Walden Bello

Structural Adjustment loans (SALs) began to be provided to debtor countries in the last years of the McNamara era. Their immediate objective was to rescue northern banks that had become overextended in the Third World. Their longer term objective was to further integrate southern countries into the North-dominated world economy. To accomplish these twin goals, the World Bank and the International Monetary Fund (IMF) became the linchpin of a strategy that involved providing compliant Third World debtors with billions of dollars in quick-disbursing SALs or "standby loans" which would then be transferred as interest payments to the private banks. But, to receive SALs, the government had to agree to undergo a structural adjustment program (SAP) which was ostensibly designed to make its economy more efficient and better capable of sustained growth.

The conditions usually attached to SALs included:

• Removing restrictions on foreign investments in local industry, banks and other financial services. No longer could local industry or banks be favored or protected against giant foreign intervention.
• Reorienting the economy towards exports so as to earn the foreign exchange required for servicing the debt and so as to become correspondingly more dependent on the global economy. The effect was to reduce self-sufficiency and diverse local production, in favour of single product manufacture or agriculture, for example, coffee.
• Reducing wages or cutting down on wage increases to make exports more "competitive" and radically reducing government spending including spending on health, education and welfare. This would control inflation and assure that all available money be channelled into increasing production for export. But the few social services that remained were gutted.
• Cutting tariffs, quotas and other restrictions on imports, to grease the way for global integration.
• Devaluing the local currency against hard currencies like the dollar in order to make exports still more competitive.
• Privatising state enterprises, thereby providing further access for foreign capital.
• Undertaking a program of deregulation so as to free corporations that were involved in the export business from government controls that protect labor, the environment and natural resources, thereby cutting costs and further increasing export competitivity. This also had the secondary effect of forcing down wages and standards in other countries - including industrialized countries - to maintain their competitiveness.

Since structural adjustment programs covered so many dimensions of economic policy, agreeing to an SAL was virtually to turn over the control of a country's economy to the World Bank and the IMF.

The Debt Crisis and the Globalisation of Adjustment

It should come as no surprise that initially few governments felt eager to receive SALs. But with the eruption of the Third World debt crisis in mid-1982, a grand opportunity was presented to further the Reaganite agenda of resubordinating the South via structural adjustment schemes. As more and more Third World countries ran into ever greater difficulties in servicing the huge loans made to them by Northern banks in the 1970s, the United States government via the Bretton Woods institutions took advantage of "this period of financial strain to insist that debtor countries remove the government from the economy as the price of getting credit." [Sheahan, 1992.]

In accordance with guidelines set by the U.S. Treasury Department, the U.S. private banks invariably made and continue to make World Bank consent a prerequisite for debt rescheduling. Predictably, the World Bank's seal of approval and its cash, which debtor countries desperately needed to make interest payments to the private banks, came dearly. As one Treasury official involved in the debt negotiations with Mexico put it, "Only countries that commit to market-oriented economic reform will get the [World Bank's] help." [Miller, 1991.]

Debtor countries had no choice but to capitulate. By the beginning of 1986, 12 of the 15 debtors designated by the then secretary of the Treasury, James Baker, as top-priority debtors - including Brazil, Mexico, Argentina, and the Philippines - had agreed to SAPs. From 3 percent of total World Bank lending in 1981, structural adjustment credits rose to 19 percent in 1986. Five years later, the figure was 25 percent. By the end of 1992, about 267 SALs had been approved.

Adjustment: The Record

Thirteen years after the World Bank's first SAP was introduced, the Bank declared structural adjustment a success. In its publication "Global Economic Prospects and the Developing Countries", 1993, the Bank asserts that developing countries face brighter prospects and that this can be attributed mainly to the widespread economic reforms these countries have adopted, notably privatisation, greater openness to trade, reduction of fiscal deficits, and commercial debt overhangs. This is, needless to say, a minority opinion.

It is acknowledged in a number of comprehensive studies, including one conducted by the IMF that SALs did not achieve their overt goal of stimulating growth. Comparing countries which underwent stabilisation and adjustment programs with those that did not, over the period 1973-88, IMF economist Mohsin Khan found that economic growth was higher in the latter than in the former countries.

Focusing on the African experience in the 1980s, UNICEF economist Eva Jespersen assessed a sample of 24 countries that were subjected to structural adjustment programs, on three counts: the rate of capital accumulation, the share of manufacturing in Groww Domestic Products (GDP) and the growth of exports. [Africa's Recovery in the 1990s from Stagnation to Human Development, Giovanni Andrea Cornia et. al., eds.] The data showed that:

• Capital accumulation slowed in 20 countries.
• The share of manufacturing in GDP in 18 countries stagnated or declined.
• Exports fell in 13 of the 24 countries, while in the 11 countries in which they increased, this did not compensate for the increased imports.

Explaining Stagnation

Why such a dismal record?

The problem, according to Massachusetts Institute of Technology (MIT) economist Lance Taylor and his associates is that the World Bank and the IMF misdiagnosed the problem. The main barrier to growth in the pre-SAL period was not that Third World economies had not been sufficiently integrated into the global economy as the IMF and the World Bank insisted, but above all that they had been subjected to two great shocks - the OPEC oil price rise in the 1970s and the debt crisis in the early 1980s. [Fanelli, 1992.] In fact, using the bank's own data, they found that the much-derided prior strategy called "import substitution" had been effective at fostering productivity. ("Import substitution" policies were simply those that emphasised local production for local consumption, thereby promoting diverse production and national self-sufficiency, especially in the area of key goods and services. This was the common practice in Latin America from 1960-1973.) After the 1982 debt crisis, on the other hand, there was a dramatic fall in private investment to developing countries, while the money made available by multinational development banks was mainly designated to repay old debts. At the same time, there was a massive outflow of resources to the industrial countries, that could have otherwise have gone to domestic local investment, which was much required to stimulate growth and employment.

Prescription for Stagnation

Taylor and his co-authors, in common with other academic critics of structural adjustment programs, have also stressed the way in which an SAP triggers a whole range of adverse consequences that cannot be predicted on the basis of IMF and World Bank theories, though which must seem inevitable to anyone with a common-sense view of economics.

A structural adjustment program, in reducing government spending, cutting wages, and literally destroying the domestic economy in order to build up a new export oriented economy must necessarily lead to an overall economic contraction, causing increased unemployment. Even in such conditions, the state is prevented from stepping to reverse the decline in private investment, which must further accentuate all these trends, creating a vicious cycle of stagnation and decline, rather than a growth, rising employment, and rising investment, as originally predicted on the basis of World Bank theory.

When devaluation and the lifting of price controls on imported inputs to agriculture and industry are added to this policy of monetary and fiscal austerity to further promote exports, the economy has to contract still further as this must raise the local cost of imported capital, as well as raw materials and the components used in local assembly plants.

For instance, letting the market determine fertiliser prices has led, in many countries to reduced applications, lower yields and reduced investment in agriculture.

At the same time, rising exports of the small range of crops, such as sugar, palm oil, and bananas, that the World Bank has encouraged developing countries to produce, regardless of whether or not there was a market for them, have led to a fall in prices and often to reduced foreign earnings. Much of these are, in any case, used for serving debt rather than for productive investment.

An indication of the sharp disparity between the expected and the actual results of a structural adjustment program is provided by the case of Chile in the 1980s.

Reproduced with the permission of Edward Goldsmith, co-editor with Jerry Mander, of "The Case Against the Global Economy and For a Turn Towards the Local" - Sierra Club Books; fax 1-415-957-5793.