Structural Adjustment Flaws

On February 1980 World Bank launched Structural Adjustment Loan (SAL) program with to prevent the effect of the oil shock crisis in 1979. This loan was targeted to maintain growth by promoting trade protection and efficient resource use. The main feature of this program is the fiscal adjustment, inflation rate control, and trade liberalization, free market promotion with less state intervention. However, the data shows that this program has missed its initial objective, because the loan recipient’s countries showed no significant change in growth, and in many macroeconomic indicators.

Why the program of the World Bank and the IMF have failed in helping the countries to be better off in reaching economic growth or bouncing from crisis lies on several factors. First, bias and inconsistency from the World Bank and the IMF itself in giving the loan (Easterly, 2005). This selection biased has failed to create incentives for the recipient countries to adjust its macroeconomic policies because of the selection biased in the process of giving the loan that is not considering and rewarding the countries whether they have fulfilled the requirements and do good policies or not. So many countries are still received assistance although they did not do well in the previous term, so it ends with stagnation and debt without any strategic adjustment (Easterly, 2005).

This inconsistency is related to the influence of the powerful actors within the organization make the organization slip from its former intention (Babb, 2003). The pressure from lender countries has made the institutions abandoned their initial objective of giving the assistance (Easterly, 2005). There are serious attempt to change how the World Bank and the IMF work by suggesting a change in the system of participation and accountability, the change in the decision-making process, and pursue transparency of its longstanding secrecy, but seems this effort is not quite successful (Babb, 2003)

The other factor of failure is come from the side of the recipient countries due to bad institutions and low government performance. The case of many African countries that are lack of political stability that makes them vulnerable and experience difficulties to execute the recipes prescribed (Van de Welle, 2009). Many countries have no enough political stability to grow and they eventually collapsed because of the quality of political management and leadership in the process of adjustment.

The bad institution happens because many countries have undermined the state capacity too long due to political reason and short-term gain of the elites. As the consequence, the practice of rent-seeking in the middle of instability like civil war and warlord states are much higher than the revenue the countries get to kick off growth. Although there is progress in economic reform but with the system remain in clienteles and patrimonial that provide conducive situation to provide rents for elites. (Van de Welle, 2009)

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International Monetary Fund

Since the 1970s, Keynesian economic practices have taken a back seat to neoliberal principles in the policy suggestion of the International Monetary Fund.  There are a myriad of explanations for why this occurred at the time. This organization implemented theses principles into developing nations that were seeking foreign aid.  The IMF began as a Bretton Woods Institution designed to facilitate the exchange of currency into US dollar and the United States Treasury would in turn ensure the conversion to gold (Babb 2003, pg.7).  The charter of the IMF set forth several ambiguous and pie in the sky goals. Babb says that these ambiguous goals are often the result of compromises set by the framers of the charter in the interest of their countries.  British economist, John Maynard Keynes, advocated for generous grants for poor countries with only the requirement of a reasonable interest rate while on the American Treasury Secretary, Harry Dexter White, wanted to attach conditions to the loans which they give out (Babb 2003, pg.16).  This move was motivated by the United States interests as the primary creditor. These policy conditions turned off a lot of potential receivers of the credit who often turned to private sources. In the 1982, there was an international credit crash and the International Monetary Fund was at the center of reestablishing international credit (Babb 2003, pg.15).  This was at a time when neoliberal policies help a lot of political capital.

The International Monetary Fund expanded their long practices of giving Structural Adjustments Loans in the 1980s (Easterly 2005, pg.2).  Those were the loans that had conditions attached that change the structural. The goals of these loans was protect balance of placement and achieve growth through the means of “fiscal adjustment, getting the prices right, trade liberalization, and, in general, a movement towards free markets and away from state intervention” (Easterly 2005, pg.2).  While the IMF may give many loans to countries, such as thirdy loans to Argentina within 20 years, the effectiveness of these donations were minimal (Easterly 2005, pg.7).  In fact there is evidence, that these policies have cause an increase in corruption and rent-seeking in these countries (Walle 1999, pg.176). This could be the result of shift cultural norms and the changes brought about by the shift in society to liberation.

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Failure of IMF Reform Programs

The major problem behind the failure of the IMF and World Bank reform projects is that they have held a God’s eye perspective, especially when they shifted to the Structural Adjustment Loans (SALs) in the 1980s. Under this broad problem comes a number of negative consequences that were inflicted upon the developing countries’ economies. The historical changes that happened in the IMF, the most important of which is the deviation from its main goal focusing on eliminating financial crises to promoting economic growth and imposing adjustments, are attributed to the lack of organizational autonomy and external pressures (Babb, 2003; Easterly, 2005). This, in turn, imposed policies on developing countries based on the interests of the IMF’s donors, especially the US, which was the biggest and most powerful IMF financial contributor.

Going back in time, Babb (2003) highlights that the IMF mandate was vague and went through different changes since its establishment. Indeed, policy and conditionality changes caused some developing countries to slip in economic crises as they obtained loans. However, the mandate in general, which adopted SALs in the 80s, remained vague in terms of solutions and policies. Easterly (2005) indicates that “aid is not a primary determinant of policy” (p. 3). To elaborate on this, the IMF lent developing countries the money they needed to, among other goals, enhance their economic growth, adjust and stabilize their balance of payments through harsh conditions. Nonetheless, IMF did not offer explicit and feasible policies to these countries on how to adjust on the ground. So, the developing countries had to whether to adjust, which was not the case, or suffer the consequences. This prescription rather caused an economic downturn, especially in view of the developing countries’ weak institutional frameworks that made them more vulnerable to crises (Babb, 2003). Not only this, Walle (1999) illustrates that SALs created more space for additional corruption in the developing countries.

Another reason behind this gap between the proposed policies and actual outcomes is that most of the IMF top staff are economists, who are guided by theories and knowledge, overlooking the various contexts of the developing countries. Both of Babb (2003) and Easterly (2005) underscore that the IMF universalized and repeated adjustment programs but with no reasonable growth and tangible improvement. The justification behind these repeated loans despite their failure was that IMF thought in order for the developing countries to achieve SALs goals, they needed several loans over long periods of time (Easterly, 2005). Most significantly, an alternative proposed by IMF for those who did badly under SAPs was the Heavily Indebted Poor Countries (HIPC) Initiative, which encouraged HIPC to get new loans instead of achieving macro adjustment in service of the previous loans (Easterly, 2005). That gave those HIPC the easy money and incentive to remain in debts and in dependency on IMF instead of enhancing their economic growth. All of this signifies the IMF’s lack of the right assessment of the field and context, which has led to proposing wonderful solutions but not for the problems in question.

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Failure of the financial institutions

There are two major reasons that the IMF and the World Bank have been largely unsuccessful: they are currently trying to do things that they were not designed to do, and local populations and government leaders are not in favor of their intervention.

The IMF was originally supposed to prevent the spreading of economic crises, like what happened with the Great Depression, and promote economic integration.  However, there has been a goal shift to promote economic development.  This shift, combined with the ambiguous structure of the institution has created a cohesion problem between the goal and how it is implemented.  Babb calls this “organizational slippage” because it transformed core organizational goals.  Additionally, the structure of the institution is ambiguous as it is due to the multilateral nature of its founding; the only way to create such an institution was to change the language so that all states involved were happy with it (or none were actually happy, but they could live with it), which has created implementation issues down the road.  These two aspects go together because the ambiguity in the institution’s structure and mandate allowed for unforeseen evolution.

According to the reading, the IMF and World Bank are also largely unpopular in the Global South.  This is both with the people, and the leadership.  This is a problem for the success of the institution because it is accountable to both the people and the official mission of the organization.  The partial reform that has come with each attempt of a structural adjustment loan, which often happen in a series, has actually strengthened neopatrimonialism.  It has also lead to withdrawal from development activities and efforts to restructure rent-seeking so it works in the changing economic system.  This is possible because the political leaders know that the population doesn’t like the structural adjustment programs.  Therefore, they find that there are low economic costs of nonimplementation and nonreform is sustainable, in the fact that they are not likely to face public backlash for not participating.

Overall, the financial institutions rarely seem to work as they are supposed to because they’ve changed their goals and people don’t want their intervention.

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Why The Reforms of IMF and World Bank Do Not Work?

First, it has to do with the organizational governance and structure of International Financial Institutions (IFIs). In terms of organizational governance, IFIs are subject to the three influencing factors, environment, external forces and internal forces. These three pressure points coupled with the political aspirations of their donors and governing boards highly affect the impact of their projects. These loop holes create significant decision making and efficacy obstacles to the organizational functions and limit the ability of IFIs to adapt to the ground situation and realities. For instance, implementation of the same structural adjustment program in different countries (Babb, 2003). The case studies presented in the readings show the inability of the IFIs depict a true picture of the diversity and difference between developing countries. The implementation of the same program not only in different regions but also repeating the failed attempts shows the obscure and unrealistic view of World bank and IMF managing people of the third world.

In terms of organizational structure, these IFIs are blotted bureaucracies and like any other organization, they are bound to its people. After all, organizations are not their wall or rules written on papers but their employees and people who run them. Their organizational view of growth in the third world countries and how-to bring development are from mere theoretical and western technocratic views. That is why the programs of 1960s and 70s of mega government driven economic growth and Import Substitution Industrialization (ISI) failed to produce the desired results.

The second reason why these structural programs are not useful is due to the capacity of the receiver countries. For any diagnosis to work the recipient should be prepared and tested to accept the dose. However, in case of the structural adjustment programs, it is very difficult to implement and achieve, even immediate results, if the governments are not complying with the stipulations of the reforms. The patrimonial and vintage culture of administration system  in majority of the third world countries are  main reasons for failure of reform programs.Implementation of any reform jeopardizes and limits their rent seeking and exploitative abilities. The complex interconnectedness of the government bodies with the elites and warlords, who are often corrupt, creates insurmountable obstacles toward effectiveness of any reform.

Third reason for why these reforms do not yield the desired results is due to their incomplete implementation. The incomplete implementation of these programs apart from the external factors have two crucial domestic reasons. The misuse of funds by corrupt rulers and elites is one reason while, the other reason is  lack information sharing intent and mechanism and understanding of such programs by local populations. In major of the World Bank and IMF funded programs local populations are not even considered as beneficiary, all bets are made on governments and officials. Due to the technicality of the reform language and context, both the IFIs and governments fail to explain and get support of the population. The image of IMF and World bank is very distorted in the third world countries. People refer to them as clandestine operating organizations of the United States and the West who are there to occupy and dominate them.

To conclude, in absence of autonomous organizational governance, sound organizational structure, expert (true) knowledge of the recipient countries, and an engaged local population as main beneficiary of the programs, it is difficult to achieve any results beyond immediate programmatic outcomes.

Understanding the Washington Consensus

Washington Consensus are set of economic policies that reinforces capitalist ideas. They promote market freedom, trade liberalization, free market, and  deregulation which are prescribed by the IMF and the WB. In other words,  such programs encourages less  government interference in order to ensure that markets are free. Washington consensus gained prominence after the battle of world war’s, the policy was to embarked on reform programs to helped war-ravage countries in Europe for a better, stable economy.

(Martha Finnemore, 2009) showcased that the previous assessment of poverty were then regarded as development capacity. Development which were largely focus on industrial projects such as: dams, railroads, highways and etc.  It was also the case that different indicators were used to understand the root problem of poverty; for example, using GNP or GNP per capita in determining the capital accumulation of a person.

Essentially, it wasn’t until 1968 when some crucial changes and critical assessments were considered as what constitute poverty.  Poverty as “Development” pushed — the IMF to spending, and investing on social programs to improve human conditions.  The role of Mcnamara under the IMF showcased the overwhelming principle of neoliberal ideas — focusing on poor segments of the society. This prompted large spending on education, health,  and literacy programs.

Along the same line, the prescription of neoliberalism in Chile has led to the complete overhaul of various reform under General Pinochet. Budget cut, free trade, monetary reforms were introduced as a catalyst for what was design to be a “National Recovery Plan”, not to mention the privatization of the education system and the social security sector as well. From the “Dependency Approach Theory”, Chile, to certain extent, witnessed the uneven-development given that they were trapped to liberalized their economy through trades, coupled with various privatization led programs. The influence of neoliberalism thus far debars Chile investing in their local economy, the import substitute approach moved Chile away from investing in local economy by becoming dependent on import substitution (John Williamson, 1990)

InSummation, Washington Consensus reinforce the basic fabric of capitalist notions, where particular priorities are given to market forces that instilled the values of neoliberal agendas. Th Chile example showcased some of the ongoing debates of whether in fact, such policies that most of the Third World countries are subscribed to is the hallmark to growth and development.

Import Substitution Industrialization

The main strategic goal of import substitution industrialization is to replace imported goods with domestic products to reduce dependency on foreign products. The strategy is by promoting local industry and creating an internal market of specific products to acquire economic growth in order to advance to become industrialized countries.

The strategy that is being used is a subsidy to vital industry, taxation, and tariff, protection policy. For example, in Africa governments established Marketing board to stabilize local price and act as a single buyer in a monopsony domestic market to regulate and set the price for exported crops in the country (Bates, 2014). By increasing, local production of export commodity government can sell it at a high price in the global market. By doing so, the government gains the huge amount of money accumulated to support the project of industrialization by promoting the manufacturing industry (Bates, 2014).

The ISI also used as a strategic solution to help the deficit in the balance of payment. Developing countries such as Chile promote the local production of the automobile by lowering tax in automobile components but impose the high tax for assembled cars, the government also require industry to use local components instead of imported components (Johnson, 1967). The logic behind this is to promote local production and gaining value added from domestic car industries. In the same time, it will also help to narrow down the deficit in the trade by promoting export than import in the long run.

The strategy in this approach is a strong role of the government to regulate the business and trade mechanism. The government act to prevent imported goods outside that will harm local immature industry and let them grow or stabilize the local price so, the product could compete in the global market.

The consequence of state-led development is the failure of the market mechanism due to excessive intervention from the government. Like the case in Africa where the marketing board that should become the protector of peasants any stabilizing the local price end up as the abuser of the local producer. The market that should be profitable for farmers they gain less than what they should have acquired (Bates, 2014).

The intervention also makes the market inefficient and not productive. The case of Chile several regulations that are intended to reserve local market ended up bearing inefficiency and high-cost production to the local community. The national requirement and foreign exchange regulation has prevented the productivity improvement and low expectation and lead to the remainder in small-scale, ineffective operation and eventually could not compete with foreign producers.

Import Substitution Industrialization

It appears that in all three cases (Ujamaa Villagization in Tanzania, Auto Industry in Chile, and Cash Crops in Africa) there was an aggressive government push to achieve economic success. Governments’ rationale to implement such agenda was to bring improvement and modernization in certain sectors on the premise of a positive socioeconomic change in their countries. However, the underlying factor behind their agenda, which was in fact a full-scale social engineering effort to exert more control over the citizens, manifested itself throughout the process.

In Tanzania, this effort entailed a Soviet-style top-down state-led program which would include forced replacement of peasantry, state-built housing, and agricultural initiative (Scott, 2001). In Chile, the government mandated importing auto components to build a strong in-house auto industry, and to ensure superiority of Chilean industrial specialization in the region in pursuit of bigger economic goals (Johnson, 1967). Nevertheless, by putting such efforts and resources on auto industry, Chilean government victimized several other areas of the economy. Similarly, African states, specifically Nigeria, manipulated agriculture sector with the idea that export-oriented agriculture would function as a stepping stone for development of other economic sectors. They lowered the price of agricultural products, diverted the income gained from this sector to local industries, and politicized agriculture to tackle urban protest (Bates, 1981).

Obviously, none of the above programs were a responsive prescription for modernization and economic development. Perhaps, those sectors might have been the appropriate sources to start with, but the way they were handled did not add up in the process as expected. In Africa, the people who suffered the most were peasants and farmers. They lost their homes and traditional agricultural skills, struggled to adjust with the new environmental conditions, and victimized between state, industry and urban constituents of political parties (Bates,1981; Scott, 2001). Consequently, as the programs failed, the barely existing support from the government employees and experts who were part of the change machine drifted away. For farmers and the rest of the populations, loss of social networks and traditional economic activities left heavy consequences. As a result, they had to express their shared concerns through launching collective protests and going against the rest of the government programs (Scott, 2001). In Chile, the government experienced a hard time managing exchange rate and grappling with maintaining its competitive edge in the market. Eventually, auto industry could not guarantee Chile to trail its economic aspiration. Given the consequences, neighboring countries, Peru for instance, would easily steal the thunder to embrace and contextually adjust the practice which would lead to a fiasco for Chile in the region.

Through these cases, although state-led development practices did not prove successful to be replicated, it might be hard to definitively declare them an absolute failure. State-led development which is not accorded by the society because of the state’s pressure on a certain group or disregarding the local knowledge obviously do not produce the expected outcome. However, excluding the government in the development process is not a choice either. In Tanzania, for instance, it is true that state forced villagization and deteriorated traditional social networks, but it also brought about certain order: organized housing, new agricultural practices, and establishment of production cooperatives. Likewise, although African states failed to utilize cash crops as one of the major income sources for development, the sector might have experienced a level of improvement because of the research and developments efforts which had been dedicated to it. Finally, in the case of Chile, despite several challenges, the country could develop its auto industry which would otherwise might not have happened.

Modernization and Dependency Theories

In considering both modernization and dependency theory, it is imperative that we understand the basis and origin of underdevelopment of the world’s population through the social, political and economic order that gave rise to their present conditions. Only then is it appropriate to expand development theories with respect to the plurality of lived human experiences.

Modernization theory basically outlines the increase of development through the use and investment of modern technology. This means that development and economic growth are more tangible and advance when industrialization is prioritized. The reason Dumont (1996) really emphasizes this is because industrialization remains the only industry able to meet the needs of a growing labor force and large scale agriculture through the means of modern technological advancements. A growth in labor and agriculture can only be bolstered through industrialization and modern machinery. Industrialization allows for a balanced increase in the labor population and the demands of agriculture. Dumont (1996) argues industrialization must be implemented at all levels of the economy for it to be an effective means for development. For industrialization to be profitable in this context, exports must be increased while imports on food and other resources must be decreased. This is to support small scale local economies, where locals will benefit from the money made from exports, and simultaneously be able to sustain economies which will enable an increase in agricultural yields. Dumont’s (1996) solution to this ongoing problem is the introduction of small-scale sugar factories in individual African villages. The implementation of hundreds of small scale factories could produce more sugar than one large factory. These small-scale sugar factories would be more efficient in putting money back into the economy, therefore expediting industrialization faster which lends itself to growth and development. Opening up small-scale sugar factories offers more jobs and reduces rural unemployment. If unemployment is reduced locals will be able to put more money into the local economy which in turn aids national economies.

Dependency theory states underdeveloped nations will have exceeding trouble in lifting themselves from the ashes of economic depression, and will only improve economically with the monetary aid from outside developed nations. This system, according to Frank (1966), is what has aided the economic depression of underdeveloped nations in the first place. Historically, a school of thought that was entertained that underdevelopment to development was traditional and original, and we can look to developed countries through a historical lens to observe how they beat underdevelopment. When in fact, it is utterly senseless to use currently developed nations as a model for reaching economic development because they were never undeveloped in the first place. The pervasive underdevelopment of nations can be tied to their economic relations with developed nations. Countries who have fused their economies with capitalist nations will only economically prosper by investments in their native economies and will only develop independently of capitalist nations and their systems of diffusion.

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MODERNIZATION AND DEPENDENCY THEORY

The issue of development has existed for the past six decades and it became significant to scholars and powerful elites after the World War II. The Western world however seized the opportunity to rebuild countries that were destroyed by the World War II come out of their crisis. The International Bank for Reconstruction and Development (IBRD) was one of the institutions created to help manage the issues of developing countries gain their economy back. Also, the issue of theorizing the challenges facing backward regions and countries, and the means of putting these vulnerable countries on the path of attaining sustainable industrialization (Rapley, 2013). Andre, (2018), made a sound argument that development theories cannot be formulated for underdeveloped economies without knowing what led to their underdevelopment.

According to Dumont, (1966), modernization theory suggests that “to regulate economic development, a country needs to lay down an economic development plan to follow” Dumont further argued that, a well planned economy helps in the allocation of  scarce resources evenly across all regions of a country to efficiently solve issues of development. Hence, for African countries to develop, more attention should be given to agricultural and industrial development.

According to Andre, (2018)“Dependency theory argues that economic development occurs in a succession of capitalist stages and that today’s underdeveloped countries are still in a stage, sometimes depicted as an original stage of history through which the now developed countries passed long ago”. Rapley, (2013) further added that, developing countries saw the need to consolidate their independence, and team up with the rich countries into an economic equality that would earn them the respect and sense of self-dignity they felt had been denied them under colonialism.

One of the principal applications of the modernization theory has been the economic field related to public policy decisions. From this perspective, it is very well known that the economic theory of modernization is based on the five stages of development from Rostow’s model. In summary, these five stages are: traditional society, precondition for takeoff, the takeoff process, the drive to maturity, and high mass consumption society. According to this exposition, Rostow has found a possible solution for the promotion of Third World modernization. If the problem facing Third World countries resides in their lack of productive investments, then the solution lies in the provision of aid to these countries in the form of capital, technology, and expertise.

Dependency theory further argued that, the peripheral nations experience their greatest economic development when their ties to the core are weakest. An example of this circumstance is the industrialization process that took root in Latin America during the 1930s, when the core nations were focusing on solving the problems that resulted from the Great Depression, and the Western powers were involved in the Second World War.