The IMF and World Bank's Cosmetic Makeover

Sarah Anderson

This article is from the January/February 2001 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/2001/0101anderson.html

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This article is from the January/February 2001 issue of Dollars & Sense magazine.

Medieval doctors always prescribed the same "cure"; no matter what the ailment, they applied leeches to patients and bled them. For the past decade and a half, critics have likened the World Bank and the International Monetary Fund (IMF) to these doctors. The two institutions have thrown millions of people deeper into poverty by promoting the same harsh economic reforms—including privatization, budget cuts, and labor "flexibility"—regardless of local culture, resources, or economic context. Strapped with heavy debts, most developing countries have reluctantly accepted these reforms, known as structural adjustment programs (SAPs), as a condition for receiving IMF or World Bank loans.

In recent years, the doctors' harsh medicine has been exposed in dozens of studies and in increasingly vocal street protests. In response, the World Bank and the IMF have been attempting to revamp their public image into that of anti-poverty crusaders. While the World Bank has long claimed a commitment to helping the poor, this is a real departure for the IMF, which has unrepentantly elevated financial and monetary stability above any other concern. Considering the two institutions' records, it is not surprising that the sudden conversion from crude medieval doctors to institutional Mother Theresas has provoked considerable skepticism.

Main Elemtents of the SAP Formula

Reducing the size of the state: The IMF requires that countries privatize public companies and services and fire public sector workers. While this may free up more funds to pay off loans, domestic capacity is crippled as a result. In Haiti, for example, the IMF admits that privatization of schools has seen extreme deterioration in school quality and attendance that will likely hamper the country's human capacity for many years to come. For example, only 8% of teachers in private schools (now 89% of all schools) have professional qualifications, compared to 47% in public schools. Secondary school enrollment dropped from 28% to 15% between 1985 and 1997. Nevertheless, the IMF recommends further privatization in Haiti.

Balancing the government budget: Even though rich country governments commonly engage in deficit spending, the IMF and World Bank believe this is a big no-no for poor countries. Faced with tough choices, governments often must cut spending on health, education, and environmental protection, since these don't generate income for the federal budget. According to Friends of the Earth, Brazil was pressured to slash funding for environmental enforcement by over 50% after accepting an IMF bailout agreement in 1999.

Deregulating the economy: The World Bank and IMF continue to push for the elimination of trade and investment barriers, and for the export-orientation of poor countries' economies. Again, if poor countries increase their foreign currency earnings by boosting exports, they may be more able to repay international creditors. The people, however, will not necessarily benefit. The World Bank's own statistics show that, in many regions of the world, increased exports are not associated with increased personal consumption. For example, while export volume increased by 4.3% in Sub-Saharan Africa between 1989 and 1998, per capita consumption declined by 0.5%.

Weakening labor: The institutions have also ardently promoted so-called "labor market flexibility" through measures that make it easier to fire workers or undermine the ability of unions to represent their members. In the spring of 2000, Argentine legislators passed the harsher of two labor law reform proposals after IMF officials spoke out strongly in support of it. The IMF, backed up by the might of the global financial community, appears to have carried more weight than the tens of thousands of Argentines who carried out general strikes against the reform. Even though a recently released World Bank study shows a correlation between high rates of unionization and lower levels of inequality, the Bank and Fund maintain that they cannot engage in promoting labor rights because this would constitute interference in domestic politics.

Although the Bank and Fund have promoted SAPs as a virtual religion for nearly 20 years, they cannot even claim that they have achieved a reduction in the developing world's debt burden. Between 1980 and 1997, the debt of low-income countries grew by 544%, and that of middle-income countries by 481%.

The IMF Gets a Facelift

In 1999, in response to increasing opposition, the IMF gave its Enhanced Structural Adjustment Facility (through which it made SAP loans) the new moniker of Poverty Reduction and Growth Facility. Both the IMF and World Bank announced that under their new approach, they would require governments seeking loans and debt relief to consult with civil society to develop strategies for poverty reduction. In addition, the institutions vowed an increased commitment to debt relief for the poorest countries. World Bank President James Wolfensohn expressed his pride in these efforts by commenting that he comes in to work every day "thinking I'm doing God's work."

Although most of the new poverty reduction initiatives are in an early stage, the World Bank and IMF have given plenty of evidence to support the skeptics:

Anti-poverty PR stunts: Nongovernmental organizations (NGOs) have raised strong criticism of the civil-society consultation processes that are supposed to take place as governments develop the required Poverty Reduction Strategy Papers. Sara Grusky of the Washington-based Globalization Challenge Initiative (GCI) doubts the value of "consultation" if countries will still have to accept the standard policies to get the IMF's "seal of approval." Carlos Pacheco Alizaga of Nicaragua's Center for International Studies says that civil-society consultation is restricted to narrow discussions of social policy. He argues that the process "tries to dilute the central discussion which is the lack of a new model of development for the impoverished countries and the creation of a new world trade system that should not be controlled by the rich countries of the north and the transnational companies." As of October 2000, only two countries (Uganda and Burkina Faso) had completed a Poverty Reduction Strategy Paper. Another 13 had completed interim drafts, but in several cases civil-society groups have reported either a complete lack of public consultation or mere public relations stunts that excluded groups more critical of Bank and Fund policies.

Debt rhetoric: A year ago, the World Bank and IMF initiated a joint plan, called the "Heavily Indebted Poor Country" (HIPC) initiative, to provide a measure of debt relief to certain countries that agree to structural adjustment conditions. The World Bank touts HIPC as an example of its "leadership to relieve the unsustainable debt burdens that stand in the way of development and poverty reduction." The IMF may be more candid about HIPC's true goals. A statement on its web site identifies the main objective not as poverty reduction but rather the reduction of poor countries' debt burdens to levels that will "comfortably enable them to service their debt" and "broaden domestic support for policy reforms." As Soren Ambrose of the Alliance for Global Justice puts it, "HIPC is just a cruel hoax designed to trick developing countries into accepting more structural adjustment."

The World Bank and IMF have tried to tout the HIPC initiative as a permanent solution to the debt crisis by concocting wildly unrealistic predictions of the eligible countries' future economic performance. (As of October 2000, only 10 of the 41 countries had met the rigid HIPC criteria.) They estimate that export, GDP, and government revenue growth will average 7-12% in nominal dollar terms for the next 20 years—optimism that is completely unjustified by the countries' past performance.

Ecuador eruption: There is perhaps no stronger evidence of the continued havoc wreaked by IMF/World Bank orthodoxy than Ecuador. During the past year, indigenous groups, trade unions, and others have organized mass protests against a harsh IMF reform program that shifts the country's economic crisis onto the backs of the poor. In the midst of a general strike against the program in June 2000, a delegation of Ecuadoran human rights, women's, and trade union groups came to Washington, D.C., to ask the World Bank to postpone consideration of a new loan agreement conditioned on further implementation of IMF reforms. The NGOs argued that there had been a total lack of public consultation on the deal, which required low levels of social spending and removal of subsidies for basic goods, while ignoring the country's need for debt relief. Despite their pleas, the World Bank approved the loan package the following week.

Censorship: The dramatic resignations in the spring of 2000 of two high-level World Bank employees raised further doubts about the institutions' commitment to poverty reduction and civil-society participation. Former Chief Economist Joseph Stiglitz claims that U.S. Treasury Secretary Lawrence Summers and IMF bigwigs succeeded in pushing him out of the Bank in retaliation for his charges that the Fund's policies helped precipitate and worsen the global financial crises that erupted in mid-1997. Stiglitz pointed out that while reckless international investors and domestic banks caused the crises, the costs were borne by the workers.

Then in June, the editor of the World Bank's World Development Report, Ravi Kanbur, broke his contract, reportedly in protest over demands that he water down content that had been developed through extensive civil-society participation. Once again, Summers and other supporters of "free market" orthodoxy had allegedly intervened to quash the report's calls for economic redistribution, claiming that economic growth was the ultimate solution for poverty.

Although the final report released in September 2000 contains some strong language about the need to empower the poor, there is no indication that the institutions are willing to consider a substantial reform of their policies. One chapter, "Making Markets Work Better for Poor People," attributes all problems of economic collapse and poverty growth to deficiencies in "market access." The report implies that those former Communist countries that have been mired in economic collapse and stagnation should have followed the examples of the countries that implemented reforms "forcefully and early." This contrasts sharply with the findings of many researchers that the most successful former Communist countries were those that adopted a more gradual and cautious approach.

Old Leeches, New Jars

So far there is little evidence of a genuine conversion on the part of the IMF and World Bank. They have not fundamentally rethought their formula of "structural adjustment," nor their overall commitment to the "free market" model. The medieval doctors have just repackaged their cruel ministrations with warm and fuzzy labels. The challenge for critics is to keep up the pressure, exposing this façade and unifying around a concrete set of meaningful alternative goals and policies—real transparency, real democracy, and a real commitment to fight poverty.

Sarah Anderson is the Director of the Global Economy Program of the Institute for Policy Studies in Washington, D.C., and the co-author (with John Cavanagh and Thea Lee) of Field Guide to the Global Economy.