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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