Is the Structural Adjustment Approach Really and Trully Dead?

Is the Structural Adjustment Approach Really and Trully Dead?
Walden Bello
Business World, 8 November 1999

Structural adjustment is the paradigm of development that the World Bank and the International Monetary Fund have prescribed for countries in the South since 1980, when the Philippines joined Turkey and Costa Rica as the guinea pigs of what was described as a new kind of loan program that was designed to support not just one project but an enterprise to restructure the whole economy. Over the next two decades, structural adjustment programs (SAPs) were extended to close to 90 Third World countries, from Guyana to Ghana. Despite important differences among the various economies, SAPs had the same basic elements: long-term "structural" reforms to deregulate the economy, liberalize trade and investment, and privatize state enterprises, coupled with short-term stabilization measures like cutbacks in government expenditures, high interest rates, and currency devaluation.

Universal model

SAPs multiplied during the Third World debt crisis of the early 1980s, and an important reason was strong pressure from the Bank and IMF on countries to adopt policies that would facilitate the repayment of their debts to the big international commercial banks. But the objective of SAPs went beyond debt repayment or the attainment of short-term macroeconomic stability. The Bank and the Fund sought nothing less than the dismantling of protectionism and other policies of state-assisted capitalism that IMF and World Bank theorists judged to be the main obstacles to sustained growth and development.

When the socialist economies of Eastern Europe and Russia collapsed in the early 1990s, structural adjustment was also extended to that part of the world, and in a manner that was even more radical than in the South - a process that Harvard's Jeffrey Sachs, then one of its vocal proponents, appropriately labelled as "shock therapy." IMF technocrats went to these countries with even more dogmatic confidence in their one true model than the Marxist bureaucrats they supplanted had in theirs. By the early 1990s, shock therapy and structural adjustment had become cornerstones of what economist John Williamson called "the Washington Consensus" on the desired macroeconomic framework that would create a truly global economy fueled by market forces.

Retreat

Two decades after the first structural adjustment loan, the Bank formally abandoned structural adjustment, replacing it with the "Comprehensive Development Framework." And, in a move that surprised many of his organization's legions of critics, Michel Camdessus, the managing director of the IMF, declared at the World Bank-IMF annual meeting in Washington in late September that henceforth, the Fund would put "poverty reduction" at the center of its programs, meaning it was also turning its back on structural adjustment.

The new paradigm, according to a statement of the Group of Seven finance ministers and central bank governors dated Sept. 25, 1989, has the following elements:

• "increased and more effective fiscal expenditures for poverty reduction with better targetting of budgetary resources, especially on social priorities in basic education and health;
• "enhanced transparency, including monitoring and quality control over fiscal expenditures;
• "stronger country ownership of the reform and poverty reduction process and programs, involving public participation;
• "stronger monitorable performance indicators for follow-through on poverty reduction; and,
• "ensuring macroeconomic stability and sustainability, and reducing barriers to access by the poor to the benefits of growth."

What brought about the 180 degree turn?

Failure. Spectacular failure that could no longer be denied at the pain of totally losing institutional credibility.

The World Bank - or rather James Wolfensohn, President Bill Clinton's nominee to head the Bank in 1993 - was the first to recognize that something was amiss. Coming from outside orthodox development circles, Wolfensohn sensed what most World Bank officials did not want to acknowledge: that with over 100 countries under adjustment for over a decade, it was strange that the Bank and the Fund found it hard to point to even a handful of success stories. In most cases, as Rudiger Dornbusch of the Massachusetts Institute of Technology put it, structural adjustment caused economies to "fall into a hole," wherein low investment, reduced social spending, reduced consumption, and low output interacted to create a vicious cycle of decline and stagnation, rather than a virtuous circle of growth, rising employment, and rising investment, as originally envisaged by World Bank-IMF theory.

With much resistance from the Bank's entrenched bureaucracy, Wolfensohn moved to slowly distance the Bank from hard-line adjustment policies and even got some of his staff to (grudgingly) work with civil society groups to assess SAPs in the so-called "Structural Adjustment Review Initiative (SAPRI)." For the most part, however, the change of attitude did not translate into changes at the operational level owing to the strong internationalization of the structural adjustment approach among Bank operatives.

While self doubt began to engulf the Bank, the IMF, in contrast, plowed confidently on, and the lack of evidence of success was interpreted to mean simply that a government lacked political will to push adjustment. Through the establishment of the Extended Structural Adjustment Facility (ESAF), the Fund sought to finance countries over a longer period in order to more fully institutionalize the desired free-market reforms and make them permanent.

The Philippine Case

The Philippines' experience under adjustment was representative of the Third World experience. Between 1980 and 1999, the Philippines became the recipient of nine structural adjustment loans from the World Bank, and participated in three stand-by programs, two extended fund programs, and one precautionary stand-by arrangement with the IMF. The country, in short, was in continuous adjustment for nearly 20 years, its macroeconomic policies being micro-managed by the Bretton Woods twins.

The first phase of adjustment, which focused on trade liberalization, saw quantitative restrictions removed on more than 900 items, while the nominal average tariff protection was brought down to 28% in 1985 from 43% in 1981. But the program failed to factor in the onset of a global recession, so that instead of rising, exports fell, while imports coming in to take advantage of the liberalized regime severely eroded the home industries. As the late economist Charles Lindsay noted, "Whatever the merits of the SAL, its timing was deplorable." Instead of allowing the government to set in motion counter-cyclical mechanisms to arrest the decline of private sector activity, the structural adjustment framework intensified the crisis with its policy of high interest rates and tight government budgets. Not surprisingly, the GNP shrank precipitously two years in a row, contributing to the political crisis that resulted in the ouster of Ferdinand Marcos in February 1986.

Under Corazon Aquino, the second phase of adjustment saw economic recovery subordinated to the repayment of the foreign debt of the country's $26 billion foreign debt. This was achieved via fiscal austerity and more intensified export of natural resources and export-oriented production. A financial hemorrhage ensued, with the net transfer of financial resources coming to a negative $1.3 billion a year on average between 1986 and 1981, according to the Freedom from Debt Coalition. To service the debt, the Aquino administration was forced to borrow heavily from domestic financial sources, forcing it to channel much of its budgetary expenditures from development and social spending to meeting both domestic and foreign debt obligations. By 1987, some 50% of the budget was going to service the national debt.

Not surprisingly, this "model debtor" via structural adjustment institutionalized stagnation, with the country registering zero average GNP growth between 1983 and 1993. Stagnation led to a worsening of social conditions, with families living under the poverty line coming to 46.5% of all families in 1991 and the share of the national income going to the lowest 20% of families dropping to 4.7% in 1991 from 5.2% in 1985. The Philippines also provided one of the best documented studies of the correlation between environmental destruction and structural adjustment, with a World Resources Institute study concluding that adjustment "created so much unemployment that migration patterns changed drastically. The large migration flows to Manila declined, and most migrants could only turn to open access forests, watersheds, and artisanal fisheries. Thus the major environmental effect of the economic crisis was overexploitation of these vulnerable resources."

When the Ramos administration took over in 1992, the focus of adjustment shifted back to accelerated privatization, deregulation, and liberalization of trade, investment and finance. Petron and several government enterprises and services passed to the private sector; a substantially free-trade regime was targetted for 2004, when tariff rates would be reduced to a uniform 5% or less for all products; and nationality restrictions on foreign investment were relaxed considerably. Capital account liberalization, an IMF prescription, resulted in massive inflows of speculative capital into the financial and real estate sector, triggering an artificial boom in Manila. But the liberalized capital account also became the wide highway through which billions of dollars exited in 1997 and 1998, at the onset of the Asian financial crisis, bringing the GDP growth rate to below zero in 1998.

Adjusted and readjusted for nearly 20 years, Manila simply could not climb out of a deepening hole.

Crisis of legitimacy

It was the Asian financial crisis that finally forced the IMF to confront reality. In 1997-98, the Fund moved with grand assurance into Thailand, Indonesia and Korea, with its classic formula of short-term fiscal and monetary policy cum structural reform in the direction of liberalization, deregulation and privatization. This was the price exacted from their governments for IMF financial rescue packages that would allow them to repay the massive debt incurred by their private sectors. But the result was to turn a conjunctural crisis into a deep recession, as government's capacity to counteract the drop in private sector activity, was destroyed by budgetary and monetary repression. If some recovery is now discernible in a few economies, this is widely recognized as coming in spite of rather than because of the IMF.

For a world that had long been resentful of the Fund's arrogance, this was the last straw. In 1998-99, criticism of the IMF rose to a crescendo and went beyond its stubborn adherence to structural adjustment and its serving as a bailout mechanism for international finance capital to encompass accusations of its being non-transparent and non-accountable. Its vulnerable position was exposed during the recent debate in the US Congress over a G7 initiative to provide debt relief to 40 poor countries. Legislators depicted the IMF as the agency that caused the debt crisis of the poor countries in the first place, and some called for its abolition within three years. Said California Rep. Maxine Walters: "Do we have to have the IMF involved at all? Because, as we have painfully discovered, the way the IMF works causes children to starve."

In the face of such criticism from legislators in the IMF's most powerful member, US Treasury Secretary Larry Summers, formerly a doctrinaire supporter of adjustment, had no choice but to throw the institution to the wolves - rhetorically that is. From hereon, he said, the US would support "a new framework for providing international assistance to these countries - one that moves beyond a closed IMF-centered process that has too often focused on narrow macroeconomic objectives at the expense of broader human development." In its place, he claimed, "would be a new, more open and inclusive process that would involve multiple international organizations and give national policymakers and civil society groups a more central role."

Thus, it was its finding itself abandoned and isolated, not a change of heart, that accounted for Michel Camdessus' remarkable disavowal of the structural adjustment approach at the IMF-World Bank meeting in late September and his declaration of the IMF's adherence to the new poverty-reduction approach proposed by its sister institution.

But is this for real?

So structural adjustment is dead, and the Bretton Woods institutions have seen the light. But wait, isn't there something too easy about all this?

For one, between intention and implementation lie a million li, as the Chinese put it. In the depth of the Asian financial crisis, for instance, World Bank anti-poverty programs amounted to nothing more than "social safety nets" to mitigate the worst effects of IMF macroeconomic policies. Today, the dead hand of the engineer on the accelerator continues to manifest itself in IMF teams that shuttle into the country to see if our technocrats are being faithful to macroeconomic targets, World Bank teams pushing "socially sensitive" programs to privatize local water utilities, rural electric cooperatives, and social security, and technocrats of the Asian Development Bank (which has also rhetorically adopted poverty reduction) making energy loans and Miyazawa funding contingent on the administration's accelerating the privatization of the National Power Corp. and the liberalization of retail trade.

Are these implementation obstacles? Or is this a case of a new and improved Dracula, with a new pair of fangs that glisten and hypnotize its intended victims? Leaning toward the latter interpretation is a frustrated Louie Corral, head of the Political Affairs Department of the Trade Union Congress of the Philippines (TUCP), who has met with World Bank and ADB teams, who says, "They're really just talking about safety nets to soften the impact of the old approach of deregulation, privatization, and liberalization."

Then, there is the issue of accountability. One cannot just walk away from the scene of the crime, saying I was wrong and let's move on. The Bank and the Fund have been responsible for tremendous economic and social damage wrought on Third World economies for over two decades. Shouldn't they be held to account for that? Should not Camdessus and the top leadership of the IMF, who blindly embraced adjustment to the end, take responsibility for their mistaken policies? When it comes to governments, admission of strategic failures is usually accompanied by the resignation of key officials and, in some countries, like Japan, by suicide in some cases.

Any discussion of the future role of the two institutions must also take into account the fact that tremendous resources were wasted on 6,000 highly paid World Bank personnel and 1,000 IMF staffers for them to produce and pigheadedly stick to a wrong and destructive strategy, in spite of urgent warnings from civil society groups over the years that structural adjustment simply wasn't working and was creating misery by the truckloads instead. For the latter, the problem goes beyond the strategy. It goes to the nature and structure of the two institutions itself: Secrecy, non-accountability and an incapacity to learn appears to be inherent to the two institutions, James Wolfensohn and his NGO liaison John Clark's reformist energies notwithstanding.

Necessary measures

This is why a number of civil society groups which have been monitoring the Fund and the Bank for years have come out with several proposals in the aftermath of the structural adjustment debacle - measures that must be taken before the world accepts any new role for both the Fund and the Bank in the management of the world economy.

At a minimum, Michel Camdessus should resign as managing director, along with Stanley Fischer, his deputy, and other top officials responsible for the failed strategy. This would not be fair, however, without a call for the resignation of Larry Summers as well, since as secretary and undersecretary of the US Treasury Department, he provided the intellectual and political muscle behind the IMF and its programs for the last seven years. Resignation, it must be noted, is not a harsh option, considering that some groups have called for a Nuremberg-style trial for economic crimes against humanity.

In addition, the following measures must be taken before one can say a real reform process is underway:

• drastic reduction of the staff of the World Bank from 6000 to 1000 and of the IMF from 1000 to 200, and major cuts in both capital expenditures and operational expenses of both institutions as a first step in transforming these institutions;
• immediate dismantling of all structural adjustment programs in the Third World and the ex-socialist world and the IMF stabilization and adjustment programs imposed on Indonesia, Thailand, and Korea following the Asian financial crisis; and,
• creation of a Global Committee on the Bretton Woods institutions to evaluate and decide on the future of the World Bank and the Fund.

And to our timid technocrats who report to their Fund monitors every quarter: The ancient regime is dead. You can now talk back and dictate the terms. Or is it true what they say - that you cling on to the skirts of Mother IMF and refuse to exit because over the years you have become more IMF than the IMF?

And indeed this might be Fund's ultimate revenge. As in a sci-fi movie, the alien retreats from the scene but the people don't realize that now they have to deal with far more difficult foes: its Filipino clones are in place.

Copyright 1999 Business World