IMF, Worldbank and Democracy

Index

1. Introduction

2. Structural Adjustment: Economic and Social Issues
2.1 20 Years of SAPs – An Outline
2.2 Criticism on the BWI
2.2.1 Economic Criticism
2.2.2 Social Criticism
2.2.3 How the BWI deal with criticism
2.3 Conclusions

3. Structural Adjustment and Democratic Development
3.1 The Public Image of the Bretton Wood Institutions
3.1.1 Painful memories
3.1.2 The BWI as US-dependent institutions
3.1.3 The BWI and Neo-liberalism
3.1.4 The Impact on Democratic Development
3.2 Good Governance and its Implications
3.2.1 Good Governance as a WB/IMF policy
3.2.2 Criticism on Good Governance
3.2.3 Good Governance and Democracy

4. Conclusion

Bibliography

Abbreviations

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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 isthemost 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 thesepoliticaleffects 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 candestabilise 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 thepoliticaleffects 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 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]andWeltbank und Währungsfond – Gestalter der Bretton-Woods-Äraby 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 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 2nd and 3rd 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 conventional SAPs are attacked as being “counterproductive in the short run” and “mixed to negative in the medium term”^[14]. The critics claim that all economic key figures like GDP, per-capita income and the investment rate have deteriorated under the influence of SAP^[15]. According to Dasgupta this thesis can be supported by the example of Brazil:

Brazil’s experience is discussed in two parts. The period from 1955 to 1980, operating under a strategy of self reliance based on import substituting industrialisation, was one of rapid growth, despite a high level of inflation(…). In contrast, the period of the 1980s, when adjustment was tried, was one of no growth but with an even more alarming level of inflation.^[16]

The BWI’ supporters argue however that there is evidence “that infant industries protected by tariff barriers only rarely reach a state of competitiveness due to the lack of competitive pressure”^[17]. And even Manuel Pastor Jr., one of the strongest critics of SAPs, concludes that “systematic cross-country analysis has revealed no generally negative impacts [of IMF programs] on growth”^[18].

Another issue drawing large amounts of criticism is the policy of privatisations. Nearly every SAP includes the privatisation of state owned industries and enterprises because of the “clearly negative results of public enterprises in developing countries”^[19]. Many critics argue that mostly international corporations buy the formerly public enterprises and thus “national property” is transferred to “transnational hands”^[20]. But the problem goes further than a simple fear of transnational corporations. Very often the prices achieved by selling public enterprises are too low. This can be caused by an insufficient number of bidders, but it may also be caused by sleaze which is “a regular companion of such transactions”^[21]. The consequences might even be worse, if the “private sector is not ready to offer services that were until then delivered by the state-owned units”^[22]. Due to this experience the BWI have become more cautious advertising privatisation^[23].

2.2.2 Social Criticism

The BWI are most frequently attacked because of the social consequences of their programs. It is claimed that SAPs create new poverty or worsen the living conditions of those already living in poverty. The second main reproach is that the gap between poor and rich increases (unequal income distribution). Most critics refer to the 1980s, the “lost decade” for Latin America. According to them the SAPs had devastating influences on poverty: “During the first half of the 1980s the number of people living under conditions of poverty according to a CEPAL study increased by 25%”^[24]. It should be noted however that this figure does not necessarily show the influence of SAPs but may as well be the consequence of a worldwide economic crisis. Secondly the numbers are taken from the 1980s and even critics have to admit that the BWI have changed their strategy^[25]. Recent IMF and World Bank programs “include an explicit focus on poverty reduction”^[26]. The success of the new policy is controversial. While supporters state that in a majority of cases the “rate of poverty decreased during the period of adjustment”^[27], opponents maintain that the social programs “are found to be too little, too late to tackle the structural causes of poverty and powerlessness in any significant way”^[28]. Both side support their theses through empirical evidence. As to the reproach of unequal income distribution the situation is almost alike: Those supporting SAPs have found out that “no recognizable trend for the development of income distribution can be observed”^[29]. Those opposed bring forward statistical evidence suggesting that the gap between rich and poor has in fact increased dramatically over the last 15 years^[30]. Statistical evidence, as the divergence of these findings proves, has to be regarded with great caution: The results will depend strongly on the method applied and can easily be manipulated, e.g. in selecting the countries^[31].

Unfortunately this paper cannot deal with every aspect of criticism on the SAP: Important aspects such as ecological or gender issues have to be left out^[32].

2.2.3 How the BWI deal with criticism

A large part of the BWIs’ (high level) staff comes from Universities and continues to publish scientific articles and books while working for IMF or WB^[33]. They can thus react very quickly on criticism and assume the leadership in every topic that becomes globally relevant. This can be illustrated on the discussion about ecological consequences of development. The World Bank was for many years considered as one of the main contributors to un-sustainable growth, damaging the environment with giant projects like the Narmada Damn. But when “sustainable development” was popular on the agenda of development politics, the WB drafted a report on “development and environment”. On the UN Conference on Environment and Development 1992 in Rio de Janeiro the World Bank was then charged with the “reconstruction” of the natural resources^[34]. By now the World Bank has a considerable number of experts on environment. The BWI have also reacted to criticism on a lack of participation: In today’s programs “Participatory processes” are one of the key factors^[35]. Often, though, there is a wide gap between theory and practice. While official policy changes the implementation of programs remains the same^[36]. There are two lines of argumentation which have continuously been used since the first SAP was implemented. The first one is sometimes called T.I.N.A, abbreviating “There is no alternative”. It is indeed true that the need for global financial institutions is hardly disputed, but most critics demand far-reaching reforms^[37]. Rainer Tetzlaff describes the second argument often used by IMF/WB staff: “Yes, there have been occasional mistakes in the past, but the lessons are learned and the necessary reform measures taken. Now the World Bank (or the IMF) is back on track”^[38].

2.3 Conclusions

The impacts of SAP on the economy are very difficult to judge. It will remain unclear if SAPs promote growth or not. The evidence from the 1980s suggests that the programs did indeed have serious negative consequences on poverty and income distribution. But as the BWI have reacted to criticism and have adjusted their programs the situation has improved. The introduction of social funds has been welcomed, but the social programs still have to be regarded rather sceptically. Even supporters of SAPs admit that “social programs are to a large extent of benefit to groups of the population such as dismissed stated employees”^[39]. The economic consequences of SAPs are unclear. More recent IMF and World Bank action has shown a significant improvement compared to the 1980s and if this trend is to continue there is room for a certain amount of optimism.

[...]

^[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.

^[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.), <www.ifc.org/economics/speeches/march98/march98.htm> Dec. 12th 2000.

^[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”, <www.imf.org/external/np/exr/facts/prgf.htm >, Dec. 26th 2000.

^[10]Dasgupta,Structural Adjustment,p. 82.

^[11]World Bank, “International Bank for Reconstruction and Development. Voting Power of Executive Directors“, <www.worldbank.org/html/extdr/about/voting/librd.htm> Jan. 16th 2001 and IMF, “IMF Members' Quotas and Voting Power, and IMF Governors”, <www.imf.org/external/np/sec/memdir/members.htm>, Jan. 16th 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.

^[14]Dieter Boris, “Fünf Jahrzehnte erfolgloser Stabilisierungspolitik“, in:Weltwirtschaft und Entwicklung,8-9/1993, pp. 1-5, p.3. S.K.

^[15]Cf. ibid.

^[16]Dasgupta,Structural Adjustment,p. 377.

^[17]Rainer Thiele,Sind die Anpassungsprogramme von IMF und Weltbank gescheitert?: eine Bilanz der Erfahrungen aus zwei Jahrzehnten,Kiel 2000, p. 9. S.K.

^[18]Manuel Pastor Jr., “The Effect of IMF Programs in the Third World: Debate and Evidence from Latin America, in:World Development, Vol. 15, No. 2, 1987, pp. 249-262, pp.252f.

^[19]Thiele,Anpassungsprogramme,p. 10. S.K.

^[20]Boris, Erfolglose Stabilisierung, p. 4.

^[21]Dasgupta,Structural Adjustment, p. 117.

^[22]Op cit. pp. 118f.

^[23]Cf. ibid.

^[24]Boris, Erfolglose Stabilisierung, p. 4. S.K.

^[25]Cf. e.g. ibid.

^[26]IMF, Poverty Reduction and Growth Facility.

^[27]Thiele,Anpassungsprogramme,p.16. S.K.

^[28]UN Commission on Human Rights, “Effects of structural adjustment policies on the full enjoyment of human rights”, Report by the Independent Expert, Mr. Fantu Cheru, submitted Feb. 24th 1999, <www.unhchr.ch/Huridocda/Huridoca.nsf/>, Jan 7th 2001.

^[29]Thiele,Anpassungsprogramme,p. 16. S.K.

^[30]UN Commission on Human Rights, Effects of structural adjustment.

^[31]For an extensive discussion on the different methods and their problems cf. Frances Stewart,Adjustment and Poverty. Options and Choices,London/New York 1995, pp. 38f.

^[32]The author of this paper feels strongly about the importance of these issues. Further reading could start from Tetzlaff,Weltbank und Währungsfond,pp.171-178 (gender issues) and pp. 179-190 (ecological issues). Numerous examples for further reading are given there.

^[33]Maybe the most famous example is Stanley Fischer, deputy director of the IMF and co-author of one of the most important books on Macroeconomics (Dornbusch/Fischer).

^[34]Cf. Tetzlaff,Weltbank und Währungsfond, pp. 191-195.

^[35]Masood Ahmed, „Making Globalization Work for the Poor”,The Independent,Dec. 12th 2000, taken from: <www.imf.org/external/np/vc/2000/121200.htm>, Dec. 26th 2000.

^[36]Cf. Tetzlaff,Weltbank und Währungsfond, p. 194.

^[37]Cf. op. cit. pp.124-140 . T.I.N.A was first used by Margaret Thatcher in the context of economic reforms in the United Kingdom.

^[38]Op. cit. p.33.

^[39]Thiele,Anpassungsprogramme, p. 16. S.K.