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.
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:
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
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.
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.
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:
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:
In addition, as Celine Tan of the Third World Network explains:
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:
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:
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:
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
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:
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:
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:
Although their goals are slightly different, the IMF and World Bank policies complement each other:
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:
Journalist John Pilger also provides a political aspect to this:
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:
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:
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:
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!
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,
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.
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 criticswhen 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 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.
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.
As Jubilee Research (formerly Jubilee 2000, the debt relief campaign organization) adds:
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:
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.
The escalating dependence of developing countries in the [Asia] region on debt-financed development has a number of negative consequences. These include:
the neglect of domestic savings as a source of development finance;
cuts in government expenditure for basic social services and basic infrastructure in order to meet debt servicing requirements;
an escalation of export-oriented resource extraction to generate hard currency receipts for debt servicing;
a reorientation of agricultural production from meeting local needs to production for export in highly skewed regional and global markets;
increased dependence on imported, capital intensive technologies as a consequence of tied procurement and project design processes led by foreign consulting companies;
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:
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.