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Debt is an efficient tool. It ensures access to other peoples’ raw materials and infrastructure on the cheapest possible terms. Dozens of countries must compete for shrinking export markets and can export only a limited range of products because of Northern protectionism and their lack of cash to invest in diversification. Market saturation ensues, reducing exporters’ income to a bare minimum while the North enjoys huge savings. The IMF cannot seem to understand that investing in … [a] healthy, well-fed, literate population … is the most intelligent economic choice a country can make.

Susan George, A Fate Worse Than Debt, (New York: Grove Weidenfeld, 1990), pp. 143, 187, 235

Many developing nations are in debt and poverty partly due to the policies of international institutions such as the International Monetary Fund (IMF) and the World Bank.

Their programs have been heavily criticized for many years for resulting in poverty. In addition, for developing or third world countries, there has been an increased dependency on the richer nations. This is despite the IMF and World Bank’s claim that they will reduce poverty.

Following an ideology known as neoliberalism, and spearheaded by these and other institutions known as the Washington Consensus (for being based in Washington D.C.), Structural Adjustment Policies (SAPs) have been imposed to ensure debt repayment and economic restructuring. But the way it has happened has required poor countries to reduce spending on things like health, education and development, while debt repayment and other economic policies have been made the priority. In effect, the IMF and World Bank have demanded that poor nations lower the standard of living of their people.

A Spiraling Race to the Bottom

As detailed further below, the IMF and World Bank provide financial assistance to countries seeking it, but apply a neoliberal economic ideology or agenda as a precondition to receiving the money. For example:

• They prescribe cutbacks, liberalization of the economy and resource extraction/export-oriented open markets as part of their structural adjustment.
• The role of the state is minimized.
• Privatization is encouraged as well as reduced protection of domestic industries.
• Other adjustment policies also include currency devaluation, increased interest rates, flexibility of the labor market, and the elimination of subsidies such as food subsidies.
• To be attractive to foreign investors various regulations and standards are reduced or removed.

The impact of these preconditions on poorer countries can be devastating. Factors such as the following lead to further misery for the developing nations and keep them dependent on developed nations:

• Poor countries must export more in order to raise enough money to pay off their debts in a timely manner.
• Because there are so many nations being asked or forced into the global market place—before they are economically and socially stable and ready—and told to concentrate on similar cash crops and commodities as others, the situation resembles a large-scale price war.
• Then, the resources from the poorer regions become even cheaper, which favors consumers in the West.
• Governments then need to increase exports just to keep their currencies stable (which may not be sustainable, either) and earn foreign exchange with which to help pay off debts.
• Governments therefore must:
  • spend less
  • reduce consumption
  • remove or decrease financial regulations
  • and so on.
• Over time then:
  • the value of labor decreases
  • capital flows become more volatile
  • a spiraling race to the bottom then begins, which generates
  • social unrest, which in turn leads to IMF riots and protests around the world
• These nations are then told to peg their currencies to the dollar. But keeping the exchange rate stable is costly due to measures such as increased interest rates.
• Investors obviously concerned about their assets and interests can then pull out very easily if things get tough
  • In the worst cases, capital flight can lead to economic collapse, such as we saw in the Asian/global financial crises of 1997/98/99, or in Mexico, Brazil, and many other places. During and after a crisis, the mainstream media and free trade economists lay the blame on emerging markets and their governments’ restrictive or inefficient policies, crony capitalism, etc., which is a cruel irony.
• When IMF donors keep the exchange rates in their favor, it often means that the poor nations remain poor, or get even poorer. Even the 1997/98/99 global financial crisis can be partly blamed on structural adjustment and early, overly aggressive deregulation for emerging economies.
• Millions of children end up dying each year.

Competition between companies involved in manufacturing in developing countries is often ruthless. We are seeing what Korten described as a race to the bottom. With each passing day it becomes more difficult to obtain contracts from one of the mega-retailers without hiring child labor, cheating workers on overtime pay, imposing merciless quotas, and operating unsafe practices.

This is one of the backbones to today’s so-called free trade. In this form, as a result, it is seen by some as unfair and one-way, or extractionalist. It also serves to maintain unequal free trade as pointed out by J.W. Smith.

As a result, policies such as Structural Adjustments have, as described by Smith, contributed to the greatest peacetime transfer of wealth from the periphery to the imperial center in history, to which we could add, without much media attention.

Maintaining Dependency and Poverty

One of the many things that the powerful nations (through the IMF, World Bank, etc.) prescribe is that the developing nation should open up to allow more imports in and export more of their commodities. However, this is precisely what contributes to poverty and dependency.

[I]f a society spends one hundred dollars to manufacture a product within its borders, the money that is used to pay for materials, labor and, other costs moves through the economy as each recipient spends it. Due to this multiplier effect, a hundred dollars worth of primary production can add several hundred dollars to the Gross National Product (GNP) of that country. If money is spent in another country, circulation of that money is within the exporting country. This is the reason an industrialized product-exporting/commodity-importing country is wealthy and an undeveloped product-importing/commodity-exporting country is poor. [Emphasis Added]

…Developed countries grow rich by selling capital-intensive (thus cheap) products for a high price and buying labor-intensive (thus expensive) products for a low price. This imbalance of trade expands the gap between rich and poor. The wealthy sell products to be consumed, not tools to produce. This maintains the monopolization of the tools of production, and assures a continued market for the product. [Such control of tools of production is a strategy of a mercantilist process. That control often requires military might.]

As seen above as well, one of the effects of structural adjustment is that developing countries must increase their exports. Usually commodities and raw materials are exported. But as Smith noted above, poor countries lose out when they

• export commodities (which are cheaper than finished products)
• are denied or effectively blocked from industrial capital and real technology transfer, and
• import finished products (which are more expensive due to the added labor to make the product from those commodities and other resources)

This leads to less circulation of money in their own economy and a smaller multiplier effect. Yet, this is not new. Historically this has been a partial reason for dependent economies and poor nations. This was also the role enforced upon former countries under imperial or colonial rule. Those same third world countries find themselves in a similar situation. This can also be described as unequal trade:

At first glance it may seem that the growth in development of export goods such as coffee, cotton, sugar, and lumber, would be beneficial to the exporting country, since it brings in revenue. In fact, it represents a type of exploitation called unequal exchange. A country that exports raw or unprocessed materials may gain currency for their sale, but they lose it if they import processed goods. The reason is that processed goods—goods that require additional labor—are more costly. Thus a country that exports lumber but does not have the capacity to process it must then re-import it in the form of finished lumber products, at a cost that is greater than the price it received for the raw product. The country that processes the materials gets the added revenue contributed by its laborers. (Emphasis is original)

Exporting commodities and resources is seen as favorable to help earn foreign exchange with which to pay off debts and keep currencies stable. However, partly due to the price war scenario mentioned above, commodity prices have also dropped. Furthermore, reliance on just a few commodities makes countries even more vulnerable to global market conditions and other political and economic influences. As Gemini News Service also reports, talking to the World Bank:

More than 50 developing countries depend on three or fewer commodities for over half of their export earnings. Twenty countries are dependent on commodities for over 90 percent of their total foreign exchange earnings, says the World Bank.

 

Almost four years after the above was written, Oxfam reveals that things have not changed for the better: more than 50 per cent of Africa’s export earnings is derived from a single commodity; numerous countries are dependent on two commodities for the vast majority of their export earnings; and there are a number of other countries in Africa heavily dependent on very few commodities.

 

In addition, as Celine Tan of the Third World Network explains:

Falling [commodity] prices have meant that large increases in export volume by commodity producers have not translated into greater export revenues, leading to severely declining terms of trade for many commodity producing countries. When the purchasing power of a country’s exports declines, a country is unable to purchase imported goods and services necessary for its sustenance, as well as generating income for the implementation of sustainable development programs.

A vast majority of developing countries depend on commodities as a main source of revenue. Primary commodities account for about half of the export revenues of developing countries and many developing countries continue to rely heavily on one or two primary commodities for the bulk of their export earnings.

Tan also highlights in the above article that a fall in commodity prices have [sic] also led to a build-up of unsustainable debt. The lack of greater revenues from exports has knock-on effects, as described further above. The irony is that structural adjustments were prescribed by the IMF and the World Bank due to debt repayment concerns in the first place.

 

As debt-relief and trade became major topics of discussion during the G8 Summit 2005, Yaya Orou-Guidou, an economist from Benin (a small African country), also noted that exporting raw materials and agricultural products would not help fight poverty. Those raw materials have to be processed in the same poor country to help create a multiplier effect:

Orou-Guidou believes Benin will need to start processing the raw materials it produces if it is to escape the poverty trap.

A prime material kept in Africa for processing in our factories is one less thing for Western factories to earn money on, he notes. But, if we content ourselves with selling our agricultural or mining products in their raw states, they will always feed Western factories which provide jobs for (the West’s) own people.

This concern also applies to larger economies. The global financial crisis that started in 2008 resulted in Brazil’s exports to US falling by some 42%, while it increased with China by 23%. However, almost 75% of Brazil’s export to the US were industrial products, whereas the opposite — about 25% — was for China. Vice president of the Brazilian Foreign Trade Association explained why this is a concern to IPS:

• When dealing in commodities, the importer decides and controls the quantity and prices, making an unstable market, in contrast to the situation with manufactured goods.
• Commodities also generate low-grade jobs, whereas manufacturing employs skilled personnel for higher wages, creates a multiplier effect on employment as the production chain is longer, and expands the domestic market.

 

 

These concerns are not new.

Political economist Adam Smith also provided some insights in his 1776 classic, The Wealth of Nations, which is regarded as the Bible of capitalism. He was highly critical of the mercantilist practices of the wealthy nations, while he recognized the value of local industry and the impact of imported manufactured products on local industries:

Though the encouragement of exportation and the discouragement of importation are the two great engines by which the mercantile system proposes to enrich every country, yet with regard to some particular commodities it seems to follow an opposite plan: to discourage exportation and to encourage importation. Its ultimate object, however, it pretends, is always the same, to enrich the country by the advantageous balance of trade. It discourages the exportation of the materials of manufacture, and of the instruments of trade, in order to give our own workmen an advantage, and to enable them to undersell those of other nations in all foreign markets; and by restraining, in this manner, the exportation of a few commodities of no great price, it proposes to occasion a much greater and more valuable exportation of others. It encourages the importation of the materials of manufacture in order that our own people may be enabled to work them up more cheaply, and thereby prevent a greater and more valuable importation of the manufactured commodities. (Emphasis Added)

Reading the above, we can say that structural adjustment policies are also mercantilist. We are constantly told that we live in a world of global capitalism, and yet we see that while free markets are preached (in Adam Smith’s name), mercantilism is still practiced!

Of course, today it is a bit more complicated too. We do have, for example, products being exported from the poorer countries (albeit some facing high barriers in the rich nations). But exporting rather than first creating and developing local industry and economy, means the developing country loses out in the long run, (hardly developing) because there is little multiplier effect of money circulating within the country, as mentioned above. Furthermore, with labor being paid less than their fair wages in the poorer nations, wealth is still accumulated by—and concentrated in—the richer nations.

 

The Luckiest Nut In The World is an 8 minute video (sorry, no transcript available, as far as I know), produced by Emily James. It is a cartoon animation explaining the effects of loans, structural adjustment and cashcrops, and their impacts on poorer countries. It traces how Senegal was encouraged to grow nuts for export. In summary,

• As a poor nation without many resources, it took out loans to help develop the industry.
• Other nations saw this was going well, so they followed suit.
• The price of nuts started to drop and Senegal faced debt repayment problems.
• Structural adjustment policies were put in place, cutting spending and reducing government involvement in the nut industry and elsewhere.
• However, things got worse.
• At the same time rich countries, such as the US, were subsidizing their own nut (and other) industries, allowing them to gain in market share around the world.
• Rich countries have tools such as trade tariffs and the threat of sanctions at their disposal to help their industries, if needed.

Thus we are in a situation where the rich promote a system of free trade for everyone else to follow, while mercantilism is often practiced for themselves.

• Free trade is promoted by the rich and influential as the means for all nations to achieve prosperity and development.
• The wealth accumulated by the richer countries in the past is attributed to this policy to strengthen this idea.
• That such immense wealth was accumulated not so much from free trade but from the violent and age-old mercantilism or monopoly capitalism is ignored.
• Such systems are being practiced again today, and even though they are claimed to be Adam-Smith-style free trade, they are the very systems that Adam Smith himself criticized and attacked.

In 1991 Larry Summers, then Chief Economist for the World Bank (and US Treasury Secretary, in the Clinton Administration, until George Bush and the Republican party came into power), had been a strong backer of structural adjustment policies. He wrote in an internal memo:

Just between you and me, shouldn’t the World Bank be encouraging more migration of dirty industries to the LDCs [less developed countries]?… The economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable, and we should face up to that… Under-populated countries in Africa are vastly under-polluted; their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City… The concern over an agent that causes a one in a million change in the odds of prostate cancer is obviously going to be much higher in a country where people survive to get prostate cancer than in a country where under-five mortality is 200 per thousand.

When looked at in this light, poverty is more than simple economic issues; it is also an ideological construct.

 

The Welfare State has Helped Today’s Rich Countries to Develop

The era of globalization can be contrasted with the development path pursued in prior decades, which was generally more inward-looking. Prior to 1980, many countries quite deliberately adopted policies that were designed to insulate their economies from the world market in order to give their domestic industries an opportunity to advance to the point where they could be competitive. The policy of development via import substitution, for example, was often associated with protective tariffs and subsidies for key industries. Performance requirements on foreign investment were also common. These measures often required foreign investors to employ native workers in skilled positions, and to purchase inputs from domestic producers, as ways of ensuring technology transfers. It was also common for developing countries to sharply restrict capital flows. This was done for a number of purposes: to increase the stability of currencies, to encourage both foreign corporations and citizens holding large amounts of domestic currency to invest within the country, and to use the allocation and price of foreign exchange as part of an industrial or development policy.

As J.W. Smith notes, every rich nation today has developed because in the past their governments took major responsibility to promote economic growth. There was also a lot of protectionism and intervention in technology transfer. There was an attempt to provide some sort of equality, education, health, and other services to help enhance the nation.

The industrialized nations have understood that some forms of protection allow capital to remain within the economy, and hence via a multiplier effect, help enhance the economy.

Yet, as seen in the structural adjustment initiatives and other western-imposed policies, the developing nations are effectively being forced to cut back these very same provisions that have helped the developed countries to prosper in the past.

The extent of the devastation caused has led many to ask if development is really the objective of the IMF, World Bank, and their ideological backers. Focusing on Africa as an example:

The past two decades of World Bank and IMF structural adjustment in Africa have led to greater social and economic deprivation, and an increased dependence of African countries on external loans. The failure of structural adjustment has been so dramatic that some critics of the World Bank and IMF argue that the policies imposed on African countries were never intended to promote development. On the contrary, they claim that their intention was to keep these countries economically weak and dependent.

The most industrialized countries in the world have actually developed under conditions opposite to those imposed by the World Bank and IMF on African governments. The U.S. and the countries of Western Europe accorded a central role to the state in economic activity, and practiced strong protectionism, with subsidies for domestic industries. Under World Bank and IMF programs, African countries have been forced to cut back or abandon the very provisions which helped rich countries to grow and prosper in the past.

Even more significantly, the policies of the World Bank and IMF have impeded Africa’s development by undermining Africa’s health. Their free market perspective has failed to consider health an integral component of an economic growth and human development strategy. Instead, the policies of these institutions have caused a deterioration in health and in health care services across the African continent.

While the phrase Welfare State often conjures up negative images, with regards to globalization, most European countries feel that protecting their people when developing helps society as well as the economy.

It may be that for real free trade to be effective countries with similar strength economies can reduce such protective measures when trading with one another. However, for developing countries to try to compete in the global market place at the same level as the more established and industrialized nations—and before their own foundations and institutions are stable enough—is almost economic suicide.

An example of this can be seen with the global economic crisis of 1997/98/99 that affected Asia in particular. A UN report looking into this suggested that such nations should rely on domestic roots for growth, diversifying exports and deepening social safety nets. For more about this economic crisis and this UN report, go to this web site’s section on debt and the economic crisis.

 

The type of trade is important. As the UN report also suggested, diversification is important. Just as biodiversity is important to ensure resilience to whatever nature can throw at a given ecosystem, diverse economies can help countries weather economic storms. Matthew Lockwood is worth quoting in regards to Africa:

What Africa needs is to shake off its dependence on primary commodity exports, a problem underlying not only its marginalization from world trade but also its chronic debt problems. Many countries rely today on as narrow a range of agricultural and mineral products as they did 30 years ago, and suffer the consequences of inexorably declining export earnings. Again, the campaigners’ remedy—to improve market access for African exports to Europe and America—is wide of the mark.

Asia too has seen development where policies counter to neoliberalism have been followed, as Lockwood also notes.

 

To see more about the relationship of protectionism with free trade, check out this site’s section on Free Trade, which also discusses protectionism and its pros and cons.

 

Structural Adjustment in Rich Countries

As the global financial crisis which started in the West around 2008 has taken hold, many rich nations themselves are facing economic problems. Perhaps surprisingly many have prescribed to themselves structural adjustment and austerity programs. Some have been pressured onto them by others. For example, in Europe, Germany is influential in requiring austerity measures if countries want bailouts from Germany or the European Union.

For more about the austerity measures being put in, and how some of it seems ideologically based in fact of evidence that it is not working — or even making the economy worse — see this site’s section on the global financial crisis.

 

IMF and World Bank

The IMF and World Bank’s policies are very different now from their original intent, as summarized here by the John F. Henning Center for International Labor Relations:

The International Monetary Fund and the World Bank were conceived by 44 nations at the Bretton Woods Conference in 1944 with the goal of creating a stable framework for post-war global economy. The IMF was originally envisioned to promote steady growth and full employment by offering unconditional loans to economies in crisis and establishing mechanisms to stabilize exchange rates and facilitate currency exchange. Much of that vision, however, was never born out. Instead, pressured by US representatives, the IMF took to offering loans based on strict conditions, later to be known as structural adjustment or austerity measures, dictated largely by the most powerful member nations. Critics charge that these policies have decimated social safety nets and worsened lax labor and environmental standards in developing countries. The World Bank (The International Bank for Reconstruction and Development) was created to fund the rebuilding of infrastructure in nations ravaged by World War Two. Its vision too, however, soon changed. In the mid 1950’s, the Bank turned its attention away from Europe to the Third World, and began funding massive industrial development projects in Latin American, Asia, and Africa. Many scholars and activists contend that the Bank’s aggressive dealings with developing nations, which were often ruled by dictatorial regimes, exacerbated the developing world’s growing debt crisis and devastated local ecologies and indigenous communities. Both IMF and World Bank policies remain a source of heated debate.

Although their goals are slightly different, the IMF and World Bank policies complement each other:

World Bank and IMF adjustment programs differ according to the role of each institution. In general, IMF loan conditions focus on monetary and fiscal issues. They emphasize programs to address inflation and balance of payments problems, often requiring specific levels of cutbacks in total government spending. The adjustment programs of the World Bank are wider in scope, with a more long-term development focus. They highlight market liberalization and public sector reforms, seen as promoting growth through expanding exports, particularly of cash crops.

Despite these differences, World Bank and IMF adjustment programs reinforce each other. One way is called cross-conditionality. This means that a government generally must first be approved by the IMF, before qualifying for an adjustment loan from the World Bank. Their agendas also overlap in the financial sector in particular. Both work to impose fiscal austerity and to eliminate subsidies for workers, for example. The market-oriented perspective of both institutions makes their policy prescriptions complementary.

But economics is often driven by politics. As a result of policies by the IMF, World Bank and various powerful nations, basic human rights have been severely undermined in many countries, as also noted sharply by Global Exchange:

By insisting that national leaders place the interests of international financial investors above the needs of their own citizens, the IMF and the World Bank have short circuited the accountability at the heart of self-governance, thereby corrupting the democratic process. The subordination of social needs to the concerns of financial markets has, in turn, made it more difficult for national governments to ensure that their people receive food, health care, and education—basic human rights as defined by the Universal Declaration of Human Rights. The Bank’s and the Fund’s erosion of basic human rights and their perversion of the democratic process have made the institutions a clear and present threat to the well being of hundreds of millions of people worldwide.

For decades, the IMF and World Bank have been largely controlled by the developed nations such as the USA, Germany, UK, Japan etc. (The IMF web site has a breakdown of the quotas and voting powers.) The US, for example, controls 17% of the voting power at the IMF. Until November 2010, an 85% majority was required for a decision, so the US effectively had veto power at the IMF. In addition, the World Bank is 51% funded by the U.S. Treasury.

 

The global financial crisis from 2008 onwards has resulted in some shifts in power, such that some leading developing countries have finally managed to break some of the control at the IMF and get more seats and votes. While some say that parts of Europe have resisted giving up some share which would be appropriate, the changes also mean the US no longer has veto power that it had for decades.

 

Journalist John Pilger also provides a political aspect to this:

Under a plan devised by President Reagan’s Secretary to the Treasury, James Baker, indebted countries were offered World Bank and IMF servicing loans in return for the structural adjustment of their economies. This meant that the economic direction of each country would be planned, monitored and controlled in Washington. Liberal containment was replaced by laissez-faire capitalism known as the free market.

The IMF and World Bank’s policies have indeed been heavily criticized for many years and are seen as unhelpful and sometimes, unaccountable, as they have led to an increased dependency by the developing countries upon the richer nations, as also mentioned at the top of this page. At the same time, the different cultures are not respected when it comes to prescribing structural adjustment principles, either.

In Africa, the effects of policies such as SAPs have been felt sharply. As an example of how political interests affect these institutions, Africa Action describes the policies of the IMF and World Bank, but also hints at the influences behind them too:

Over the past two decades, the World Bank and International Monetary Fund (IMF) have undermined Africa’s health through the policies they have imposed. The dependence of poor and highly indebted African countries on World Bank and IMF loans has given these institutions leverage to control economic policy-making in these countries. The policies mandated by the World Bank and IMF have forced African governments to orient their economies towards greater integration in international markets at the expense of social services and long-term development priorities. They have reduced the role of the state and cut back government expenditure.

…

The World Bank and IMF were important instruments of Western powers during the Cold War in both economic and political terms. They performed a political function by subordinating development objectives to geostrategic interests. They also promoted an economic agenda that sought to preserve Western dominance in the global economy.

Not surprisingly, the World Bank and IMF are directed by the governments of the world’s richest countries. Combined, the Group of 7 (U.S., Britain, Canada, France, Germany, Italy and Japan) hold more than 40% of the votes on the Boards of Directors of these institutions. The U.S. alone accounts for almost 20%. (The U.S. holds 16.45% of the votes at the World Bank, and over 17% of the votes at the International Monetary Fund.)

 

But it is not just health. Basic food security has also been undermined. An example in 2002 at least made it to mainstream media attention in UK. As Ann Petifor, head of debt campaign organization, Jubilee Research noted, the IMF forced the Malawi government to sell its surplus grain in favor of foreign exchange just before a famine struck. This was explicitly so that debts could be repaid. 7 million of the total 11 million population were severely short of food.

But its [sic] worse than that, said Petifor. Because Malawi is indebted, her economic policies are effectively determined by her creditors—represented in Malawi by the IMF. Malawi spent more than the budget the foreign creditors set. As a result the IMF withheld $47 million in aid. Other western donors, acting on advice from IMF staff, also withheld aid, pending IMF approval of the national budget. (Emphasis added).

To add to the humiliation of the Malawian government, the IMF has also suspended the debt service relief for which she was only recently deemed eligible—because she is off track.

That is not the end of the story unfortunately. As Petifor also mentioned, under the economic program imposed by her creditors, Malawi removed all farming and food subsidies allowing the market to determine demand and supply for food. This reduced support for farmers, leading many to go hungry as prices increased. As she also noted, the rich countries, on the other hand, do not follow their own policies; Europe and the US subsidize their agriculture with billions of dollars.

But the US, for example, sees this situation as exploitable. Petifor again:

US Secretary for Agriculture, Dan Glickman, illustrates well the US attitude to countries suffering famine and in need of food aid:

Humanitarian and national self interest both can be served by well-designed foreign assistance programs. Food aid has not only met emergency food needs, but has also been a useful market development tool. (OXFAM report: Rigged Rules and Double Standards: Trade Globalization and the Fight Against Poverty by Kevin Watkins and Penny Fowler)

 

It is not just the US that uses aid in this way. Most rich countries do this. And it isn’t just food aid, but aid in general that is often used inappropriately. The Guardian reported (August 29, 2005) how £700,000 (about $400,000) of £3 million in British aid to Malawi was mis-spent on US firms’ hotel and meal bills. Even notebooks and pens were flown in from Washington rather than purchased locally. See this site’s section on foreign aid for more details about the issue of foreign aid and its misuse.

IMF and World Bank Reform?

Throughout the period of structural adjustment from the 80s, various people have called for more accountability and reform of these institutions, to no avail.

Following the IMF and World Bank protests in Washington, D.C on April 16, 2000, and coinciding with the Meltzer Report criticizing the IMF and World Bank, there has been more talk about IMF reforms. At first thought the reforms sound like the protests and other movements’ efforts are paying off. However, as Oxfam noted, some of the reform suggestions may not be the way to go and may do even more harm than good. In their own words:

While some of the reform proposals now being debated are sensible, the thrust of the reform agenda is a source of concern for the following reasons:

• It reflects a growing disenchantment with multilateralism
• It threatens to replace inappropriate IMF conditions with inappropriate conditions dictated by the G7 countries
• It fails to address the real policy issues at the heart of the IMF’s failure as a poverty reduction agency
• It does not address the politicization of IMF loans, especially with regard to the US Treasury’s influence
• It does not adequately consider the democratic deficit which prevents poor countries from having an effective voice in the IMF

On the one hand it seems appropriate to demand an end to the IMF. However, such an abrupt course of action may itself lead to a gaping hole in international financial policies without an effective alternative. And that is another topic in itself!

Into 2008, and the global financial crisis has been so severe that rich countries have been affected. Calls for reform have therefore increased, even from within some of these institutions themselves. These calls have included more transparency and accountability as well as specifics such as creating a more stable financial system, and cracking down on tax havens.

This time, however, developing countries are demanding more voice, and have more power that in past years to try and affect this. In April, the IMF conceded just 3% of rich country votes to the developing countries, but developing countries rightly want more.

Historically democracy and power have not gone well together, and as journalist John Vandaele has found,

The most powerful international institutions tend to have the worst democratic credentials: the power distribution among countries is more unequal, and the transparency, and hence democratic control, is worse.

If change is to be effective, these fundamental issues will need resolving. Powerful countries may try to reshape things only in so far as they can get themselves out of trouble and if they can avoid it, they will try to limit how much power they concede to others. And perhaps a sad reality of geopolitics will be that any emerging nations that become truly influential and powerful in this area will one day try to do the same. For now, however, developing countries generally have a common agenda of more voice and will therefore champion common principles of better democracy and accountability.

 

IMF and World Bank Admit Some of Their Policies Do Not Work

Recently, we have heard members of the World Bank and IMF entertain the possibility that maybe their structural adjustment policies did have some negative effects.

For example, the Bretton Woods Project revealed that in 2000, an internal World Bank report has concluded that the poor are better off without structural adjustment. The report itself is titled The Effect of IMF and World Bank Programs on Poverty. (Requires a PDF reader.)

The report doesn’t really look in detail at why the poor benefit less from adjustment. Instead it speculates that they may be ill-placed to take advantage of new opportunities created by structural adjustment reforms because, as the Bretton Woods Project insinuates, the report implies that the poor have neither the skills or financial resources to benefit from high-technology jobs and cheaper imports.

Now, it may not have been the intent of the report to do so, but one can’t help but notice how it almost seems as though while they may admit that structural adjustment didn’t benefit the poor, it is almost as though the Bank tries to subtly absolve itself by subtly blaming the poor for not benefiting from this. When structural adjustments have required cut backs in health, education and so on, then what would one expect?

In March 2003, the IMF itself admitted in a paper that globalization may actually increase the risk of financial crisis in the developing world. Globalization has heightened these risks since cross-country financial linkages amplify the effects of various shocks and transmit them more quickly across national borders the IMF notes and adds that, The evidence presented in this paper suggests that financial integration should be approached cautiously, with good institutions and macroeconomic frameworks viewed as important. In addition, they admit that it is hard to provide a clear road-map on how this should be achieved, and instead it should be done on a case by case basis. This would sound like a move slightly away from a one size fits all style of prescription that the IMF has been long criticized for.

As mentioned further above, and as many critics have said for a long time, opening up poorer countries in an aggressive manner can leave them vulnerable to large capital volatility and outflows. Reuters, reporting on the IMF report also noted that the IMF sounded more like its critics when making this admission.

In theory there may indeed be merit to various arguments supporting global integration and cooperation. But politics, corruption, geopolitics, as well as numerous other factors need to be added to economic models, which could prove very difficult. As suggested in various parts of this site, because economics is sometimes separated from politics and other major issues, theory can indeed be far from reality.

Sitglitz, the former World Bank chief economist, is worth quoting a bit more to give an insight into the power that the IMF has, and why accusations of it and its policies being colonial-like are perhaps not too far off:

…The IMF is not particularly interested in hearing the thoughts of its client countries on such topics as development strategy or financial austerity. All too often, the Fund’s approach to the developing countries has had the feel of a colonial ruler. A picture can be worth a thousand words, and a single picture snapped in 1998, shown throughout the world, has engraved itself in the minds of millions, particularly those in the former colonies. The IMF’s managing director, Michel Camdessus (the head of the IMF is referred to as its Managing Director), a short, neatly dressed former French Treasury bureaucrat, who once claimed to be a Socialist, is standing with a stern fact and crossed arms over the seated and humiliated president of Indonesia. The hapless president was being forced, in effect, to turn over economic sovereignty of his country to the IMF in return for the aid his country needed. In the end, ironically, much of the money went not to help Indonesia, but to bail out the colonial power’s private sector creditors. (Officially, the ceremony was the signing of a letter of agreement, an agreement effectively dictated by the IMF, though it often still keeps up the pretense that the letter of intent comes from the country’s government!)

Defenders of Camdessus claim the photograph was unfair, that he did not realize that it was being taken and that it was viewed out of context. But that is the point—in day-to-day interactions, away from cameras and reporters, this is precisely the stance that the IMF bureaucrats take, from the leader of the organization on down. To those in the developing countries, the picture raised a very disturbing question: Had things really changed since the official ending of colonialism a half century ago? When I saw the pictures, images of other signings of agreements came to mind. I wondered how similar this scene was to those marking the opening up of Japan with Admiral Perry’s gunboat diplomacy or the end of the Opium Wars or the surrender of maharajas in India.

The above passage is from Stiglitz’s book, Globalization and its Discontents. In it, he highlights many, many more issues, criticisms and aspects of IMF/Washington Consensus ideological fanaticism that have hindered development, and in many cases, as he points out, worsened situations. It is surprising and also quite illuminating to get the insider image of the workings of some large institutions in this way.

Into mid-2005, and though not as vocal as Stiglitz, others at the IMF are also questioning the institution’s strict adherence to the free market doctrine, as Bretton Woods Project reveals. One of the authors of a paper from the IMF concedes the failure of IFI policies for the poorest countries saying that Much of sub-Saharan Africa has been under IMF and World Bank programmes during the last three decades, and while a modicum of macroeconomic stability has been achieved, progress has been spotty at best. Another working paper from the IMF suggests that trade liberalization has crippled some governments of poorer countries, and that prospects for further trade liberalization in poor countries may be troubling.

 

PSRPs replace SAPs but still SAP the poor

The IMF in 1999 replaced Structural Adjustments with Poverty Reduction Growth Facility (PRGP) and Policy Framework Papers with Poverty Reduction Strategy Papers (PSRP) as the new preconditions for loan and debt relief. However, the effect is still the same as the preceding disastrous structural adjustment policies, as the World Development Movement reported. Many civil society organizations are increasing their critique of the PSRPs.

[T]he PRSP process is simply delivering repackaged structural adjustment programmes (SAPs). It is not delivering poverty-focused development plans and it has failed to involve civil society and parliamentarians in economic policy discussions.

As Jubilee Research (formerly Jubilee 2000, the debt relief campaign organization) adds:

Joint World Bank/IMF papers (39) on the PRSP stress poverty reduction and that the paper must be country-driven with the broad participation of civil society. But the IMF in its own papers stresses that this is in addition to everything that was required in the past; none of the old Washington consensus policies have been removed. In a paper for a meeting of African finance ministers, 18-19 January 2000, to explain the new PRGF, (40) the IMF stresses that it will demand of all countries a more rapid privatisation process and a faster pace of trade liberalization—the conditions criticized by Joseph Stiglitz when he was chief economist of the World Bank.

… James Wolfensohn, president of the World Bank, commented that it is also clear to all of us that ownership is essential. Countries must be in the driver’s seat. The theory is fine, but the practice distorts the meaning of these words. Countries are in the driving seat only as the chauffeur of the Washington Consensus limousine. And as Angela Woods and Matthew Lockwood comment, all too often ownership relates to persuading the public that reforms are necessary and good in order to minimize political opposition to them.

… The implication is that governments wishing to take an alternative economic approach must expect to forgo aid and debt relief. But Wood and Lockwood note that not only does the Bank define a good policy environment very narrowly, the consensus on what defines good policies is subject to change. What may have been regarded as a good policy yesterday may not be today.

… It is impossible to ignore the sweeping critique, by the second most important man in the World Bank [Joseph Stiglitz], of policies still being imposed on poor countries as a condition of debt cancellation and aid. And it must be remembered that these are being imposed in the names of good governance, sound policies and poverty reduction.

Stiglitz notes that had the US followed IMF policy it would have not achieved its remarkable expansion.

Additionally, as this book reports (see pages 37-38 of the PDF online version), [A] senior [World] Bank official described the PRSP-PRGF as a compulsory programme, so that those with the money can tell those without the money what they need in order to get the money. It would be worth additionally noting the cruel irony that nations that are those with the money today have largely accumulated it through plunder via imperialism and colonialism upon those very nations who today are without the money. Prescribing how to get the money, in that context, is dubious indeed.

For additional information and critique, you can see the following links as well:

• Reports from the World Development Movement:
  • One size for all: A study of IMF and World Bank Poverty Reduction Strategies, September 2005
  • Still Sapping the Poor: A critique of IMF poverty reduction strategies, by Charles Abugre, June 2000
  • Polices to Roll-back the State and Privatize? from the World Development Movement, April 2001 provides additional studies and examples
• From the Bretton Woods Project, an IMF and World Bank monitoring organization:
  • Structural Adjustment/PRSP section of their web site
  • The ABC of the PRSP, an introduction to the new Bank and Fund Poverty Reduction Strategy Papers, by Angela Wood, April 2000
• From the Focus on the Global South:
  • The World Bank and the PRSP: Flawed Thinking and Failing Experiences

 

The Asian Development Bank

Like the IMF and World Bank, the Asian Development Bank (ADB) has also fallen under much criticism for its policies, which also require structural adjustments for loans. Through its policies it encourages export-driven, capital and resource-intensive development, just like the other international financial institutions. The largest financing and influence of the bank comes from Japan and the United States.

As summarized from chapter 2 of The Transfer of Wealth; Debt and the making of a Global South:

The escalating dependence of developing countries in the [Asia] region on debt-financed development has a number of negative consequences. These include:

1. the neglect of domestic savings as a source of development finance;
2. cuts in government expenditure for basic social services and basic infrastructure in order to meet debt servicing requirements;
3. an escalation of export-oriented resource extraction to generate hard currency receipts for debt servicing;
4. a reorientation of agricultural production from meeting local needs to production for export in highly skewed regional and global markets;
5. increased dependence on imported, capital intensive technologies as a consequence of tied procurement and project design processes led by foreign consulting companies;
6. increased dependence on and influence of international financial institutions such as the ADB and the World Bank, particularly through the imposition of debt-induced structural adjustment programs and policy based lending.

Also, as with the IMF and World bank, and mentioned in the above link, governments are using the rubric of poverty reduction to channel taxpayer funds to their private sector companies via the ADB. This is occurring with little or no pubic scrutiny although government representatives will, if necessary, appeal to commercial self-interest to justify continued contributions to the ADB and other multilateral development banks. As with the IMF for example, loans by the IMF are guaranteed by the creditor country. In essence then, tax payers from the lending countries will bail out the IMF and ADB if there are problems in their policies.

(For more details, statistics etc., the above link is a good starting place.)

The ADB has mentioned its desires to promote good governance. However, Aziz Choudry is highly critical in terms of whom this governance would actually be good for:

It has nothing to do with democratization, humanitarianism or support for peoples’ rights. It is a euphemism for a limited state designed to service the market and undermine popular mandates. The term is explicitly linked to the kinds of structural adjustment measures promoted by the ADB—measures for which there is little popular support and which are rapidly increasing economic inequalities.

Structural adjustment policies have therefore had far-reaching consequences around the world. Yet, this is just one of the mechanisms whereby inequality and poverty has been structured into laws and institutions on a global scale.