Economic Adjustment and Development

Since the 1980’s the World Bank has been lending money to developing countries in order to combat poverty and improve economic, political and social structures of these nations. These loans come attached with various conditions that seek to implement neo-liberal market standards into the economies of the lendees under the pretext that orthodox regulations are necessary contingencies for development. These attempts at ‘modernizing’ and strengthening poor economies and subsequently all other aspects of a developing country, however, have been greatly criticized due to their imposition of western, neo-liberal ideology. Evidence has shown that the reception and implementation of these loans has had rather negative impacts on lendees, despite recent changes to the lending program. This paper will, therefore, examine and show how the provisions of the World Bank, despite minor successes, have had an overall detrimental impact on developing countries, and what this could entail for economies in the future.

Background

In the mid-1980’s the World Bank introduced structural adjustment loans (SALs), which were designed to modify the economic and political systems of borrowing nations in order to make their market structures more effective and efficient. This change was induced by the ever growing debt of developing nations, and the general worry that they would be unable pay it back in the future (Touissant, 2008). SALs would allow a country to become a stronger player in the international economy and would enable it to be more competitive. Peet explains that “the idea was to reduce trade barriers, switch the economy’s focus to exports, and compete vigorously in world markets” (2009). As Bajpai outlines, some of the more specific policy measures of structural adjustment loans were the following:

            “removal of import quotas, tariff reductions, budget reform, interest rate

policy reform, revision of agricultural prices, reduction in the powers of state

marketing boards, reduction or elimination of some agricultural input subsidies,

revision of industry incentive system, and strengthening the capacity to

formulate and implement public investment programme” (1990)

Generally, SALs diminished the role of the government and increased the presence of external market forces within a borrowing country. Pease explains that “the orthodox view of development parallels liberalism as a worldview in that both see the market as the solution to underdevelopment while ascribing to state intervention and protectionism a causal or exacerbatory role in underdevelopment” (2012). During and prior to the 1980’s, many viewed government intervention in developing countries as “economically irrational”, so that “no investor, foreign or domestic, could be expected to take a chance on the kind of long-term investment necessary to generate jobs, exports, and tax revenues” (Crisp & Kelly, 1999). This type of economic instability was only amplified by political unrest, which many countries in the southern hemisphere have experienced. Foreign investors regarded the venture into these nations as bad business. Therefore, Third World countries were largely unable to stimulate their economies from their standpoints at that time. Hence, the World Bank sought to transform that situation by altering economies to make them more attractive for foreign investment. Given the conditions “the entirety of a country’s macroeconomic structure became subject to change” (Peet, 2009). Once the World Bank deemed that a lendee has met all of the conditional attachments, it would grant the loan. The above mentioned measures were intended to facilitate development; therefore, countries “were actively encouraged to take on loans by the World Bank (Touissant, 2008). However, the credibility of SALs was questioned as many countries were unable to escape poverty despite receiving funding and changing their economic organization. In order to appease the growing criticisms, the World Bank introduced a new method of implementing changes within developing countries called poverty reduction strategy papers (PRSPs). Unlike SALs, PRSPs allow a government to have greater influence in its markets. Imboela states that “the defining feature of PRSPs is the concept of ‘country ownership’”, in which a state can create its own program with its own conditions in order to receive loans from the World Bank (2005). In theory, these reflect the needs of a nation in greater detail and allow for region specific adaptation in the fight against poverty. As a matter of fact, “the principle of broader public participation has been heralded as one of the distinctive features that separate PRSPs from previous programs” (Imboela, 2005). Although this appears to be a positive alteration, critics assert that the framework of the loans remains the same and that little has changed. In order to get a clearer view of the support and disapproval for SALs and PRSPs, I will examine some of their failures and successes, which, given the evidence, will show that World Bank lending is highly controversial and currently leads to more problems rather than solutions.

Failures:

The main criticism against the Bank is that its loans impose strictly orthodox market structures, which mostly benefit the wealthy member states of the organization rather than the lendees. Peet explains that “throughout the 1980s the World Bank […] exercised considerable powers of control over most Third World and post-communist countries” and that “much of this power resided in the policy conditionality of the widespread structural adjustment programs” (Peet, 2009). Although Article 4, Section 10 of the Bank’s Charter states that it is prohibited to take any political or non-economic considerations into account in its funding operations, the World Bank has found many systematic means of getting around [them]”, as is discussed below (Touissant, 2008). The changes that developing nations have had to endure put a tremendous strain on citizens, as government spending was slashed and public goods became privatized. Adjustment was difficult as jobs were lost and whole national economies were turned upside down to meet the Bank’s criteria for SALs. In fact, the conditional loans “intensified poverty in many African countries in the 1980s and 1990s”, which “increased the vulnerability of African populations to the spread of diseases”, so that “during the past two decades the life expectancy of Africans has dropped by fifteen years” (Peet, 2009). From 1986 onward, therefore, international criticism that came from various NGOs, mounted so drastically that the World Bank started to respond by attuning its public image and modifying its immense eligibility rules (Peet, 2009). Nonetheless, “the World Banks has played a critical role in legitimizing the neo-liberal free-market paradigm over the past quarter-century” and many nations were heavily impacted by these (Peet, 2009). There are numerous accounts that illustrate the negative implications that SALs or PRSPs had on the political and economic spheres in countries.

Political:

Despite its Charter, the World Bank is a highly political entity that measures and weighs the benefits and disadvantages of granting loans to some countries versus others. For example, the organization was a supporter of the Somoza dictatorship in Nicaragua, as the “Somoza family had a stranglehold on a huge proportion of the country’s wealth and encouraged the implantation of large foreign firms, especially from the US” (Touissant, 2008). The United States are the World Bank’s greatest donor and one of the most influential member states. Therefore, if it had a personal interest in supporting Somoza, it could use the Bank directly in order to channel its interests towards the regime, when looking from a realist point of view. Subsequently, when Daniel Ortega became the democratically elected president of Nicaragua in 1984 the funds from the World Bank quickly dried up and the United States initiated a trade embargo against the country (Touissant, 2008). A strikingly similar pattern was followed when it came to the disbursement of SALs in Chile. Under Pinochet, the country received large loans, while once again no funding was supplied when the democratic Allende was still in power (Touissant, 2008). This does not necessarily show that the World Bank has had a special interest in developing countries that operated under a dictatorship but simply illustrates that the organization does take political aspects into account, although it is prohibited to do so under its own Charter. Geo-Taja and Mangum state that “the structural adjusters took the easy way out” and “instead of insisting that corruption be ferreted out […] they slashed more visible expenditures on education or public health” (2001). Another example that illustrates this point is the dictatorship of Mobutus in Zaire/Democratic Republic of Congo, whose “gross economic mismanagement and systematic misappropriation of a portion of the loans did not result in the IMF and World Bank halting aid to his dictatorial regime” (Touissant, 2008). What is going on? All these cases elucidate that sometimes the World Bank’s primary interest is not the alleviation of poverty and the reduction of child mortality or erosion of human suffering, or whatever else they are selling, but simply their own well-being, which includes the well-being of its member states. Both Pinochet and Mobutus were heavily backed by the United States at the time of power seizure. Although their atrocities were recorded and reported by NGOs, such as Amnesty International, their funding from the World Bank continued to flourish. Throughout its entire existence, the World Bank “has actively supported all the dictatorships and all the corrupt regimes of the US-allied camp” (Touissant, 2008). Pease agrees in the sense that the Bank has been “highly politicized” and that the US “has used its voting share to block loans to politically undesirable states and reward allies” (2012). Since the Bank seeks to “reduce poverty and support development”, it ought to be more concerned about the people that need the development, such as workers and families, rather than dictators (World Bank, 2012). From his extensive research, Touissant concludes that “it is clear that sound economic management criteria are not the deciding factor in WB and IMF decisions” (2008). Carroll agrees when examining the World Bank and its role in the Asian crisis, in which Indonesia’s high level of corruption and cronyism under Suharto was supported by the failure of the WB to act in accordance to its monitoring duties (2010). Therefore, when looking at the political facets of World Bank adjustment loans, some major issues that negatively impact the lendees become evident.

Economic:

From an economic standpoint, there have been even further troubles with SALs and PRSPs over the past decades. The United Nations Economic Commission of 1989 stated, after a period in which the loans were functional, that growth rates in countries, which did not receive conditional loans, were actually higher than in countries, who had adjusted their economies according to the orthodox market (Geo-Taja & Mangum, 2001). Easterly elaborates even further by explaining that “none of the top 20 recipients of repeated adjustment lending over 1980-1999 were able to achieve reasonable growth and contain all policy distortions” (2005). In addition, some researchers go even further by stating that “the extent of structural adjustment appears to be negatively associated with both poverty and inequality” (Crisp & Kelly, 1999). Longer case studies show that “even countries with a decade or more of adjustment behind them have very little to show for it in terms of human development” (Geo-Taja & Mangum, 2001). So although the World Bank’s formula for development and progress appears to be correct in theory, it turns out that there are some major problems with it. Unfortunately, many investing firms do not directly share their wealth in the outsourcing country, in which their foreign direct investment resides, but rather take their profit back to their home country, such as the United States. If a company opens up a factory in a foreign, developing country, there are some positive effects, such as job creation and knowledge spillovers. However, there are also other major problems, such as environmental degradation and exploitation of a largely poor and cheap labour force. If there are problems of corruption and fund mismanagement by the government, as was discussed earlier, the success of SALs and PRSPs is seriously challenged. So by simply adopting the conditions of the Bank, one is not guarantee to achieve positive growth and development. In some serious instances, some negative or reverse growth effects are observed.

There are a number of specific countries that have experienced adversarial results through the implementation of World Bank conditions. Under the pretext of market reform, the Bank has been increasingly interested in the privatization of utilities. Carroll states that it is “perhaps the most obvious form of market extension undertaken as part of the Bank’s work” (2010). All human beings depend on utilities, especially on water. Consequently if it is privatized, the owners of these resources are guaranteed to make a profit. It is a resource that is always going to be in demand and individuals are going to have to purchase it. We will give up other things first before we can give up utilities, since our lives are dependent on them. Therefore, the topic of water privatization is highly controversial and poses a great problem since the World Bank has greatly advocated the sale of these resources to private investors. From a neo-liberal standpoint, the privatization of any product or service is going to benefit consumers because the market will technically regulate and balance on its own. A private company is always going to charge the lowest possible price and perform at its best, in order to outperform competitors and keep them out of the market. However, once again the theory of neo-liberal economic thought sounds convincing, but the reality bears great difficulties. In Ghana, for example, 30% of the population lack access to clean drinking water. Nonetheless, Ghana privatized its public water supply, in compliance with World Bank conditions in 2001, which nearly doubled the price of water in May 2001 (Touissant, 2008). Ghana, in general, suffered tremendous hardship under the World Bank. Research shows that “[its] experiment with adjustment had a catastrophic impact on urban low-income groups, especially retrenched public sector employees, who were already living below the poverty line” (Geo-Taja & Mangum, 2001). In addition, due to wage cuts and privatization of various sectors, “their purchasing power was drastically reduced, making life nearly unbearable for them and their families” (Geo-Taja & Mangum, 2001). The sale of public resources to private investors, therefore, can bear tremendous, negative side effects for nations that already have very little to work with.

Other examples of economic failures through the imposition of SALs and PRSPs are evident throughout the history of the World Bank. An examination of Pakistan’s real GDP, for example, elucidates another ineffectuality of the orthodox market structure. Through his very detailed analysis of Pakistan’s economic growth and advancement, McGillivray concludes that none of the positive transition in GDP was due to World Bank funding (2003). He states that “insofar as GDP growth is concerned, this performance would seem to be a continuation of a prior phenomenon”, “which is consistent with the findings of some previous research” (McGillivray, 2003). However, other nations were not so lucky as to retain no significant change on their poverty levels from the implementation of World Bank loans. The government of Zambia, for example, has found that “an unconditional implementation of economic reforms throughout the 1990s has resulted in higher poverty levels” (Imboela, 2005). Imboela further adds that “in Mozambique, neoliberal economic reforms have resulted in increased poverty levels particularly in rural communities” (2005). The heralded and lofty aspirations of the World Bank have, therefore, remained unrealized to a large extent over the past years. Research by Easterly also confirms that “the intensive recipients of adjustment loans had the same near-zero per capita growth rate as the overall developing country sample” (2005). In fact, “they also had the same current account deficit, the same government deficit, and the same black market premium and inflation rate, and the same near-zero real overvaluation and real interest rate” (Easterly, 2005). Easterly found some of his findings very surprising because some countries experienced very negative growth although they had adopted all of the intensive conditions and received an average of 19 adjustment loans (2005). The economic failures, and subsequently negative social impacts, that the World Bank provoked with its structural adjustments are, therefore, numerous and spread throughout the world.

The World Bank continues its lending programs to developing countries to this day, although they have changed some aspects of the conditions, as well as the structural makeup of the loans themselves. As a matter of fact, changes to these programs are common and they “permeate all aspects of society” (Geo-Taja & Mangum, 2001). Nonetheless, with a record that is blotted with miserable failures and filled with increased rather than decreased human suffering over the past 30 years, any real change and progress in the operation of the World Bank is questionable. Geo-Taja and Mangum argue that there is a great “need for outside intervention, a visible hand, usually that of government, to help the crippled invisible hand of market forces” (2001). Although the Bank has acknowledged its massive shortcomings and has tried appeasing the public on a few occasions, it still appears not to be enough to undo its past mistakes. In 2005 the G8 Finance Ministers announced the cancellation of the $40 billion debt owed by 18 developing countries. However, this “is no gift: it is merely a compensation for the neoliberal straitjacket that has been imposed on them for years through the HIPC initiative” (Touissant, 2008). Given all the negative examples that were explored throughout this paper thus far, it does appear to be some form of compensation for the damages that the lendees had to incur during and post the implementation period. Therefore, when looking at the shortcomings that SALs and PRSPs brought with them over the past decades, it becomes clear that World Bank lending has had a detrimental effect on political and economic aspects of the Third World.

Successes:

Nonetheless, the World Bank boasts with some successes that it was able to achieve in a number of developing countries. The following is a small overview of some of its achievements that are listed on its website:

            – US$835.8 million in fast-tracked funding in response to the 2008/09 food price crisis

            – Mitigation of air pollution in urban and industrial areas

            – Reduction of the gap between girls’ and boys’ school primary and secondary

enrollment from 25 to 11 percentage points between 1991 and 2006

– Increase in cellphone subscribers from around 1 percent to over 29 percent of the

Third World population

– Construction of 260.000km of roads

– Connection of 600.000 first-time customers to energy lighting in Bangladesh

– Trade related funding of $1.8 billion in 2010

– 3 million people lifted out of poverty in Mozambique

(World Bank Group, 2011)

In other instances, the Bank presents some information very differently from what independent researchers, such as the ones that I have been mentioning in my article, have found. For example, Ghana is “becoming a middle income economy through years of sustained economic growth, enhanced by the recent discoveries and commercialization of oil and gas” (World Bank, 2011). As is evident from the above mentioned examples, the Bank regards development as assimilation to the orthodox market.

Analysis:

Despite the positive developments and changes that the World Bank reports, my research has presented me with an overwhelmingly majority of academics that distrust and disapprove of the organization.  Peet argues that “the quality and pattern of growth and the importance of the equality of distribution [are] themes that are novel to Bank thinking” (2009). Touissant adds that “the models that have influenced the Bank’s vision can only result in making the developing countries heavily dependent on an influx of external capital, particularly in the form of loans, which create the illusion of a certain level of self-sustained development” (2008). These comments are partially true. While the Bank has seriously mismanaged many developing countries and their loans, some of their successes are undeniable and there is some credit that the Bank deserves. The problems are not necessarily small, developing countries and their mishandled and weak economies but the overarching market structure that we operate in. Nowadays, we are all interlinked and dependent with each other. It is not just Third World countries that would become contingent on the West. For example, Canada is highly reliant on trade with the US, and the European Union depends on oil imports from other countries. This form of economic dependence affects every nation; therefore, I do not agree that it is something that is specifically targeting developing countries. It is true, however, that these weaker countries are more susceptible to outside influences and have little power in shaping their own destinies. Touissant argues that “the World Bank is a despotic instrument in the hands of an international oligarchy […] who bolster an international capitalist system that is detrimental to mankind and the environment” (2008). Furthermore, “it is still unclear whether the new, more market-oriented model will lead to growth across the developing world and whether that growth will have a more positive impact on the relative condition of the poor” (Crisp & Kelly, 1999). The ‘one size fits all’ approach of the Bank in addressing underdevelopment issues is highly problematic because it tampers with entire communities and cultures that are affected by the economic changes. The ripple effects of alterations to market structures are great and reach into the depth of society. Therefore, the World Bank appears to be quite ignorant when it simply applies the same or very similar logistics from country to country in the name of development. The organization does not appear to have much consideration for the fabric of communities and how individuals are interwoven with each other. It uses a cookie-cutter method that attempts to clone individuals in the Third World into dependent, working consumers that maintain the wealth of the rich in the world. As restated by Alastair, Williams “has argued that, in order to make its market model work, the Bank attempts to remake African people, constructing a ‘homo economicus’” (2005). Although the Bank has made attempts to reform its loans, such as with the introduction of PRSPs, the framework of these funds still remains the same (Imboela, 2005). The reality of PRSPs is that “the Bank was clearly keen to ensure its own voice and decision-making power were strengthened”, while it heralded that more control was being transferred to locals (Alastair, 2005). The relationship between the organization and developing countries “is still predominantly based on power, resource control and dominance” (Imboela, 2005). Therefore, Alastair concludes that “we are nowhere near a world of post-conditionality (2005). The fact is that the Bank is seriously tampering with other countries and administering irrevocable changes to economies, societies and the environment. One can choose to look at it from a liberal perspective, in which the organization’s real main worries are underdeveloped and poor individuals, who would benefit from accessing orthodox markets. However, from a realist standpoint, the organization is just a strong tool of the international elite that enables them to tap into untouched resources and markets, and subsequently guaranteeing them the power over them.

 

Conclusion:

The World Bank is an organization that maintains the power of wealthy countries and enables them to shape Third World nations into dependent consumers. Although “the increasing subjection of people to the market in the developed world, and the precariousness that accompanies this, means that encouraging an interest in the process of development and the work of the Bank is even harder to achieve than before” (Carroll, 2010), the Bank will nonetheless be able to attain this goal. Wealthy nations hold a tremendous amount of power over other international players and they can manipulate and coerce others into submission. Aside from opening up previously protected economies to international trade, companies and multinational corporations are interested in reaching a new group of consumers that they had very little access to previously. The Bank has had a positive impact in many countries, however, all these results produce the same thing: They mould individuals with different cultures into a Starbucks-drinking, Nike-wearing consumer, whose main purpose in life is to sustain the big players on the top.

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