Many developing nations are in debt and poverty partly due to the policies of international institutions such as the International Monetary Fund (IMF) and the World Bank.
Their programs have been heavily criticized for many years for resulting in poverty. In addition, for developing or third world countries, there has been an increased dependency on the richer nations. This is despite the IMF and World Bank’s claim that they will reduce poverty.
Following an ideology known as neoliberalism, and spearheaded by these and other institutions known as the Washington Consensus (for being based in Washington D.C.), Structural Adjustment Policies (SAPs) have been imposed to ensure debt repayment and economic restructuring. But the way it has happened has required poor countries to reduce spending on things like health, education and development, while debt repayment and other economic policies have been made the priority. In effect, the IMF and World Bank have demanded that poor nations lower the standard of living of their people.
As detailed further below, the IMF and World Bank provide financial assistance to countries seeking it, but apply a neoliberal economic ideology or agenda as a precondition to receiving the money. For example:
They prescribe cutbacks, liberalization of the economy and resource extraction/export-oriented open markets as part of their structural adjustment.
The role of the state is minimized.
Privatization is encouraged as well as reduced protection of domestic industries.
Other adjustment policies also include currency devaluation, increased interest rates, flexibility of the labor market, and the elimination of subsidies such as food subsidies.
To be attractive to foreign investors various regulations and standards are reduced or removed.
The impact of these preconditions on poorer countries can be devastating. Factors such as the following lead to further misery for the developing nations and keep them dependent on developed nations:
Poor countries must export more in order to raise enough money to pay off their debts in a timely manner.
Because there are so many nations being asked or forced into the global market place—before they are economically and socially stable and ready—and told to concentrate on similar cash crops and commodities as others, the situation resembles a large-scale price war.
Then, the resources from the poorer regions become even cheaper, which favors consumers in the West.
Governments then need to increase exports just to keep their currencies stable1 (which may not be sustainable, either) and earn foreign exchange with which to help pay off debts.
Governments therefore must:
remove or decrease financial regulations
and so on.
Over time then:
the value of labor decreases
capital flows become more volatile
a spiraling race to the bottom then begins, which generates
social unrest, which in turn leads to IMF riots and protests around the world2
These nations are then told to peg their currencies to the dollar. But keeping the exchange rate stable is costly3 due to measures such as increased interest rates.
Investors obviously concerned about their assets and interests can then pull out4 very easily if things get tough
In the worst cases, capital flight can lead to economic collapse, such as we saw in the Asian/global financial crises of 1997/98/99, or in Mexico, Brazil, and many other places. During and after a crisis, the mainstream media and free trade economists lay the blame on emerging markets and their governments’ restrictive or inefficient policies, crony capitalism, etc., which is a cruel irony.
When IMF donors keep the exchange rates in their favor5, it often means that the poor nations remain poor, or get even poorer. Even the 1997/98/99 global financial crisis6 can be partly blamed on structural adjustment and early, overly aggressive deregulation for emerging economies.
This is one of the backbones to today’s so-called free trade. In this form, as a result, it is seen by some as unfair and one-way, or extractionalist. It also serves to maintain unequal free trade8 as pointed out by J.W. Smith.
As a result, policies such as Structural Adjustments have, as described by Smith, contributed to the greatest peacetime transfer of wealth from the periphery to the imperial center in history, to which we could add, without much media attention.
One of the many things that the powerful nations (through the IMF, World Bank, etc.) prescribe is that the developing nation should open up to allow more imports in and export more of their commodities. However, this is precisely what contributes to poverty and dependency.
As seen above as well, one of the effects of structural adjustment is that developing countries must increase their exports. Usually commodities and raw materials are exported. But as Smith noted above, poor countries lose out when they
export commodities (which are cheaper than finished products)
are denied or effectively blocked from industrial capital and real technology transfer, and
import finished products (which are more expensive due to the added labor to make the product from those commodities and other resources)
This leads to less circulation of money in their own economy and a smaller multiplier effect. Yet, this is not new. Historically this has been a partial reason for dependent economies and poor nations. This was also the role enforced upon former countries under imperial or colonial rule. Those same third world countries find themselves in a similar situation.
This can also be described as unequal trade:
Exporting commodities and resources is seen as favorable to help earn foreign exchange with which to pay off debts and keep currencies stable. However, partly due to the price war scenario mentioned above, commodity prices have also dropped. Furthermore, reliance on just a few commodities makes countries even more vulnerable to global market conditions and other political and economic influences. As Gemini News Service also reports, talking to the World Bank:
In addition, as Celine Tan of the Third World Network explains:
Tan also highlights in the above article that a fall in commodity prices have [sic] also led to a build-up of unsustainable debt. The lack of greater revenues from exports has knock-on effects, as described further above. The irony is that structural adjustments were prescribed by the IMF and the World Bank due to debt repayment concerns in the first place.
These concerns are not new.
Political economist Adam Smith also provided some insights in his 1776 classic, The Wealth of Nations, which is regarded as the Bible of capitalism. He was highly critical of the mercantilist practices of the wealthy nations, while he recognized the value of local industry and the impact of imported manufactured products on local industries:
Reading the above, we can say that structural adjustment policies are also mercantilist. We are constantly told that we live in a world of global capitalism, and yet we see that while free markets are preached (in Adam Smith’s name), mercantilism is still practiced!
Of course, today it is a bit more complicated too. We do have, for example, products being exported from the poorer countries (albeit some facing high barriers in the rich nations). But exporting rather than first creating and developing local industry and economy, means the developing country loses out in the long run, (hardly developing) because there is little multiplier effect of money circulating within the country, as mentioned above. Furthermore, with labor being paid less17 than their fair wages in the poorer nations, wealth is still accumulated by—and concentrated in—the richer nations.
Thus we are in a situation where the rich promote a system of free trade for everyone else to follow, while mercantilism is often practiced for themselves.
Free trade is promoted by the rich and influential as the means for all nations to achieve prosperity and development.
The wealth accumulated by the richer countries in the past is attributed to this policy to strengthen this idea.
That such immense wealth was accumulated not so much from free trade but from the violent and age-old mercantilism or monopoly capitalism is ignored.
Such systems are being practiced again today, and even though they are claimed to be Adam-Smith-style free trade, they are the very systems that Adam Smith himself criticized and attacked.
In 1991 Larry Summers, then Chief Economist for the World Bank (and US Treasury Secretary, in the Clinton Administration, until George Bush and the Republican party came into power), had been a strong backer of structural adjustment policies. He wrote in an internal memo:
When looked at in this light, poverty is more than simple economic issues; it is also an ideological construct.
In some countries, more is spent on debt servicing than education22. For example, even in the former communist countries that are trying to undergo rapid economic reform, education is given a back seat23. In fact, the UK-based development and relief organization, Oxfam, goes as far as saying that the IMF policies deny children an education24.
Since the end of the Cold War, even wealthier nations have seen government rollback on some functions, in a similar style to structural adjustment. John McMurtry captures this well, being very critical on the impact of such adjustments on life requirements:
And as the crisis of AIDS gets worse in Africa, measures that reduce health budgets in already poor countries contribute to the problems. (See this site’s section on AIDS in Africa25 for more on that issue.)
What is the IMF/World Bank Prescription?
As economist Robin Hanhel summarizes:
Joseph Stiglitz is one of the most cited economists in the world26, the former winner of the Nobel prize for economics and a professor at Columbia University. He was also former chief economist at the World Bank, who resigned under pressure from criticisms he made of the IMF and World Bank. He was also a member of then-US President Bill Clinton’s cabinet and chairman of the US President’s Council of Economic Advisers. His insights and criticisms are worth paying attention to. He notes that:
In April 2001, Greg Palast conducted an
interview with Joseph Stiglitz
28 which was published in the British newspaper Observer and Guardian.
The World Bank talks of assistance strategies for every poor nation using careful country by country investigations. However, as reported in the article, according to insider Stiglitz, the Bank’s investigation involves little more than close inspection of five-star hotels. It concludes with a meeting with a begging finance minister, who is handed a restructuring agreement pre-drafted for voluntary signature.
Stiglitz then tells Palast that after each nation’s economy is analyzed, the World Bank hands every minister the same four-step program (emphasis added), described in the article as follows:
Privatization. Stiglitz tells Palast that some politicians were corrupt enough to go ahead with some state sell-offs: Rather than object to the sell-offs of state industries, he said national leaders—using the World Bank’s demands to silence local critics—happily flogged their electricity and water companies. You could see their eyes widen at the prospect of 10% commissions paid to Swiss bank accounts for simply shaving a few billion off the sale price of national assets. According to Palast, Stiglitz asserts that the US government knew about, at least in one case: the 1995 Russian sell-off: The US Treasury view was this was great as we wanted Yeltsin re-elected. We don’t care if it’s a corrupt election. (Emphasis added)
Capital market liberalization. According to Palast, Stiglitz describes the disastrous capital flows that can ruin economies as being predictable, and says that when [the outflow of capital] happens, to seduce speculators into returning a nation’s own capital funds, the IMF demands these nations raise interest rates to 30%, 50% and 80%.
Market-based pricing. Palast writes that it is at this point that the IMF drags the gasping nation to this third points, described as a fancy term for raising prices on food, water and cooking gas which, Palast continues, leads, predictably, to Step-Three-and-a-Half: what Stiglitz calls, The IMF riot. These riots, which the article clarifies are peaceful demonstrations dispersed by bullets, tanks and teargas[sic], cause further capital outflows, a situation which, as Palast points out, is not without a bright side: foreign corporations … can then pick off remaining assets, such as the odd mining concession or port, at fire sale prices.
Free trade. But a version dominated by rules of the World Trade Organization and the World Bank, which according to Palast, Stiglitz likens to the Opium Wars: That too was about opening markets, he said. Palast writes that As in the nineteenth century, Europeans and Americans today are kicking down barriers to sales in Asia, Latin American and Africa while barricading our own markets against the Third World’s agriculture. (Note that while even President Bush will claim that we want rules based global mechanisms, the mainstream media often does not ask what the rules themselves are, and whether they are most appropriate.)
Palast highlights Stiglitz’s problems with the IMF/World Bank plans, plans that the article describes as devised in secrecy and driven by an absolutist ideology: first, they are not open to discourse and dissent, and second, that they don’t work. Palast writes that Under the guiding hand of IMF structural assistance Africa's income dropped by 23%.
Africa Action, an organization working for political, economic and social justice in Africa is highly critical of SAPS34, noting that, The basic assumption behind structural adjustment was that an increased role for the market would bring benefits to both poor and rich. In the Darwinian world of international markets, the strongest would win out. This would encourage others to follow their example. The development of a market economy with a greater role for the private sector was therefore seen as the key to stimulating economic growth.
Focusing on Africa, the article points out that the issue wasn’t that African countries did not need corrective reforms, but whether SAPs were the appropriate answers. The key issue with adjustments of this kind, however, is whether they build the capacity to recover and whether they promote long-term development. The adjustments dictated by the World Bank and IMF did neither.
In these ways then, the IMF and World Bank’s encouragement of poor countries to open up for foreign trade is too aggressive; arguing that these policies will help create a level playing field with rich countries is almost opposite to what has happened in reality in most cases.
Perhaps one of the most serious effects is that these external policies indirectly undermine democracy and democratic accountability, not only of the IMF and World Bank (after all, if their policies fail, who are they accountable to?) but also of the governments of the poor countries themselves, who see a reduction in their ability to make important decisions for their people. In some cases, the more corrupt governments can use structural adjustment as an excuse not to cater to all their people.
Because some of the poor nations are not as aggressive in privatization and other conditionalities as the IMF or World Bank would like, they face continual delays of debt relief36.
This model of development, whereby the North (or the developed Nations) impose their conditions on the South (the developing Nations) has come under criticism37 by many NGOs and other groups/individuals. Perhaps the model needs to be revised and approached from different angles, as this Oxfam paper38 suggests.
True, in some cases corrupt governments have borrowed money from these institutions and/or directly from various donor nations and ended up using that money to pursue conflicts, for arms deals, or to divert resources away from their people. However, in most cases that has been done knowingly, with the support of various rich nations due to their own national interests, especially during the Cold War. As Oxfam says
39, it would be wrong to hold civilians to ransom by placing stringent conditions on humanitarian relief because of the way their government spends its money.
Furthermore, it has been argued that Structural Adjustments encourage corruption and undermine democracy40. As Ann Pettifor and Jospeh Hanlon note, top-down conditionality has undermined democracy by making elected governments accountable to Washington-based institutions instead of to their own people. The potential for unaccountability and corruption therefore increases as well.
As the article from Africa Action above also mentions, African countries require essential investments in health, education and infrastructure before they can compete internationally. The World Bank and IMF instead required countries to reduce state support and protection for social and economic sectors. They insisted on pushing weak African economies into markets where they were unable to compete with the might of the international private sector. These policies further undermined the economic development of African countries.
This inevitably means that the poor suffer45, while the rich get richer46.
Also note that the illegal drug trade has increased in countries that are in debt (because of the hard cash that is earned), as Jubilee 2000 points out47. Growing such illegal crops also diverts land away from meeting local and immediate needs, which also leads to more hunger. Debt’s chain reactions and related effects are enormous. (For more information on debt in general, see this web site’s section on debt related issues48.)
These policies may be described as reforms, adjustments, restructuring or some other benign-sounding term, but the effects on the poor are the same nonetheless. Some even describe this as leading to economic apartheid49.
In a more cynical or harsher description, structural adjustments and other trade related policies could also be seen as a weapon of mass destruction as Raj Patel hints, (commenting on the Doha WTO conference in November, 2001. Although this is a different context, the overall aspect remains the same):
The Welfare State has Helped Today’s Rich Countries to Develop
As J.W. Smith notes, every rich nation today has developed because in the past their governments took major responsibility to promote economic growth54. There was also a lot of protectionism and intervention in technology transfer. There was an attempt to provide some sort of equality, education, health, and other services to help enhance the nation.
The industrialized nations have understood that some forms of protection allow capital to remain within the economy, and hence via a multiplier effect, help enhance the economy.
Yet, as seen in the structural adjustment initiatives and other western-imposed policies, the developing nations are effectively being forced55 to cut back56 these very same provisions that have helped the developed countries to prosper in the past.
The extent of the devastation caused has led many to ask if development is really the objective of the IMF, World Bank, and their ideological backers. Focusing on Africa as an example:
While the phrase Welfare State often conjures up negative images, with regards to globalization, most European countries feel that protecting their people when developing helps society as well as the economy.
It may be that for real free trade to be effective countries with similar strength economies can reduce such protective measures when trading with one another. However, for developing countries to try to compete in the global market place at the same level as the more established and industrialized nations—and before their own foundations and institutions are stable enough—is almost economic suicide.
An example of this can be seen with the global economic crisis of 1997/98/99 that affected Asia in particular. A UN report looking into this suggested that such nations should rely on domestic roots for growth, diversifying exports and deepening social safety nets. For more about this economic crisis and this UN report, go to this web site’s section on debt and the economic crisis58.
To see more about the relationship of protectionism with free trade, check out this site’s section on Free Trade61, which also discusses protectionism and its pros and cons.
The IMF and World Bank’s policies are very different now from their original intent, as summarized here by the John F. Henning Center for International Labor Relations:
Although their goals are slightly different, the IMF and World Bank policies complement each other:
But economics is often driven by politics. As a result of policies by the IMF, World Bank and various powerful nations, basic human rights have been severely undermined in many countries, as also noted sharply by Global Exchange:
For decades, the IMF and World Bank have been largely controlled by the developed nations such as the USA, Germany, UK, Japan etc. (The IMF web site has a breakdown of the quotas and voting powers67.) The US, for example, controls 17% of the voting power at the IMF. , so the US effectively had veto power at the IMF68. In addition, the World Bank is 51% funded by the U.S. Treasury69.
Journalist John Pilger also provides a political aspect to this:
The IMF and World Bank’s policies have indeed been heavily criticized for many years and are seen as unhelpful72 and sometimes, unaccountable73, as they have led to an increased dependency by the developing countries upon the richer nations, as also mentioned at the top of this page. At the same time, the different cultures74 are not respected when it comes to prescribing structural adjustment principles, either.
In Africa, the effects of policies such as SAPs have been felt sharply. As an example of how political interests affect these institutions, Africa Action describes the policies of the IMF and World Bank, but also hints at the influences behind them too:
IMF and World Bank Reform?
Throughout the period of structural adjustment from the 80s, various people have called for more accountability and reform of these institutions, to no avail.
Following the IMF and World Bank protests in Washington, D.C on April 16, 2000, and coinciding with the Meltzer Report criticizing the IMF and World Bank, there has been more talk about IMF reforms. At first thought the reforms sound like the protests and other movements’ efforts are paying off. However, as Oxfam noted, some of the reform suggestions may not be the way to go and may do even more harm than good. In their own words:
On the one hand it seems appropriate to demand an end to the IMF. However, such an abrupt course of action may itself lead to a gaping hole in international financial policies without an effective alternative. And that is another topic in itself!
IMF and World Bank Admit Some of Their Policies Do Not Work
Recently, we have heard members of the World Bank and IMF entertain the possibility that maybe their structural adjustment policies did have some negative effects.
For example, the Bretton Woods Project revealed that in 2000, an internal World Bank report has concluded that the poor are better off without structural adjustment83. The report itself is titled The Effect of IMF and World Bank Programs on Poverty84. (Requires a PDF reader85.)
The report doesn’t really look in detail at why the poor benefit less from adjustment. Instead it speculates that they may be ill-placed to take advantage of new opportunities created by structural adjustment reforms because, as the Bretton Woods Project insinuates, the report implies that the poor have neither the skills or financial resources to benefit from high-technology jobs and cheaper imports.
Now, it may not have been the intent of the report to do so, but one can’t help but notice how it almost seems as though while they may admit that structural adjustment didn’t benefit the poor, it is almost as though the Bank tries to subtly absolve itself by subtly blaming the poor for not benefiting from this. When structural adjustments have required cut backs in health, education and so on, then what would one expect?
In March 2003, the IMF itself admitted in a paper that globalization may actually increase the risk of financial crisis in the developing world
86. Globalization has heightened these risks since cross-country financial linkages amplify the effects of various shocks and transmit them more quickly across national borders the IMF notes and adds that, The evidence presented in this paper suggests that financial integration should be approached cautiously, with good institutions and macroeconomic frameworks viewed as important. In addition, they admit that it is hard to provide a clear road-map on how this should be achieved, and instead it should be done on a case by case basis. This would sound like a move slightly away from a one size fits all style of prescription that the IMF has been long criticized for.
As mentioned further above, and as many critics have said for a long time, opening up poorer countries in an aggressive manner can leave them vulnerable to large capital volatility and outflows. Reuters, reporting on the IMF report also noted that the IMF sounded more like its critics87 when making this admission.
In theory there may indeed be merit to various arguments supporting global integration and cooperation. But politics, corruption, geopolitics, as well as numerous other factors need to be added to economic models, which could prove very difficult. As suggested in various parts of this site, because economics is sometimes separated from politics and other major issues, theory can indeed be far from reality.
Sitglitz, the former World Bank chief economist, is worth quoting a bit more to give an insight into the power that the IMF has, and why accusations of it and its policies being colonial-like are perhaps not too far off:
The above passage is from Stiglitz’s book, Globalization and its Discontents. In it, he highlights many, many more issues, criticisms and aspects of IMF/Washington Consensus ideological fanaticism that have hindered development, and in many cases, as he points out, worsened situations. It is surprising and also quite illuminating to get the insider image of the workings of some large institutions in this way.
PSRPs replace SAPs but still SAP the poor
The IMF in 1999 replaced Structural Adjustments with Poverty Reduction Growth Facility (PRGP) and Policy Framework Papers with Poverty Reduction Strategy Papers (PSRP) as the new preconditions for loan and debt relief. However, the effect is still the same89 as the preceding disastrous structural adjustment policies, as the World Development Movement reported. Many civil society organizations are increasing their critique of the PSRPs.
As Jubilee Research (formerly Jubilee 2000, the debt relief campaign organization) adds:
Additionally, as this book92 reports (see pages 37-38 of the PDF online version), [A] senior [World] Bank official described the PRSP-PRGF as a compulsory programme, so that those with the money can tell those without the money what they need in order to get the money. It would be worth additionally noting the cruel irony that nations that are those with the money today have largely accumulated it through plunder via imperialism and colonialism upon those very nations who today are without the money. Prescribing how to get the money, in that context, is dubious indeed.
For additional information and critique, you can see the following links as well:
Reports from the World Development Movement:
One size for all: A study of IMF and World Bank Poverty Reduction Strategies93, September 2005
Still Sapping the Poor: A critique of IMF poverty reduction strategies94, by Charles Abugre, June 2000
Polices to Roll-back the State and Privatize?95 from the World Development Movement, April 2001 provides additional studies and examples
From the Bretton Woods Project, an IMF and World Bank monitoring organization:
Structural Adjustment/PRSP96 section of their web site
The ABC of the PRSP97, an introduction to the new Bank and Fund Poverty Reduction Strategy Papers, by Angela Wood, April 2000
From the Focus on the Global South:
The World Bank and the PRSP: Flawed Thinking and Failing Experiences98
Like the IMF and World Bank, the Asian Development Bank (ADB) has also fallen under much criticism for its policies, which also require structural adjustments for loans. Through its policies it encourages export-driven, capital and resource-intensive development, just like the other international financial institutions. The largest financing and influence of the bank comes from Japan and the United States.
As summarized from chapter 2 of The Transfer of Wealth; Debt and the making of a Global South99:
The escalating dependence of developing countries in the [Asia] region on debt-financed development has a number of negative consequences. These include:
the neglect of domestic savings as a source of development finance;
cuts in government expenditure for basic social services and basic infrastructure in order to meet debt servicing requirements;
an escalation of export-oriented resource extraction to generate hard currency receipts for debt servicing;
a reorientation of agricultural production from meeting local needs to production for export in highly skewed regional and global markets;
increased dependence on imported, capital intensive technologies as a consequence of tied procurement and project design processes led by foreign consulting companies;
increased dependence on and influence of international financial institutions such as the ADB and the World Bank, particularly through the imposition of debt-induced structural adjustment programs and policy based lending.
Also, as with the IMF and World bank, and mentioned in the above link, governments are using the rubric of poverty reduction to channel taxpayer funds to their private sector companies via the ADB. This is occurring with little or no pubic scrutiny although government representatives will, if necessary, appeal to commercial self-interest to justify continued contributions to the ADB and other multilateral development banks. As with the IMF for example, loans by the IMF are guaranteed by the creditor country. In essence then, tax payers from the lending countries will bail out the IMF and ADB if there are problems in their policies.
(For more details, statistics etc., the above link is a good starting place.)
The ADB has mentioned its desires to promote good governance. However, Aziz Choudry is highly critical in terms of whom this governance would actually be good for:
Structural adjustment policies have therefore had far-reaching consequences around the world. Yet, this is just one of the mechanisms whereby inequality and poverty has been structured into laws and institutions on a global scale.
0 articles on “Structural Adjustment—a Major Cause of Poverty” and 2 related issues:
Poverty is the state for the majority of the world’s people and nations. Why is this? Is it enough to blame poor people for their own predicament? Have they been lazy, made poor decisions, and been solely responsible for their plight? What about their governments? Have they pursued policies that actually harm successful development? Such causes of poverty and inequality are no doubt real. But deeper and more global causes of poverty are often less discussed.
Small update noting how rich countries are applying structural adjustment to themselves in the wake of the global financial crisis.
Tiny update to note that the IMF voting structure has changed so US no longer holds veto power that it had for so long
Small update to add another example of why commodity exporting is not always good compared to exports of industrial goods
A small update to mention more recent thoughts of reforming the World Bank and IMF due to the global financial crisis.
Some video clips were added; one is an award-winning animation looking at nuts, global trade and structural adjustment, the other two are from the Third World Network’s Martin Khor about impacts to poor countries.
Small update noting how commodity diversity is still lacking for poor countries
Small update adding more about how the IMF is beginning to admit that its policies may have done some harm
Very small note on how some aid to Malawi was mis-spent
Small note adding to the need for a multiplier effect in poor countries
Small addition on IMF telling Malawi to sell surplus grain stock for foreign exchange to repay debt—3 months before a famine struck. Also added a note on the brain drain phenomenon affecting poor countries. (Remainder of text remains untouched since July 16, 2003.)