The World Bank and the IMF

01 Mayo 2006
Walden Bello

The World Bank and the IMF
Walden Bello
with Shea Cunningham
North South View, July 1994

Walden Bello and Shea Cunningham are co-authors of the recently published book, Dark Victory: The US, Structural Adjustment, and Global Poverty (London: Food First, 1994), on which this article is based. Dark Victory can be obtained by writing or calling Food First, 398 60th St., Oakland, CA 94618. Tel. (510) 654 4400.

1994 marks the 50th year of the founding of the International Monetary Fund (IMF) and the World Bank at Bretton Woods, New Hampshire, during an Anglo-American-managed conference attended by, among others, Lord Keynes.

For people in the more than 70 countries which have been subjected to 566 IMF and World Bank stabilization and "structural adjustment" programs (SAPs) in the last 14 years, there is hardly any reason to celebrate this anniversary. Indeed, from Nigeria to Jamaica, "Sap" has entered popular discourse as a synonym for economic misery.

And far from being the promoters of global economic growth and stability envisioned by Keynes, the World Bank and IMF are a central cause of the stagnation and instability that plague the world economy.

At the onset of the global debt crisis in the early 1980s, Third World countries were told that the "structural reforms" promoted by these programs were essential to sustained growth and economic stability. Faced with the threat of a cutoff of external funds needed to service the mounting debts they had incurred from the western private banks that had gone on a lending binge in the 1970s, these countries had no choice but to implement the painful measures demanded by the Bank and Fund. These usually included:

  • cutbacks in government expenditures, especially in social spending;
  • rollback or containment of wages;
  • privatization of state enterprises and deregulation of the economy;
  • elimination or reduction of protection for the domestic market and less restrictions on the operations of foreign investors;
  • successive devaluations of the local currency in the name of achieving export competitiveness.

Rationale and Reality

In an effort to counter a rising crescendo of criticism, the World Bank has released a report claiming that African countries that faithfully follow SAP prescriptions have better economic growth rates than those that don't. Instead, the report has come across as a classic methodological exercise of how to manipulate marginal statistical differences for ideological ends. The real world provided a harsh counterpoint shortly after the report appeared earlier this year: Mali is one of the World Bank and IMF's model African pupils, having fully implemented, over the last 12 years, all key elements of the SAP program, including massive salary cutbacks, devaluation of the currency, and liquidation of state enterprises. But with their purchasing power declining by over 117 per cent since the start of adjustment, people finally rebelled "against SAP" this February, barricading streets and ransacking buildings.

A similar unmasking of another model SAP occurred more than a month earlier, in early January. The indigenous Zapatista rebellion in Chiapas, Mexico drew global attention not only to popular opposition to the North American Free Trade Agreement (NAFTA) but also to the staggering consequences of 13 years of structural adjustment: some 20 percent of the work force unemployed, another 40 percent underemployed, over half the population below the poverty line, and massive discontent all around.

In fact, structural adjustment has failed-miserably-to accomplish what World Bank and IMF technocrats said it would do: promote growth, stabilize the external accounts, and reduce poverty.

Institutionalizing Economic Stagnation. In contrast to the positive evaluation of the recent World Bank report on structural adjustment in Africa, an earlier global survey of the impact of adjustment over a 15 year period by the IMF reported the uncomfortable finding that "the growth rate is significantly reduced in program countries relative to the change in non-program countries." For non-doctrinaire economists, in fact, this was not surprising, for structural adjustment had brought about in Third World countries the same conundrum that stymied the mature industrial economies during the Great Depression, and for which Keynesian demand-side economics was designed as the solution. That is, economies under adjustment are stuck in a low-level trap, in which low investment, increased unemployment, reduced social spending, reduced consumption, and low output interact to create a vicious cycle of stagnation and decline, rather than a virtuous circle of growth, rising employment, and rising investment, as originally envisaged in World Bank theory. In the words of Massachusetts Institute of Technology Professor Rudiger Dornbusch, "[E]ven with major adjustment efforts in place, countries do not fall back on their feet running; they fall into a hole."

Guaranteeing Debt Repayments. Despite global adjustment, the Third World's debt burden rose from $785 billion at the beginning of the debt crisis to nearly $1.5 trillion in 1993. Thirty-six of Africa's 47 countries have been subjected to structural adjustment by the Fund and Bank, yet the total external debt of the continent is now 110 percent of its gross national product.

Structural adjustment loans from the World Bank and the IMF were given to indebted countries to enable the latter to make their immediate interest payments to the western commercial banks. Having done this, the Bank and the Fund then went on to apply draconian adjustment policies that would assure a steady supply of repayments in the medium and long term. By having Third World economies focus on production for export, foreign exchange would be gained which could be channeled into servicing dollar-denominated foreign debt.

The policy was immensely successful, effecting as it did an astounding net transfer of financial resources from the Third World to the commercial banks that amounted to $178 billion between 1984 and 1990. So massive was the decapitalization of the South that a former executive director of the World Bank exclaimed: "Not since the conquistadors plundered Latin America has the world experienced a flow in the direction we see today."

Intensifying Poverty. If structural adjustment has brought neither growth nor debt relief, it has certainly intensified poverty. In Latin America, according to Inter-American Development Bank president Enrique Iglesias, adjustment programs had the effect of "largely canceling out the progress of the 1960s and 1970s." The numbers of people living in poverty rose from 130 million in 1980 to 180 million at the beginning of the 1990s. Structural adjustment also worsened what was already a very skewed distribution of income, with the result that today, the top 20 percent of the continent's population earn 20 times that earned by the poorest 20 percent.

In Africa adjustment has been a central link in a vicious circle whose other elements are civil war, drought, and the steep decline in the international price of the region's agricultural and raw material exports. The number of people living below the poverty line now stands at 200 million of the region's 690 million people, and even the least pessimistic projection of the World Bank sees the number of poor rising by 50 percent to reach 300 million by the year 2000.

Adjusting the Environment. IMF and Bank-supported adjustment policies have been among the major contributors to environmental destruction in the Third World. By pushing countries to increase their foreign exchange to service their foreign debt, structural adjustment programs have forced them to superexploit their exportable resources. In Ghana, regarded as a "star pupil" by the Fund and the Bank, the government has moved to intensify commercial forestry, with World Bank support. Timber production more than doubled between 1984 and 1987, accelerating the destruction of the country's already much-reduced forest cover, which is now 25 percent of its original size. The country is expected to soon make the transition from being an net exporter to being a net importer of wood. Indeed, economist Fantu Cheru predicts that Ghana could well be stripped of trees by the year 2000.

Impoverishment, claims the World Bank, is one of the prime causes of environmental degradation because "land hungry farmers resort to cultivating erosion-prone hillsides and moving into tropical forest areas where crop yields on cleared fields usually drop after just a few years."

What the World Bank fails to acknowledge is that its structural adjustment programs have been among the prime causes of impoverishment, and thus a central cause of ecological degradation. In the Philippines, for instance, a World Resources Institute study claims that the sharp economic contraction triggered by Bank-imposed adjustment in the 1980s forced poor rural people to move into and superexploit open access forests, watersheds, and artisanal fisheries.

The Strategic Objective

But if structural adjustment programs have had such a poor record, why do the World Bank and the Fund continue to impose them on much of the South?

This question is vali, only if one assumes that the Bank and Fund's intention is to assist Third World economies. Then, the failure of structural adjustment programs can be laid to such things as bad conceptualization or poor implementation. However, it is becoming increasingly clear that, whatever may be the subjective intentions of the doctrinaire technocrats that are tasked to implement them, structural adjustment programs were never meant to succeed. Instead, they have functioned as key instruments in the North's effort to roll back the gains that had been made by the South from the 1950s to 1980s.

These decades were marked by high rates of economic growth in the Third World. They also witnessed successful struggles of national liberation, and the coming together of southern states at the global level to demand a New International Economic Order (NIEO) that would entail a more equitable distribution of global economic power.

Central to the economic achievements of the South was an activist state or public sector. In some countries, the state sector was the engine of the development process. In others, state support was critical to the success of domestic businesses wishing to compete against foreign capital. While private ownership of land, resources, and enterprises was the rule in most of the newly independent societies of the South, and economic exchange was largely mediated by the market, government intervention in economic life was pervasive, and the state had a strategic role in economic transformation.

Contrary to doctrinaire conservative interpretations, the prominence of the state in post-colonial economic development did not stem from a usurpation of the role of private enterprise; rather it was a response to the weakness of private industrial interests. "[T]he state," observes one analyst, "became a surrogate for private enterprise that could drive modernization without challenging....entrenched interests-indeed would continue to protect them-and without turning the country completely over to foreign interests."

In this connection, Third World political and economic elites were Janus-faced. Fearful of insurgent lower-class movements, they cooperated with Washington's anti-Communist campaigns. But partly from a desire to gain popular legitimacy and outmaneuver the left, some Southern elites took increasingly bold moves to gain more control over their economies and a greater share of the surplus being extracted from them in the 1960s and 1970s. Led by the US's most strategic allies in the Persian Gulf, Saudi Arabia and Iran, the Organization of Petroleum Exporting Countries (OPEC) seized control of the pricing of oil via the oil embargo of 1973 and a massive price rise in 1979. Meanwhile, US businesses were alarmed by developments in two key markets. In Brazil, where foreign-owned firms accounted for half of total manufacturing sales, the military-technocrat regime, invoking national security considerations, moved in the late 1970s to reserve the strategic information sector to local industries, provoking bitter denunciation by the then massively dominant IBM (International Business Machines). In Mexico, where foreign firms accounted for nearly 30 percent of manufacturing output, government moves to give local drug manufacturers greater control of the market via no-patent policies provoked threats of disinvestment by the powerful US pharmaceutical industry.

It was not surprising then that when Reaganites came to power, they saw as one of their central missions the resubordination of the Third World. State-assisted capitalism was the key target, and here the anti-South agenda coincided with the free market ideological mindset of the new regime. After a brief period of debate, the mechanism chosen for the dismantling of the economic apparatus of the Third World state was the structural adjustment program of the IMF and the World Bank.

Not surprisingly, few southern governments were willing to accept structural adjustment loans when they were first offered. The onset of the debt crisis in 1982, however, provided the golden opportunity for Washington to simultaneously protect US financial interests and roll back the threat from the South by radically adjusting Third World economies. The US, notes Latin America specialist John Sheahan, took advantage of "this period of financial strain to insist that debtor countries remove the government from the economy as the price of getting credit." Similarly, a survey of structural adjustment programs in Africa carried out by the United Nations Economic Commission for Africa concluded that the essence of these programs was the "reduction/removal of direct state intervention in the productive and distributive sectors of the economy."

The New South

By the end of the 12-year Reagan-Bush era in 1992, the South had been transformed: from Argentina to Ghana, state participation in the economy had been drastically curtailed; government enterprises were passing into private hands in the name of efficiency; protectionist barriers to Northern imports were being eliminated wholesale; restrictions on foreign investment has been radically reduced; and, through export-first policies, the internal economy was more tightly integrated into the capitalist world market.

To be sure, it was not the South alone that suffered from adjustment policies. With the ostensible objective of reducing its trade deficit with the Asian "tiger economies," the US has launched a multipronged offensive designed strategically to radically reduce the leading role of the state in these economies, which even the World Bank in a recent study has grudgingly conceded as a key element in their success. And in the US, adjustment came in the form of Reaganomics-deregulation, radical reductions in tax rates for the rich, gutting of the New Deal safety nets, and the end of the compromise between big capital and big labor mediated by big government. The elimination of state supports for production in rival economies-including Japan and Europe-and state restraints on corporate activity in the home economy: this was the key thrust of a global adjustment program designed to reassert US corporate hegemony globally. But the main brunt of adjustment fell on the South.

The coming to power of a new Democratic administration has not altered Washington's economic policy toward the South. On structural adjustment and trade policies, the Clinton administration has emphasized continuity with the Bush administration. Indeed, the coupling of free market and free trade rhetoric with threats of the unilateral display of US power vis-a-vis all comers-the South, the Newly Industrializing Countries, Europe, and Japan-has, if anything, become more aggressive under Clinton.

The erosion of Third World economies has translated at the international level to the weakening of the formations which the South had traditionally used to attain its collective goal of bringing about a change in the global power equation: the Non-Aligned Movement, the United Nations Conference on Trade and Development (UNCTAD), and the Group of 77. The decomposition of the Third World was felt at the United Nations, where the US was emboldened to once again use that body to front the interests of the North, including providing legitimacy for the US-led invasion of Iraq in 1991.

Rollback via structural adjustment had succeeded.

At the time on independence in the 1950s and 1960s, the peoples of the South were optimistic that the future belonged to them, the 80 percent of the world's population that colonialism had long treated as second or third class citizens of the world. The illusions were gone by the beginning of the 1990s. As the South stood on the threshold of the 21st century, the South Commission captured the essence of its contemporary condition: "It may not be an exaggeration to say that the establishment of a system of international economic relations in which the South's second-class status would be institutionalized is an immediate danger."

Copyright 1994 North South View