GUEST ARTICLE – PROFILES OF POWER: Financial Relief at a High Price
The International Monetary Fund (IMF) and the World Bank (WB) are supposed to be the saviours of developing countries suffering financial distress but our Chief Financial Market Correspondent Dogbert disagrees – citing their disastrous track record caused by prescribing standardised open market shock therapy …
Despite grandiose pro-development rhetoric, the IMF and World Bank have inflicted irreversible financial pain in innumerable developing countries – the neediest patients, desperate for a shot of liquidity to stabilise their ailing economies.
Unlike a doctor, the IMF and World Bank don’t bother to listen to their patient’s problems, look for symptoms, make a considered diagnosis, and then prescribe the appropriate remedy.
The staunch belief of the IMF and the World Bank in conditional loans and ‘good governance’ as the ‘best practice’ or only solution to restore stability and build growth has proven to be flawed.
Without consultation, the IMF and World Bank leap straight to their prescription pad and demand the developing country take its standard shock therapy at full strength. The session concludes with a blunt warning.
The foreign investment and loans they so desperately need to ease the liquidity squeeze or escape the cycle of underdevelopment can’t be guaranteed without the IMF’s seal of approval that the developing country will ‘consent’ to implementing its ‘structural adjustment packages’ (SAPs).
In return, the country is then placed under IMF supervision. World Bank consultants can then step in and recommend private investor infrastructure ‘partnerships’ in areas ranging from health and education to utilities (Green, 1998) (Stein & Nissanke, 1999).
Structural adjustment packages are tied to strict conditions resulting in the developing country deepening its dependance on foreign financial flows. In order to qualify for an ongoing line of credit, developing countries must open their markets to investment and adopt their prescribed neo-liberal (free market) policies.
The ‘Washington Consensus’ forms the foundation of Structural adjustment packages. These policies are ‘one size fits all’, designed to open markets and restore stability through the forced running of budget surpluses, high interest rates, privatisation and liberalised trade, prices, financial markets, labour markets and agriculture (Remmer, 1998).
This process transfers economic decision making authority to the IMF, World Bank and foreign investor interests, leaving the developing country with no option to obey their orders as it clings to its only lifeline. Structural adjustment packages have deepened and prolonging financial crisis and underdevelopment in many cases and undermined the sovereignty of developing countries.
In 1991, realising that it would not be consulted on the conditions of its impending ‘rescue loans’, India opened its markets prior to being bailed out by the IMF and World Bank, in a bid to maintain its democratic legitimacy and resolve its balance of payments crisis (Mathur, 1993).
In 1997, South Korea didn’t require a Structural adjustment package to access foreign finance, but to qualify for IMF loans it was compelled to surrender its economic independence and deepen its reliance on global investment flows, Japanese imports and embrace ‘market friendly’ regulations and labour market deregulation (Feldstein, 1998) (Ismail, 2002). However, IMF loans tied to Structural adjustment packages did not automatically boost investor confidence and attract investment because it made South Korea look risky and indebted (Feldstein, 1998).
In 1998, the IMF ordered Brazil to run budget surpluses and lift interest rates in order to qualify for a $30 billion loan (Green, 2003). Despite IMF assurances, interest rates as high as 25 per cent downgraded investor confidence and short-term investment dried up (Petras et al., 2003). Worse still, growth slowed, public investment in agrarian poverty reduction was slashed and its people impoverished (Reynolds, 2003).
Initially, the IMF simply lent money as a last resort for countries with balance of payments crises, allowing for independent development once liquidity was restored (Lastra, 2000). However, its expansion into long term conditional policy-based lending has had a disastrous and disproportional impact. The poor, women and rural farmers already in poverty have become further marginalised (Chossudovsky, 1998).
The IMF dumped Structural adjustment packages under a barrage of criticism, resistance and developmental failures in the late 1990s. But don’t be fooled, Structural adjustment packages re-emerged under the domain of the Bank with a new name and a broader social agenda – ‘good governance’ measures to aid ‘poverty reduction’ (UNCTAD, 2002).
The World Bank preaches ‘broad-based growth’ – policies designed to boost income-earning opportunities for the poor (Green, 1998). The gradual widening of the World Bank’s agenda has not achieved poverty reduction through ‘trickle down’ of income to the poor.
This is because the World Bank’s private partnerships favour user pays systems. In an Indian case, the poor could not access reliable power after their local electricity utilities were privatised in 1992, despite protests. Nine years later, the government terminated the contract and democratic legitimacy was restored (Beder, 2005).
World Bank/IMF Case study – Uganda
Structural adjustment packages in Uganda denied the government of its policy independence. In a desperate bid to continue service delivery in a climate of worsening poverty, political instability, and falling real GDP, Uganda succumbed to IMF loans (Muhumuza, 2002). Structural adjustment packages have made Uganda reliant on external loans to finance its economic and social development, with project support loans more than doubling from $94.2 million in 1991/92 to $202.4 million by 1999/2000 (Nkusu, M. 2004) (Fantu, 1999).
This was because World Bank ‘pro poor growth’ and ‘good governance’ confined Uganda to deepening its global economic linkages and facilitating open markets (Fantu, 1999). The welfare of the poor in Uganda did not improve even with annual growth rates of 6 per cent over 16 years, largely due to jobless growth and non-existent trickle down effects (Muhumuza, 2002) (Sengupta, 2005).
Contrary to IMF promises, the incomes of the poor in Uganda did not improve after agricultural and trade liberalisation. 84 per cent of the rural poor depend on agriculture for their livelihood, but exposure to world agriculture markets through freer trade did not boost their incomes (Muhumuza, 2002).
Nor were farmers consulted on market policies that made them divert from local subsistence agriculture towards high yield intensive cash cropping (SAPRIN, 2000). Instead, the rural livelihoods of coffee farmers were exposed to high risks: volatile, low world prices, deflated by oversupply and long value chains. Despite the increase in tonnage, total values for 60kg bags of coffee declined from US$ 432,651,033 in 1994/95 to US$ 366,126,641 in 1996/97 (Muhumuza, 2002).
The elimination of price controls did not increase incomes either. Rural farmers could not effectively participate in world markets due to low value adding, insecure property rights, simple technology, basic infrastructure and market distortions (Muhumuza, 2002).
Credit and expenditure tightening measures failed to achieve ‘pro poor growth’ either. Subsidies were removed from critical agriculture inputs and forced the poor to draw upon their dwindling incomes or sell some of their assets to afford user pays education and healthcare (Muhumuza, 2002).
In a distributional sense, the World Bank model failed because of its perverse effects. The poor bore the brunt of the structural adjustment burden, while the economic welfare of the wealthy improved. As consistent with World Bank reasoning that Structural adjustment packages boost incomes and thereby must reduce poverty, Ugandan government household surveys claim poverty fell from 56 per cent in 1992 to 35 per cent in 2000. In reality, the gap between the rich and the poorest quintile widened from 1992 to 1996 due to the narrow focus on income poverty reduction (Muhumuza, 2002).
GDP per capita remains one of the lowest in Africa at $220 (Muwanga, 2001). Despite the rhetoric of the World Bank model and a reduction in absolute poverty of 21 per cent since 1992, about nine million Ugandans remain below the absolute poverty line (Muhumuza, 2002).
Poverty has increased in a non-monetary sense because social networks and cultural values have been eroded due to Structural adjustment packages promoting individual welfare maximisation above traditional communal values (Muhumuza, 2002).
Alternative Case Study – Malaysia
Malaysia’s departure from the Washington Consensus during the Asian financial crisis was a stunning rejection of orthodox structural adjustment and a strong endorsement of local interests.
Initially, Malaysia adopted the neo-liberal model to maintain investor confidence, but after its poor performance, returned to selective market policies that prioritised the interests of the Malay people in economic policy making (Buckley et al., 2004).
Later, the IMF admitted the failure of austere Structural adjustment packages and supported Malaysia’s sensible counter cyclical approach (Buckley et al., 2004).
During the crisis, the Government invested considerable political will to maintain its strong role as a market mediator to ensure an equitable distribution of resources. In contrast to Structural adjustment packages, supportive economic and social policies shielded the poor from the costs of adjustment (Buckley et al., 2004). Malaysia’s independent policies lessened the severity of the shocks and maintained its recovery at least as fast as IMF backed countries.
By adhering to homegrown policies, Malaysia emerged from the crisis with its economic sovereignty intact. Temporary and strategic application of capital controls retained crucial foreign direct investment (FDI) stocks and also attracted further FDI flows (Kamer, 2004) (Jomo, 2005).
Malaysian financial markets were also insulated from regional volatility stemming from sudden speculative withdrawals of short-term investment in a regional context of rapid capital account liberalisation (Jomo, 2005). Capital controls were complemented by expansionary budgets and low interest rates that stimulated economic recovery, strengthened investor confidence and capital inflows (Kamer, 2004)
These measures supported the pegging of the ringgit to the US dollar to reduce volatility (Buckley et al., 2004). Even though Malaysia’s growth reversed to -6.7 percent in 1998 (the year of the crisis), down from 7.7 per cent in 1997, it was better than Indonesia and Thailand and its rate of recovery was just behind South Korea by 1999 (Ismail, 2002) (Buckley et al., 2004). Malaysia’s indigenous structural adjustment even won the praise of credit rating agency, Moodys (Buckley et al., 2004).
This article has been written by an anonymous writer who has chosen to write under the alias of Dogbert.
Dogbert is one of the main characters in the Dilbert TV series and comic strip