RON BEVACQUA |
Some comments on the first post in this blog series linked market-based development to the structural adjustment programs (SAPs) pursued by the International Monetary Fund (IMF) and World Bank. It’s a tempting analogy, especially since both economic approaches have been labeled “neo-liberal”.
In fact, these two concepts have very different intellectual histories as well as economic (and political) goals. They do, however, share one very important trait: exaltation of individual action and, by extension, hostility toward any forms or institutions of collective action. They both also share a jaundiced view of politics, although for entirely different reasons: right-leaning neo-liberalism seeks to prevent politics from interfering with property rights, while left-leaning neo-liberalism seeks to prevent politics from interfering with technocratic solutions to social and economic problems.
Because of these common starting points, these two economic visions ultimately lead to the same final outcome: grossly unequal results for those with more assets (financial, real, or educational) compared to those who have less.
It didn’t have to be this way. But the final result was not, as some have argued, the result of bad faith as much as ideological blinders, naïve views about human nature and domestic politics, and an utter failure to think through the consequences of their recommendations.
The austerity policies of SAPs emerged from the lessons learned from the developing country debt crises of the 1980s. US domestic policy during the first half of the decade led to an overvaluation of the dollar and a collapse in global commodity prices. Many developing countries had borrowed in dollars but could not earn enough on their agricultural exports to repay their debts. The ensuing balance of payments crises necessitated intervention by the IMF and World Bank that became known as the “Washington Consensus”.
When John Williams of the Washington-based Institute for International Economics delivered a background paper entitled “What Washington Means by Policy Reform” at a conference on responses to the Latin American debt crises in November 1989, he diagnosed the problems in those countries’ economies as “structural”. The overall thrust of the Washington Consensus was to shift governments away from controlling the economy and the businesses that operated in it, as was common among developing and socialist countries during the Cold War, toward policies that provided public goods to “increase capacity for growth based on the country’s ability to compete in world markets”: reduced budget deficits (especially through the privatisation of state-owned enterprises and tax reform), non-intervention in market pricing of interest rates and exchange rates, trade and investment liberalisation, deregulation, and protection of property rights.
The SAP prescriptions were based on the supply-side conceptualisation of economics: its policies were all meant to encourage business investment. The resulting spending on goods and employees––demand––was expected to ignite a virtuous circle, stimulating more demand and thus encouraging more investment. Starting in 1985, the IMF and World Bank attached structural adjustment conditions to more than 700 loans to more than 100 countries.
Yet when the IMF officially ended SAPs in 1998, they had coincided with “lost decades” in many developing countries, with global poverty increasing over that period. The flaw in the SAP recommendations was not only that they tied the hands of policymakers, but also that they provided no guidance to policymakers regarding what to prioritise within the imposed constraints. In the hands of domestic political actors, such policy prescriptions inevitably led to choices that favored the powerful. Many countries exceeded their fiscal conditions and still underspent on health and social services. Ultimately, the SAP goal of creating an “enabling environment” for business naturally led to policies that favored what are now often called “job creators” but at least until the end of the Cold War were more commonly referred to as “capital”.
Writing in retrospect, John Williams argued that he did not intend for the Washington Consensus to mean that government had no role to play in the economy. Indeed, his description of the Consensus accepted pro-poor spending, regulations that protected people and the environment, and “managed” (that is, neither completely fixed nor completely floating) exchange rates. He explicitly omitted policies that emphasised monetary policy over government spending in stabilising economic cycles, allowed free flows of capital for financial speculation rather than investment in productive assets, and limited regulation.
Williams would also regret not including a stronger emphasis on equitable outcomes when he outlined the Washington Consensus. He believed that “it is important for governments to target an improved distribution of income in the same way that they target a higher rate of growth”. This meant adopting policies that would be considered unorthodox from the point of view of economic efficiency but would nevertheless have a strong impact on income distribution. While progressive taxation was a key component of achieving equity, he also recognised that “significant improvements in distribution will come only by remedying the fundamental weakness that causes poverty, which is that too many people lack the assets that enable them to work their way out of poverty”. To this end, he recommended land reform (to reduce landlordism and the unequal distribution of land holdings), land titling systems, spending on education, and micro-credit.
Williams’s emphasis on assets is telling: he understood that the model he was promoting benefitted those with more assets (financial, real, or educational) compared to those who have less. The problem with his mea culpa was not only that achieving a modicum of equity in assets requires redistribution, but also that it implies a political order in favor of such policies in the service of equity. Yet the main recommendations of SAPs implied a diametrically opposed political order: one that gave primacy to those with the most assets.
As discussed in the first post in this series, the idea of targeting the poor directly emerged from the recognition that top-down development policies and programs were not delivering the results that had been expected. The International Labour Organization (ILO), USAID, and the World Bank all placed the cause of continuing poverty in local politics, with differentials in power driving unequal market outcomes. Their recommendations for reducing poverty explicitly sought to overcome the monopoly on economic gains from market transactions by the politically powerful by redistributing wealth downward.
The SAPs made a similar mistake as the old top-down development policies: imposing a one-size-fits-all framework without considering how domestic politics would shape the outcome.
Ron Bevacqua is an Adjunct Research Fellow at the Griffith Asia Institute as well as the Co-Founder and Managing Director of ACCESS Advisory Inc.