raising
productivity, the standard of living and conditions of labour in their
territories.

293

Appendix

(iv) To arrange the loans made or guaranteed by it in relation to


international loans through other channels so that the more useful and
urgent projects, large and small alike, will be dealt with first.
(v) To conduct its operations with due regard to the effect of international
investment on business conditions in the territories of members and,
in the immediate postwar years, to assist in bringing about a smooth
transition from a wartime to a peacetime economy. The Bank shall be
guided in all its decisions by the purposes set forth above.
Article II

Membership in and Capital of the Bank

SECTION 1. Membership

(a) The original members of the Bank shall be those members of the
International Monetary Fund which accept membership in the Bank
before the date specified in Article XI, Section 2 (e).
(b) Membership shall be open to other members of the Fund, at such
times and in accordance with such terms as may be prescribed by the
Bank.
SECTION 2. Authorized Capital

(a) The authorized capital stock of the Bank shall be $10,000,000,000, in


terms of United States dollars of the weight and fineness in effect on
July 1, 1944. The capital stock shall be divided into 100,000 shares
(1) having a par value of $100,000 each, which shall be available for
subscription only by members.
(b) The capital stock may be increased when the Bank deems it advisable
by a three-fourths majority of the total voting power.
SECTION 3. Subscription of Shares

(a) Each member shall subscribe shares of the capital stock of the Bank.
The minimum number of shares to be subscribed by the original
members shall be those set forth in Schedule A. The minimum
number of shares to be subscribed by other members shall be
determined by the Bank, which shall reserve a sufficient portion of its
capital stock for subscription by such members.
(b) The Bank shall prescribe rules laying down the conditions under
which members may subscribe shares of the authorized capital stock of
the Bank in addition to their minimum subscriptions.

294

Appendix

1. As of April 27, 1988, the authorized capital stock of the Bank had
been increased to 1,420,500 shares.

(c) If the authorized capital stock of the Bank is increased, each member
shall have a reasonable opportunity to subscribe, under such
conditions as the Bank shall decide, a proportion of the increase
of stock equivalent to the proportion which its stock theretofore
subscribed bears to the total capital stock of the Bank, but no member
shall be obligated to subscribe any part of the increased capital.
SECTION 4. Issue Price of Shares

Shares included in the minimum subscriptions of original members shall be issued


at par. Other shares shall be issued at par unless the Bank by a majority of the total
voting power decides in special circumstances to issue them on other terms.
SECTION 5. Division and Calls of Subscribed Capital

The subscription of each member shall be divided into two parts as follows:
(i) twenty percent shall be paid or sub