HOW CAN AFRICANS AVOID THIS? “THE WORLD BANK AND THE IMF IN AFRICA: STRATEGY AND ROUTINE IN THE GENERATION OF A FAILED AGENDA” By Howard Stein Visiting Professor Center for Afro-American and African Studies (CAAS) and School of Public Health University of Michigan, 505 S. State St., 4700 Haven Hall Ann Arbor, MI 48109-10921 January, 2004 1 A shorter version of this paper will appear in Ulf Engel and Gorm Rye Olsen eds. Global Politics and Africa (London: Routledge, 2005) 2 “The World Bank and the IMF in Africa: Strategy and Routine in the Generation of a Failed Agenda” by Howard Stein Debt financing by multilateral sources led by the World Bank has proliferated in the past twenty-two years. Between 1980 and 2002, long duration debt from international financial institutions (IFIs) increased nearly eight times to approximately $365 billion. Despite the widespread belief that private sources of finance have been replacing official sources, IFI loans have been the fastest growing source of debt for developing countries In relative terms, the debt from the IFIs increased from 10.7% to almost 19% of the total over this period. In Sub-Saharan Africa (SSA) expansion has been even more astonishing. The continent has been mostly cutoff from private capital flows and has experienced bilateral aid fatigue. By 2002, debt arising from the IFIs reached 36% of the total compared to 16% in 1980. Within this context, the World Bank (IBRD and IDA) has been by far the biggest player, increasing its share of total long term outstanding debt to 25% in 2002 compared to 11% in 1980 (World Bank, 2003a). With this increased flow has been a commensurate increase in the power of the World Bank to dictate the policy agenda through loan conditionality. While the IMF has only doubled its debt to Africa over this period, the conditions of their Structural Adjustment Facilities or more recently Poverty Reduction Growth Funds continue to be at the core of aid agreements between donor and recipient countries up to and including the latest budget support schemes (Cramer, Stein and Weeks, 2003). After 1980, the first year of loans, structural adjustment conditionality had become ubiquitous in sub-Saharan Africa. By 1995, 37 sub-Saharan countries had received at least one World Bank adjustment loan and 33 had two or more loans. (Kapur et al., 1997, p.798). African economies have performed poorly over the period of adjustment. The evidence is overwhelming. By 2001, SSA GNP per capita (excluding S. Africa) in dollar terms had fallen 43 percent since 1980 (World Bank, 2003b). Debates on the responsibility of adjustment for the poor performance of African economies have been rancorous and protracted.2 While the World Bank and IMF have actively participated in these debates, the focus of this paper will be less on the impact of these measures and more on explaining and documenting the shifting policy agenda in Africa. After two decades of loans largely for infrastructural support and brief flirtations with income distribution, basic needs and poverty reduction in the 70s, the World Bank in the 2 The literature is extensive and will not be reviewed here except for the brief discussion in the last part of the paper. For a theoretical critique of adjustment including some of this literature and a more extensive empirical review of the performance of African economies since 1980, see Stein and Nissanke, 1999 and Stein, 2003. 3 1980s focused on the trinity of neo-classical orthodoxy, stabilization, privatization and liberalization. In contrast, the IMF had a long history of orthodox policies (stabilization component) dating from the 1950s. After 1980, Fund conditionality increasingly expanded both in terms of the duration of loans and by incorporating more items linked to privatization and liberalization strategies. Beginning in 1989, the World Bank began to expand their developmental lexicon to include issues of governance and capacity building, social capital, institutions, poverty reduction, sustainable development, decentralization, ownership and others. By the late 90s, the IMF was also using similar terminology when discussing the challenge of African development and in discussing “new” strategies. The latter part of the essay will focus on the dynamics of this shift and the impact it has had at the operational level. What has been the motivation for the shifting Africa agenda? Bilateral relations debates often focus on the role of nation-state actors in structuring international relations vs. the post-Westphalian argument on the transnationalization of relations. In the former context, policies towards Africa are the product of a confluence of state interests and domestic politics. In the setting of an international organization, the debate is somewhat different, since by nature we are dealing with multilateral, not state entities. Neo-realists (Keohane, 1986) see multilateral agencies as a product of the interaction and relative power of participating states. In contrast, new realists like Robert Cox (1997) take a post- Westphalian view that points to a system greater than the sum of the interests of participating states. Following Cox, Boas and McNeill (2003) see multilateral organizations as structures of governance which establish a new social order which is embedded in the “nexus between material conditions, ideas and interests”. These institutions provide an arena of contestation within institutionalized rules and procedures. Policy outcomes are seen as a product of the struggle between NGOs, states with membership and the institutions themselves. In this context, the actions of the hegemonic power are modified and tempered by the confluence of these actors. This essay will take a somewhat different approach. As I will argue throughout the paper, the neo-realist approach understates the role of the United States as the hegemonic power in setting the policy agenda, in instituting a set of rules and concatenating norms that helped legitimize those priorities (through the domination of neo-classical economists in the Bank) and in acting as the vehicle for NGO access (via Congressional politics) to the World Bank and IMF. These are not loci of contestation between equal players but are institutions with only “relative autonomy”, or, to use the terminology of Peter Evan’s, they have “embedded autonomy”. Although they are independent actors, the interests of the hegemonic power have been institutionalized. Thus, in some ways, the literature has falsely dichotomized both unilateral/multilateral and neo-realist/new realism distinctions. The essay is divided into five sections. The first part of the paper provides a brief discussion of the foundation and structure of the World Bank and IMF. The second 4 section traces the phases of World Bank in Africa up to 1981. The third examines IMF policy stages in Africa from the 1940s to 1981. The fourth section traces the decision making process in the Bank and Fund which led to their convergence to structural adjustment, including the broadening of the agenda into new areas like governance. The final section critically examines the post-1981 agenda and the reasons for its failure to generate development on the continent. Foundation and Structure of World Bank and IMF Policy in Africa The World Bank In principle, the structures and policies of the Bank are supposed to reflect the will of the membership. The reality however is quite different with many of the changes mirroring the shifting priorities of U.S. foreign policy toward Africa. In mid-1947, forty countries had become members of the World Bank. Only two were from Africa (Ethiopia and South Africa). In 1957, the same two were still the only African members, although membership had grown to 60 nations. As African countries gained their independence, the membership rapidly expanded to eight by 1962, thirty four by 1967 and forty by 1971. By 1971, African countries constituted 35% of the total membership, but had only 8.6% of the voting power. In contrast, the developed countries of Europe, North American and Japan with 20% of the membership controlled almost two-thirds of the votes (Mason and Asher, 1973, pp.65). The US had by far the largest vote with around 24.5% in 1970 falling to a low of 15.1% in 1990 before increasing to 16.45% in 2001(Boas and McNeill, 2003,p.26). In principle, the distribution is based on measurements of national income, foreign reserves and contributions to international trade. In practice, the process is highly political with United States deliberately keeping its share above 15%, in order to maintain veto power over major decisions that require a 85% special majority.3 No other country has veto power or anywhere near the votes of the US. Japan is the next highest at around 8%. While the ruling 24 member Executive Board of the IBRD mostly operates by consensus, the hegemonic presence of the US with its voting power is omnipresent. If a loan does not have the approval of the US, it is unlikely to be proposed to the Board. (Woods, 2000, p.133-34). The internal structure of the Bank’s dealing with Africa changed in 1961 with the creation of an Africa department. Prior to then, Africa was lumped together in a section with Europe and Australasia. A confluence of events pushed the Bank to increase its lending to Africa and to expand the scope of lending activities. Beginning in the late Eisenhower years, aid was seen as a vehicle to build up support in nations as a bulwark 3 At the end of June, 2003, the US had a 16% voting power in the World Bank. At that time, the US was trying to block a proposal to increase the voting power of developing countries from 40% to 43 or 44% which might threaten the 15% benchmark. The US occupied one seat on the 24 member executive board of the IBRD, while the European powers had eight all together. The 47 countries of sub-Saharan Africa together had only two seats (Financial Times, Friday, June 27, 2003). 5 against Soviet expansion. Program assistance was perceived as being more effective if it was institutionally separated from foreign policy mechanisms (Gwin, 1994, p.14).4 In this context the US heavily pushed for the creation of a new arm of the World Bank known as the International Development Agency which could make loans to the poorer developing countries at more reasonable terms. The idea of creating a new agency for this purpose was actually proposed as early as 1951 by a US presidential commission led by Nelson Rockefeller. However, events in the late 1950s led by the Russian success of Sputnik and the creation of SUNFED (Special United Nations Fund for Economic Development) (Oliver, 1995, p.44) finally spurred its creation.5 When the IDA proposal was formerly submitted by the US in July, 1959, it was a fait accompli since it was already cleared through Treasury discussions with World Bank officials and other donors. One of the lasting effects of the creation of the IDA arose from its financial structure. Unlike the IBRD which is largely self-financed, IDA loaned money at less than the market rate and needed replenishment every three years. This gave the US Congress, which voted on the US contribution, a mechanism to impose conditions on the US allocation thereby influencing the World Bank agenda (Wade, 2002, pp.203-4). For example during the IDA 6 (1981-84) negotiations in 1979, McNamara was warned by key members of congress that the replenishment would be voted down unless he agreed to block all loans to Vietnam. McNamara complied (Kapur et al., 1997, p.1150). US NGOs, long ignored by the Bank, have used their access to the US congress to shift the World Bank into new areas such as the environment (Wade, 1997) and to later push the Bank in abandoning user fees in health and education. The two other major units of the Bank were also shaped by the US. The IFC or International Finance Corporation was organized in 1956 after long delays from negotiations with the US government. The IFC extended loans to private companies in developing countries. Its size (reduced from a proposed capitalization of $400 million to $100) and initial operating principles (no ability to raise money on capital markets or to invest in stock) reflected pressures from a conservative US administration that felt the Bank should not compete with the private sector. MIGA (Multinational Investment Guarantee Agency) organized in 1988 to provide insurance for foreign investment and technical support for developing countries to formulate foreign investment policies was also delayed by a skeptical Reagan administration. From Africa’s perspective the IFC and MIGA have played rather minor roles. For example between 1970 and 74, the continent received only 5.5% of total IFC funds and in 1985 and 1990 only 11%. In contrast, Latin America for the same periods was allocated 37% and 46.5% of the total. IFC funding has also in most cases been much smaller than 4 In the context of supporting the creation of the Inter-American Development Bank Eisenhower was quoted as saying: “If this instrument insisted upon social reform as a condition of extending a development credit, it could scarcely be charged with intervention.” (quoted in Kapur et al., 1997, p.155) 5To quote a World Bank official working closely with Treasury, IDA “was not a US affirmative program” but “a desire to assuage Congress” and “to keep off SUNFED” (quoted in Kapur et al., p.155). SUNFED was a product of pressure of developing countries for development assistance in social areas under softer terms and was a potential challenge to the domain of the US dominated World Bank. 6 the overall percentage allocated to Africa(Kapur et al., p.885). In contrast as we will see below, the continent has been receiving a growing and disproportionate share of the IDA funds. The IMF The hegemony of the US in the Fund was also present from its inception. The IMF was created at the Bretton Woods Conference of 1944, and formally came into existence at the end of 1945. The US wanted a bank which was selective and conservative in its loan disbursements, with the US dollar as the reserve currency (backed by gold) and wanted it situated in Washington. Keynes, leading the UK delegation, wanted a new international currency (bancors), wanted ease of access of resources to maximize sovereignty in the choice of policies and wanted the Fund in New York or Europe removed from the politics of Congress. The US effectively vetoed Keynes’ proposal and the IMF was born in accordance with its priorities, a pattern that has continued to the present.6 The debate over the question of loan conditionality was particularly protracted with the US representative to the Bretton Wood negotiations Harry Dexter White pushing heavily for the Fund to be given the right to challenge any drawings7. While the language was fairly ambiguous in the final articles, the Board, almost from the onset interpreted the clauses along US lines (see discussion below). Under the articles of the agreement the Board of the Executive Directors was responsible for the daily operations. Five of the twelve were appointed by the countries with the largest quotas. From the beginning the US always appointed one director. Over time the number of Executive Directors increased to 24. As the case of the World Bank, the Board seldom votes but reaches an artificial consensus reflecting the distribution of power. The voting power reflects the size of each country’s quota. Once again the US has maintained an effective veto through voting power exceeding 15% (eg. the 85% rule on major issues also applies). As of March, 2002, the US had 17.16% of the vote. (Boas and McNeil, 2003, pp.30-31). While the policy model, the targets and the operating structure largely remained the same, new lending mechanisms gradually expanded the influence and resources of the International Monetary Fund. Many were developed in the post-1973 period as the IMF reinvented itself in the wake of the demise of the Bretton Woods system. In the early stages the IMF relied on member deposited funds to be relent to the membership through the quota system. After 1952 governments signed standby agreements with conditions tied to a series of tranches (see discussion below). 6 Keynes was very concerned the Fund and Bank would become a political tool. In the inaugural meeting of the Board of Governors of the IBRD and Fund in Savannah, Georgia in 1946 he asked the good fairies to look over the “Bretton Woods twins” and hoped the fairy Carabosse would not be forgotten since if she was to come uninvited she would curse the children by saying “You two brats” you “shall grow up politicians; your every thought and act shall have an arriere-pensee; everything you determine shall not be for its own sake or on its own merits but because of something else.” Spoken with Keynes’ usual clairvoyance... (quoted in Horsefielde, Volume I, p.123) 7 See lengthy discussions in Horsefielde, Volume I, pp.67-77. 7 In 1962, the IMF greatly expanded its capacity to lend by the establishment of the “general arrangements to borrow”. This gave them a line of credit with governments and banks greatly increasing the resources in support of their lending operations to member states. The Compensatory Financing Facility (CFF) was introduced in 1963 to help countries deal with temporary export shortfalls from external sources. Conditionality was generally lighter than upper tranches of standby accords. The CFF changed over time with increasing access permitted in 1966, 1975 and 1979. There was a growth in drawings in 1976 and 1980. Of particular interest to Africa, the CFF, in 1981, expanded its domain to cover higher imports of cereals in the wake of poor domestic harvests and in 1988 to cover increases in interest payments caused by rising global rates. In 1988 the CFF was renamed the Compensatory and Contingency Financing Facility (CCFF) to reflect the expanding domain. However at the same time as the domain expanded, the IMF between 1983 and 1988, tightened the conditionality and made an existing program or eligibility for a standard program a prerequisite for financing(Bird, 2003, pp.231-32). A few other facilities were introduced including the Buffer Stock Financing Facility (BSFF)in 1968 to assist countries with balance of payments problems arising from participation in commodity agreements. In 1974, the EFF (Extended Fund Facility) was also added as the Funds’ first loan with a medium term focus. The aim was to give countries time to deal with sources of slow growth and balance of payments problems. An Oil Facility was set up between 1974 to 1976 to deal with the consequences of the run up of prices of oil after 1973. A Trust Fund was financed by Fund gold sales allowed these countries access to money at lower interest rates (sub-Saharan Africa received 28% of the total). Both the EFF and the Trust Fund were important precursors to the development of Structural Adjustment Facilities(SAFs) in the 1980s. The EFF illustrated the ability of the Fund to get into “development” issues over a longer time horizon, a model later used by SAFs and ESAFs (Enhanced SAFs) when they were introduced in 1986 and 1988. The Trust Fund also was used to support the SAFs and ESAFs and provided a source of funds outside the General Resource Account (which supported all the other facilities) that could be given on concessionary terms. The main difference between the ESAF and SAFs was that the ESAFs went beyond the conditionality of a typical stabilization package to include broader Washington consensus elements (eg. such as trade openness and privatization). This led to the complete convergence with the World Bank. (Bird, 2003, pp.231-34). 8 8 In the 1990s the Fund’s domain and facilities continued to proliferate. The Systemic Transformation Facility was introduced (1993-95) to assist the transitional countries, a Supplemental Reserve Facility in 1997 to deal with sudden losses in market confidence, and Contingent Credit Lines in 1999 as a precautionary line of credit to defend countries with “strong policies” against balance of payments crisis arising from the contagion effect of international finance. Also in 1999, the BSFF was discontinued (commodity agreements were no longer in fashion), the CCCF returned to its earlier name of CFF since it no longer used the contingency element and the ESAF was renamed the Poverty Reduction Growth Facility, as if the name change would somehow allow them to argue that it was always about poverty (Bird, 2003, pp.231-34). 8 The Policy Phases of the Bank and Fund up to 1981 The Bank The policy phases of the World Bank largely followed the shifting priorities of US foreign policy in line with political changes in Washington and alterations in geo-political relations. However, the policy content of these new phases was not developed in a vacuum but also reflected shifts in academic fashions which influenced thinking inside the beltway (in and out of the Bank) and the idiosyncratic stamp of key individuals. Moreover, the use of temporal constructs artificially suggests high levels of institutional discontinuity when in reality the precursors to new policy paradigms were in place well before the new strategies were widely implemented. The history of policy in the Bank can be divided into three phases infrastructural facilitator from 1945 to 1968, McNamara and anti-poverty development strategies 1968- 1981 and Bank-Fund convergence on development: neo-liberalism and its peripherals 1981 to the present. The first two phases will be discussed in separate sections. The latter will focus on the development of the joint agenda in Africa as an illustration of the dynamics of decision making. Infrastructural Facilitator 1945-1968 Eugene Black was President of the World Bank from 1949 to 1962 (but actually arrived in 1947 as the US executive director(ED)). He emphasized a narrow focus on lending for infrastructure projects with a clear demonstrable capacity to expand GDP and generate the income to repay the loan. Black was a former bond seller and was interested in securing the safety of the World Bank issues with a conservative portfolio. To the US and other developed countries, he was an excellent choice to lead the Bank in the 1950s given the capital structure of the Bank. From its inception, only 3 to 5% of subscriptions of country members were paid to the Bank. The rest was in the form of “guarantees” by the states. Under Black’s tutelage the World Bank was able to maintain the triple A rating by Moody’s (first awarded in 1949) (Oliver, 1995, p.41). This was central to the operation of the Bank, since it required bonds to be floated at the lowest possible interest rates. Profits to finance the operations would arise from the difference between the interest rates charged and the rate paid by the borrowing country which would be lower than what they could receive from private credit markets. Overall, 83% of all pre-IDA loans to poor countries were for power and transportation without a single loan to education, health or other social sectors (Kapur et al., 1997, pp.109-10). In Africa, this agenda was evident from the beginning. The first loan to an African nation was to Ethiopia in 1950 (Mason and Asher, 1973, pp.65,165). The focus was on developing transport and telecommunications infrastructure. The World Bank also financed a state owned development bank of exactly the type the Bank would criticize during the structural adjustment period! The reason was the lack of a viable 9 private sector a problem that clearly had not disappeared in many African countries many decades later despite many years of privatization. Other lending in the 1950s in Africa was directed to transport infrastructure to support the colonial extraction of minerals. No loans could go to African colonies without being guaranteed by the colonial power. Still, the quantity was not insignificant and amounted to roughly 10% of lending in the 1950s with four-fifths going to South Africa, the Federation of Rhodesia and Nyasaland and the Belgian Congo (Kapur et al.,1997, p.685- 87). By the early 60s, the infrastructural approach was so successful that the Bank was saddled with large excess earnings. At the same time there was a growing paucity of investment opportunities from their traditional clients. Further support for the expansion of the World Bank agenda affecting Africa, came from the newly elected president. Kennedy was a particularly strong proponent of using aid to foster democratic development in emerging nations. With this in mind, Kennedy selected George Woods a private banker and Chairman of First Bank Corporation as the new president of the World Bank (the US has always made the selection and always appointed a US citizen). Woods planted the seeds of domination by economists in the Bank. Woods felt that greater economic knowledge of individual countries was important if the World Bank was to truly become a bank focused on broadly defined development issues. Woods hired Irving Friedman an IMF economist who had been involved with developing the country study agenda at the Fund. Friedman agreed to come only if Woods would create a new post as chief economist at the vice-presidential level. In his new position Friedman was instrumental in raising the profile of economists which were previously looked down upon by other World Bank officials. He hired nearly 200 economists (alone increasing the staff of the Bank, by 25%), organized an economics department which grew to the second largest in the Bank, set up an economics committee which evaluated all potential loan proposals to individual countries (prior to being sent to the loan committee), and did annual reviews of development and development finance which was the precursor to the World Development Report (introduced in 1978). Along IMF lines he strongly believed in conservative monetary and fiscal policies where governments avoid trade or payments restrictions, multiple currency regimes and inflation. Friedman started the practice of IMF representation in World Bank country meetings of the economic committee (Oliver, 1995, chapter 4) Woods rapidly realized that expanding IBRD loans into “riskier” areas would solve the duel problem of excess profits (now justified by higher risk) and new avenues of investment. The new realm of lending focused mostly on agriculture with some commitment to social spending like education and water supply. A new category of “technical assistance” was created due primarily to a recognition of the weak technical capacities of newly independent states in Africa. The new program was formally introduced at the September, 1963 annual meeting (Kapur et al., 1997, p.181) bringing IBRD priorities more in line with the new IDA. By 1965 15% of overall spending was 10 going to agriculture (up from 9% in 1960) and 5% to social spending (up from 0% in 1960) (Mason and Asher, 1973, p.200). Overall Bank loans to Africa increased from 5.7% in 1960/61 to 14.7 % in 1966/67 with nations on the continent receiving more than half the technical assistance projects in that year (Oliver, 1995, p.188). From Africa’s perspective perhaps a more important legacies of the Woods period was a large increase in the numbers, power and influence of economists in the World Bank and an increase in the linkage between the IMF and World Bank. This would later become important in advancing the neo-liberal agenda inside the Bank with the enormous consequences to Africa and other regions. It was a legacy which did not disappear with the push to poverty during the McNamara era.9 While George Woods with US backing laid a foundation for a new agenda, the overall affect on the direction of lending was moderate. Infrastructure still accounted for 64% of the total loans of the Bank from 1960 to 1969( Kapur et al., 1997, p.6). However, after 1968, with the appointment of McNamara, the spending pattern of the Bank began to more closely be aligned with the new philosophy. McNamara and anti-poverty development strategies 1968-1981 Not surprisingly, given his role as Secretary of Defense and the failed military solution in Vietnam, McNamara’s early concerns with poverty seemed to be focused on security issues.10 He was clearly affected by Johnson and Kennedy’s domestic war on poverty. In his speech at his first annual meeting, he explicitly pointed to the lack of correspondence between growth and poverty reduction. This to some extent preceded coming criticisms in the academic literature confronting the standard economic doctrine that growth alone was the best way to raise the standard of living for most people in developing countries.11 Moreover, the turn toward poverty issues was largely in consonance with shifts in US policy. In the 1960s, the American government sponsored the Alliance for Progress in Latin America which proposed policies aimed at improving income distribution and accessibility to health, education and housing. In addition, in 1973 Congress passed the 9Ayres(1983) in his study of the Bank under McNamara argues “The dominant ideology, widely shared, throughout the Bank, may be identified as that of neo-liberalism…The technocratic neo-liberalism is tenacious and was certainly far from totally discarded as a result of the reorientations, real and proposed of Bank activities since 1973…Poverty-oriented emphases sometimes seemed to have been passed on the prevalent ideology without, however, altering its fundamental slant” (pp 74-75). There is little doubt that many Bank economists were happy to unambiguously return to their central core of beliefs when Washington pushed its new set of policy priorities in the early 80s. 10“Among 38 very poor nations… no less than 32 have suffered significant conflicts…As development progresses, security progresses, and when the people of a nation provide themselves with what they need and expect out of life and have learned to compromise peacefully among competing demands in the larger national interest, then their resistance to disorder and violence will enormously increase…” (McNamara, speech May 18, 1966, to American Society of Newspaper editors, Montreal, Canada quoted in Oliver, 1995 pp.223-4) 11 See for example Adelman and Morris, 1973. The challenge to orthodoxy was hardly a revelation to UN agencies like ECLAC given their work in the 1960s or to neo-Marxists like Paul Baran who’s research was published in the 50s. 11 US Foreign Assistance Act which called for a new approach to development by concentrating on the needs of the poor. Bilateral assistance was to focus on food, nutrition, health and education aimed at improving the lives of the poor in developing countries (Ayres, 1983, p.9). Spending during the first McNamara term in agriculture and social areas like education and water supply increased to 31% of the total to low and middle income countries. Between 74 and 82 it increased even further to 40% (Kapur et al., 1997, p.235). The period of his first term can be characterized as a search for policy alternatives and strategies to reduce poverty in developing countries. Various ideas such as population control and the use of distributional weights proved to be non-starters. Two-thirds of spending in the first five years was still in the traditional areas and much of the increase in agriculture and social areas was still missing the poor. While the Bank dabbled in issues like health, nutrition and employment (some of which were discussed in the annual country program papers (CPP introduced in 1968) the major shift occurred in the wake of his 1973 speech in Nairobi which saw rural development emphasizing smallholder agriculture as the backbone for a strategy to reduce poverty.12 The most dominant form of poverty focused rural strategies particularly for Africa was the area development approach. Over the period of 74 to 82 period 59% of all projects in East Africa and 63% in West Africa were in area development.(World Bank, 1988, pp.11, 24, 116-17). In some African countries the shift to area development strategies went beyond the World Bank to include other donors. In Tanzania, four donors in four integrated rural development schemes joined the three area development programs of the World Bank. In total between 1972 and 1984 $136.5 was committed to these projects (Kleemeier, 1984, p.43). By the World Bank’s own measurement undertaken by its operation evaluation department the area projects were a failure. In East and Southern Africa 12 out of 15 projects failed. In West Africa, 43% of area development projects failed.13 While a variety of technical factors are cited in the report, in the African context, Bank officials in interviews in the early 80s tended to place the blame on poor state policies and institutions rather than design problems14. This set the tone for shifting the focus toward liberalization and privatization in rural areas in the 80s and 90s. The IMF 12 Other new elements of the poverty agenda were introduced after 1976. Prodded by ILO studies (ILO, 1976) that employment generation and growth were not sufficient to guarantee basic needs, the World Bank generated a series of country and sector specific evaluations. There was heavy opposition, with proponents in the Bank forced to justify basic needs proposals in strictly cost and economic terms. Strong opposition by chief economist Chenery and his assistant Ernie Stern (chief of operations after 1978) ensured that the proposals did not go beyond the study stage. The argued that there were too many growth opportunity costs to basic needs (Kapur et al., 1997, pp.263-268). With McNamara’s departure basic needs discussions were abruptly dropped. 13 The criteria for failure are less than a 10% internal rate of return on the projects. 14 See Ayres, 1983, pp112-115 for discussion of Nigeria and Tanzania. 12 Unlike the Bank, the IMF was affected less by the shifting fashions of development theory and policy. However, like the Bank they were still used for great purpose by the US government over the course of the post-war period. The history of the IMF as it affects Africa can be divided into a three broad periods, enforcer of fixed exchange rate regimes 1945-1971; the interim search for a new identity: 1972-81 and Bank-Fund convergence on development: neo-liberalism and its peripherals 1981 to the present. Enforcer of the Fixed Exchange Rate System 1944-1971 In general the purpose of the Fund until 1971 was to manage a fixed exchange rate system and make foreign currency available(through revolving loans) to countries with balance of payments problems (although formally there were six purposes in its Articles of Agreement). Countries contributed to the capital of the bank through a quota system based on the size of their national income, their reserves and their contribution to international trade. Twenty-five percent of their quota (or 10% of its gold and dollar reserves if it was less) was initially in the form of gold with the rest deposited in their national currencies. In the initial formulation governments could swap up to 25% per annum of their currency for a total deposit of 200% of their quota. Graduated charges were set on amounts of currencies in excess of their gold tranche (article 5, section 8). Beyond this there was no formal conditionality on the loans except for some rather vaguely worded provisions. In section 5 of the same article, it states: “ if the Fund is of the opinion that any member is using the resources of the Fund contrary to the purpose of the Fund” it can “declare it ineligible to use the resources of the Fund”. Article XX 4(i) on the final provision reiterates this fund option to postpone exchange transactions if resources use would be “prejudicial to the Fund or the members” (Horsefielde, Vol III [Articles of Agreement] 1969, p.192, 209). The Board interpreted its mandate in very conservative terms along US lines discussed above. The first approach to draw funds actually came from an African country, Ethiopia, on April, 1947 for $900,000. The Board turned it down since they were skeptical that so large an amount could be “presently needed” although it approved a subsequent request in 1948 for a third of the amount (Ethiopia and South Africa were the first two African countries to draw from the IMF).15 In contrast in May, 1947, a drawing of about 5% by France was rapidly approved. The bias against the ease of borrowing by developing countries was rapidly being put in place. When Mexico’s applied for a drawing in August it was only approved after a lengthy discussion of its economic position. In September, 1947 conditionality was formally put in place. Chile was told that its drawing would only be approved if appropriate fiscal and monetary measures were undertaken. The Board debated whether they had the right to impose conditions and in the end decided that if it was permitted to declare a member ineligible under Article 5, section 5 (discussed above), then it could certainly impose lesser constraints like loans tied to policies. (Horsefielde, 1969, Volume I, p.187-92). 15 Egypt and Liberia were the other African members who were initial members of the Fund. 13 Conditionality became ubiquitous in the wake of the standby agreement system formally introduced in 1952. These accords directly linked lines of credit from the IMF to certain policy targets. Gradually standby arrangements became the most common mechanism accessing IMF resources. Along with this was the commitment to stabilization programs. From the beginning the focus was on incorporating anti-inflationary policies into stabilization programs.16 The emphasis was on readily quantitative targets on the expansion of domestic credit(sometimes sub-divided by sector), growth of foreign debt, setting budgetary goals, and balance of payment and exchange reserve targets. The relation was formalized by Polak (1957) and become known as the financial programming approach. The typical agreement was for 12-18 months with repayment in 3 ¼ to 5 years. Credit was allocated in tranches with conditionality becoming stricter with each tranche. The focus was on a monetarist approach to maintaining fixed exchange rate by adjusting domestic absorption capacity to deal with balance of payments crises. In the early independence period standby agreements dominated the Fund agenda in Africa. Between 1960 and 1972, 51 standby agreements were signed between the Fund and 12 African countries (43 with 10 sub-Saharan African countries). In 1962, Egypt was the first country to sign a standby accord with the IMF in 1962 followed by Liberia in 1963 and Mali, Somalia and Tunisia in 1964. Loan amounts were typically small and under SDR 10 million. Only Egypt, Ghana, Sudan and Zaire had loans of higher amounts of between 20 and 40 million SDRs(Mohamed, 1993, pp.92-93). Overall, the role of the Fund in Africa was minor. They were largely preoccupied with managing the Bretton Woods system in the more advanced countries. Only 3.7% of Fund credit went to African countries during the 1960s (Ferguson, 1988, p.204). As we will see below, this changed dramatically after 1971. The interim search for a new identity: 1972-81 In 1972 the Fund was largely overseeing the unraveling of the post-war system. By 1973, most of the developed countries abandoned the fixed exchange system. The IMF was informally allocated the rather ill-defined job of surveillance of exchange rate policies. Until 1978 when a new Articles of Agreement was formulated, no IMF member was performing their exchange rate obligations in line with the Fund’s Articles (De Vries, 1986, pp.117-18). The period was characterized by a series of disturbance including the severe recession of 1974-75 and the OPEC oil price boosts and considerable disaccord among the membership. The Fund gradually evolved into a lending institution from the manager of an exchange rate system. Developing countries inside the Fund heavily pushed for a link between SDR allocations and development needs (rather than their earlier mechanism based on quota size). 16 In the chapter on standby agreements in the official history of the IMF, the author Spitzer states:“The generally expansionary environment which has prevailed in most parts of the world since World War II has intensified the need for anti-inflationary policies and has encouraged their embodiment in comprehensive stabilization programs. In its work with its members the Fund has devoted much time and thought to fostering such programs “( Sptizer,1969, p.468) 14 Compared to other facilities, SDRs were rather attractive in the 70s due to their low interest rates (1 ½ per cent) and ease of access (use of 70% of cumulative allocation without repayment obligations). The U.S. blocked the proposal even in the face of strong support from Italy and France(Ferguson, 1988, p.130). However, the issue of an increased role in developing countries was a persistent one and became increasingly central in the search for a functional redefinition. In 1974 the Boards of Governors of the Bank and Fund created a new joint committee on the transfer of resources to developing countries. New facilities (EFF, Trust Fund, etc) discussed above were created with developing countries in mind (De Vries, 1986, pp.133-34). In the 1970s sub-Saharan Africa began to use some of the new facilities. In 1975 91% of 262 million their net-SDR borrowing from the Fund came from the Oil Facility and in 1976, 73% of the 264 million SDR allocation came from the CFF and BSFF. However by 1978 standby agreements with the tougher conditionality again dominated flows from the Fund with 92% of the total net borrowings coming from credit tranches in 1977, 71% in 1979 and 76% in 1980(Mohamed, 1993, pp.92-93). This was a pattern which foreshadowed developments after 1981 when structural adjustment became the dominant policy agenda and standby agreements became the prerequisite for all foreign assistance in Africa. While developing countries in the 1970s took an increasing portion of the total IMF resources to nearly 59% (from 46% in the 70s), no other region’s share grew as rapidly. Overall credit allocation to Africa increased nearly 10 times from the 1960s (in nominal terms) rising to 11.3% of the total to all countries (Ferguson, 1988, p.204). As we will see below the commitment to Africa rapidly accelerated in the early 1980s. World Bank-IMF Convergence after 1981 The World Bank Shift to Adjustment While the IMF commitment to the neo-liberal model was in place long before 1981, the larger question is the reason for the World Bank’s movement in the new direction. Boas and McNeill (2003) argue that the foundation for adjustment was present from the 1970s. In particular there were growing criticisms of state-led development models by neo-liberals like P.T. Bauer and vocal criticisms by the US government of the World Bank. In particular they point to a 1976 speech at a Bank conference by Treasury Secretary William Simon opposing any increase in the US contribution to capital. The speech called for a greater recognition of the role of the private sector in development. However this was hardly a revelation or anything knew to the Bank which had an arm already lending exclusively to the private sector (IFC).17 The policies, however, did predate the Thatcher and Reagan elections (of May and November, 1979, respectively). A key aspect was the appointment of Ernest Stern in July 1978, as the v.p. in charge of operations and as chair of the Loan Committee. Since his 17 The dispute was focused more on lending terms not policy with a particular worry about the sustainability of loan to capital ratios and the rising spread between US and World Bank interest rates on bonds (Kapur et al., 1996, pp.992-997). 15 days as an economist at USAID macrostabilization was a particular interest of Stern’s. He was also quite uncomfortable with the basic needs strategy complaining repeatedly about the trade-off with growth ((Kapur et. al., 1996, p.267 and see footnote above). For McNamara issues like good macro policies and trade liberalization were “matter of fact”, but not necessarily of greater consequence than many other issues. In a May, 1979 McNamara in a speech to UNCTAD was planning to urge the developed countries to open up their markets to developing country exports. Stern and others saw the opportunity to raise their pet macro issues arguing that to avoid being a “nonplayer bearing unsolicited advice” the Bank should add trade policy to their agenda. Thus in May 10, 1979 in Manila, McNamara stated: In order to benefit fully from an improved trade environment the developing countries will need to carry out structural adjustments favoring their export sectors. I would urge that the international community consider sympathetically the possibility of additional assistance to developing countries that undertake the needed structural adjustment for export promotion in line with their long-term comparative advantage. I am prepared to recommend to the Executive Directors that the World Bank consider such request for assistance and that it make available program lending in appropriate cases.(quoted Kapur et al., 1996, pp.506-507) Less than a week later, Stern generated a long memo outlining the new approach. McNamara was favorably inclined. By the midsummer the process was accelerated by the second oil shock and the rapid need for balance of payments support. McNamara saw the opportunity to increase the loans and profile of the Bank, while Stern saw an opportunity for his new policy framework. After considerable discussions the directors approved a moderate allocation of bank funds (roughly5 to 6.5 percent of the total IBRD/IDA loans) . This was only twelve weeks before the end of McNamara’s term. A series of changes quickly pushes adjustment to the center of the new agenda. In July, 1981, the Reagan regime put forward Bank of America president, A.W. Clausen a staunch supporter of free markets as the new head of the World Bank. In addition Mahbub ul Huq the biggest proponent of anti-poverty strategies left the Bank, while the pragmatic Hollis Chenery was replaced by the dogmatic neo-liberal Anne Krueger, as chief economist (Kapur et al., 1996, pp.507-512). The new senior staff had close ties to the new Reagan presidency (intellectually and otherwise) which ensured an embedded presence of US priorities. More than anywhere the new agenda had the greatest impact on sub-Saharan Africa, due to its growing dependence on multilateral finance. The First Decade of Adjustment in Africa In 1981, the World Bank published a study laying out its new agenda in Africa. “Accelerated Development in Sub-Saharan Africa” or the Berg Report (named after its principal author) squarely placed the blame for Africa’s poor performance on poor government policies (World Bank, 1981). While the report was undertaken in response to 16 a request in 1979 by African governors of the Bank for a special study of the region, there is little doubt that the hiring of Elliot Berg, a staunch neo-classical, was no coincidence. Ernie Stern quickly jumped on the report with a memo to McNamara in April, 1981 to justify his new agenda. For African economies to grow, it would require “governments individually coming to grips with the distortion of prices and resource allocation and the operational responsibility assigned to the public sector and making necessary changes”. In the same memo Stern also blamed donor policies “which have supported domestic strategies which were inappropriate”. In response, he called for much closer donor coordination where the Bank should be prepared “to take a lead in assisting governments to undertake the changes indicated on the one hand and to raise the resources and strengthen donor coordination on he other” (quoted in Kapur et al., 1997, p.716-17). Thus the idea of the donor cartel pushing the structural adjustment agenda in Africa was born. The IMF with its long history of conditionality-linked program aid was brought in early in the process. When the structural adjustment lending was proposed to the Executive Board of the Bank in 1980, they was concerned about overlapping with the Fund’s sphere of operation , coordination problems and Articles of Agreement which restricted program loans to “exceptional” cases. The senior staff of the Bank successfully argued that exceptionality would simply be defined as countries already having a Fund stabilization program (Mosley et al, 1991, p.37). Management also ensured that the policy changes they proposed would be outside the core concerns of the Fund and that they would carefully synchronize any macro-related policies with the Fund. Thus the IMF was also brought on board. Moreover, the IMF was given most of the responsibility for generating the “jointly produced” Policy Framework Papers for countries undertaking adjustment measures setting out the major multiyear targets. After 1980, the IMF jumped into Africa with enormous enthusiasm while the Bank moved more cautiously in its new direction. In a time when the Fund’s role in the global system was being questioned, the IMF was trying to redefine itself in the wake of widespread criticisms in the press. Between 1980 and 1983, the net flow of Fund loans to sub-Saharan African countries reached $4.3 billion compared to only $2.83 from the World Bank. By 1983, it was clear that the economic crisis was not resolved and the repayment to the IMF would threaten the sustainability of the new strategy.The Bank rapidly pitched in by increasing its lending for structural adjustment from .9 billion in 1980-83 to 3.3 billion in 1984-87 or from 13% of total lending to 36%. Overall net inflows reached $4.7 billion compared to a negative outflow from the Fund of 3.22 $billion. Much of this new adjustment lending was in the form of sectoral adjustment loans (SECALs). With many African countries having difficulty implementing economy-wide adjustment programs, SECALs with their narrower focus, were introduced in 1982, to deal with burgeoning balance of payments problems. While six African countries received SALs and SECALs between 1980 and 1983, an additional 21 countries were added to the list between1984 and 1989(Kapur et al., 1997, pp.510-11, 519). 17 The introduction of SECALs was only the beginning of a long history of “innovations” in the design or delivery of adjustment in the face of the protracted decline in Africa without fundamentally altering the commitment to the core program. To protect the integrity, resources and reputation of the Bank that invested so much in adjustment in Africa, it was necessary to find a way for it to work.18 The domination of the neo-classical trained economists in the Bank where policy is posited deductively from a set of core axioms also limited the domain of self-criticism.19 Fault by definition could not arise from the premises of the model, but from outside factors, inadequate implementation or inadequate resources. This was worsened in the wake of the hiring of Anne Krueger as the chief economist of the Bank. Former research staff of economists were seen as too “statist” in their views and deficient in appropriate technical skills. Three years after her arrival, 80% of the staff of the Development Research Department had left replaced by people with the “appropriate skills”. Between 1983 and 1986, the Economics department set up an “intelligence system” to identify staff with positions diverging from the established views and to reward loyal followers (Kapur et al., 1997, pp.1193-94). By 1991, 80% of all the senior staff of the Policy, Research and External Affairs Departments was trained in economics or finance from UK or US institutions which tended to focus on a very narrow neo-classical economic curriculum (Woods, 2000, p.152). Through much of the 80s the Bank all but forgot the problems of poverty. Stern and Krueger relied on neo-classical deductive arguments that the poor would automatically gain from adjustment.20 Since overvalued currencies, export taxes and protectionism favored the urban population, and most poor were in rural areas, devaluation and liberalization would raise the income of the rural sector thereby reducing poverty. Stern took it a step further by invoking an argument that would be used again later in the context of support for shock therapy. For political reasons, rapid adjustment was best for the poor since if it is implemented slowly resistance could build by elites who are hurt by adjustment. Moreover, rapid adjustment would be the fastest way to raise economic growth which would be of greater value for the poor. It was also the quickest way to reverse the rising debt burden. Krueger also deliberately discouraged any work on the social cost of adjustment or debt thereby discouraging alternative policy development in the Bank. These views were quite consistent with the conservative US treasury which in memos to President Clausen was concerned with privatization, macroeconomic policies, financial 18The World Bank early on recognized the danger of failure of is agenda in Africa. In a briefing to incoming President Conable(April 23, 1986) it was stated “We must recognize that the role and reputation of the Bank Group is at stake in Africa...We have been telling Africa how to reform, sometimes in terms of great detail. Now a significant number of African countries are beginning to follow the Bank’s advice. If these program fail, for whatever reason, our policies will be seen widely to have failed, the ideas themselves will be set back for a long time in Africa and elsewhere” (quote in Kaupur et al, 1997, p. 730). 19 The methodology and theory underlying adjustment is critically discussed in Stein and Nissanke, 1999 and below. 20 See Krueger’s study of agriculture Krueger (1991) for these arguments. 18 and management issues rather than anything on poverty or social spending. They also helped shield the Bank from criticisms from liberal elements of Congress. 21 The view of poverty and adjustment was also consistent with the view of the IMF throughout the 80s.22 While the Krueger period (1981-87) was the most ideologically extreme, the commitment to neo-liberalism and neo-classical economic methods had been institutionalized with a system which readily allowed pro-free market results to be rapidly disseminated with little question and critical studies to be challenged and sent back for restudy (Wade, 2002, p.219). As the agenda began to broaden through the 90s to include governance, decentralization, ownership, social capital, legal reform, participation, poverty reduction and so on three elements were evident. First there was an unwavering commitment to the core set of adjustment policies. Second, each new policy was seen as a complement to adjustment which would enhance or act as a catalyst to reform. Third, the microfoundation of each new element was based on neo-classical economic theory. The Failure of Adjustment and the “Broadening” Agenda Within a few years of the beginning of adjustment, it was apparent that the situation was not improving in Africa. The blame was not on the policies but “by the lack of external capital.”23 To deal with this, the Bank strengthened its coordination functions to ensure all the donors were behind the same policies. A key mechanism was the strengthening of the African consultative group (annual aid meetings between donors chaired by the Bank) from five in 1980 to 1982 to sixteen in 1987. The number of donor sector meetings also increased with 12 being held in African countries in 1986. The situation of financing was exacerbated by pressure from the US which decreased its contribution to the IDA 7 replenishment. At a donor meeting in January, 1985, the Bank organized a new source for backing its structural adjustment programs, the Special Facility for Africa (SFA). Beginning in July, 1985, the SFA provided $2 billion in additional support to IDA eligible African countries that were undertaking significant policy reforms. The SFA was financed by France, Italy, the Netherlands, Japan, Germany, the UK and IBRD money transferred from profits (Kapur et al, 1997, p.733). The Bank was also successful in encouraging countries to support adjustment through bilateral aid programs. By 1990, Japan, for example, allocated 25% of their growing commitment to sub-Saharan Africa to structural adjustment24. 21 In a parallel course, USAID, a strong supporter of neo-liberalism in the 80s, beginning in 1990 sponsored a team of neo-classical economists at Cornell to study poverty and adjustment. The individuals selected pretty much predetermined the results. Sahn et al. (1998) use CGE models and SAMs and absurd neoclassical assumptions like no unemployment and Sophist reasoning where the wealthy are defined in terms of their access to economic rents, to prove that their incomes diminish after liberalisation when rents by definition decline. In contrast, the poor are better off after adjustment because they are in rural areas and proportionately have more access to income from tradeables which will increase in price in their world of adjustment. For a critique, See De Maio et al. ,1999, and Stein ,2000. 22 “There is no support for the view that adjustment programs generally hurt the poor as a group. The rural poor benefit directly from adjustment programs” (IMF, 1988) quoted in Kapur et al, p.357, footnote 111. 23 From memo from Stern to Clausen in Dec, 1983 quoted in Kapur et al., 1997, p.732. 24 Adjustment was seen by the Japanese as a US priority and was supported for bilateral reasons (Stein, 1998). the last part to be added soon. thank you
Posted on: Wed, 19 Jun 2013 17:29:49 +0000
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