IMF, Worldbank and Democracy

Index

1.  INTRODUCTION  2

2.  STRUCTURAL ADJUSTMENT: ECONOMIC AND SOCIAL ISSUES  3

2.1  20 Years of SAPs - An Outline  3

2.2  Criticism on the BWI  4

2.2.1  Economic Criticism  4

2.2.2  Social Criticism  5

2.2.3  How the BWI deal with criticism  6

2.3  Conclusions  7

3.  STRUCTURAL ADJUSTMENT AND DEMOCRATIC DEVELOPMENT  8

3.1  The Public Image of the Bretton Wood Institutions  8

3.1.1  Painful memories  8

3.1.2  The BWI as US-dependent institutions  9

3.1.3  The BWI and Neo-liberalism  9

3.1.4  The Impact on Democratic Development  10

3.2  Good Governance and its Implications  11

3.2.1  Good Governance as a WB/IMF policy  11

3.2.2  Criticism on Good Governance  12

3.2.3  Good Governance and Democracy  13

4.  CONCLUSION  14

  BIBLIOGRAPHY  16

  Abbreviations  

  BWI - Bretton-Woods Institutions PFP - Policy Framework Papers  

  ESAF - Enhanced Structural Adjustment PRGF - Poverty Reduction and Growth  

  Facilities Facility  

IBRDAAAAAAA  International Bank for Recon- SAP - Structural Adjustment Program  

  struction and Development  

IMFAAAAAAA  International Monetary Fund WB - World Bank  

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1. Introduction

Since 1982, when the debt crisis broke out in Latin America the continuous presence of IMF and World Bank has become part of the every day life of Latin American countries. While the programs have changed both in nature and in size, the criticism on the structural adjustment programs (SAPs) has been a constant factor throughout the last years ¹ . The debate on SAPs focused basically(with minor variations) on two key questions: Their effect on the economy and their social costs, the latter including income distribution ² . The tendency of scientific studies reached from vigorous defence of IMF/WB policy to complete rejection. The vast majority of the studies were performed by economists applying economic criteria. The economic perspective is without any doubt the centre of the issue and thus absolutely indispensable. However, investigating the consequences of SAPs without due regard to the political side of the issue will result in an incomplete picture. Many economists regard the political consequences of SAPs as a mere economic factor that has to be considered. From a political scientist’s viewpoint on the other hand, the effect of SAPs on the democratic development of a country is the most important issue. One should keep in mind though that WB and IMF are, according to their Articles of Agreements, politically neutral. But due to the strong influence the institutions exercise, political effects are inevitable. This paper will attempt to analyse these political effects of SAPs. The question it seeks to answer is, how the adjustment programs of World Bank and IMF influence democratic development in Latin America. Nevertheless, economic aspects cannot be excluded: Economic success can stabilise a democratic government the same way an economic crisis can destabilise it. Therefore the second chapter of this paper will deal with economic and social aspects of SAPs (2.). It will reflect the arguments of critics as well as supporters of WB/IMF policy and describe the development of adjustment programs over the last two decades. The third chapter investigates those political effects that are caused by SAPs independent of their economic outcome(3.). It will first investigate the image of the World Bank and IMF and then examine the implications of good governance. The results will be evaluated using the concept of political culture. In the conclusion it will then be possible to draw some conclusions about the political effects of SAPs and to propose policy improvements. As almost all Latin American countries have at least formally democratic systems, this paper will focus on the effects on

¹ Cf. e.g. Rainer Tetzlaff, Weltbank und Währungsfond - Gestalter der Bretton-Woods Ära, Opladen 1996, pp.

26-30.

² Since the beginning of the end of the 80s, environmental costs could be added to this list. Due to the limited extent of this paper they cannot be included.

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existing democracies. Effects of SAPs on authoritarian regimes may vary and are not subject

of this investigation.

Drafting this paper I have relied on a great number of journal articles and online

resources. Two of the most important sources were the IMF website ³ and Weltbank und

Währungsfond - Gestalter der Bretton-Woods-Ära by Rainer Tetzlaff ⁴ . The paper isnot an

empirical study and will thus rely on empirically derived results from other studies as well as

on concepts and arguments.

2. Structural Adjustment: Economic and Social Issues

In the following chapter the main economic issues of IMF/WB programs will be discussed.

The basic content of SAPs and their evolution throughout the last 20 years is briefly

summarised (2.1). A second part treats the main lines of criticism of the BWI and their

reactions(2.2). This chapter can not deal in depth with the economic issues, its function is to

outline the most important concepts and problems.

2.1 20 Years of SAPs - An Outline

Throughout the last 20 years SAPs have followed the so called “Washington Consensus”

(although the term itself was first used in 1990). It contains the following policy guidelines: “

• Fiscal discipline

• Public expenditure prioritization, e.g. killing "white elephants" (uneconomic investment projects)

• Tax reform

• Financial liberalization

• Unified and competitive exchange rate

• Trade liberalization

• Liberal foreign direct investment regime

• Privatization

• Weeding out regulations which do not serve the public interest, and strengthening those that do, such as banking supervision.

• Secure property rights without excessive transaction cost.” 5

After the strategy of Import Substitution Industrialization (ISI) that was followed by many

Latin American Countries since the 1960s could not prevent the debt crisis, the Washington

Consensus meant a complete turnaround in economic policy. It derives from two main

³ www.imf.org

⁴ Tetzlaff, Weltbank und Währungsfond.

⁵ Guy P. Pfeiffer, “The way ahead. Economic Reform in Latin America”, IFC Economics department (ed.), Dec. 12 ^th 2000.

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assumptions: The first one is that free trade and a low level of state interference in the economy are the most efficient means to ensure a growing economy. Secondly it is assumed that after a short, painful period of adaptation the profits of growth will “trickle down” to the poor and “a high growth rate would take care of poverty related problems” ⁶ . Reacting on partly devastating social consequences of SAPs and on harsh criticism by many analysts (cf. section(2.2), the BWI developed “Structural adjustment programs of the 2 ^nd and 3 ^rd generation” ⁷ . Social funds and special poverty relief programs were designed to guarantee “adjustment with a human face” ⁸ . The IMF, which had never regarded itself as a development institution introduced special facilities for low income countries. As criticism continued these “Enhanced Structural Adjustment Facility” (ESAF) were renamed and redesigned as Poverty Reduction and Growth Facility (PRGF) in 1999 ⁹ .

2.2 Criticism on the BWI

Many Critics accuse the BWI of only acting on behalf of the industrialized countries, ensuring the loans of the international banks. Biplab DASGUPTA points out that the “official motive for giving support to structural adjustment was to rescue the hard-pressed debtor countries, but a less charitable explanation is that the main concern of the BWI was to save the global private banking system from bankruptcy” ¹⁰ . This argument is supported by the power distribution in the BWI: The five largest economic powers hold 40.32% of the voting power in the IMF and 37.5% in the IBRD, the most important organisation of the World Bank Group ¹¹ .

2.2.1 Economic Criticism

A large part of criticism focuses on economic aspects of SAPs. It is frequently argued that the ISI did not fail as clearly as many supporters of SAPs claim. This has led to the “Nuevo Cepalismo” ¹² or neo-structuralism which tries to improve on the evident failures of the old structuralism in the 1970 instead of changing the entire system ¹³ . Simultaneously

⁶ Biplab Dasgupta, Structural adjustment, global trade and the new political economy of development, London

1998, p. 98.

⁷ Tetzlaff, Weltbank und Währungsfond, p. 134. S.K.

⁸ Ibid. The term “adjustment with a human face” was taken from a 1988 UNICEF report with this title.

⁹ Cf. IMF, “The IMF’s Poverty Reduction and Growth Facility. A Factsheet”, , Dec. 26 ^th 2000.

¹⁰ Dasgupta, Structural Adjustment, p. 82.

¹¹ World Bank, “International Bank for Reconstruction and Development. Voting Power of Executive Directors“, Jan. 16 ^th 2001 and IMF, “IMF Members' Quotas and Voting Power, and IMF Governors”, , Jan. 16 ^th 2001.

¹² The CEPAL, the UN Economic Commission for Latin America, promoted the ISI until the late 1970s.

¹³ Cf. Chris van der Borgh, “A Comparison of Four Development Models in Latin America”, in: The European Journal of Development Research, Vol. 7, No. 2, 1995, pp.276-292, here pp.278f.