SAP and Conditional

SAP: Issues and Conditionalities: A Global Review
Author(s): Biplab Dasgupta

Source: Economic and Political Weekly, Vol. 32, No. 20/21 (May 17-30, 1997), pp. 1091-
1095+1097-1104
Published by: Economic and Political Weekly
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SAP: Issues and Conditionalities
A Global Review
Biplab Dasgupta
Thtis paper attempts to show that the structural adjustnmenit progranmme formulated by the Bretton Woods
organisations that are controlled by the seven richest countries in the world operates exclusively in the less
developed countries. How far and to what extent has the adjustnment package been introduced to rescue the
internationcal banking system facing bankruptcy in the aftermath of the second oil crisis and the debt crisis
to find markets for the MNCs of US origin in view of the mlassive balance of trade deficit that country is incur
every )ear? The author examines IMF and World Bank conditionalities and reviews the experience of countries
which have implemetnted structural adjustnment programmes.
I adjustment package. To make life easier, in if they alone were responsible for their trade
Introduction this paper. the stabilisation programme of deficits. World Bank never had to engage
IMF will be treated as a part of the structural in the task assigned to it by the Conference;
WHEN in 1991 the Indian government aidjustment package, though, at a formal European reconstruction was carried out by
accepted structural adjustment loans from level, these two organisations prescribe the US-sponsored Marshall Plan. ITO was
the IMF and the World Bank, it is doubtful somewhat different policies. never born because of US opposition, though
whether the policy-makers took into its charter was drawn and other formalities
KEYNES' PROPOSALS AND FINAL OUTCOME
account the global experience with adjust- were completed.
OF BRE-rrON WOODS
ment since 1980, when it is was first It is important to remember, in the context
introduced. This paper is not on the Indian In his original proposals to the Bretton of our own discussion and also of the role
expericnce with structural adjustment. It is Woods Conference in 1944, Keynes sought the Bretton Woods twins came to play in
an attempt to identify the main issues and the establishment of three separate inter- later years, that, in the original conceptions
to summarise the global experience with inational institutions to serve three specificof Keynes and White, the development of
structural adjustment over a period of nearly objectives. First, a central bank of central the less developed countries was not on the
17 years. banks, with its own currency (named bancor) agenda. Both the twins were to operate,
In Section ll, we look at the changing role to help ease the balance of payment nearly exclusively, in thc interest of the
of World Bank and IMF, the two Bretton difficulties of the member countries. This developed countries alo;w Though India
Woods institutions that have been bank, contrary to the current practice, was and one or two other olonies were
instrumental in the formulation and to penalise countries holding trade surplus, represented in the Bretton WotLs Conference
monitoring of implementation of thiswith a global tax of I per cent per month,
policy that was only to provide thie British
on the ground that they were keeping the
package at the global level. We ask the government with some supporting voice.
world effective demand low by their under-
question: what prompted these organisations The word 'development' associated with the
pturchase of goods produced by other
to introduce this package, and whether any name of IBRD was an afterthought as the
motive other than doing good for the poor countries. The proceeds of such global task of reconstruction was not required to
countries dominated their thinking and action. taxation was to be utilised for international be performed, and did not really mean
Section III looks at the genesis of stnictural buffer stock operations in primary goods. 'development' in the sense we mean the
adjustment, how it was originally conceived Second, a fund for the economic term today. If Keynes was advocating a
and how its character changed by 1980. In reconstruction of war-devastated Europe. buffer stock of primary goods that was
Section IV we examine the conditionalities Third, an International Trade Organisation only because these were often adestabilising
imposed by the Bretton Woods twins, and (ITO), which would maintain and operate factor in the world market and affected
the manner in which the performance of a this buffer stock of primary goods, in order
industrial growth in the developed capitalist
country under structural adjustment is to stabilise their prices; The buffer stock countries.
monitored. Section V looks at the major operation was supposed to be anti-cyclical;
CHANGES UP TO 1980: ABANDONMENT OF
ITO making purchases when the world prices
consequences of this package forthe recipient
GOLD STANDARD AND OIL CRISES
countries, including those on GDP, trade, were low and selling when the prices became
industry, agriculture, public enterprises, hiigh. In the course of the following five decades
macro-economic management and their The final outcome of the deliberations of both of the organisations underwent
the Bretton Woods Conference, where along
social dimension. In Section VI we bring the significant transformation in the scope and
major conclusions together. with Keynes, White, representing the US, manneroftheirfunctioning. Whilethe Soviet
also played an important role, was somewhatUnion and its allies participated in the Bretton
II
different from these proposals. The fund that
Wood Conference, they opted out of both
Fund and Bank
was established resembled Keynes' bankbut with the onset of the cold war following the
In this discussion on structural adjustment
without some of his proposed features, while conclusion of the second world war. This,
we begin with an examination of theevolution
the bank approximated the fund in the plus the fact that the voting power in those
of the role of the International Monetary Keynesian scheme of things. The differences
was linked with the contributions or 'quotas'
Fund (IMF, simply Fund) and World Bank were not merely in the nomenclature. No of the members, brought the twins under the
(IBRD, simply Bank), the two Bretton Woods common world currency was floated by I MF cleardomination of the rich, western countries
organisations responsible for the formulation and, in contrast with the Keynesian view, and gave those a pro-market and anti-state
and iniplementation of the structural the deficit countries were now penalised as intervention focus.
Economic and Political Weekly May 17-24, 1997 1091
Despite their sharing a common emergence of an integrated global capital reflected the bargaining strength of various
philosophy, the twins differed in the scope market, backed by modern means of com- countries and groups of countries in the
and time span of their programmes. IMF's munication, rich countries with good credit executive bodies of those organisations [Bird
main role was as the guardian of the gold ratings face no difficulty in mobilising 1992:24]. At present the G-7 countries (the
standard underwhich the value of a country's required funding from that source. Only US, the UK, France, Germany, Canada, Italy
currency was defined in terms of gold. countries with low credit rating, having no and Japan) account for roughly half the
Countries facing imbalances intheirexternal other source of funding, now come to World voting power and virtually control the Orga-
account usually sought IMF's financial Bank as lender of the last resort. The Bank nisation. Based on an informal arrangement,
support to tide over temporary difficulties. also operates a soft loan window through from which the less developed countries are
If the imbalances persisted and reflected a International Development Agency, which excluded, the presidentship of World Bank
fundamental disequilibrium, the IMF offers loan at a low, subsidised rate, but, both
and the post of managing director are rotated
prescription was for devaluation - to the quantum of loan offered through IDA between the United States and Europe.
encourage exports at a cheaper price and to and the category of recipients are clearly Further, these two agencies operate in
discourage imports now available at a higher defined [Williamson 1983: 609]. close understanding with each other, each
price. In both cases, the time span was short taking a representative of the other in its own
FUND-BANK ASCENDANCE OVER
and the medicine was expected to work country missions and both work together
UNITED NATIONS
immediately. The organisation's brief was with the country concerned to produce what
specific and well defined. From the early While their role as international organi- is known as the Policy Framework Paper
days conditionalities had been a part of IMF sations has diminished, with the dissolution (PFP) which forms the basis of support given
loans, but these were few and not rigorously of the gold standard and the emergence of by either. As the saying goes, IMF prepares
enforced. The conditionalities were oriented a well integrated global capital market. their the draft of PFP, World Bank concurs and
towards improving macro-economic imlportance has grown more than propor- the country concerned signs [Killick
management and operated from the demand tionately in the economic life of the less 1 992a:23]. The relationship between the two
side. developed countries. The conditionalities is governed by periodic concordats, e g,
Those seeking long-term financial support accompanying their loans now shape the those of 1966 and 1989, that delineate their
went to World Bank, which acted as an economic policies of the recipient countries. respective jurisdiction, e g, IMF leading on
international banker, assessed the viability At the same time, the poor. borrowing exchange rates, balance of payment problems
of a project in terms of its capability of countries, more numerous than the rich and restrictive trade systems, while World
countries, have virtually no influence over
repaying the loan with interest and offered Bank leading on development, financial
loans on the basis of guarantees provided the decision-making process of these institutions and capital markets [Mosley et
by the governments. While IMF was international bodies. In their charters these al 1991:36,53]. The regular meetings of the
concerned with macro-economic were recognised as international institutions development committee, involving senior
management and operated on the demand altlliated to the United Nations, and it was officials of the two organisations and
side, World Bank's concern was micro, expected that their reports would regularly ministeis of member countries, is a forum
project-based lending. In its country reviews, go to the Economic and Social Council of where common issues are raised, discussed
World Bank's approach was supply side the United Nations (Ecosoc) and their heads and resolved.
oriented, and it urged the governments 'to would attend the meeting of Ecosoc. The While they were set up to perform two
get the prices right', to make the private latter, rather than either of the twins. was distinct tasks. over time, they have come
supposed to be the agency co-ordinating the
sectors the main actors in the economic scene, closer in their mode of functioning and
and to reduce-the role of the state in the economic activities of the nations, and was treatment of issues. IMF, which was supposed
economy to the minimum. to play a role in the world economy that was to be concerned with short-term remedies to
Over the past two to three decades, both parallel to the role of the Security Council balance of payment difficulties, is offering
have undergone important changes. With in political and military affairs. In practice, ten-year term Extended Fund Facilities (EFF)
the abandonment of the gold standard and neitherWorld Bank norlMFeverplayed this since 1974, and structural adjustment loans
the floatingof currencies in 197 1, IMF's role subordinate role vis-a-vis Ecosoc, and in since 1986, while World Bank, specialising
as superviser of gold standard was over. Its time came to loom much larger than the in micro issues, has now graduated from
role as a world body also declined, as the latter. One major reason for this was that, project-based lending to policy-based
rich countries found other ways of funding with the beginning of the cold war, the rich programme and sectoral lending, and,
their deficits, e g, from the global capital countries played down the role of the Ecosoc through its structural adjustmiient loans, is
market. The last occasion when a rich countryand patronised World Bank and IMF. While taking a close interest in macro-economic
took an IMF loan was more than two decades Ecosoc was perennially short of funds, the management [Killick 1992a: 17; Mosley et
ago when, in 1975, UK and Italy were loanees. twins were generously funded by the rich al 1991:37]. "Thus, the former distinctions
Since then, IMF's activities have remained western countries. between the roles of the Fund and the Bank
exclusively confined to the less developed One reason for the westerni preference for - macro versus micro, demand versus supply,
countries [Bird 1993:5]. Though IMF World Bank and IMF. over Ecosoc, was its adjustment versus development, financfal
regularly publishes world surveys, etc, it decision-making procedure. Unlike the versus real, programme versus project loans,
plays no global surveillance role in the world United Nations, where every country big or
short terrn versus long term - have been
economy and it carries no influence with the small has one vote, in case of these two the severely eroded" [Williamson 1983:619].
richcountry governments [Killick 1983:109]. voting is linked with their contributions to There is., however, an understanding that, for
Keynes' expectation that about half of world'sthe initial fund, which again is linked with a country, structural adjustment would be
imports would be backed by IMF funding the size of their GDPs. Over the past five preceded by a stabilisation package under
was never materialised; the current level of decades the 'quotas' for various countries IMF umbrella [Mosley et al 1991:56].
IMF support covers only about 2 per cent have been revised, each revision raising the When structural adjustment was introduced
of world imports. share of the rich countries. Such revisions by World Bank, making a complete break
World Bank too now operates exclusively were not usually simply based on key national with narrow, project-based lending, the
in the less developed countries. With the and international economic variables, and argument advanced i n support of such change
1092 Economic and Political Weekly May 17-24, 1997
was in terms of fungability. That is, such Generally speaking, the interests of Fund- were more easily substitutable and lack of
project-based loans were often spent on Bank management regarding a country com- contiguity and political-cultural cohesion
activities that the governments would have plemented the cold war requirements of the made collective action politically infeasible.
undertaken in any case with their own money west [Bird 1993:22; Stiles: Lancaster: 1991; On the other hand, while the OPEC-led oil
even without Bank lending, and the Bank Killick 1992a: 25].Therehadbeen numerous exporting countries amassed enormous
provision for this only allowed the country examples of a hardened attitude on the part wealth. and within a short time, the last thing
concerned to spend on other activities that of these two institutions towards countries they wanted was to dissipate it in the form
were not always in accordance with World not favoured by the west (e g, Chile underof aid to less developed countries.
Bank priorities. Further, the task of project Allende or Ghana under Nkrumah). The If these two sets of less developed countries
assessment was made difficult by the liostile attitude changed dramatically after had agreed to work on the basis of a common
divergence of internal prices from their those regimes were toppled and were replaced understanding, the problems of both could
scarcity values or world prices. In this by a pro-US government e g, Chile under have been solved, perhaps at the cost of the
Pinochet, or Ghana under Busia. Soviet
situation. the argument went, it was necessary developed west, by transferring the surplus
to have an overall view of the country's Union under Gorbachev was denied loan, investible fund from the formerto the capital-
economy and to influence its overall policy and was told by G-7 leaders that more starving less developed countries of the south.
direction [Mosley et al 1991:29-301. important than money was good policy, but That was not to be, mainly because of the
To summarise the discussion so far, here a more generous approach was adopted when political economy of these oil-rich tiny
we have two rich country-controlled Soviet Union disintegrated, and Yeltsin took kingdoms, dependent as their ruling elites
institutions that are exclusively operating in over the reins of Russia. The latter was were, for their political survival, on the
the poor countries. In some instances the promised a loan of $40 billion on the eve military might of the west. The 'petro-dollar'
Fund-Banlk teams visiting a country involve of a crucial election for the presidency. was recycled back to the west, much to the
themselves in the details of budget-making, Similarly, a massive loan package was put relief of their economic managers, more
even going to the extent of "analysing the together for Mexico in a matter of days, specifically to the international banks located
budget line by line", to implement the cut something that is unlikely to be done for in the west [Mosley et al 1991:6-7], while
in government expenditure [Killick India unless its foreign policy changes. The the oil-consuming countries (Nopecs) faced
1 992a: 19-201. The question. naturally, arises attitude towards the rich and the a severe balance of payment crisis only partly
Fund-Bank
with what objectives these institutionspoor countries is explicitly asymmetrical. as
operate mitigated by a special IMF facility set up
in less developed countries? To put it in also that between left-leaning and other deficit for compensatory and contingency purposes.
another way, in the context of this studystates
and [Killick 1992a:6]. This, again, created a new situation: the
also of The New Political Economy (NPE), international banks were now flush with
III
what is the political economy of structural funds and were willing to lend to anybody.
Structural Adjustment: The Genesis
adjustment? There can be three possible The less developed countries - mainly in
answers to this: Africa and Latin America- were now induced
OIL CRISES OF THE 1 970s
(a) in their operation they are inspired by to borrow from these banks to ease their
the concern for the well-beinig of the less Structural Adjustment Programme (SAP), balance of payment difficulties. Within a
developed countries, or by a strong ideo- as a loan package, was introduced by World few years an enormous amount of loan was
logical commitment to free market because Bank in 1980, and IMF began offering dished out by these banks, competing with
of their belief that it is good for the mankind; structural adjustment loans from 1986. one another to find borrowers - to a very
( b) their actions in the less developed However, to understand how this programme large number of countries, mostly poor and
countries, motivated by rational self- came into being, we need to go back to the backward, ruled by authoritarian
interested behaviour, further the economic 1 970s. The decade of the 1 970s was one ofgovernments with virtually no popular
(and may be also political) interests of the massive economic upheavals, prompted by participation in, or organised opposition to,
rich countries; two oil crises - in 1973 and in 1979-80. The administration - throwing the usual
(c) the interests of the two - the rich and sudden and steep rise in oil prices created, conservative banking norms to the wind.
the poor countries - converge, and, therefore, on one hand, an unforeseen opportunity for The less developed countries, on their part,
while acting in the interests of the rich growth foragroup of less developed countries apart from various inducements, preferred
exporting oil, and on the other, at least for
countries, their policies also benefit the poor this source of borrowing: unlike IMF, these
ones. while, a feeling of despair in the west, as banks asked few questions and were quick
Of these three, (a) would be irreconcilable it was going to involve a massive outflow with their paper work. Quite a few borrowed
with NPE, with its emphasis on self-interest of resources from the rich countries located more than was prudent in view of the
as the motivating force, that provides the in that part of the globe. precarious conditions of their own
theoretical basis for structural adjustment The oil exporting countries led by OPEC economies, their crucial dependence on only
[Olson 1982; Dasgupta 1997b]. And (c) were wholeheartedly supported by the other one or two export items with records of
appears improbable given the known less developed countries ('Nopecs', to use volatile price fluctuations in the global
contradictions of interest between the two the terminology of Hans Singer) on the basis
market, and low levels of macro-economic
sets of countries on a wide range of issues. of two major expectations: (a) that it wouldmanagement efficiency.
But if one accepts. for the sake of argument, make possible for other groups of primary The bonanza lasted only for a few years.
that, in the long run, their interests are producing and exporting countries - While lending on a massive scale, the
compatible, the fact would remain that, even specialising in copper, bauxIte, jute, tea, etc
international privately owned banks were
- to bring about similar reversal of termsinfluenced
in that situation, the self interest of the rich of by a herd mentality. Then, as it
countries would be paramount. and its trade through collective action, and (b) that happens with international finance quite
a substantial part of the resource flow into
convergence with that of the poor countries regularly, the same banks suddenly woke up,
would be a matter of coincidence. By all OPEC would become available to them in began calculating the risks they had taken,
accounts, (b) would come closest to NPE. the lorm of cheap loan. However, as it turned
and became parsimonious with their money.
In the past, the behaviour of these two out, the OPEC model was not amenable to This too reflected their herd mentality as
institutions had been consistent with (b) easy repl ication, as the other pri mary products
they tried to extricate themselves from the
less developed countries [Williamson lies in its concern for the impending disaster particularly in the attempts to produce
1983:615; Bird 1992:6-7]. This coincided facing the global banking system based in standardised global formats for legislation
with a slump in the world demand for the west. Under this interpretation., the fundon intellectual property rights, investment.
that was supplied by IMF, through its
agricultural exports, and theirprices, landing labour and so on, in the repeated application
many of the mono-crop less developed 'stabilisation programmes', to the indebted of Act 301 in the US trade legislation against
countries in serious trouble. Ironically, this less developed countries, was intended to countries reluctant to open up their markets,
was the time when they needed most to ensure repayment of bank loans, so that the and in the use of VoluntaryExportRestraints,
borrow from these banks, but by then the grave crisis facing the international bankinganti-dumiping laws and other pressures.
traditional conservative attitude of bankers. system could be resolved. Structural A measure of the success. from the point
had returned. The international banks, rather adjustment accompanied debt rescheduling of view of the economies of the United States
than extending further loan, operated pro- under international agreements, by waiving and some other western countries, is the fact
cyclically, wanted their money back with a part and stretching the rest over a longer that, despite lending by these two agencies,
interest, and were not willing to take any period, which further guaranteed repayment there has been a consistent net outflow of
furtherrisk in this volatile financial situation.[Lancaster 1991:33-54]. According to Unitedfinancial resources from the countries opera-
The credit-rating of the less developed Nations Economic Commission for Latin ting under structural adjustment programme
countries took a nose-dive and further loan America, thedebt rescheduling process under since 1980. Between 1984 and 1991, the net
was denied [Bird 1992: 7].To make things the guidance of the OECD countries was fartransfer out of the less developed countries
worse, the coming to power of monetarist from even-handed, as the cost of the crisis amounted to $20 billion per year. IMF net
regimes in the west, particularly in UK and was passed on to the debtors [OECD 1992: lending was negative during most of the 80s
USA, under Margaret Thatcher and Ronald 195]. Another study by Overseas Develop- [Development Committee 1992:39; Bird
Raegan, respectively, resulted in a rise in ment Institute concluded: 'The Fund insisted 1993: 71.
interest rates, thus accentuating the debt that recipients of Fund loans remained current One decision that could have eased the
burden. Government-to-government assis- with their commercial debt obligations and debt crisis, particularly in case of the most
tance was also curtailed to add to the growing hence, in some quarters, (was) viewed as a heavily indebted countries in sub-Saharan
burden of the less developed countries. debt collector for the banks" [Bird 1993:17].Africa, was to expand the supply of Special
The inevitable debt crisis that followed, flowever, such repayment, with the support Drawing Rights (SDR) for this purpose. In
beginning with public proclamation of of the Bretton Woods institutions, was the mid-I 970s the Fund authorities wished
bankruptcy by Mexico, gravely underminedwithout any assurance that further loans from to make SDRs the principal reserve asset in
the international banking system, with a this source would be forthcoming. In fact, the international monetary system. in view
given their low credit rating, it is highly
high and increasingrisk of large-scale default of its capital value and liquidity. However,
on the part of the less developed country unlikely that, for a long time to come. the after the collapse of the gold standard, reserve
borrowers. This was the timing of the global banking system would take any notice adequacy was no longer seen as a relevant
introduction of structural adjustment by of them as borrowers [Development issue and no fresh SDR allocation was made
World Bank. 'Adjustment' was expected to Committee 1993b:491. Once in the lap of after 1981. Further, with the demise of the
bring less developed country imports in line IMF, few countries have managed to grow gold standard, dollar took over that function
with their dwindling foreign exchange out of it. The Bank-Fund programmnes. once of reserve currency. As capital mobility
earnings from exports and whatever little initiated in a country, as a time-bound measure permits settlement of current account im-
they could get from the outside world in to solve all problems, tend to continue for
the balances, the reserve constraint has now
form of assistance [Mosley et al 1991:9]. ever. Even if interrupted for one reason or been replaced by a creditworthiness con-
Exports and imports were sought to be equa- another, external or internal, the country straint [Williamson 1992:87]. In recent years,
lised, as also domestic revenue and expen- reverts back to it after a few years, usually with the failure of the global banking system
diture, by constraining demand in the 'stabi- after a coup or some other less orderly form in meeting balance of payment financing
lisation' stage and later, through the comple- of change of guards. The amount offered at requirement, and the low credit rating of the
mentary Bank package by way of privatisa- a time has not been adequate to meet the less developed countries, again interest has
tion and inflow of foreign investment. balance of payments and other needs of the been focused on the possibility of fresh SDR
Initially, theidea of 'structural adjustment' countries concerned. During the 1 980s, IMF allocations. Such allocation, based on
was not meant forthe less developed countries had taken more money back from them membership quotas, was expected to help
at all. The objective was to restructure the than it had made available in terms of new countries with low credit worthiness but
economy of the OECD countries, the most loans. "This raises important issues in without implying a permanent real transfer
developed countries of the world, following termns of the systemic role of the IMF as ofanresources. Such allocations were not to
oil crises, the emergence of huge deficits in international financial institution" [Bird be tied to conditions or a fixed repayment
the balance of payments of the United States 1993:33-34]. schedule, and were to stand as a proxy for
and the expected dismantling of multi-fibre The other motive, consistent with rich the long run demand to hold international
agreement and the European Steel price ring. country self-interest, could be the urge to reserves [Williamson 1992: 91; Bird 1992:
Only afterwards, the emphasis was changed, find markets in the less developed countries, 21]. But this proposal was heavily resisted
and the burden of adjustment to the new particularly for the MNCs based in the US. by the rich countries as they thought that
world economic situation, arising from a The soaring balance of trade deficits, augmentation of international liquidity would
variety of developments in the 70s, was particularly withJapan, Germany and China, not be in their interest [Bird 1993: 23].
reaching a dizzy figure of $162 billion in
shifted to the not too broad shoulders of the
IV
less developed countries. Adjustment got 1987 impelled these MNCs to look for
The Package with Conditionalities
priority over other policy objectives such as markets elsewhere, particularly in those
poverty alleviation and redistribution countries where the government and the The conditionalities accompanying the
[Mosley et al 1991:22-231. competition were weak [Krugman 1991: loans of these two organisations reflect their
The formal, official, motive for launching 1-3]. Finding access to markets in various common market-oriented approach, but, as
it was to rescue the hard-pressed debtor countries became a matter of urgent priority we have al ready noted, whilelIMF emphasises
countries, but a less charitable explanation in the-Uruguay round of GAlT' negotiations, on demand constraint, the World Bank
operates on the supply side, and there is a government to adhere to agreed norms if it non-fulfilment of some criteria. If, on the
broad consensus that the former would were to receive payments for following other hand, the lending organisations suspect
precede the latter, in the sequencing of tranches, (c) the fund is withheld pending that the government concerned is not basically
programmes. Sequencing itself has become the fulfilment of conditions,. (d) funding for market friendly, the conditionalities and their
a major source of controversy inside both this particular loan programme is allowed implementation become harsher. Often
but no further loan is going to be consideredcountries with weak bargaining strength buy
the organisations, but that is a different story
and need not concern us here. for future, and (e) the programme is scrapped. conditionalities, even though these are not
Whether publicly acknowledged or not, necessarily the countries that need reform
POLICY FRAMEWORK PAPER AND CONCEPT
coercion is often applied to make a country from a Bank point of view, and even though
OF OWNERSHIP
accept what, in the opinion of the country, they do not mean to implement those [Mosley
Both the organisations incorporate the is not in its interest [Killick 1992a: 10; Mosley et al 1991:40]. Most studies reveal a high
conditionalities in the loan package in a et al 1991:38]. Needlessto say, this coercion, degree of slippage in the implementation,
particular manner that deserves attention. It an inherent element in a conditionality largely arising from lack of political will
is never done directly as stipulations in the package, undermines ownership [Killick [Killick 1993:106].
loan agreement itself, to avoid hurting 1993:51. One World Bank study found Much depends also on the type of loan
national sentiments and compromising the government 'ownership' of adjustment sought. In case of IMF, a loan is linked as
legitimacy of the recipient country package high only in one-fifth of the a percentage of the 'uota' of a member. The
governments. The formal loan applications programmes [Killick 1993: 11 0]. Some first credit tranche, equivalent to 25 per cent
are preceded by detailed negotiations between studies have commented on the arrogance of the quota of the country, is made available
the two and the government concerned. In of the Fund-Bank staff visiting a country, more easily and with fewer-conditions, but
the course of the negotiation various condi- their 'take it or leave it approach' and the the next three upper credit tranches (each of
tionalities are spelt out by the Fund-Bank 'judgmental naturc' of their reviews of the 25 per cent), involve more stringent
side and disputes on those are resolved. performance of that member [Cooper conditions. A reserve tranche, equivalent to
Eventually a Policy Framework Paper (PFP) the difference between its quota and current
1983:576; Killick l992a:24-271. Apart from
is prepared, formally signed by the country coercion, the weak administration in most holding by the IMFof its currency, is offered
concerned, which incorporates these less developed countries tends to fold underwithout conditions and is in fact not treated
conditionalities as policy statements by the the pressure of mounting outside as a loan.
government concerned. We have already commitments, and permits them no sense The Compensatory
of and Contingency
noted that, in case of nearly all the countries.
ownership [Killick 1994:11-14]. Financing Facility (CCFF) takes care of
such PFPs are drafted by IMF and World Sometimes a country on its own anticipates sudden declines in export earnings, e g,
Bank, but are presented as the views, those conditionalities, and undertakes policy
because of an adverse movement in terms
assessments and policies of the country reforms even before the formal negotiationof trade or a shortfall in remittances from
concerned. Once the negotiations are over with these funding bodies begins. In some outmigrants, or a sudden increase in import
and PFP is drafted, the formalities, such as cases such policy changes are imposed as costs, as it happened with oil prices in the
submission of loan application and its preconditions by Fund or Bank for entering 1970s. Earlier, the only requirements for this
into negotiations. This fulfilment of
approval, are carried out very quickly. There type of assistance were that the change was
is seldom, if ever, any discussion between unforeseen, was beyond the control of the
antticipated( or front-loaded) conditionalities
the lending organisation and the applicant helps the country concerned to claim that country
its concerned, and the support was
country between the submission of policy changes have not been dictated by needed.
the In recent years such CCFF assistance
application and its approval, which are lending
taken bodies and have preceded loan is being made available only for a short
as mere formalities. negotiations [Webb and Shariff 1992:82; period and only to countries who have agreed
One reason why so much care is taken toMosley et al 1991:45]. In case of Thailand, to a high conditionality IMF programme
fo'rmulatePFPin this particular way is linked half the conditionalities were implemented [Killick 1992a: 13]. As a consequence, this
with the Fund-Bank idea of ownership of prior to signingJ the agreement, as a kind of source has become practically dry, accounting
such programmes. The theory is that the down payment [Sahasakul et al 1991:102]. for a mere $1 billion throughout the 1980s,
success of a programme is closely correlated Generally speaking, for both World Bank and from Buffer Stock Financing Facility
with the feeling in the country that it was and IMF, the package of conditionalitics (BSFF, a similar facility) only another $0.50
developed by it on its own and without varies according to the quantum of loan billion during this period [Bird 1993: 11].
outside interference. However, such feeling In contrast, loan underStructural Adjustment
sought, the economic position of the recipient
about owning a programme sponsored by country, the purpose for which the loan isFacility (SAF) or its extended version
either of the twins is qualified by the way being asked for and the character (political (ESAF), can fetch up to 350 per cent of the
the financial assistance is dished out. The and otherwise) of its government. The largerquota under a three-year arrangement,
total quantum of loan is usually sliced into the loan, other things remaining the same,repayment beginning after five-and-a-half
a number of tranches, each specific to a timethe greater is the number of conditions and years and ending in 10 years, the installments
period, and payment for each tranche is the rigour with which it is monitored. being paid twice a year. While these loans
conditional on the fulfilment of the Similarly, the kind of conditionality imposed
carry a low rate of interest - of around 0.5
performance criteria specified for the on sub-Saharan Africa would be unthinkableper cent - the conditionalities accompanying
preceding period [Mosley et al 1991:45].inIncase of countries with stronger economiesthose encompass the working of the entire
case of non-fulfilment of some or all of the but with some temporary difficulties. and economy and are subjected to strict
performance criteria, following discussion would most certainly not be tolerated by monitoring as tranches are released.
with the government, the twins usually take developed countries [Killick 1993:109]. If Generally speaking, IMF conditionalities
one of the following positions: (a) the the government concerned is already prescribe the following: (a) devaluation to
performance is on the whole satisfactory, ideologically and otherwise market-oriented bridge the gap between official and market
despite non-fulfilment of some criteria, and. in its approach, the conditionalities are less exchange rate of the currency of the country
therefore, the fund is released, (b) the fund and the twins tend to take a more lenient concerned, (b) demand management, mainly
is released, but with a warning, asking the attitude in cases of violation of norms or by way of reducing government expenditure,
to reduce domestic effective demand and optimal and efficient, while any deviation comparative advantage, that is, given its
consequent inflationary pressure, and (c) from it would involve avoidable social costs. factor endowments, it can produce best.
reduction of fiscal deficit, as a proportion To ensure that markets are allowed to do Earnings from such exports should be able
of GDP, below 4 per cent, in phases. Here theirjobs, all controls and regulations should
to pay for imports that is required. In most
(b)and(c) arecomplimentary, as both require be done away with as also measures that poor countries such comparative advantage
curtailment of public expenditure. and both constitute barriers to entry. lies in labour-intensive production such as
also help to reduce domestic demand for It follows from this that the state should food products and textiles, and not in large-
imports. The objecti ve behind those measures
take a back seat in economic matters. Any scale capital and knowledge intensive
isto bring imports in line withexporteamingsintervention by the state - in the form of industries involving long gestation periods
and to take the steam out of the inflationary
controls. subsidies, selective protection, etc such as steel, oil refining, petrochemicals,
pressure. Devaluation has become virtually - would distort prices and make the resulting or shipbuilding.
a compulsory requirement for getting IMF allocation inefficient, thus hindering A corollary of the third is an open door
assistance since 1983 [Bird 1993:20]. economic growth. Controls, by restricting policy with regard to the multinational
One perennial problem with IMFor Worldflows of commodities or capital, involve enterprises - many of which are vertically
Bank assistance is that once dependence onhigh social costs, distort priorities, and integrated, operate with numerous affiliates
those begins it seldom ends. One programme
involve rationing in some form or another. and subsidiaries spread over the world, and
is followed by another and loanees, in Further, controls create opportunities for maintain close and tacit understanding with
particular low income countries, find it rent-seeking on the part of license-seekers fellow oligopolists while also engaging in
difficult to disengage themselves from those
and bribes or accumulation of social /political
non-price competition with them. Under
funding bodies. Counting of figures show power, on the part of the controlling structural adjustment, such enterprises should
that 21 countries had support for 14 years authorities. In case of the less developed be treated on par with the local enterprises
or more, and Mexico has continuously been countries. such controls operate in favour of and should not be discriminated against. In
on the agenda, one programme succeeding the better off, mostly urban dwellers, particular 'local content requirement' - e g,
another, from the beginning of structural including the bureaucrats, at the cost of the to deploy local labour, to purchase local
adjustment in 1980. There is, thus, strong rural poor. Food is under-priced to satisfy goods and services, to reinvest a part of the
evidence that IMF policies do not allow a the urban-industrial sector. profit within the country or to export a
country to graduate away from their reliance Privatisation: It follows from this eco- proportion of total production, and so on -
on these organisations. All these despite thenomic philosophy that whatever public sectorshould be discontinued. Foreign competition,
idea incorporated in. the Articles of economic activities are in operation should according to this view, would improve the
Agreement of IMFthat such assistance would be closed down, or phased out or trimmed, efficiency of the indigenous producers and
be temporary and the funds would be or passed on to the private sector. Public would drive them towards production of
revolving [Bird 1993:12-13]. ownership should be allowed only in cases goods that are in line with the country's
Regression models on the demand for of natural monopolies and strategic industries,comparative advantage. Further, the vast
IMF loans give inconsistent results with lowe g, in defence and research establishments, experience, skill and new technologies of the
explanatory power, possibly because of the and should not be allowed to become a drain MNCs would facilitate global integration of
arbitrary nature of assistance decision [Bird on state resources. These would operate under the national economy.
1993:22-26]. Countries suffering from a memorandum of understanding that
ROLE OF THE STATE
balance of payment problems initially resist delineates state's financial commitment and
the ideaof borrowing from IMFwith attached other responsibilities. Privatisation of such This world view is reflected in specific
conditionalities, but once they have passed enterprises would improve their efficiency provisions in the conditionalities of these
a threshold, they become less resistant to and bring much needed fund for reducing two organisations. Their insistence in
future borrowing [Bird 1993:271. In case of fiscal deficit. bringing down inflation first to single digit
IMF sponsored structural adjustment Globalisation: The third major objective level and then further to a figure of around
facilities, IMF conditionalities come very is globalisation. Here the core idea is that 3-4 per cent reflects their concern for macro-
close to the World Bank ones, as given more trade is better for all the parties economic stability. The concern for a low
below [Killick 1992a:21-22]. concerned - some may gain more than others, fiscal deficit leads them to insist on
but all would gain. Any action that interferes elimination of subsidies. Privatisation, by
WORLD BANK CONDITIONALITIES
with the free flow of capital, goods and improving efficiency and eliminating
The conditionalities imposed by World services, would produce sub-optimal results.subsidies for public sector activities, they
Bank tend to be less specific and aim at Import substitution and consequent protective hope, would reduce fiscal deficit and
reorienting the incentive structure in tune measures, e g, tariffs, controls and restrictions,
inflation, while the selling of government's
with a market-centered economy. The threeraise the cost of d!omestic production. Such share in public sectors is expected to
main components of World Bank condi- a policy discriminates against those export contribute furthertowards theeffortto reduce
tionalities seek to achieve liberalisation, items that could be traded in the global deficit.
privatisation and globalisation, described by market on the basis of the country's Not that the state has been left with no
some as the LPG model. comparative advantage, by reducing their role under this new regime. The main
Liberalisation: The core of the idea is thatcompetitiveness. Import substitution, in this economic task of the government, under
economic management should be left to the way, hinders exports, makes the economy structural adjustment programme, is to
market. The prices determined by the inward looking and increasingly backward, pronmote 'human capital formation'.
interaction of demand and supply forces -and isolates it from worldwide technical and Universaltsation of literacy, priority
whether for commodities, labour power, other changes. extension of technical education and access
capital, land, or foreign exchange - should Further, the goal of self-sufficiency makes to safe drinking water and health facilities
be flexible in either direction and should be no sense in a closely integrated world by all, are seen as major areas of governmental
capable of clearing the market. The resulting economy with free buying and selling. A activity. Natural monopolies and areas of
allocation -of resources, commodities, labour countr' should specialise in production and
security concern are also admitted as
power, foreign currency, etc - would be exports only in those items where it enjoys
exclusive preserves of the state, as also its
role in rectifying market failures'. Another and for future prosperity. During the 1980s the decline in public investment [Stevens
major task of the 4tate is to create and main- poverty alleviation was not seen as an area and Solimano 1992:120].
tain an incentive structure and environment of primary concern in the structural Further, when a government is forced to
that is conducive to production under adjustment programmes, the argument being reduce its expenditure, the axe tends to fall
private ownership. All these are in addition that a high growth rate would take care of on capital expenditure, e g, on irrigation,
to the traditional functions of the state - to poverty-related problems. State subsidies for power and other major rural infrastructure,
maintain law and order and to defend the the economically poor or socially backward, to the detriment of production [Killick
country. Otherwise, the government is or for underdeveloped regions were frowned 1992a:19-20]. In many cases social
expected to retreat and to allow the market at while they prescribed whittling down and expenditure on education or health is also
to take over. eventual abolition of public distribution curtailed [Mosley et al 1991:101-2]. The
The Fund-Bank package relies heavily on systems (except limited ones targeted towards global experience shows that a fiscal
the financial sector to provide necessary the poorest). This stern view was somewhat adjustment that falls disproportionately on
incentives to the private agents of production.
modified after UNICEF pleaded fora 'human capital expenditure tends to reduce private
Financial reform is, therefore, an integral face' in structural adjustment [Cornea et al investment and hinders export promotion by
part of the overall reform package. State 1987]. Some 'social component' is now leading to exchange rate appreciation in some
directed credit for certain favoured categories added to structural adjustment programmes, cases [Foroutan 1983: 29]. The balance
including the poor and the weak, usually such as a 'renewal fund' or a 'safety net' achieved between imports and exports, in
along with subsidised interest rates, is for the severance pay and retraining of a this situation, often reflects a low capacity
frowned at. The interest rate is expected to retrenched worker. to import because of a slow rate of growth
be flexible and market-determined, while This is a bare outline of Fund-Band of GDP. As two scholars from within World
allocation of credit is subjected to forces of fundamentals and conditionalities. Most of Bank once pointed out, "There is little merit
demand and supply. A corollary of this these conditionalities are present in most of in having a low budget deficit and a low
objective is to keep real interest rate positive,
the agreements, explicitly or implicitly, external account deficit if the outcome is a
that is to keep nominal interest rates ahead though not all the agreements include all the low level of saving and investment in the
of inflation, in order to encourage saving. components discussed above. economy" [Chiber and Khalizadeh-Shiraji
The concept of'development banking' is 1991: 28].
V
rejected in favour of the view that banks too Oneeconometric study by El Farhan, using
Consequences: The Global
should aim at profit-maximisation. data for 32 countries of sub-Saharan Africa,
Experience
Uneconomic parts of bank functioning - finds a close positive correlation between
such as branches in backward and in- In this section we are examining some of GDP growth and export earnings and a
accessible areas at a loss - should be dis- the major consequences of the structural negative one with debt service ratio [Killick
continued. The state enterprises should not adjustment prograamme for the economies 1992b: 12-14]. Another study shows that per
have privileged access to bank finance and of the loan recipient countries. These are capita income declined in 17 out of 23
should not 'crowd out' private sector invest- broad generalisatons, based on the reading adjusting countries in Africa and 11 out of
ment. Further, banks too should be under of available data at global level, and do not 13 adjusting countries in Latin America,
private ownership, and foreign ownership rule out countrywise variations on some during the 1980s, which is now described
should not be discouraged. speicfic points. as the 'lost decade of the 1 980s' [Comments
Fiscal reform too is an integral part of the by Frances Stewert, in Corbo et al 1992:67].
GDP GROWTH, SAVING AND INVESTMENT
adjustment package. The tax structure should A major difficulty with the stabilisation
RATIOS AND EXPORT EARNINGS
be transparent and simple, not arbitrary and/ programme is its exclusive cqncern with
or dependent on the whims and caprices of One major consequence of demand curtailment of government expenditure, for
the taxing authorities and not oppressive. management under IMF stabilisation reducing fiscal deficits, while theotheroption
The rates of taxation should be low enough programme has been, for most countries, a for meeting the same objective, that is
to encourage compliance and to avoid the decline in saving and investment ratios augmenting revenue by taxing those who are
growth of 'black money'; even with lower associated with or leading to a decline in able to pay, particularly the rural rich and
rates, a higher level of compliance, along GDP growth rate, even when trade deficits the new industrialists and traders, is virtually
with a stricter enforcement, the taxes would have been eliminated and inflation has been ignored. The adjustment programmes, while
be expected to raise the level of revenue bridled [Corbo and Fischer 1992:14]. This stressing on the need to reduce tariff, say
collection. The tax system should be is largely because, contrary to the Fund- virtually nothing about tax reform and, with
conducive to saving and investment and Bank fundamentals, a decline in public a few exceptions, no effort has been made
productive asset accumulation and should investment, carried out in order to reduce to increase tax revenue. One dominant
not be, as far as possible, discriminatory andfiscal deficit, has not been compensated by argument against such policy is, a la Donald
selective in its incidence. a corresponding rise in private investment. Please, that it might lead to a reduction in
The proponents of structural adjustment Ratherthan crowding out private investment, aggregate saving in the country, as the
do not claim that adjustment would be as World Bank would make us believe, public propensity to save is lower in case of the
achieved without pain. The easing of price investment in an area signals government public sector compared with the private
controls might, at the initial stage, lead to priorities and commitment and willingness sector. However, as the east Asian experi-
a sudden jump in prices, and inflation might to share risks, that encourages private ence shows, it is possible to raise tax revenue
continue at astronomical rates for several investment. This complimentary nature of to finance public investment, which in turn
these two types of investment, in the context can raise aggregate saving and investment
years, but, eventually, as prices settle to new,
higher, levels, inflationary pressure would of the less developed economies, is not in a country. Further, as the experience in
be brought under control. The Fund-Bank understood by the voluminous World Bank Thailand and Malaysia shows, it is pos-
prescription does not rule out growing literature and prescriptions [Mzulu 1993: sible for a government to maintain a high
poverty, inequality orunemployment during 3 1; Stevens and Solimano 1992:132]. budget deficit without affecting the current
the process of adjustment, but, they argue, Perhaps the only major exception in Chile, account if the private sector is willing to
this would be the price to pay for past follies where private investment has made up for generate additional net saying surpluses at
reasonable rates of inflation and real interest of the financing needs that these countries commodity marketing boards under World
rates [Chibber and Khalizadeh-Shirazi have faced or in terms of other financial Bank directive, and the adverse terms of
1991:27-39]. flows. At a time when countries had severe trade effect mentioned above, prices have
Justification of such an attitude on the payments difficulties, often associated with become lower and unstable. Where
ground that it operates as a disincentive, attempts to escape from the problem of agriculturists have gained from higher pr
again, looks at the issue from one side - that external debt, the IMF took more money oftheirproduce,eitherbecauseof withdrawal
is the requirement to induce the rich to make back from them than it made available in the of price control or because of a rise. in
effort to become richer by producing more form of new loans. This raises important government administered support prices, this
- but not the other, no less important, one issues in terms of the systemic role of the has been outweighed by higher input prices
of providing incentive for the vast majority IMFas an international financial institution"they have been asked to pay because of
of workers who would actually turn the [Bird 1993:33-34]. cessation or lowering of subsidies. In several
wheel. In fact, the literature on structural Contrary to monetarist expectations, credit instances, only the larger, surplus producing,
adjustment and new political economy is restrictions tend to have adverse farmers have gained from higher agricultural
replete with policy prescriptions that would consequences for output and employment, prices, given the highly skewed land
keep wages within limits, even by way of particularly because of the undeveloped distribution in most of the less developed
repression of organised labour, while nature of the financial market. Where countries [Dasgupta 1997c; ILO 1993: 5;
allowing the industrialist and trader to quantitative controls are imposed on credit, Toye 1991: 190-97]. The rural producers
maximise protit. the banks tend to prefer bigger customers; have suffered more from the curtailment of
While public enterprises are being sold active competition from the new customers public expenditure on irrigation, power,
under structural adjustment as a part of the is discouraged [Killick 1992a: 17-18]. roads, education and health, undertaken in
privatisation process, the units being sold are Even where stabilisation programmes order to reduce fiscal deficit, as discussed
not usually the ones that are unremunerativeshow some success, it is never easy to above [Webb and Shariff 1992: 77-78].
and loss-making. More important than the establish how much of it is because of good On balance, the influence has been more
desire to improve efficiency by disposing ofpolicy advice and how much because of the negative than positive on agricultural output.
those draining the state resources, becomesfinance it accompanied. As the experience Politically also, there is no evidence anywhere
the necessity to sale the profit-making andof sub-Saharan African countries shows, of the agriculturists marching to the capital
more efficient of the public sector units despite following the IMF and World Bank with waving flags in their hands to express
which are more likely to be sold in the market prescriptions more truthfully than most their support or gratitude to the government
and at a good price and which will, thus, helprecipient countries, they are yet to recover for implementing structural adjustment. In
to reduce fiscal deficit. Sometimes, reductionfrom deflation induced by the IMF package.any case, the high level of agricultural
in fiscal deficit is carried out by a sleight Repeated devaluations have failed to boost protectionism in the US and western Europe,
of hand, that is by pushing the public sectordemand fortheirexports, though the external farexceeding that in less developed countries,
units out of the budget, along 'with their accounts are in better balance now than they has undermined the credibility of Fund-Bank
liabilities, inordertoimpress thelMF visitinghad been in the past: In several cases prescriptions favouring liquidation of
team deciding on the release of the next competitive devaluation has brought agricultural subsidies and controls in less
tranche. Even where, as in the Indian case,collective ruin for countries exporting the developed countries [Development
tight monetary and fiscal discipline helps to same range of products, as the prices have Committee 1992: 93-94]. On the other hand,
bring fiscal deficit and inflation down, it is steeply declined. these structural adjustment packages have
seldom easy to sustain the process when Agriculture: Agriculture was expected to ignored the most basic structural issue in
GDP growth slows down; and when some benefit from structural adjustment, largelyagriculture: land reform. In several cases the
relaxations are announced to boost demand, because of its bias in favour of that sector. process of land reform has been reversed
the fiscal deficits and inflation tend to go With the dismantling ofcontrols that favouredunder structural adjustment, as in Chile, Peru
on the rise again. urban-industrial interests, agriculture was andEthiopia [Knudsenand Nash 1991: 137].
Some have argued that the last thing a expected to take off and its exports were Industry: The main thrust of the industrial
country needs when facing adverse external supposed to be the main eamer of foreign policy under structural adjustment has been
account along with a low growth rate is such exchange (along with light industries such towards elimination of control and subsidies,
IMF prompted deflationary policy. In the as textiles) for meeting the costs of imports support to private agents, rolling back of the
middle of the deepest depression for half a of other goods. Agriculture was taken as an state from economic affairs, and 'getting the
century, in 1982, IMF sought demand area where the less developed countries prices right'. The removal of entry barriers,
constraint in borrowing countries that could possessed a comparative advantage, and withunder adjustment, allows both domestic and
not but depress the economy further. the dissolution of controls that kept domestic foreign companies to move in; attempts to
[Williamon 1983:640]. While a high dose agricultural prices low and the costs of impose 'local content requirements' on
ofdeflation helps to restore external balance,agricultural inputs high, this advantage was foreign firms are frowned at. The programme
in the process it jeopardises the internal supposed to take the economy to new heights. discourages investment in heavy industries
balance, and outweighs the expansionary Further, the agriculturists, identified as and prefers production in line with the
effectsofdevaluationon demand fordomestic potential beneficiaries from structural reform, 'comparative advantage' of a country, which
goods [Williamson 1983:626]. Some even were expected to form the core of a political in effect implies specialisation in light
describe the excessive demand compression coalition in support of reform, in order to industries such as textiles and garments. The
prescribed by IMF as macro-economic make it politically feasible in the face of stiff conditionalities imposed by the World Bank
overkill [Mosley et al 1991: 7; Killick opposition from vested interests in industries reflect its strong opposition to a national
1992a: 5]. As one important study on IMF and urban areas [Knudsen and Nash 1991; strategy of self reliance based on import
concluded: "Lending by the IMF has notDasgupta 1997c]. substituting industrialisation.
made a significant contribution to financingDespite these expectations, agriculture has, There is no evidence that domestic
balance of payment deficits in developing generally speaking, done badly under industries have bloomed under structural
countries as a group during much of the structural adjustment. In most cases, with the adjustment anywhere. Where, in recent years
1980s and 1990s, either in terms of the size dissolution or dilution of the working of the a group of less developed countries have
sustained a high rate of industrial growth for oreast Asia by the United States and the west unionists, that long-term labour contracts,
threedecades, thatis in east Asia, the influence European countries under the Plaza Accord with tenure systems and the like, are an
of Fund and Bank was conspicuous by its of 1985 and the Louvre Accord of 1986 important feature of well functioning labour
absence during the course of their growth, [Hobday 1995; Dasgupta 1997a]. Another markets in many developed countries; Japan
but for a short period of around five years explanation is given in terms of Chinese as a country and IBM as a company being
in case of South Korea immediately after the connections, emphasising the fact that the two good examples of such a policy [Corbo
second oil crisis of the 1970s. The policies business in the three successful southeast and Fischer 1992: 20]. In recent years,
they followed were at variance with the Asian countries (but not in the Philippines) through the office of WTO, attempts are
World Bank commandments, and despite is in the hands of the minority ethnic Chinese being made to impose some 'labour
this (according to many, because of this) community which has links stretching standards' on the less developed countries
they had managed a very high rate of growth
through Taiwan, Hong Kong and Singapore that, despite the high moral posturing by the
of GDP and industrial production. Rather to the mainland. Trinity (including WTO with the twins), are
than taking a back seat, the interventionist Labour, Employmenit and Social Issues: in effect concealed protectionist measures
state led industrialisation from the front, The protagonists of structural adjustment against less developed country exports. The
directed credit and investment, offered seek reform of labour market too, by latter have now begun raising the issue of
subsidies in its chosen priority areas. rescinding labour legislation that inhibit labour mobility (paralleling the rich country
promoted heavy industries, operated a large dismissal of employees, and reduce factor demandformobility of capital) andtheeasing
public sector which included banking, kept mobility and substitution, but in most of immigration laws in the rich countries to
the foreign companies at bay and/or bridled countries, because of strong local opposi- allow poor country labour export as a
them with heavy domestic content tion, have not been able to make much countervailing measure.
requirements, protected fledgling domestic headway in this area. As one World Bank It has been found that the breakdown of
industries from unequal competition until document puts it, "the Bank has acquiesced the adjustment programme and a policy
they were strong and capable of standing on in the desire of the governments to avoid reversal is more likely in cases where the
their own, and did everything else too that the politically sensitive issue of labour social cost is high, in terms of its impact on
was diametrically opposed to the generous vulnerable
retrenchment" [Corbo and Fischer 1992: 1 1; sections, e g, in Zambia in 1987
advice rendered by the Bretton Woods twins. Webb and Shariff 1982: 78]. Only in a and in Madagascar in 1991, leading to
While the east Asian success with import country like Ghana, where ghost workers suspension of adjustment programmes
substitutingindustrialisation canbeexplained constitute a significant proportion of the [Foroutan 1993: 31]. A food riot here and
by a wide range of factors, including public pay roll, a substantial public a strike there, or, in case of democracies, a
implementation of land reform, heavy saving has been achieved by removing few election debacles, is likely to unnerve
investment on human capital over a long many (not all) of those from the list [Toye the government in power and to lead to a
period, offering time-bound protection, 1991: 175]. rolling back of the economy from structural
seeing import substitution as complimentary In general, structural adjustment leads to adjustment. Most studies show that struc-
to export promotion, good macro-economic a freeze in public employment and the private tural adjustment gives rise to poverty, un-
management and access to western markets sector employment also seldom grows employment, lowering of wages and a lower
because of close links with the western because of low level of private investment. level of access to health and education, as
Most of the unemployed fa!l back on the low government social spending and subsidies
powers, the fact remains that the state played
productivity informal sector which acts as
a role in east Asia that is reckoned as harmful are reduced and wages are held back in the
for production and growth by the World a natural safety net. The high social cost of faceof inflation [Mzulu 1993:32].One World
Bank theology [World Bank 1992:5-6; structural adjustment programmes has been Bank study, evaluating the performance of
Amsden 1989; Wade 1990; Dasgupta, a recurrent theme in studies by Unicef and the adjustment programmes in the 1980s,
1997a]. ILO among others. In sub-Saharan Africa admits that calorie intake had stagnated or
Perhaps the 'southern tier' of three structural adjustment has destabilised manydeclined during the 1980s, and poor had
southeast Asian countries, Thailand, poor households, which have been hurt by been hurt by pruning of government acti-
Indonesia and Malaysia, two of which inflation and food scarcity [ILO 1993: 4-9; vities or privatisation of health and other
operated for a long time under structural Cornea et al 1987]. services; in the latter case the richer are
adjustment, are the best examples of industrial For a long time, social issues were ignoredtargeted by those providing services [World
success under this package. But the record by World Bank, but from the early 1990s, Bank 1992: 6; Zuckerman 1991: 254]. On
gets somewhat soiled when one recalls that thanks to a campaign launched by Unicef, the other hand, on the basis of evaluations
the fourth country in the region, Philippines, a 'social dimension' is now added to SALs, undertaken by the World Bank, some take
which was at one time the most advanced e g, with a safety net and renewal programmes the view that adjustment lending is not
of the four, and which has been showered that cushion the impact of retrenchment in associated with misery, and is less costly,
with more blessings by the Bretton Woods non-viable industries by offering some in social ternms, than disorderly adjustment
twins than the other three, has failed to take funding and training for self- employmentwithout Bank support would have, been
off despite being under their tutelage ever and other jobs [Development Committee [Corbo and Fischer 1992: 14]. Some prota-
since structural adjustment was initiated. 1 993b: p v]. However, the amount available gonists go as far as to argue that a country
The failure of the Philippines makes one for these activities have usually proved to has no choice but to go through this pain
question the merit in attributing industrial be inadequate. On this issue there appears because of past follies and the future it
success in southeast Asia to structural to be a serious contradiction between the promises. There is a view that even social
adjustment. One possible explanation lies in Bretton Woods twins and ILO, which views safety nets should be privatised, while more
the flying geese model, or some of its variants provision of social insurance and social dominant view is that, in view of limited
such as the neighbourhood effect, that protection both as a human right and as an fund-management capability and the virtual
attributes industrialisation in this area to the
essential element to be embodied in concepts non-existence of regulatory mechanism, such
shifting of Japanese (and then east Asian) of international labour standards [Develop- a measure might expose the pensioners and
capital to this region to evade restrictions ment Committee 1993b; 123]. There is a other beneficiaries to a high risk [Develop-
placed upon their own investments in Japan strongly held view, and not only by the trade ment Committee, 1993b: 5 and 69-74].
On the issue of public distribution system, improve efficiency, state enterprises should have done in any case in their own interest.
the overwhelming opinion inside the Fund- be allowed to sell theirgoods at a price above This is based on the argument that export
Bank establishment is in favour of trimming the desired level. orientation, openness and competition are
it to its minimum size and targeting it in As one World Bank document admits: universal good things that benefit everyone
favour of the rural poorest. The opinion on "The key factor determining the efficiency [Balassa 19811. The assumption underlying
the other side is that, in a situation where of an enterprise is not whether it is publicly the argument is that the global trade is free
the administration is not equippedto identify or privately owned, how it is managed", and and competitive, there are few barriers to
recipients and perform such targeting, such once barriers to entry have been removed, entry and all that a country needs, in order
a policy does hurt the most vulnerable sec- to reap its benefits, is toidentify commodities
there is no a priori presumption as to whether
tion in a poor country [Knudsen and Nash better management will be found in public in which they enjoy comparative advantage.
1992; also comments by Nurul Islam on that or private sector [World Bank 1983:50]. This formulation has been challenged. As
paper, 153-158; Development Committee, Allocative efficiency is a function of market
John P Lewis commented: "the neo-classical
1993b: 75]. structure and not of the form of ownership alternative of a completely open international
Public Sector Reform and Privatisation: [Mzulu 1993: 31]. Many states, goaded by market is not a viable alternative because it
Since state intervention in economic affairs the World Bank, tend to dismantle the public is not available [Lewis 1995: 34]. A recent
is considered to be bad per se, two types of sector hastily, even when the private sectorOECD document alleges, there is no free
issues are handled in relation to public sector market, and the market is typically dominated
is not ready to offer services that were until
units in structural adjustment programmes: then delivered by the state owned units by largeoligopolistic firmsengagedin mostly
first, how many of these public sector units [Mosley et al 1991: 112]. Another World non-price, and sometimes price, competitions
can be transferred to private hands to make Bank document takes the view that amongst themselves [OECD 1991:192]. We
them more efficient, and, second, how those privatisation is not always a necessary have already pointed out that exports from
remaining in the public sector can be made strategy; in China or South Korea private less developed countries are subjected to a
more efficient and less burdensome for the sector grew without privatisation. More variety of trade restrictions in the developed
government. As for the first, we have already important is to stress on restructuring and countries [Low 1995; Schott 19941. Limita-
noted that, in the privatisation programmes, upgrading public administrative capacities. tions of space and focus prevent us from
concern for bringing down fiscal deficit It also admits that attitude regarding presenting evidence, mainly from UNCTAD,
makes the state sell mainly those public OECD and even World Bank sources, to
privatisation has been changing in the light
sector units which are running well, but of the east Asian experience reinforce this argument in relation to less
which also have agood demand in the market. developed countries' exports in general.
[Development Committee 1993a: 69-70;
On the other hand, units that are not a note on private sector development: aPerhaps, more important than any other
performing well and might possibly benefit progress report prepared by the World Bank policy change, at the global level, for the
staft].
by being transferred under private ownership, benefit of the less developed countries, would
generally fail to find buyers, partly also have been some restructuring of global trade
RATIONALE FOR WORLD BANK
because the domestic capital markets are that helped to reverse the unfavourable shift
CONDITIONALITIES
unwilling to fund such transfers, and the in terms of trade in favour of primary
governments continue to run those at a loss. Several scholars have questioned the producers. Most studies, mainly undertaken
by World Bank, IMFand UNCTAD, indicate
Shutdowns are not seen as a preferred alter-rationale behind World Bank conditionalities.
native in this situation as these lead to Where the recipient countries are convincednot only how terms of trade havebeen moving
increased unemployment and provoke about the need for those policies, such for many years now against primary exports,
strong opposition. Even in countries where conditionalities amount to pushing an open but the fearful prospectofthetrend persisting
public sector units have been sold in door. Where the recipient countries are until the end of the first decade of the next
dozens, e g, in Chile or Mexico, potential reluctant, and such policies are forced down century. A study by Fund-Bank officials
buyers often collude and offer low -prices.their throat, the political will tends to be shows that terms of trade of the exports of
Sleaze is a regular companion of such missing [Foroutan 1993:9]. The government the lessdeveloped countries havebeen falling
transactions [Webb and Shariff 1992: 80; concerned always compares the political cost since the early 1980s, and, for the non-oil
Nash 1992: 5031. A senior economist with of compliance with conditionalities with the commodities, had fallen by 45 per cent, in
pro-privatisation views like Arnold C financial costs of non-compliance [Mosley real terms, between 1984 and 1994. In 1992,
Herberger has cautioned: "Even people as et al 1991:77]. Sometimes conditionalities their terms of trade with manufactured goods
generally market-oriented as myself are are formally accepted without meaning to reached their lowest level in 90 years
adivising governments to move carefully, to implement those. The very high mortality [Development Committee 1994:53-60].
go slowly and to think about the prices theyrate of the structural adjustment and Between 1980 and 1993, the index of real
are getting and alternate terms on which to stabilisation programmes is, at least partly, commodity prices fell by half and, according
achieve privatisation. Governments should, a consequence of such coercion. "Half of all to Lewis T Preston, President of World Bank:
in particular, try to have a salable asset programmes broke down before the end of "today the real price of many non-oil
before putting it for sale" [Corbo et al their intended life in 1980-90; two-thirds in commodities are the lowest they have been
1992:182]. 1987-90. Three-quarters of World Bank since 1945; in many cases prices are so low
Public enterprise reform turns out to be adjustment loans have installment tranche that they do not cover production costs. For
the most difficult of all reforms incorporated releases delayed because of non-imple-' 1993, the transfer in purchasing power from
in structural adjustment [Development mentation of policy condition in 1987-88" the developing to the developed countries
Committee 1993b: 42]. In some cases there [Killick 1993:1041. due to the fall in non-oil commodity prices
appears to be a trade-off between getting the Export Orientation: One major argument between 1980 and 1993, was about $100
in favour of structural adjustment, from the billion - more than double the net aid flows
prices right and reducing the budget deficit
of the government. According to one view point of view of the less developed countries to developing countries in 1993" [Develop-
inside the World Bank, in the transitional is that, despite the evident rich country self- ment Committee 1994:81.
period, while allowing imports to compete interest in it, the conditionalities only force Not only that the negative terms of trade
with public sector products and striving to the poor countries to do what they should effect outweighed the positive effect of aid
inflow, these accounted for a massive loss studies to vindicate Fund-Bank condi- public investment and sluggish private
of up to 7 per cent of GNP. The document tionalities. One objection is that, in those response to improved policy instrument.
predicted that during the next ten years, cross country studies, 'success' is defined (d) outcomes tend to be less favourable for
commodity prices would increase slightly inaparticularway: theirdegreeof conformity low income (or African) countries than
faster than those of manufactured goods, with conditionalities, e g, openness, export- for middle income countries.
but, after that, the long run declining trend orientation and so on, rather than in terms (e) on balance, adjustment programmes have
would again assert itself [Development of a set of objective economic criteria. only a modest capacity to improve-
Committee 1994:8]. In this situation, more Secondly, countries operating under those economic performance.
production and export of agricultural conditionalities are compared with those (f) the absence of strong results is partly
commodities, in line with their static which are not, as if conditionalities alone because conditionality has a modest
comparative advantage, by all the poor account for the differences between these revealed capability for achieving im-
countries of the world together, is likely to
two sets of countries, ignoring a whole variety proved policies [Killick 1993:104].
pull down their prices even further. The of intervening factors including initial The study by Mosley et al, based on data
misery of primary exporters is compounded conditions, historical and political context for 17 SAL recipients, finds that the overall
when, in a region, as in Sub-Saharan Africa, and also the specific conditions prevailing effect of finance plus policy compliance is
they together account for a significant in the world market during that period. weak, and the two operate in conflict with
proportion (30 per cent or more) of world Thirdly, even ignoring those, the con- each other - the finance having a negative
supply of some commodities, and the clusions derived by these evaluations do not
effect while the reform having a positive
intensified export drive brings down their necessarily follow from the data provided one. However, the study is not clear about
prices and even export income despite a by these studies themselves. Even where the direction of causation, whether high
highervolumeof exports, in many instances. success has been achieved with structural growth has made liberalisation possible, as
This 'fallacy of composition' is not usually adjustment, it is never clear how far this is in east Asia. On the other hand, neither
takenaccountof when theFund-Bank policy- due to conditionalities and how far to the finance nor reform seems to have attracted
makers advise the less developed countries additional funding made available along with foreign private investment [Mosley et al
to focus on export orientation [Killick it [Killick 1993b; Mosley et al 1991:182- 1991: 208-24].
1992b: 191. Further, structural factors in 205].
the It was also asked whether one would Over the past 11 years, from time to time,
world trade system come in the way of get a fair idea of what is happening around several 'miracles' have been projected outside
export expansion through devaluation-based the world by putting Botswana on par with east Asia, such as Turkey or Mexico, that
price decisions alone. And if devaluation China, 1000 times bigger, without any have not stood the test of even half a decade.
fails to keep imports in trim, there remains weighting, in these exercises [Comments by A deep search of the literature reveals
the possibility of price rise through high Jere R Behrman in Corbo et al (eds) 1992: only two country cases of consistent per-
import costs, which in turn affects export 64]. As for the before-after exercises, it doesformance over a reasonably long period:
prices, given import intensity of exports in not tell us what could have happened without Ghana under Rowling and Chile under
many situations. In such situations, reform [Mosley et al 1991:182]. Pinochet. Even in these two countries,
devaluation might be able to do very little Working on the same set of data as used 'successes' are only in relation to the im-
for balance of payments [Killick 1 992a: 16; by World Bank, the Economic Commission mediately preceding period, post-Nkrumah
Mzulu 1993: 68]. The expected turn-around for Africa has reached the opposite con- and post-Allende periods, respectively, until
is nowhere on the horizon despite running clusion: thatcountries with 'strong' structuralstructural adjustment was vigorously
those programmes, off and on, for a decade adjustment programmes recorded an overall pursued. When comparison is made with
and half, in case of these countries. negative average annual growth rate (about periods under Nkrumah and Allende,
A major shortcoming in the Fund-Bank 1.5 per cent) during the period 1980-87, respectively, in terms of saving and invest-
policies is the assumption that, forthe failings while 'weak adjusting' countries and 'non- ment ratios and growth rates, the period
of those economies, only the governments adjusting' countries achieved an overall under structural adjustment does not appear
of those countries are responsible. Such average annual GDP growth rate of 1.2 per in a positive light even in case of these
policies do not consider adequately the cent and 1.3 per cent, respectivel, during two countries [Leechor 1991: 327; Moran
the period 980-1987 [Mzulu 1 !93: 62].
structural constraints within the world trade 1991: 478 and 490-93; Agosin 1981: 27].
Econometric studies by independent scholars,
structure that inhibit growth of their exports. The views propagated by the World Bank
As one econometric exercise shows, terms based on the data for the recipient countries,
and IMF are by no means shared by all the
of trade and weather produce better results do not reveal any clear pattern. Terms of international agencies. Indeed, various other
on GDP growth than Fund-bank policy or trade or weather appear to have a more directinternational agencies have, from time to
finance [Mosley et al 1991: ?08-171. Such impact on GDP. There is sufficient evidence time, raised important questions regarding
decline in terms of trade cannot be explained that the packages inhibits GNP growth, different aspects of structural adjustment.
by the demand factors alone; the collapse saving, investment, and propensity to import
UNICEF has focused on the misery inflicted
of international stabilisation schemes for [Killick 1992a: 5; Stevens and Solimano on the people, particularly the poor, by such
some major commodities, partly induced by 1992: 117-32; Schmiddt-Hebbel 1992: programmes, ILO has opposed the idea of
Fund-Bank hostility towards marketing 139-158; Mosley et al 1991: 208-25]. trimming labour legislation in the name of
boards, have contributed to price volatility Killick summarises the overall perfor- letting the market work, FAO has challenged
[Development Committee 1994: 53-60]. mance of the structural adjustment pro- the idea that food security is not important
World Bank Evaluation of Structural gramme as follows: and countries running deficit in food need
Adjustment: Over the past decade or so, (a) these strengthen balance of payments not strive for food self-sufficiency, UNCTAD
several World Bank studies have attempted but fail to bring down inflation; has questioned the view that trade is the cure
to vindicate their conditionalities in terms (b) programmes do not make much dif- for all third world ills, and regional Eco-
of the progress achieved in the countries ference to economic growth. Results fornomic Commissions for Africa as well as
undergoing such adjustment. However, various countries are in conflict with for Latin America and Caribbean have
several scholars have raised serious questions one another. expressed their opposition to the package in
about the methodologies adopted in those (c) programmes are associated with reduced its entirety.
VI Leaving aside east Asia, and to a certain Paper 70. London.
Conclusions extent southeast Asia, one is hard put to Chibber, Ajay and Javed Khalizadeh-Shirazi
come across cases where the structural (1993): 'Public Finance' in Thomas et al
This paper has attempted to show that adjustment model has proved to be a success. (eds), Chapter 3, e20-46.
Cooper, Richard N (1983): 'Comments in a
structural adjustment has been formulated Miracles have been projected from time to
Panel Discussion' in John Williamson (ed),
and implemented by Bretton Woods orga- time, but these have not failed to withstand
pp 569-80.
nisations, which operate exclusively in the the test of time. The only two cases of
Corbo, Vittorio, Stanley Fischer and Steven B
less developed countries. It has asked the success are Ghana and Chile, which are
Webb (eds) (1992): Adjustment Lending
question whether such action, i e, the 'success' only in a qualified sense, in Revisited - Policies to Restore Growth, A
introduction of structural adjustment, on the comparison with the immediately preceding World Bank Symposium. World Bank.
part of the very rich countries, has been period; per capita income and investment Corbo, Vittorio and Stanley Fischer (1992):
prompted by an altruistic motive or whetherratios, to pick only two of the major variables, Adjustment Programmes and Bank Support
theirself-interest is involved in this exercise. are lower in these two countries now than - Rationale and Main Results in Corbo et al
It then asks the question, how far and to what they were under Nkrumah and Allende. On (eds), pp 7-20.
extent the adjustment package has been the other hand, the structural adjustment Cornea, Andrea, RichardJolly andFrances Stewert
package, rather than injecting funds from
introduced to rescue the international banking (1987): Adjustment With a Human Face,
system facing bankruptcy in the aftermathoutside, has actually reversed the net flow Oxford University Press, Oxford.
Dasgupta, Biplab (1997a): 'The East Asian
of the second oil crisis and debt crisis and/of resources in favour of the rich countries,
or to find markets for the MNCs of US origin as evidence available from World Bank and Devel,opment Experience: A Critic
Analysis', mimeo, Calcutta.
in view of the massive balance of trade IMF sources shows.
-(1997b): 'The New Political Economy: a
deficit that country is incurring every year. The biggest flaw of the package is that it
Critical Analysis' in Economic and Political
In other words, whether the burden of expects the less developed countries to
Weekly, January.
'adjust' to the world economic environment, , (1997c): 'Indian Agriculture in the Global
adjusting the massive balance of trade deficit
of the US has been passed on to the less by which they imply the environment created Context and Under Structural Adjustment'
by the rich countries themselves, while
developed countries in the form of structural in G K Chaddha and Aloke N Sharma, Growth,
adjustment. placing no obligation on the rich countries Employment and Poverty in Rural India:
Section IV examines IMF and World to orient their economies in tune with poor Change and Continuity, Allied Publishers,
Bank conditionalities, the economic coercion country interests. It blames the governments Delhi.
thatit accompanies, and the particular manner in the less developed countries for all their Development Committee (1992): 44th Meeting,
in which the negotiation is carried out, economic ills, but fails to take into account September, World Bank, Washington DC.
including the formulation of PFP, in order the real 'structural' factors that inhibit their -(1993a): 46th Meeting, May, World Bank,
Washington DC.
to hide those and to avoid hurting national exports, a structure that has been created by
(1993b): 47th Meeting, September, World
sentiments. It also shows how,'despite the the rich countries themselves.
Bank, Washington DC.
imposition of those from outside, the concept Dependence on structural adjustment tends
- (1994): 48th Meeting, April, World Bank,
of 'ownership' has been advanced to project to become never-ending, and more so for
Washington DC.
those as decisions of these countries countries that have been most faithful in
Foroutan; Faezeh (1993): Trade Reform in Ten
implementing those, e g, countries in sub-
themselves. In section V we have established, Sub-Saharan African Countries: Achieve-
Saharan Africa. Seventeen years is a long
sector by sector, how structural adjustment ments and Failures, Policy Research Working
has failed to engineer the take off it had time for testing a package of policies, and Paper 1222, World Bank, Policy Research
promised. there can be no doubt that structural Department, Trade Policy Division.
The only major example of success with adjustment has failed the test of time. On ILO (1993): Structural Change and Adjustment
the other hand, the success of the east Asian
industrialisation in recent years has been that in Zimbabwe, Interdepartmental Project on
of the east Asian countries that have not countries on the basis of a strategy of import Structural Adjustment, Occasional Paper 16.
relied on Bretton Woods institutions for substitution, and led from the front by a Killick, Tony (1992a): CLontinuity and Change
financial support and have not subjected strong intervening state, points to an in IMF Progracmme Design 1986-92, ODI
Working Paper No 69, London.
themselves to their conditionalities, except alternative route of indigenous capitalist
- (1992b): Explaining Africa's Post-
for one brief instance. On the other hand, development in a late developing country
Independence Development Experiences,
in the process of their development, they that has a proven record of success.
Overseas Development Institute Working
have flouted virtually each and every norm
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Economy Programme, OECD. Paris. volume 2, Chapter 14.
/
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1104 Economic and Political Weekly Ma;y 17-24. 1997

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SAP: Issues and Conditionalities: A Global Review

Author(s): Biplab Dasgupta

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