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foundation for economic expansion, especially if stabilization is followed by a fundamental
adjustment process in the way the economy functions so that disequilibrium situations are less
likely in future. In the Fund™s view, adjusting the “fundamentals” requires several steps:
International institutional linkages 563
1 a devaluation of the currency to its sustainable, equilibrium value to stimulate exports
and discourage imports;
2 control of the rate of growth of the money supply in order to stem inflationary pres-
sures which lead to overvaluation of the currency and excess aggregate demand in the
economy;
a reduction of government spending, especially to control the fiscal deficit, to restore
3
the balance between the public and private sector™s roles in the economy and to reduce
inflationary pressures;
4 a reduction in real wages (that is, of inflation-adjusted wage payments) in order to make
exports more attractive on the world market and to mitigate internal aggregate demand
at the same time. By reducing real wages, the profit share of industry is expected to rise,
as will the profit rate. A higher profit rate will attract more direct foreign investment,
which will provide a net addition to the capital stock, thereby strengthening the export
capability of the economy and reducing the external borrowing requirements.

While the relative emphasis on the above four components varies somewhat from nation to
nation, they constitute the essence of what is generally known as an IMF austerity package.
It is worth briefly reviewing each of these components of an austerity program.


Devaluation
Unquestionably, the Fund™s view that exchange rate overvaluation is a significant underlying
factor contributing to current account deficits and economic crisis often has a solid basis, as
was argued in Chapter 15. Poor nations far too often do have a tendency to over-value their
currencies. Why? Necessary imports of machinery and equipment and intermediate products
can be acquired relatively cheaply via overvaluation, and this may speed the development
process, particularly during the import substitution phase of industrialization (see Chapter
9).
Unfortunately, however, superfluous luxury consumer good imports and foreign travel
also are made cheaper for domestic elites with overvaluation. A politically weak govern-
ment may appeal to the middle class, proffering travel and imported luxuries at low prices
in exchange for their political support. Thus there are tempting political and economic
reasons for currency overvaluation, particularly in countries lacking a strong democratic
tradition.
In the Fund™s view, devaluation of the currency will accomplish two desired objectives:
imports will decline, while exports will increase, closing the trade gap and reducing the
current account deficit. While this is true in theory, as we saw in Chapter 15, in real time
exports may not respond strongly to a devaluation as a result of a low price elasticity of
demand, particularly if such exports are primary products.7
Thus, the bulk of the austerity package™s effect from devaluation tends to fall heaviest on
import compression via higher import prices. The foreign trade account may well come into
balance with time, but often only by under-cutting the productive base of the economy as a
result of the increased cost of importing needed capital and intermediate goods for industry.
In the longer term, the effect of a devaluation may well be to reduce the capacity to export
to the extent that imported inputs enter into the production of export industries, thus creating
precisely the opposite result from that sought by the Fund.
We are not arguing, let it be clear, against devaluation per se, or in favor of maintaining
import substitution industrialization beyond the time period when ISI can usefully be
564 The Process of Economic Development
sustained, as the discussions in Chapters 9 and 10 made abundantly manifest. Nor are we
arguing in favor of over-valued exchange rates, as Chapter 15 hopefully made clear. We are
suggesting that, at times, a devaluation, particularly a sharp and large devaluation, actually
may interfere with a nation™s trajectory of structural transformation, rather than supporting
it. By asymmetrically and adversely affecting import substitution industries more rapidly and
more severely than contributing to export expansion, a devaluation, if not carefully consid-
ered, and perhaps bolstered with compensatory programs, such as public investment, may
actually inhibit the desired adjustment process that the IMF would wish to encourage, aimed
at altering the productive structure of the less-developed country. Thus, current research
shows, in repeated cases, that one of the consequences of acceptance of a Fund program is a
decline in investment. Another effect, to be expected when investment declines, is that GDP
growth turns significantly negative during the period when nations are under Fund programs
(Bird 2001: 1851“2). Adam Przeworski and James Vreeland found in a recent study covering
a wide number of cases or “observations” that GDP growth was lowered by an average
amount of 1.5 percent per year while nations were participating in IMF programs (Prze-
worski and Vreeland 2000). This is no small matter when we consider that many nations
have been under some form of IMF program for extended periods of time. For example, in
the period 1971“2000 the Philippines were under IMF programs for 24.7 years, Haiti for 21
years, Panama for 20.8 years, Uganda for 18.4 years, El Salvador for 11.5 years (Bird 2004:
34). As Graham Bird notes, “On the positive side IMF programs do seem to be associated
with a statistically significant and enduring depreciation in the real exchange rate. Perhaps
connected with this, they also appear to be associated with some significant strengthening in
the balance of payments” (Bird 2001: 1852).


Inflation
According to the IMF, domestic inflation is a major cause of currency overvaluation.
The Fund anticipates that a country with an over-valued currency is simultaneously one
wherein the domestic rate of inflation has been so high, relative to the world average, as
to create overvaluation, particularly if exchange rates are not freely floating. Inflation is
viewed by the IMF as a monetary problem, one of “too much money chasing too few
goods.” This excess demand arises from many sources, but two are considered primary:
first, the governments of less-developed nations attempt to expand spending too rapidly
relative to the effective tax base, providing social services and engaging in poorly thought-
out spending programs. The resulting “fiscal deficit” is believed to crowd out the private
sector, by pushing up interest rates as government borrows to finance expenditures above
revenues, thus absorbing the limited amount of investment funds. Second, workers, particu-
larly unionized workers and government employees, who also may be unionized, push
up wages beyond justified productivity increases in an economy that already suffers from
excess demand conditions.
So, behind the balance-of-payments crisis, the IMF finds overvaluation of the currency;
behind overvaluation lie excessive inflationary pressures; and behind high inflation is prof-
ligate government spending on development and social projects, without proper regard for
the limited resources of the developing nation. Given this interpretation, the Fund imposes
limits on the growth of the domestic money supply, requires a tightening of bank credit, and
imposes a ceiling on wage increases, typically well below the rate of inflation. This is part of
the IMF™s overall view of the need for reining in excessive state involvement in the economic
activity of less-developed economies.
International institutional linkages 565
Government spending
Less-developed nations often run central government budgets that are in deficit, contributing
to the inflation process. The Fund views the government™s deficit as prima facie evidence of
excess demand and therefore imposes strong cuts on government spending as a condition
of receiving loans. Governments in the developing world often provide subsidies on basic
goods such as food staples, milk and meat products, fuels, and pharmaceutical products. The
Fund generally will impose a “get prices right doctrine” and call for the elimination of such
subsidies, letting market-determined prices prevail.
As a consequence, austerity programs often impose an inordinate burden on those in society
who can least afford the effects of income and spending compression. (Ironically, by deregu-
lating the prices of basic goods, inflation often surges.) Other targets for government cut-
backs can vary widely from nation to nation, but governments often reduce their educational
budgets and/or physical infrastructural outlays, which will, unfortunately, reduce the supply
capacity of the developing nation in the future. Nonetheless, in searching for ways to reduce
state spending and the government deficit, these are often where cuts are made, rather than in
military spending, because of political pressures from domestic elites and the military itself.
The Fund requires cuts in central government spending as a condition for its loans, given
its competitive equilibrium approach, which leads it to argue that resources released, that is,
not spent, by the public sector will be more productively employed by the private sector.8
This assumption, however, is often unwarranted when the private sector is structurally weak
and competition, in the economic sense, is absent. As a result, the institutions of society, from
banks to private businesses operating in the private sector are not well developed and do not
respond well or quickly to investment resources freed up by the public sector.
Business interests may react to the general downturn in the economy brought on by reduced
government expenditure, in fact, by reducing production and investment. Or, as is sometimes
the case, these business interests may have drained much of their liquid funds from their own
nation in anticipation of the devaluation which the Fund will surely impose. Capital flight
often may be more appealing to business interests than higher levels of investment or the
expansion of domestic productive capacity and the social capacity to do technology.
Again, we do not wish to invite misunderstanding. There is no denying the culpability of
many governments in running unsustainable fiscal deficits, in poor project design, and in
unnecessary and wasteful spending. But IMF demands to simply cut state spending, without
some fundamental analysis of the structural and institutional transformations desired for that
particular society, can inhibit further progress. No doubt many blanket subsidy programs for
staple foods or for utilities are wasteful, providing benefits not only to the poor, but also to
non-poor who could afford to pay more. Targeted subsidy programs by government would
retain the spirit of such spending measures by helping those who needed them most, thus
reducing the cost of such programs without eliminating them.
Cutting back indiscriminately on central government, educational, health, and certain
infrastructural expenditures would not seem to be advised, certainly not on the basis of the
new growth theory evidence examined in Chapters 8 and 12. What we are suggesting is
that the IMF™s condition requiring a cut in government spending so as to reduce the fiscal
deficit and hence inflationary pressures has been too often a terribly blunt instrument, cutting
into areas of social investment with substantial positive external effects. More attention also
could be placed on better and more effective tax collection measures. Reducing the fiscal
deficit is a two-sided objective, and it can be achieved by reducing government expenditures
and/or raising tax revenues.
566 The Process of Economic Development
Wage repression
Wage cuts have their counterpart in a reduction in total consumption and that tends to reduce
total national income. Thus it becomes problematic to argue that an increase in the profit
rate alone, created by wage cuts, will be sufficient to stimulate additional production, since
reduced demand is likely to follow lower wages. If additional production can be easily
exported, however, wage repression may result in a net increase in output, but it may not if
the export sector is weak.9 It is also difficult to determine how foreign investors may respond
to lower wage costs, as there are many other factors that enter into a decision to commit to
an investment abroad besides the cost of labor.
The Fund posits that a nation that is in the process of stabilizing its economy and which is
serious about adjusting its economic structure will attract foreign capital. But if the domestic
economy is in a shambles, and export markets show weak growth, foreign capital may choose
to stay on the sidelines. James Vreeland conducted a massive study involving 110 countries
that underwent IMF programs from 1961“93. He concluded that IMF programs have a nega-
tive effect on manufacturing labor and therefore shift the distribution of income from labor
to capital. On average, controlling for many factors, Vreeland shows that labor™s share of
income in the manufacturing sector under IMF programs falls from 39.8 percent to only 36.4
percent “ and this is found within the context of a falling GDP (Vreeland 2002: 121“30). One
of Vreeland™s most interesting findings, long argued by opponents of IMF austerity programs
with little evidence, is that the degree of income redistribution toward capital is so great that
industrialists are actually better off under the IMF programs than they would have been had
economic growth been satisfactory. Table 17.2 summarizes Vreeland™s startling findings in
three cases.


Compression effects versus expansionary effects of IMF programs
Having now traced out some of the possible effects of an IMF austerity package, it is
important to add a significant qualification regarding the compression effects of the Fund™s
program. While the Fund™s approach, in and of itself, would seem to point to an induced
economic downturn for the borrowing nation, the Fund also injects hard currencies into the
economy when it lends, and this should act as a stimulus to economic expansion, moderating
the various dampening effects of the components of the austerity program. Furthermore, and
this is a very important point, nations which consummate a loan arrangement with the Fund
are able, by virtue of now being under the guidance of the Fund, to essentially alter their
country risk status in the eyes of international lenders and often gain access to new credits
from abroad. This is a second possible stimulus working to counteract the adverse affects
of a domestic austerity program. A third stimulus will almost surely come from the World

Table 17.2 The impact of IMF austerity programs: capital™s share and labor™s share
” Capital™s incomea (%) ” Labor™s sharea (%)
Country Years GDP (%)

1985/1986 ’2.99 +9.5 ’8.5
Congo
Uruguay 1989/1990 ’1.03 +2.0 ’2.7
1982/1983 ’5.7 +36.0 ’18.0
ecuador

Source: Vreeland 2002.
Note
a Manufacturing sector income.
International institutional linkages 567
Bank (discussed below) which will lend because the Fund has lent, as usually will the relevant
regional development bank for that country, such as the African Development Bank for
African countries and the InterAmerican Development Bank in Latin America. In addition
to this threefold injection of hard currencies from the Fund, from the international financial
markets, and from the World Bank and/or the regional development bank, if the borrowing
nation is quite poor, it is likely to receive some financial grants from bilateral foreign aid
entities such as the United States Agency for International Development (AID). However,
in a significant study Graham Bird™s evidence demonstrates that IMF programs generally
do not serve as a catalyst to attract either private or bilateral or other forms of multilateral
financial flows (Bird 2001: 1856“62).
If equity investments (DFI) are arriving, and a variety of new loans and grants are extended,
the stimulus effects may well outweigh the compression effects of the austerity program.
However, new DFI may introduce other problems for a less-developed nation (Chapter 14),
grants may come at the price of other concessions to a powerful and wealthy neighbor, and
new loans will surely cause a poor nation to exchange short-term liquidity for longer-term
financial obligations which create an outflow on the current account. Only if the nation actu-
ally becomes a better producer, that is, only if the inflows of financing contribute to structural
transformation and a fundamental adjustment of the economy along the lines set out in Chap-
ters 9“13, will the loans, grants, and investments make any long-term developmental sense,
as was argued in the previous chapter concerning external debt.
These positive effects can materialize, but these newfound sources of liquidity may merely
be utilized by the borrowing nation as a short-term expedient, while the structural problems
of the nation remain unaddressed, again as occurred during the debt crisis. Consequently,
even if, under the best of circumstances, GDP growth is quickly resumed in the aftermath of
the imposition of an IMF austerity package, it is also necessary to analyze the post-compres-
sion debt levels, and to take account of the manner in which DFI and new foreign aid grants
impact the productive capacity of an economy.
In any given year, the IMF does not loan immense sums of money, certainly in comparison
to the problems the Fund hopes to address. As we have seen in Table 17.1 in 2000 the Fund
made loans in the amount of 7.7 billion SDRs (approximately $10 billion US$), but received
repayments in that year of 15.8 billion SDRs. Thus, the net effect of the Fund™s lending in
that year was to contract global liquidity by about $10.5 billion US$. In 2002, by contrast,
the Fund was a net contributor to global liquidity (IMF 2003b). But, then again in 2006
it contracted global liquidity by an impressive $28.8 billion US$ (IMF 2007b). What the
Fund really has to offer to a nation in difficult straits is its imprimatur, the Fund™s stamp of
approval to the international financial community, from which other loans, grants, and DFI
will flow, in varying proportions, to the beleaguered nation, or so it is argued. And, the Fund
strongly believes, good technical economic advice, particularly concerning macroeconomic
policy, will be another major benefit arising from an IMF program.


Do IMF programs work?
The answer to this question depends on how we interpret it. If we take it to mean that,
once the less-developed nation reaches an agreement with the IMF, follows IMF condition-
ality to the letter, and undergoes a “successful” stabilization and adjustment of the economy
whereby inflation is thereafter controlled, the currency is thereafter realistically valued in
terms of hard currencies, the trade account remains in balance, investment remains high, and
the economy grows and prospers, the answer (in most instances) is assuredly “no.”
568 The Process of Economic Development
The IMF has been very interested in posing and answering this question. In their most
recent attempt at self-evaluation, the Fund™s research economists studied forty-five stand-by
and Extended Fund Facility arrangements which the Fund approved between mid-1988 and
mid-1991 in thirty-six countries. According to the Fund, the results were as follows.

• Improvement was most notable on a pre-loan, post-loan comparison basis for exports.
With the imposition of a Fund agreement, exports improved strongly, but over time
export strength weakened.
Only approximately half of the countries benefitted from additional capital inflows.

• Regarding inflation, “a few countries achieved dramatic reductions from very high
initial rates, but many continued to experience moderately high inflation; a few even
recorded upward trends.”
• Regarding growth, “few if any countries shift[ed] to a distinctly more rapid pace of
growth backed by higher savings ratios.”
• Regarding investment, “few countries saw any increase in overall investment ratios,
although private investment rates rose as public investment rates fell” (IMF 1995b: 234).

Clearly, the results of the Fund™s study, which largely parallels numerous studies made
previously both by the Fund and independent researchers, portray the IMF™s impact in a less
than flattering light. Hostile critics of the Fund would have a difficult time mounting a more
severe critique than the Fund has made of the consequences of its own policies. But the Fund
seems unburdened by these findings.
Undismayed and undeterred by this latest report indicating that the IMF™s model has failed
to come to grips with the persistent problems of the less-developed nations, the Fund™s Exec-
utive Directors drew two inferences from this study: first, that the Fund should warn nations
which undergo adjustment that they cannot expect improvement on both the external balance
of payments account and in short-term improvement in growth and investment; second, that
the Fund should lend for a longer period of time, that is, the Fund should continue to shift
its programs away from stand-by arrangements, lasting twelve to eighteen months, toward
intermediate adjustment program loans with a duration of three to five years.
Of the many studies conducted on the effectiveness of the Fund by independent researchers,
a 1992 study headed by Tony Killick broadly confirms the IMF™s inhouse study cited above,
while adding new dimensions worth noting. Killick and his associates analyzed the effects
of 266 Fund programs in the 1980s, 220 of which were stand-by arrangements. Forty-eight
percent of the stand-bys were never completed, indicating that the recipient nation was
unwilling or unable to comply with the conditionality demands of the Fund.10 Thirty-three
percent of the discontinued programs broke down almost immediately. And, in the 1988“90
period, the non-completion rate on stand-by loans reached 88 percent.
Why? According to Killick, easier credit conditions allowed the less-developed nations
to go elsewhere for loans, and thereby to avoid IMF oversight and conditionality. Another
important finding is the prevalence of recidivism: “no less than nineteen countries had six
or more programs approved by the Fund, encompassing 131 programs or 44 percent of the
total for the period” (Killick et al. 1992: 590). On a somewhat more positive note, Killick
and his research associates did find in a study of IMF arrangements in the 1979“85 period
that Fund adjustment programs led to improvements in the balance of payments, without
any long-term “strangulation” of imports. But the study of the 266 Fund programs, referred
to above, found that, over time, net capital inflows did not improve as “Fund credits were
often used to repay other creditors.” Killick argues that, although countries under a Fund
International institutional linkages 569
program may, and probably will, attract new financing from the World Bank, the regional
development banks, and foreign aid donors, “there appears to be no general catalytic effect
on private flows” (Killick 1995: 179). Meanwhile, 40 percent of the completed programs
were associated with increased rates of inflation. And, most important for considerations of
economic development, “the brunt [of adjustment] falls on the fixed investment ratio, which
declines substantially and significantly over the whole period. Overall, the programs appear
unable to exert any appreciable squeeze on private and public consumption” (Killick et al.
1992: 593“5). Since Killick completed this important study many econometric analyses have
been conducted pointing out that IMF programs reduce growth rates, such as Axel Dreher™s
examination of ninety-eight countries in the 1970“2000 period, and James Butkiewicz and
Halit Yanikkaya™s review of 100 nations in the 1970“97 period (Dreher 2006; Butkiewicz
and Yanikkaya 2005).
In summing up the complex state of the evaluative literature on the IMF a number of
conclusions appear to be accepted by both critics and supporters of the Fund.11

• Short-term improvements in the balance of payments are significant, even for countries
which abandon the IMF programs (Killick 1995: 68).
• IMF compression and austerity are most often associated with compression of wage
income, compression of social services and compression of investment, but without any
compression of overall consumption, which implies that upward income redistribution
occurs.
One of the strongest effects of IMF programs, as Manuel Pastor™s research on Latin

America clearly demonstrated, is a decline in the wage share of GDP (Pastor 1987).
Pastor™s results are particularly applicable to workers in the state sector and wage
workers in the formal sector, who feel the brunt of wage compression in a standard IMF
program. Peasant producers, on the other hand, may find that the emphasis on devalua-
tion and export promotion increases their earnings.
While in the short term some countries do find that the rate of growth of GDP rises

modestly, in relation to the situation immediately preceding the crisis which precipitated
the IMF program, over a somewhat longer period of time the basic capacity to sustain
growth often appears to be undermined by reductions in public- and private-sector invest-
ment. This, apparently, helps to explain why many nations which have either completed
or abandoned IMF programs subsequently enter into new programs with the IMF.

Some critics and observers of the Fund, citing studies such as the two summarized here,
argue that the IMF is an inept institution which should either cease to do business or radically
recast its approach. Others maintain that the IMF does, in fact, serve its purpose and meet its
objectives. To these observers, the Fund™s objectives are not really tied to the improvement of
the performance of the less-developed nations, but to the long-term improvement of condi-
tions which allow major participants in the international economy, such as the transnational
corporations, relatively free access to the widest possible range of production and sales sites
in the global economy (Pauly 1994: 204“15; Crow et al. 1988: 310“30). In this view, the
IMF is a “mechanism of integration,” bringing the less-developed nations into a new inter-
national division of labor and ensuring the repayment of international bank loans which
soared in the 1970s. If this, indeed, is the criterion by which the Fund should be evaluated,
high marks are surely to be awarded. Certainly the Fund has been consistent in its hostility to
import substitution industrialization, at least since the early 1970s. And it has unquestionably
advocated a more open trading regime around the world.
570 The Process of Economic Development
Prior to the Asian crisis of 1997 the Fund was a supremely confident, even swaggering,
institution. But, in the early years of the twenty-first century the IMF found itself the target
of some very influential sources “ among them Joseph Stiglitz, whose Globalization and Its
Discontents opened with a blistering two-chapter critique of the IMF informed by Stiglitz™s
years as chief economist of the World Bank (Stiglitz 2002: 3“52). Also breaking ranks, the
United Nations™ Human Development Report 2002 focused on the “democratic deficit” of
the Fund (and the World Bank along with the World Trade Organization), noting that only
seven of the 184 nations in the IMF controlled 48 percent of the voting power of the institu-
tion. While the Fund urged “transparency” and “good government” and “participation” on
the member nations during IMF austerity programs, the United Nations noted in some detail
the lack of these crucial elements within the organizational structure of the IMF (United
Nations 2002: 112“17). Stung and seemingly confused by these critiques, high-level Fund
officials who rose to prominence in the 1980s and 1990s were less than convincing in their
statements that critics really did not understand the complexities and intricacies of high-level
economic theory, and that time had proved IMF policies correct, or at least or would do so
(Boorman 2002: 241, 245“8). While widely disparaged, the Fund continues to exert tremen-
dous influence “ at the close of 2002 the IMF held vital influence over the lives of hundreds
of millions of citizens of fifty-three developing nations through the IMF™s programs. Even
in 2007, after five years of the commodity boom, some sixty-three nations were beholden
to some extent to the Fund because they were participating in Poverty reduction Strategy
Programs operated by both the IMF and the World Bank, as will be discussed below.
A global superpower in itself (functioning with over 2,700 employees in 2007), the Fund™s
pivotal role in development issues is beyond dispute.


The World Bank
Like its twin Bretton Woods institution, the IMF, the World Bank was created in late 1945 and
commenced lending on a very modest scale in 1947. The International Bank for Reconstruc-
tion and Development (as the Bank was originally, and still officially is, known) loaned an
average of slightly more than half a billion dollars per year from 1947 to 1967, a relatively
meager sum when spread over the many nations that sought to receive Bank support. Until
the 1970s, one distinguishing characteristic of the Bank was that it loaned “long,” that is, for a
multiyear period, while the Fund loaned “short,” for periods of twelve to eighteen months.12
Another distinction between the Fund and the Bank in the early years was that the Bank
offered project loans and technical expertise to promote large-scale capital-intensive mega-
investment projects in less-developed nations. Highest on the list for loans was water projects
such as dams, irrigation systems, flood control, and hydropower installations for promoting
agricultural development and electricity generation for industry. Until 1968, when Robert
McNamara became World Bank president, the most notable change at the World Bank was
the creation of the International Development Association (IDA) as a new component of
the World Bank Group. The IDA was assigned to be the entity to make long-term loans to
nations which otherwise could never receive funding in adequate amounts from the Bank,
as a result of their general financial weakness. IDA loans are concessional, meaning that a
significant portion (more than 25 percent) of the interest cost of the loan is waived and other
easier terms, such as grace periods for the repayment of interest, can be built into the loan.
Under its charter, the Bank may lend only to governments.
With the exception of the IDA loans, it expects to, and does, make a respectable profit. It
is not, therefore, in the strict sense of the word, an aid institution. Still, the Bank is not just
International institutional linkages 571
another financial institution, because it does lend to nations for the long term on unproven
projects, often with substantial externalities, and for which private sources are usually reluc-
tant to make loans. Even after the IDA came into existence, the World Bank attracted little
attention. Lending from the IDA amounted only to a modest average of one quarter of a
billion US dollars per year up to 1967 (see Focus 17.2).


FOCUS 17.2 THE WORLD bANK GROUP
The International Bank for Reconstruction and Development: Until the 1980s, the IBRD,
known popularly as simply the World Bank or “the Bank,” lent for specific development
projects, usually with a seven-year cycle from planning to completion. In its early years,
the IBRD definitely reflected an “engineering” orientation. From 1947 to 2006, the Bank
made cumulative loans of $420 billion to ninety-four nations. Loans normally have a five-
year initial grace period, after which they are to be repaid over a period of fifteen to twenty
years, at the market rate of interest. The Bank does not reschedule or cancel its loans.
Borrowing governments have an outstanding record of paying off these loans, since failure
to repay the Bank would virtually destroy the credit rating of a developing nation. The IBRD
has always achieved a substantial rate of profit on these loans. Loans are heavily concen-
trated: in 2006, 52 percent went to Brazil, China, India, Mexico, and Turkey.
The International Development Association (IDA): Established in 1960 to forestall the
creation of a similar agency at the UN, the IDA lends to nations which cannot qualify for
IBRD loans under the usual lending rules. Only the poorest nations are eligible for IDA
loans, in 2008 the qualifying limit was below a national per capita income level of $1,065.
In 2007 the IDA had 80 nations (2.5 billion people) as potential candidates for its “credits.”
Over 41 percent of the $135 billion in IDA loans issued from 1961 to 2002 went to India,
China, Bangladesh, and Pakistan. In 2007 39 percent of all loans went to India, Pakistan,
Nigeria and Vietnam. Formally the IDA does not issue loans, but rather “credits.” These
“credits” have a nominal interest rate of 0.75 percent, a grace period of ten years, and
repayment over the following forty years. In 2007 IDA lending reached a record level of
$11.9 billion (49 percent for Africa).
The International Finance Corporation (IFC): Created in 1956, the IFC supports private-
sector development, functioning as a co-investor and assisting the private sector to obtain
debt and equity financing in the international financial markets. In 2006, for example, the
IFC created 284 new projects in sixty-six nations “ up from fifty-one nations in 1992. With
an emphasis on small- and medium-sized businesses, the IFC has become more significant
since the 1970s as a result of changes in policy orientation at the World Bank. Nonethe-
less, the IFC is much smaller than the IBRD and the IDA; its total outstanding loans amount
to $21.6 billion. The World Bank has continued to prioritize the IFC with growth in annual
lending more than doubling from 1992 to 2002. IFC loan commitments reached an all-time
record of $8.2 billion in 2007 “ 64 percent of the level of IBRD lending. The IFC™s rapid
growth reflects the heavy emphasis on private-sector development originating with the
US from the 1980s onward. The IFC has a distinct culture, functioning more like a venture
capital bank than an aid institution. It expanded the reach of its lending by 42 percent in
2006 through co-financing from other lenders who partially funded new IFC projects.
The Multilateral Investment Guarantee Agency (MIGA): Since 1988, the MIGA has
functioned to guarantee direct foreign investments against non-commercial risks, such
as nationalization, and has given policy advice, particularly to potential foreign investors.
The MIGA organizes international conferences to promote investment opportunities in
developing nations and also trains nationals in poor nations on methods of investment
promotion. In 2007 the MIGA guaranteed $1.4billion “ up from $313 million in guaran-
tees in 1992. Cumulative investment guarantees amounted to $16 billion in 2006.
572 The Process of Economic Development
US influence at the Bank
Since its inception, the Bank has had only US citizens for its presidents. (In a mirror image
of this tradition, and reflecting international power relations which prevailed when these
institutions were created, only Europeans have headed the IMF.) As in the IMF, the United
States has been the dominant shareholder in the World Bank. Yet, its sway over the Bank
has diminished somewhat over the years, as its share of the Bank™s capital subscriptions,
and consequently its share of the voting power within the IBRD, has fallen from 35 percent
in 1947 to 21 percent in 1981, and then 16.4 percent in 2003. Once again, it has been Japan
which has gained the largest relative share of influence in the Bank in recent years, though
it held only 7.9 percent of the voting share in 2003. Much of the money lent by the Bank to
less-developed nations also has served to stimulate production in the United States economy
and in the other advanced nations. On average, roughly 60 percent of all loans and credits
consist of orders for equipment and supplies furnished by the economies of the advanced
nations. The US has used its voting power to significantly influence concessionary lending
patterns at the IDA, according to an analysis conducted for the years 1993“2000 (Barnebeck,
Hanson, and Markussen 2006).


The McNamara era and the basic human needs approach
As an institution, the Bank rapidly changed under the leadership of Robert McNamara
(1968“81). With McNamara the Bank moved to center stage in the development dialog. It
built up a vast cadre of highly trained economists, reaching 6,100 full-time staff in 1994,
with 1,375 consultants or temporary staff. By 2004 the bank had a full-time staff of 10,000.
McNamara changed the Bank in practically every way imaginable. Its funding vastly
expanded, its orientation changed radically, and its “mission” was completely and dramati-
cally redefined. Heretofore, the Bank had modest goals. But McNamara accepted a new
approach to development, known as the basic human needs approach, first advocated by
the International Labour Organization in the late 1960s. Now, the central focus of the Bank
would be to put an end to world hunger, poverty, and misery. Thus, the Bank leaped from
its modest objectives of placing a few selected loans in the developing nations to attacking
the most intractable and broadest of developmental objectives. McNamara and his close
associates became advocates of the basic human needs approach which sought to channel
development funding to programs in less-developed nations that would directly benefit the
poor, particularly the poorest 40 percent of the population. This meant a vast new role for
the IDA, and a new emphasis on housing projects, water sanitation, the Green Revolution,
schooling, and related matters (see Focus 17.3).
Between 1967 and 1993, the IBRD lent $224 billion on over 3,000 separate loans, while the
IDA lent an additional $76 billion. Just as important, however, was the fact that co-financing
allowed the Bank to vastly increase its importance, because other entities, particularly inter-
national banks, lent funds for Bank-approved loans. Co-financing can expand the reach of
the Bank by 80 percent or more; in 1992, for example, the Bank loaned $16.4 billion, but also
generated $13.3 billion in co-financing. Thus, in terms of its importance in generating long-
term capital flows into the less-developed nations, the Bank can be nearly twice as significant
as its annual lending numbers would suggest.
In the 2002“6 period the roles of the IBRD and the IDA were reversed: in each of those
years the IBRD had a negative net lending position, while IDA lending steadily increased. In
2003 and 2004, the IBRD™s net withdrawal of funding was very strong “ loans amounted to
International institutional linkages 573

FOCUS 17.3 THE WORLD bANK AND THE ENVIRONMENT
Beginning in the late 1970s, prominent environmental groups began to carefully examine
the lending policies of the World Bank. Their mounting critique helped push the Bank into
issuing an official statement in 1984 mandating that the Bank would no longer finance
projects which “cause severe or irreversible environmental degradation.”
In 1987, with criticism of the Bank™s environmental commitment mounting, Bank presi-
dent Barber Conable announced that he would create an Environmental Department and
increase the Bank™s research on environmental degradation, desertification, and environ-
mentally threatening forestry practices. By 1989, Conable had introduced the Bank™s first
environmental review process to screen some loans and projects for their potential envi-
ronmental impact. From 1989 to 1993, 300 projects were evaluated for their environmental
impact. Critics charged that the majority of loans and projects, however, were not subject
to adequate environmental review. But by 1992 the Bank was employing 279 full-time
analysts to work on environmental issues.
In 1993, the Bank indicated that its commitment to environmental concerns was deep-
ening. A new role of Vice-President for Environmentally Sustainable Development was
created with the objective of helping “Bank operational staff better understand the link-
ages between poverty and the environment and to view social, environmental, cultural,
and agricultural concerns as more interrelated.” Between 1992 and early 1995, the Bank
devoted nearly 10 percent of its funding to projects with environmental objectives.
The Bank is also the implementing agency for the Global Environmental Facility (GEF),
created in 1991 and restructured in 1994. The GEF is a financial mechanism under the
combined trusteeship of the World Bank, the United Nations Environmental Program, and
the United Nations Development Program. By mid-1995, the GEF had funded projects
with a combined worth of $558 million, while committing to lend $2 billion from 1994
to 1997. These project loans address a range of broad environmental issues, such as
climatic change, depletion of the ozone layer, and land degradation.
Does all this constitute a “Greening” of the Bank? Critics are not sure, but they do
acknowledge that the Bank has made serious steps toward addressing environmental
issues which it long ignored or down-played. Some critics are less sure:

The environmental movement has won some project-by-project skirmishes but it has
been strategically and ideologically outflanked. Through a combination of reassuring
rhetoric and some genuine improvements, the Bank has distanced itself from outright
hostilities with the opposite camp.
Sources: George and Sabelli 1994: 183; World Bank 1984: 4; 1995a: 26, 28

$11.9 billion in 2003, but repayments on past loans came to $19.9 billion. In 2004 the figures
were $10.1 billion and $18.5 billion for loans and repayments, respectively.
Table 17.3 records total Bank lending and co-financing for recent years. Note that these
figures are in current, rather than inflation adjusted, dollars. Adjusting for inflation, and after
soaring in 1999, Bank lending actually fell somewhat from 1990 to 2002.


The rise of structural adjustment lending: 1979“2007
By the late 1970s, McNamara™s vision had gone beyond that of meeting basic human
needs. He now believed that successful economic development would require that the Bank
itself provide much of the guidance and implementation of a development program to less-
developed nations. In this view, these countries would have to share, if not relinquish,
decision-making powers over a vast array of economic policy matters which heretofore
574 The Process of Economic Development
Table 17.3 World Bank lending and co-financing (billions of US dollars, fiscal years)
1990 1993 1995 2000 2002 2007

Gross disbursements
13.9 12.9 10.4 10.9 11.5 12.8
IBRD
IDA 3.9 4.9 5.7 4.4 8.1 11.9
Total 17.5 17.8 18.4 15.3 19.6 24.7

Co-financing 11.6 4.7 4.9a
n.a. 8.2 7.0

Source: World Bank, World Bank Annual Report (Washington, D.C.: World Bank, various years); www.worldbank.
org./annualreport/.
Note
a 2006.


had been considered strictly the sovereign province of independent nations. With these
new loans, which McNamara never completely defined prior to stepping down in 1981, the
World Bank once again recast its “mission”; now, it would guide the economic trajectory
of entire nations in their quest for development. The new-style comprehensive loans were
termed structural adjustment loans and sectoral adjustment loans. These loans have
continued to be a prime focus of the World Bank™s activities.
The global economic crisis of the late 1970s had altered McNamara™s perspective. In his
view, as he expressed it in his annual presidential address to the World Bank in 1980, the debt
crisis, the rise in oil prices, and the slow growth in aggregate demand in the advanced nations
were all working to undermine the development prospects of the less-developed nations.
Consequently, the basic human needs approach was not enough; it was not possible to rely on
the less-developed nations to define their paths to development, while the Bank attempted to
care, through its lending, for those who had been left out of the process of economic growth.
Rather, now it was necessary to help build, adjust, and remold the economic foundations of
the developing nations. A wide range of issues which, previously, the World Bank had left to
the determination of the borrowing nation would now be uppermost in the Bank™s analysis
when it considered which countries were eligible for loans and credits.
From the late 1970s, when the first structural adjustment loans, called SALs, were made,
through to 1986, the role of SALs within overall Bank lending grew to the point where
approximately one out of every three dollars in lending was for the purpose of structural
adjustment. In 2002 total adjustment loans accounted for 64 percent of all lending, with
48 percent of loans going either to restructuring the public sector or the financial sector! In
essence, a SAL is granted not to build anything in particular, but to change national economic
policies in some desired direction. Consequently, the borrowing nation has some discretion
on where and how it will spend the SAL funds, unlike project loan funds from the Bank
which are very much under the control of the Bank for a specific undertaking.
Depending on circumstances and the nation involved, SALs attempted to address a broad
range of macroeconomic problems. Once a SAL has been arranged, funds are disbursed over
time in a conditional manner, much as for the IMF, being dependent on the success of the
economy in making fundamental changes in pre-selected policy areas. Between 1980 and
1986, the average SAL had conditions in ten of the nineteen policy areas which the Bank
wished countries to address. The most frequent conditions were to “improve export incentives”
(76 percent of all SALs incorporated this as a condition), to “reform the government™s budget
or taxes” (70 percent), to “improve financial performance of public enterprises” (73 percent),
International institutional linkages 575
“to revise agricultural prices” (73 percent), and to “strengthen capacity to formulate and
implement public investment programs” (86 percent) (Mosley et al. 1991: vol. 1, 44).

Adjusting the state sector
It is clear from this brief summary of the most common conditions for SAL loans that the
role of the state was at the epicenter of the Bank™s analysis regarding what most needed
to be “adjusted” in the poor nations. This orientation reflected the so-called “new political
economy” perspective of Anne Krueger, who was for a period in the 1980s the Chief Econo-
mist of the World Bank, as well as reflecting the views of many other influential economists
within the Bank. As will be recalled from our earlier discussion in Chapter 7, the focus of
neoliberal economists has been upon what they believe has been the excessive role of the
state in the economy which, they argued, constituted a serious impediment to economic
development. Thus, it comes as less than a surprise to find that the central thrust of the
SALs was largely concentrated on paring back the role of the state intervention, particularly
through the sell-off, or privatization, of state-owned firms via programs often financed and
directed by the Bank.
The ultimate aim of the Bank was to achieve a new form of macroeconomic management
which would successfully integrate the borrowing nation into the global system of trade,
finance, and investment. Any nation which sought to hold on to the vestiges of import substi-
tution industrialization did not receive much assistance from the Bank; dismantling ISI and
instituting export production became a virtual sine qua non for obtaining Bank assistance.
In striving for a complete reorientation of the economies of many nations, the World Bank
ventured into territory which had long been the sole domain of borrowing governments, such
as the size of the public administration apparatus, the organization of the civil service, and
the general structure of the public sector, labor regulations, and public investments. In every
instance, the Bank sought to remold the society and economy to create an environment it
believed would be more encouraging to the private business sector, including international
corporations.
By 1987, the Bank was ready to formalize its shift to structural adjustment lending via
what it termed its “integration policy,” which sought to coordinate all Bank programs within
a nation in order to obtain consistency under the umbrella concept of structural adjustment.
In effect, then, even though loans formally defined as SALs remained at the level of roughly
one-third of annual outlays, in nations where “integration” was adopted, all loans, including
project loans, were intended to be coordinated within the framework of the SAL concept.
Furthermore, under cross-conditionality, nations could only receive SALs if they had
stand-by arrangements with the IMF. And, they could only receive stand-by support from
the IMF if they accepted SALs from the Bank. (Meanwhile the IMF itself began to enter
into SAL lending with the creation of the Structural Adjustment Facility in 1986 and the
Enhanced Structural Adjustment Facility in 1987.)

Did SALs speed the development process?
One survey of the effectiveness of World Bank SALs was conducted on 241 such loans
conferred upon thirty-three African nations between 1980 and 1989. The results were that
average per capita income fell on average 1.1 percent per year in these nations, while per
capita food production declined overall. The purchasing power of the minimum wage fell by
an average of 25 percent. Government expenditures for education declined by 36 percent,
576 The Process of Economic Development
and the total number of elementary school students decreased by 14 percent. Not surpris-
ingly, the numbers of the poor increased steadily (George and Sabelli 1994:141). These are
not particularly encouraging outcomes, though one might argue that the special problems of
the poor African nations makes this an unfair measure of success or failure of SALs, as other
adverse forces also were at work. On the other hand, the Bank never suggested that some
countries, in Africa or anywhere, might find a deterioration of economic progress to be the
outcome of accepting SALs. An independent research team composed of Paul Mosley, Jane
Harrigan, and John Toye attempted to evaluate the effects of SALs via a detailed study of
nine nations from countries in Africa, Asia, and Latin America. They buttressed this sample
with a broader comparison of twenty countries that had received SALs between 1980 and
1987 with twenty similar nations which had no SAL loans over the period. Their findings
were largely similar to the study conducted on Africa, cited above. Their four main conclu-
sions were:

1 SALs had a positive impact on exports and on the balance of payments;
2 overall investment declined under the SALs;
3 SALs failed to increase the economic growth rate and the flow of international capital,
but they did not decrease either growth or international capital flows over the period
prior to the SALs;
4 living standards for the poor, however, declined under SALs (see Focus 17.4).

Their overall evaluation of SALs was little short of devastating:

By contrast with the Bank™s generally acknowledged success in project lending (e.g., an
average ex post rate of return of 17 percent across all projects between 1960 and 1980),
it is not even clear whether the net return, in terms of growth of gross national product,
on the $25 billion which the Bank has so far invested in policy-based ending is positive
or negative.
(Mosley et al. 1991: vol. 1, 302)


FOCUS 17.4 WOMEN AND “INVISIbLE ADJUSTMENT”
Women have proven to be more vulnerable than men to the loss of household income
following the implementation of structural adjustment loans (SALs). To compensate, women
have adopted new survival strategies increasing their workload and engaging in prolonged
periods of greater self-sacrifice. This process has been termed “invisible adjustment,” since
such strategies are normally not included in the evaluation of the effects of SALs.
The process of “invisible adjustment” is complex. One aspect concerns the need for
adaptive strategies in the face of sizeable reductions in public spending, which normally
are required as a condition for receiving an SAL. When public health spending is reduced,
for example, women must attempt to adapt by increasing the time they spend as informal
medical aides, nurturing and nursing sick children and other family members who, prior
to the SAL, might have been treated at rural health clinics or urban hospitals. With food
subsidies eliminated or reduced, women often must spend more time shopping and
preparing food, and the food they have available after an SAL may have a significantly
reduced protein content. Even relatively poor women in many less-developed countries
sometimes employ “servants,” usually young girls, to help with the labor-intensive tasks
of food preparation and washing-up. But when household income falls, this “luxury” is
quickly eliminated, and women and girls in the family perform these tasks.
International institutional linkages 577
This helps set up a vicious circle, since a restricted diet for children often means
increased vulnerability to illness and longer periods of recovery. Furthermore, a reduced
diet means that family workers will have much less energy to devote to remunerative labor,
thereby risking dismissal because of lower productivity or increased absenteeism.
SALs often include restrictive monetary policies designed to create higher unemploy-
ment and thus reduce real wages. In the formal sector, women are more vulnerable to such
unemployment effects, and they often are forced into the informal sector where compen-
sation is lower and the effort to survive is typically greater. In an attempt to compensate,
women often increase their hours of work. For those women working outside of the home,
their increased absence often necessitates that older children care for younger siblings.
Under such circumstances, it is usually older girls who lose the advantage of an education
in order to provide child-care at home. One study of a major urban area of Ecuador found
that during a period of structural adjustment, the share of women working in the informal
sector jumped from 3 percent in 1988 to 21 percent in 1992.
SALs appear to impose a three-fold burden on women: time devoted to market activi-
ties (in either the formal or informal sectors) increases; household labor increases; and
nurturing labor (helping with sick children and relatives) increases.
Sources: Henshall Momsen 1991: 97“9; World Bank 1995b: 106“8


Critiques of World Bank and IMF SaLs
Criticism of the SAL strategy has fallen into two distinct categories. First, some observers,
including many from the developing nations, have felt that the World Bank and the Fund have
abused their vast powers by overstepping their proper boundaries and usurping a considerable
share of national sovereignty at a time when the developing nations were particularly vulner-
able to pressure, due to the decline in primary commodity prices and the ravages of the debt
crisis. Second, other observers have argued that the Bank and the Fund have operated from
false premises and assumptions derived from the neoliberal school, which maintains that by
“freeing-up” resources from the public sector and orienting the economy toward the export
sector, the economy will expand at a much higher rate. With the Bank seemingly impervious
to the early critical work on SALs, and with the focus on SALs increasing through 2002, the
Bank “ under considerable pressure from citizens™ groups and non-governmental organiza-
tions “ consented to a joint World Bank“Civil Society review of SALs with their participa-
tion. The report of the Structural Adjustment Participatory Review group “ which examined
the impacts of SALs on Bangladesh, Ecuador, Ghana, Hungary, Mexico, the Philippines, and
Zimbabwe “ was sufficiently devastating that the Bank reached the following key conclu-
sions regarding structural adjustment lending:

• trade liberalization has been pushed through indiscriminately, allowing import growth
to surpass that of exports, destroying domestic firms;
• lack of meaningful participation of national stakeholders in the design and implementa-
tion of trade policies have rendered these measures technically inefficient;
• financial assets have become more concentrated;
• [financial] reforms have promoted short-term speculation and investment in non-pro-
ductive activities;
• employment levels have worsened and real wages have deteriorated and income distri-
bution is less equitable today;
• women have suffered the most as a result of labor-market reforms;
• employment has become more precarious;
578 The Process of Economic Development
• the elimination of universally provided subsidies for essential goods has negatively
affected the poorest (SAPRIN 2002).

Regarding the first of these propositions, while it is true that the World Bank and IMF
SAL programs have effectively sought to usurp a portion of national sovereignty, it would
be a mistake to view the borrowing nations as passively accepting the various conditions of
the SALs. Rather, as the research of Mosley, Harrigan, and Toye has shown, the borrowing
nations have used the new SAL format as a basis for carrying on sophisticated bargaining
with the World Bank and the IMF. Most recipient nations have not fully complied with the
intent of the SALs, and they have sought to bend the conditionality of the SALs to their best
advantage (whether this advantage accrues to a narrow elite or to the nation as a whole is
debatable and, ultimately, the real issue). Desiring influence, the World Bank, at least, has
reluctantly accepted the fact that the issue of governance of a nation will not be willingly
handed over to a group of World Bank economists. Failing to find the leverage which they
sought, the World Bank has been forced to settle for some influence, rather than maximum
influence. At the same time, non-compliance by countries has left advocates of SALs, as
effective instruments of change, a convenient escape route when SALs have failed to demon-
strably improve the overall macroeconomic environment in borrowing nations; they have
argued that, had the borrowing countries followed World Bank and IMF advice to the letter,
matters would have turned out differently.

Sustainable development, comprehensive development framework,
and a knowledge bank?
In 1991, when the World Bank selected its eighth president, Lewis Preston, the evidence
regarding the weaknesses of the SAL approach had mounted, and there was a growing chorus
of voices decrying the Bank™s apparent abandonment of the world™s poor. Some of those
voices came from within the World Bank itself, where many of the top research economists
simply did not share the ideological fervor of the neoliberal economists who had proposed and
advanced the SAL agenda so rigidly, and often with little regard for the particular history of
individual nations. Troubled by signs of weakness in many aspects of the Bank™s past accom-
plishments, Preston called for a full evaluation of the Bank™s lending practices to be headed
by the then Bank vice-president, Willi Wapenhans. In 1992 the “Wapenhans Report,” entitled
“Effective Implementation: Key to Development Impact,” was presented. Its results exerted a
strong, perhaps unprecedented, influence on the Bank, at least up until 1995. The main conclu-
sion of the report was that, compared to the early 1980s, the Bank™s loan portfolio had suffered
a rapid decline in performance. Wapenhans found that in the early 1980s, the Bank had clas-
sified only 11 percent of its loans as “troubled,” but by 1991, 37.5 percent fitted that category.
In only 22 percent of the cases had borrowers fulfilled all of the agreements of a loan. Preston
reacted rather quickly by bringing the concept of “sustainability” to the foreground, much as
McNamara had emphasized the basic human needs approach throughout most of his tenure.
Sustainability shares with the basic human needs approach an emphasis on the poor,
but in addition the Bank was to seek to insure that its loans were consistent with environ-
mental concerns (for details, see Chapter 2 on “sustainable development”). A third pillar of
the Bank™s sustainability concept is population control. Preston reoriented the Bank toward
sustainability, so defined. The dual track approach of the Bank™s thrust (SALs + sustain-
ability) became a complex mix of SALs + sustainability + comprehensive development
framework + social capital + good government + a knowledge bank under James Wolfensohn,
International institutional linkages 579
who took over the Bank™s presidency from 1995 to 2005. While the above terms will not be
detailed here, suffice it to say that one critic charged that under Wolfensohn the Bank has
suffered from “a burgeoning agenda ¦ and a concomitant overload of objectives and condi-
tionalities” (Kapur 2002: 69). Others find evidence of “loss of control over its agenda,” an
“operational loss of focus,” and the embrace of “mission creep and accelerating goal prolif-
eration” as the Bank has continued to deepen its commitment to SALs while simultaneously
attempting to focus on sustainability, transparency, accountability, participation based on
country “ownership” of programs, and “institution building,” most under the heading of the
comprehensive development framework (Pincus and Winter 2002: 20).
Much of this approach “ critics label it a diversion “ is closely tied to the sustainability
concept in the Bank™s annual World Development Report 2003, devoted to “Sustainable
Development in a Dynamic World” (World Bank 2003). Here readers can follow the Bank™s
text as vague issues such as “interpersonal networks, share values and trust” are entertained
(ibid.: 19). Many critics have argued that the Bank, beset by the same barrage of criticism as
the IMF, has sought to partially commit to a plethora of goals to deflect the criticisms (largely
well documented) leveled against the Bank from the early 1990s onward. One informal group
of trained observers has called for a return of the Bank to its earliest role as a Development
Bank (see Focus 9.3), dropping the structural and sectoral loans, stepping back from the
comprehensive development framework, because the Bank lacks the operational framework
and resources to pursue the plethora of goals it has now set forth (Pincus and Winter 2002).
It would probably be an overstatement to argue that the Bank is currently in a “crisis,” but
the institution is challenged as never before by its constituents, its observers/critics, and its
funders.


The Poverty reduction Strategy approach
The widespread critique of World Bank structural adjustment policy led to one major inno-
vation which subsumed policy-based lending (such as the SALs and the sectoral adjustment
loans) under the heading of the Poverty Reduction Strategy Papers (PRSPs). The PRSPs
program “ sometimes labeled the “new aid model” “ came into effect in 2000 and rapidly
expanded to become the centerpiece initiative regarding poor nations for the International
Monetary Fund, the World Bank, bilateral aid agencies, and non-governmental organiza-
tions (NGOs) that are involved with development policy. By 2003 twenty-two nations had
completed PRSPs, in 2005 there were forty-nine, and in 2007 the number had risen to sixty-
four out of seventy nations, containing 2 billion people, originally identified as potential
candidates (Malaluan and Guttal 2003: 2; World Bank and IMF 2005: 1; IMF 2007c: 1).
The program involves not only the World Bank, but also the IMF, essentially bringing them
together in a policy-based lending operation over a minimum of three years (but the time
frame is generally projected to be considerably longer). Not only are the two Bretton Woods
lenders involved; the Poverty Reduction Strategy approach is further complicated because it
asserts that the borrowing nation will be brought into the program as the first among equals,
“owning” the new policy-based loan. Moreover, the program is not merely tripartite, since it
is designed to offer the framework under which “Development Assistance” (more commonly
known as foreign aid “ discussed in the following section) is to be applied. This is important,
particularly since in 2005 the advanced industrial nations committed to an increase of $50
billion in Development Assistance by 2010 “ effectively doubling foreign aid for Africa.
The PRS Approach is designed to totally integrate Development Assistance into a long-term
framework that is consistent with the capabilities and objectives of the borrowing nation “ a
580 The Process of Economic Development
conceptual break from prior foreign aid practices that have generally been vertical in nature,
uncoordinated with the Bretton Woods institutions and often of an essentially ad hoc nature.
Coordinating the process was, at the official level, to be handled by the three major partici-
pants “ the borrowing nation, the IMF, and the World Bank. Yet, at the level of operation the
World Bank has been the dominant element. The idea of combining the IMF and the World
Bank in a given project is novel because it is an attempt to wed two very distinct institutions.
The IMF is an essentially “vertical” and homogeneous organization that centers its analysis
on a static macroeconomic adjustment model focused on the balance of payments. The World
Bank has a distinct underlying model, based essentially on the dynamic Harrod-Domar
growth theory (see Chapter 4) which assumes that the levels of savings and therefore invest-
ment are the determining variable in defining the level of growth of the economy (Bergeron
2005: 111“12). The World Bank also has a somewhat heterogeneous focus, with large units
devoted to a broad range of issues such as agriculture, basic needs, and women and develop-
ment. In other words, absent balance of payments problems there are no “defining restraints”
for developing nations according to the IMF. But for the World Bank, in theory there can be
a great variety of restraints, chief of which is the now quite out-dated idea that with sufficient
capital formation poor nations can rise from underdevelopment. Little introspection would be
needed to predict that the IMF and the World Bank would find it impossible to work together
on a project designed to potentially reach all nations eligible for IDA support “ the 2.5 billion
people in nations below the threshold level of $1,000 in annual average per capita income.

Key elements of the Poverty Reduction Strategy Program
The PRSPs are extremely complex and the entire project is the most ambitious ever undertaken
by the Bretton Woods institutions. In essence, PRSPs are national development programs,
based on the hypothesis that foreign trade and investment are the engines of growth, and that
economic growth is the best, and nearly the only, way to address poverty. Under the PRS
approach there are four essential elements to be pursued:

1 stabilization of the macroeconomy through the application of IMF conditionality using
a minimum of targets with funding from the IMF™s Poverty reduction and Growth
Facility;
2 implementation of structural adjustment concepts in accordance with the Washington
Consensus, emphasizing privatization, reduction in government, opening to international
trade and investment, and prioritization of private-sector development consistent with
IFC objectives; providing concessional funding from the World Bank™s International
Development Agency via its Poverty reduction Support Credit (PRSC) program
designed to alter policy and institutions in recipient nations;
3 focus on economic growth as the underlying means to reduce poverty on the assumption
that the rate of growth of income for those who are poor will be higher than the rate of
growth of incomes for those above the poverty line. Failing the automatic appearance
of “pro-poor growth” there should be minor emphasis on social safety nets designed to
target poverty reduction coupled with other strategic outlays, as needed, to enhance the
participation of the poor in the growing economy “ such as agricultural infrastructure
investments that target poor farmers, or schooling for youth, particularly girls (Ravillion
2004: 20);
4 domestic “participation” in the formulation, and eventual “ownership,” of the PRS
program.
International institutional linkages 581
An analysis of the four essential elements of the PRSP
Taking these elements as listed, the first has largely been the province of the IMF. However,
in the context of the PRS program the IMF is unable to act with the autonomy to which it
has long been accustomed. Any stabilization package will be viewed not only in terms of its
short-term impacts on the balance of payments, but in addition “ in the first instance “ by
the World Bank in terms of the likely inconsistencies between IMF conditionality leading
to the compression of aggregate demand (reducing or eliminating growth) and the under-
lying objective of achieving intermediate to long-term growth. Joining in the PRS program
has thrust the IMF into unknown territory. Its ability to combine the opposing forces of
conditioned stabilization with a viable growth strategy as envisioned by the World Bank is
presumably far beyond its “core” competency.
Moving to the second element, a sense of d©jà vu is overwhelming. Although now out of
fashion, and explicitly rejected by some high-ranking World Bank officials in the Bank™s
2005 book Learning from a Decade of Reform, it is hard to escape the conclusion that the
World Bank™s operational arm continues to apply the Washington Consensus approach with
the PRS framework (Rodrik 2006: 977). Here the World Bank™s low-income lender, the IDA
extends long-term PRSC loans to achieve the goal of altering the structure of the national
policy-making process while “building institutions for markets.” In short, viewing the PRS
approach from the perspective of the operational arm of the World Bank, the new program
would seem to be reducible to “SAL +,” the + being the three other elements.
In terms of the third element, pro-poor growth is initially assumed to be growth of the
economy wherein the rate of growth of income for those who are perhaps in the bottom third
or one-half of the distribution of income is higher than the rate of growth of those who are in
the upper two-thirds or one-half of the income distribution. This directly contrasts with the
Kuznets curve analysis introduced in Chapter 1 wherein Simon Kuznets found an inverse
relationship between economic growth and reduction of income inequality until per capita
income rose to an intermediate level. It is worth recalling from Chapter 5 that the most widely
accepted model of the initiation of the development process “ as constructed by Arthur Lewis
“ is premised on the argument that growth will be biased against workers and subsistence
farmers. There seems to be no acceptable basis in development economics for assuming that
in a laissez-faire economy such a process as pro-poor growth should occur in a poor nation “
particularly one wherein the IMF and the World Bank are determined to reduce government
programs and forms of regulation that have been constructed to help those who are disad-
vantaged or weak in an unregulated economy. Should growth not show a bias in favor of the
poor, the strategy would be to introduce very limited, targeted programs designed to create
safety nets or “social protection measures.” But such interventions remain vaguely defined,
and subordinated to the goal of growth. While there has been little or no independent review
of the PRS approach, the Bretton Woods institutions have nonetheless presented an awkward
attempt to demonstrate that PRSPs are tilting toward pro-poor policies: In their 2005 review
of the PRSPs the IMF and the World Bank found for a sample of 27 countries that the level
of “poverty reducing expenditures” expressed as a percentage of government revenue rose
from 41 percent in 1999 to 49 percent in 2004 (IMF and World Bank 2005: 22). They like-
wise found that these outlays in relation to GDP rose from 6.4 to 8.3 percent. However, in a
footnote the same document states that the category “poverty reducing expenditures” “is not
always based on a good understanding of the appropriate public interventions necessary to
reduce poverty” with programs often “skewed towards better-off households” (World Bank
and IMF 2005: 22). The reader is left to wonder what exactly might be a “poverty reducing
582 The Process of Economic Development
expenditure” and how it could be the case that such outlays are skewed to the better-off and
if that is true how any of this might necessarily connect to the goal of expanding programs
designed to reduce poverty! One is also left with a sense of wonderment: could one-half
of all public outlays in a poor nation undergoing the PRS program be allocated to poverty
reduction? What is it that the IMF-Bank have decided to label as “poverty reduction” public
expenditures?
Finally, we come to the last element, considered the key one by many, country “owner-
ship” of the program. To begin to understand this concept within the framework of the PRS
program, it is important to recognize that national “ownership” of the program does not
mean that the borrowing nation will have any say whatsoever in the manner in which the
IMF implements its stabilization program, nor will this nation be able to bargain or influ-
ence the structural adjustment program financed and implemented by the World Bank. The
Bangkok-based research center Focus on the Global South critiqued the Bank“Fund concept
of “ownership” in the following manner:

When advising governments on how to prepare a PRSP, Bank-Fund missions have come
prepared with their perspectives on the country™s poverty situation, their analysis of the
country™s obstacles to growth, their menu of policy options, and their views on how to
mobilize resources for the PRSP, including external donor assistance. Their perspec-
tives form the basis of all discussion between Bank-Fund missions and borrowing
governments about the structure and content of PRSPs. And despite claims that “causes
and solution of poverty are country-specific,” all PRSPs are expected to contain “core
elements” that the Bank and the Fund consider essential to poverty reduction.

PRSP processes have been extremely narrow in both their substance and participation.
Participation has by and large been limited to inviting prominent and well-resourced NGOs
to offer their perspectives on pre-prepared documents. Unions, workers™ organizations,
farmer and fisher groups, women™s groups, indigenous peoples, medical associations, and
even academics have not been included in the process. Most PRSP consultations have yet
to involve local populations in devising strategies for nationally meaningful development
plans, or in monitoring the impacts of past policy reforms and programs.

In a number of countries, initial drafts of the ¦ PRSP were not translated into local
languages until the final stages thus excluding local input into the formulation process.
(Malauan and Guttal 2003: 7, 9, 10)

At the outset of the implementation of the first PRSPs in 2000, critics of structural adjust-
ment polices were enticed by the allure of the concept of “ownership.” But by 2003, it was
claimed that they are a new “technology of control” that suggested empowerment and there-
fore served to mystify the fact that PRSPs are a new and deeper way to discipline the national
economies of poor nations than anything previously constructed by the Bretton Woods insti-
tutions (Fraser 2005). PRSPs are viewed as a means to “engineer consent” because they
have managed to incorporate some of the most articulate and capable NGOs into the PRS
process “ along with wealthy-to-poor nations™ aid programs “ while reducing the visibility
of any one external agent. Thus they have served to camouflage, in particular, the IMF while
shrouding World Bank leverage in a fog of “participatory” rhetoric. In effect, critics view
the PRSP as a new form of dependency where there is a superficial appearance of “willing
participation” on the part of governments caught in the complex web of the PRS approach.
International institutional linkages 583
The PRS approach has escaped greater scrutiny not merely because it is both exceedingly
complex in its structure and intentionally subtle in terms of mystifying the power relation-
ships of the process. In addition, since 2002/2003 the rapid spread of PRSPs has taken place
within the context of a commodities boom unprecedented at least since the Second World
War. With few exceptions, throughout the world the nations of the South have experienced
five years of relatively rapid economic growth “ growth which the Bretton Woods institutions
are not hesitant to claim as the outcome of the PRS approach. Nonetheless, the future of the
PRSPs was thrown into doubt with the arrival of the “Malan Report” delivered by an external
review committee on Bank“Fund collaboration in the PRSPs (IMF 2007). Noting that there
had been a drastic cut in IMF outlays to the Poverty reduction Growth Facility in 2005
and 2006, the committee recommended that this fund be closed and that the IMF withdraw
from long-term financing, effectively taking the IMF out of the complex PRS equation (IMF
2007d: 44). In effect, the “Malan Report” is a recognition that the conditioned stabilization
model employed by the IMF is designed to force an adjustment in the balance of payments
through repression of aggregate demand. The IMF™s institutional structure can only work at
cross-purposes to policies designed to engender growth. Should the IMF withdraw from the
PRS program this will not necessarily limit the Bank™s financial capacities, but it could mean
that the Bank will eventually become a much more visible target for critics “ particularly
when commodity prices stop rising or fall.

Foreign aid
The term foreign aid is often loosely and incorrectly applied to programs that are not conces-
sionary, such as loans from the IBRD or the IMF (excluding the PrGF), or to bilateral
programs that are essentially military or strategic in nature. All foreign aid is concessionary;
it comes either in the form of concessionary loans or outright grants. The major source of
foreign aid is bilateral assistance from the advanced nations to a selected number of poorer
nations. Nearly all foreign aid is intended for the purpose of economic development; rela-
tively little (10“15 percent) in a given year will be for the purpose of “emergency assist-
ance,” such as food, clothing, and emergency medical care for victims of disasters, war, and
famine. Food aid is normally less than 10 percent of all aid. Multilateral organizations such
as the United Nations certainly play a role in the decisions made and funds expended for
foreign aid, but their programs are smaller than the sum of the bilateral programs of devel-
oped countries.
Among the many misconceptions regarding foreign aid, one in particular tends to stand
out above all: contrary to popular conception, the really poor and destitute nations do not
receive much of the foreign aid in any given year. This fact is brought to light in a summary
of some of the known research regarding the recipients of foreign aid presented in the United
Nations Development Program™s (UNDP) Human Development Report 1993. In discussing
the unique role played by the NGOs in transferring aid to the poor nations, the UNDP stated
some of the more disturbing characteristics of foreign aid programs: “If government and
official aid programmes usually fail to reach the poorest 20% of income groups, most NGO
interventions probably miss the poorest 5“10% ¦ On the whole it is easier for NGOs to
reach the not-so-poor than the very poorest” (UNDP 1993: 96). Why is this so? Because
aid programs tend to be designed for those that already have some assets, such as small
farmers, rather than, say, landless farm laborers or informal service workers. even a self-help
housing program designed for the poorest of the poor may put aid officials in an awkward
position, since these destitute families often will be “squatters” on land owned by others.
584 The Process of Economic Development
Providing assistance to such families would place the aid-giving group in direct opposition
to the guardians of the property laws in the aid-receiving nation, and they thus shy away from
such projects and controversy.
In 2005 total “official” foreign aid, or Official Development Assistance (ODA), from the
advanced nations and OPEC and other nations came to roughly $110 billion (UN 2007:
153, Table A.19). About 23 percent of this total was transferred to multilateral institutions
such as the World Bank, the remainder being spent as bilateral aid, about three-quarters of
which was devoted to grants. In addition perhaps as much as $20 to $30 billion was raised
by NGOs along with foundations such as the Global Fund which anticipates annual grants
reaching the $10 billion level by 2010, and the Gates Foundation with assets of $34.6 billion
in 2006. NGOs (and foundations) come in all sizes, with highly varied focuses. Some are
supported by religious organizations, others are secular. Some are extremely specialized,
such as Doctors without Borders, and highly effective.
Many do not have a humanitarian rather than developmental perspective. And many bring
highly honed skills in language and culture to facilitate social movements with organizational
knowledge that results in empowerment. If all the various forms of concessional aid were
added together, and if these funds were distributed broadly to all developing nations, foreign
aid would allow for about 5 cents (US) per person per day of external support in the poorest
nations of the world. Targeted directly to the best projects in a few of the poorest nations,
ODA can make a difference, helping to set a society on a new path. But this can only happen
when programs actually reach the poor, when programs are well designed and crafted to meet
the very specific needs of a recipient country, and when overall ODA outflows rise to the
growing challenge of global poverty.
None of this appeared to be happening until recently. ODA, adjusted for inflation, reached
a peak in 1992, and by 1997 aid flows had fallen 23.7 percent in relation to 1992 (Hjertholm
and White 2000: 85“6). In 2000 “ estimating the effects of inflation “ official aid was well
below the 1992 level, and on a rough par with that of 1997. But by 2006 it had recovered to
the relative level achieved in 1992 “ 0.33 percent of the combined national income of the
Development Assistance Committees countries (UN 2007, x). Commentators explained the
serious drop in relative aid contributions from 1992 through 2003 as a result of the end of the
Cold War. During the Cold War poorer nations had some leverage with the superpowers of
the era. Furthermore, it was asserted that “aid fatigue” “ arising from unexplained causes but
thought to be based in the intractable nature of many of the most pressing problems in poor
nations “ explained the twenty year downturn. In 1998 the World Bank published a highly
influential study Assessing Aid which essentially argued that aid did not help poor nations in
many instances, and that in the future donors should direct their aid funds to nations that had
“good” government and “good” policies “ which essentially seemed to mean market-friendly
neoliberal governments and policies (World Bank 1998). Aid fatigue was encouraged by the
study™s findings that only 29 cents of every US dollar intended for aid expenditures actually
went to such ends (World Bank 1998: 19, 21). Aid, then was fungible, suggesting that the
remaining 71 cents of each dollar intended for aid was wasted or misspent or misappropri-
ated. This conclusion, however was not demonstrated in the study. In many cases, perhaps,
recipient nations used the additional funds to support high priority projects that yielded a
satisfactory social return. Serious study of this issue remains to be conducted: one recent
polemical follow-on attempt failed to make a compelling case in support of the “aid has
failed” hypothesis (Easterly 2006; Radelet 2006). In the US strident criticism has come from
the right of the political spectrum, particularly through the Metzler Commission formed by the
US Congress in 1998 to analyze the role of international financial institutions “ especially the
International institutional linkages 585
World Bank and the IMF (Sanford 2002: 747“51). The Commission was hostile to the inter-
national financial institutions seeking either major reductions or the elimination of both the
IMF and the World Bank. The Commission was also hostile to aid, buttressed in its views by
the very critical analysis presented in Assessing Aid. As a result, the US government, adopting
many of the Metzler Commission™s views, had called for the conversion of 50 percent of
the IDA™s funding from loans to grants. This, of course, would eventually end the IDA, as
it currently relies for much of its ongoing financing from the repayment of loans (twenty to
forty years after the loans have been issued). On the other side of the aid debate, Jeffery Sachs
has been extremely influential with both governments and multilateral institutions. Sachs is
the able director of the UN™s Millennium Project. His work with corporations and corporate-
sponsored, aid-oriented foundations illustrates his impressive abilities as a fund raiser. His
eloquent recent book The End of Poverty has been widely read (Sachs 2006). Particularly
valuable are his many ideas on how to address debilitating poverty in Africa with targeted aid
programs. Sachs has no “magic bullet” theory. His goal is not the end of poverty, but rather the
end of extreme poverty. Lifting people above an arbitrary line of $1 or $2 a day in per capita
income, however, will hardly end “poverty” “ except in some statistical sense. Nor will having
$2.01 per day (putting an individual over one of the “lines”) obliterate the need to continue to
devise strategies that will result in meaningful and adequate economic development.
Aid, which had not been much discussed in development economics, became a major area
of dispute after 1997. The Journal of Development Studies devoted an entire issue to the
controversies stirred by Assessing Aid, finding weaknesses in the key econometric studies
that the report was based on. Researchers urged that aid not be restricted to nations that
had embraced neoliberal policies. Rather, aid should be used to build good policies, instead
of restricting aid to nations that had already adjusted their institutions and policies to the
neoliberal model (Hermes and Lesink 2000: 1“15). But, as suddenly as aid was disparaged
in many powerful quarters it was aggressively re-embraced by the World Bank and even the
US government after the UN sponsored the Millennium Summit in 2000. The UN, pushed
into a background position on aid issues, has steadily regained prestige and momentum after
it began publishing the Human Development Index (see Chapter 2) in the early 1990s. Under
Kofi Annan™s leadership as Secretary General of the UN, the industrialized nations signed on
to the Millennium Development Goals in September 2000. To meet the goals “ which include
(1) the eradication of extreme poverty and hunger, (2) the achievement of universal primary
education, and (3) reduction of child mortality rates by two-thirds, all by 2015 “ ODA would
have to roughly triple from its 2000 level to $175 billion a year (in current dollars). Given the
context set by Assessing Aid and the Metzler Commission, the abrupt volte-face regarding aid
policy issues was extreme. Observers attributed the success of the Millennial Conference to
the underlying weakness in the global economy first exhibited with the Asian crisis of 1997
and to the polarizing effects of globalization. The Millennial Conference was subsequently
supported by the 2002 Monterrey (Mexico) Conference sponsored by the UNDP “ where
the US Administration announced that it would raise ODA spending by 50 percent in the
next three years! On the way to the Monterrey Conference, the World Bank issued a staunch
defense of its role as an institution involved in aid assistance, thereby distancing itself from
the paradigm suggested in Assessing Aid.
This dizzying chain of events seems to suggest three things: first, the UN has gained a
new voice, new legitimacy, and new urgency in leading with the Millennium Development
Goals project. Second, the World Bank is now officially supporting the program, claiming
that the “goals have been commonly accepted as a framework for realizing development
progress” (World Bank 2003: 1). Third, the US™s position in favor of converting IDA to grants
586 The Process of Economic Development
as an indirect way to end development aid has undermined its own legitimacy, creating a new
political space for Europe and Japan in the debate over aid (Sanford 2002: 754“7). Aid fatigue
is no more, and the United Nations suggested in 2007 that the rate of growth in aid outlays
(through 2006) indicates that the 2010 target level of ODA of $130 billion will be reached.
Table 17.4 presents a range of data regarding ODA flows of some of the major donor
nations comparing outlays in 1970 with those of 1991, 2000 and 2005 as a share of gross
national product (GNP). Note that while the United States is the second largest donor nation
in absolute size, it is by far the smallest contributor among the wealthy nations when viewed
from the standpoint of the share of ODA to GNP. The UN has set a target of 0.7 percent
of GNP as a goal to be achieved by the donor nations for their aid contributions; all donor
nations fall well below that UN benchmark, as Table 17.4 demonstrates. Indeed, by 2000 the
“aid commitment” level had fallen to only 0.22 percent of GNP “ 33 percent below the level
of 1991, the lowest registered since 1973 (IMF 1996: 1, 7).
When aid is directed to the poorest nations and to the poor in the less-developed nations,
serious difficulties often arise with the process of delivery. This is most painfully obvious in the
case of emergency assistance. Press reports of food piled up at docks in the midst of a famine
are common. Road and rail transport is too often in insufficient supply; the food may have come
from thousands of kilometers, while the distance between the starving and the food supply on
arrival may be only a few kilometers, but it might as well be ten thousand. Maybe it is a case
of roads being destroyed, of bridges gone, or of the government or a tribal leader pilfering the
food for individual profit. Whatever the reason, failure to deliver the aid is the outcome.
In other instances the same problem of an inhibiting institutional structure arises, but in
a more subtle form. Agricultural aid is a good example of this situation, where new tech-
nologies, such as the Green Revolution discussed in Chapter 11, cannot be diffused because
the recipient nation lacks the necessary technically trained cadre of farm advisers who can
communicate with the peasantry and overcome their doubts. Indeed, studies of agricultural
aid in India have shown strongly positive results, only because of a relatively large number
of technically literate individuals who were able to fill the gap between the technology and
knowledge and those who would use the technology. India™s success has rarely been dupli-
cated elsewhere, particularly in Africa. Consequently, it is necessary to recognize, once again,
that a vicious circle of poverty is hard to overcome merely by providing one or only a few of
the necessary ingredients for development. Aid programs that are not well integrated into the


Table 17.4 ODA flows of selected advanced nations
2005 outlays Percentage GNP Per capita

(billions of 1970 1991 2000 2005 1991 2000 2004
US dollars)

13.1 0.23 0.32 102
Japan 0.28 0.28 77 70
US 27.5 0.31 0.17 0.1 44 35 67
0.22
9.9 0.33 0.41 0.36 92 71 91
Germany 0.27
UK 10.8 0.42 0.32 0.32 0.48 99 79 131
10.0 0.46 0.54 0.32 0.47 115 137
France 80

Total or average 106.4 0.33 0.22 0.26* 75 67 91
ODA

Sources: UNDP 1993: 203; 2002: 202; 2006: 343; UN 2006: 343.
* 2004 data.
International institutional linkages 587
wider complex of social institutions within the less-developed nation may succeed in spite of
the odds against them, but the probability of success is typically low. This lack of an absorp-
tive capacity for aid is perhaps obvious enough to students of economic development, but it
is too often overlooked in the broad, politically charged, debates surrounding aid giving.


Donor bias
Most aid is disbursed via bilateral programs “ 77 percent of all Development Assistance from
the OECD nations, or $82 billion in 2005. Much bilateral aid reflects the biases of the donor
nation. Donor bias arises from the following considerations.

Commercial interests
Most foreign aid is tied, meaning that a proportion of the aid funds must be spent in the donor
nation. For loans and grants this means that up to 75 percent of the inputs for the project
(machinery and equipment, materials and supplies) are to be purchased from suppliers in the
donor nation. This often results in more capital-intensive projects than necessary.
In the area of technical assistance it is common to require 100 percent from the donor
nation. Tied aid has been found to raise the cost of projects in recipient nations by 15“30
percent above an identical project wherein the inputs and technical assistance were acquired
from the most competitive suppliers. Sometimes the pressure to accept tied aid is more
subtle, amounting to strategic non-lending for nations which have previously received aid,
but failed to buy their inputs primarily from the donor nation. In other instances, commercial
interests shift the focus from product sales to the maintenance of prices and production; this
is particularly the case with food aid, which pushes surplus agricultural commodities off the
domestic and global market into non-market aid channels, thus helping to keep market prices
higher in the donor nation than they might otherwise be. Unfortunately, food aid can under-
mine production by local producers of competing commodities in the aid-receiving nation by
diverting local demand to the “dumped” food-aid imports. No one can compete against food
products which are either given away or sold below their cost of production. This process
can force many local producers from the market, perhaps contributing to a dependence on
imported food staples from the developed countries.
Figure 17.3 illustrates one attempt to take into account the quality of foreign aid. The index
reduces the contribution of nations which require that aid be tied. It also expresses foreign
aid as an annual net expenditure, reducing gross aid outlays by the amount a nation receives
in repayment on previous aid loans. Further, donor nations that lend to well-off nations or
corrupt regimes have their aid contribution adjusted downward.13 In effect, the index asserts
that $US 1 of aid from Denmark or Sweden is worth roughly $5 from Japan. Not only are
these nations (along with Norway and the Netherlands) able to deliver high-quality aid, they
are also much more committed to high levels of aid: their average aid outlay as a percentage
of GNP in 2005 was 0.87 “ more than 80 percent higher than the UK, the most generous
nation of the “big five” presented in Table 17.4.


Spheres of influence
Most of the large donor nations distribute their aid with a high emphasis on maintaining posi-
tive relationships with former colonial regions and/or regions where they have historically
maintained a degree of political and economic hegemony. Another consideration may be
588 The Process of Economic Development
15




10




5
Denmark
Sweden
Norway
Netherlands
Ireland
Belgium
Switzerland
United Kingdom
France
Finland
Canada
Germany
Greece
Austria
Australia
Spain
Portugal
New Zealand
United States
Italy
Japan
Figure 17.3 A bilateral aid quality index, 2006.
Source: Center for Global Development 2007.


national strategic leverage in a region. Such considerations largely explain why egypt was
the number one US aid recipient in 1991; the United States has based much of its Middle
East strategy on maintaining Egypt as a friendly Arab nation, leading it to contribute most of
the $4.6 billion in ODA funds received by this nation. This also served to explain why Iraq
and Afghanistan were the number one and number two aid recipients in 2004.

Procedural imperatives
In many instances, aid programs are allocated for one or only a few years. Yet in order to
foster development, a multi-year aid commitment would be necessary. It may be procedur-
ally necessary to limit aid programs as a result of budgetary considerations, or changes in
political rule in the donor nation, leaving the recipient nation without the follow-through to
make a project viable.

Ideological imperatives
When ideology drives the aid process, as it often does, the neediest nations and the best
projects may be overlooked, or under-funded. Since the late 1970s, aid agencies have, for
the most part, emphasized the desirability of private-sector development, a reflection of the
dominance of neoliberal thinking. Nations which have resisted this orientation have often
found that aid funds are difficult to obtain.

Aid and the multilaterals
While most aid is bilateral (77 percent in 2005), the largest donor nations generally work
closely with the IMF and the World Bank. This has been even more the case since the Poverty
International institutional linkages 589
Reduction Strategy Papers have become the centerpiece for concessional lending since 2002.
Nations that are deemed to be unwilling to cooperate with the Fund and the World Bank are
often considered to be unworthy of bilateral aid. Thus, in the1980s when the Bank and then
the Fund placed such emphasis on structural adjustment and neoliberal economic doctrine,
the aid agencies and governments generally followed the lead of the multilaterals. This new
tendency toward a three-way interlocking of the IMF, the World Bank, and bilateral aid is
explained by IMF Deputy Director Mark Allen:

ODA is increasingly channeled to countries with IMF- and Bank-supported adjustment
programs. The donor community finds that the existence of such programs gives an
assurance that aid will be invested more productively. If we compare 1990“3 with the
previous three years, nominal ODA to countries with IMF-supported programs increased
by 35 percent, while that for countries without such programs rose by only 6 percent.
Thus, continued financing from the IMF and the Bank is a catalyst for considerably large
ODA flows to these countries.
(IMF 1995a: 339)

Since neoliberal economic advice often resulted in a reduction of programs and expendi-
ture which were most likely to reach the neediest, aid often became a supplement to structural
adjustment, attempting to fill in some of the gaps in the social fabric created by the SALs.
The UN Economic Commission for Latin America and the Caribbean conducted a study of
income distribution changes in the course of the 1980s when structural adjustment lending
was first introduced; all but one of the eight nations studied experienced strong shifts toward
greater income inequality. Only two countries stood out as exceptions; Uruguay™s income
distribution was essentially unchanged, while Colombia™s improved (ECLAC 1994: 1). Absent
from the study was Mexico, the nation with the second-largest population in Latin America.
It too experienced a dramatic shift toward even greater income inequality. Mexico, it will
be remembered, was the World Bank™s largest single experiment with SAL programs. With
Mexico™s recovery after the peso crisis of 1995 that nation was held up as a shining example
of the new era of the 1990s: “Trade, not Aid!” Yet, predictably, the World Bank/IMF/US
“Washington Consensus” view on Mexico crumbled along with the Mexican economy in late
2000. The Mexican case had been taken as proof of the benefits of unrestrained opening to
trade and investment. But this shallow perspective was not really based in the realities of the
Mexican economy which had long exhibited deep pathological traits before the export-led
boom evaporated in late 2000 (Cypher 2001: 11“37).


Conclusion
Enjoying the benefits of the commodities boom from 2003 through 2007, many developing
nations actively sought to repay their debts to the IMF and the World Bank. IMF credits and
loans outstanding are at levels not seen since the early 1970s (with nearly one-half extended
to one nation). The World Bank™s gross lending through the IBRD was lower in 2007 than it
was in the early 1990s. For the Bretton Woods institutions combined net lending was nega-
tive. Most activity for the multilateral institutions has been focused on the Poverty Reduction
Strategy approach which has attempted to combine the short-term stabilization focus of the
IMF with the “capital for growth” approach of the World Bank through the IDA. The Poverty
Reduction Strategy approach has also brought bilateral lenders and NGOs into a new policy
initiative which has quietly deepened and broadened the reach of “Washington Consensus,”
590 The Process of Economic Development
structural adjustment programs in nearly seventy poor nations. These programs, for the most
part, address poverty in their titles, but not in the content of their policy-based lending. The
Poverty Reduction Strategy approach is one that highlights high economic growth. Growth
per se will reduce poverty. But this will occur as a by-product, not as the central thrust of
growth. Most importantly, growth per se will leave those who are isolated from the acceler-
ated economic processes of a rapidly expanding economy with little or no benefit. Landless
and subsistence farmers, the aged, poor children, the sick, and the disabled will not be direct
beneficiaries of the growth process. Public goods are not automatically funded nor are exter-
nalities necessarily addressed when an economy expands. The Poverty Reduction Strategy
approach is based on the novel idea of pro-poor growth as the probable outcome of high
economic growth in poor nations. Growth biased toward the lower third or fifty percent of
the income distribution is an exotic idea with little to no empirical support. Failing this, the
Poverty Reduction Strategy approach is to be amended with targeted safety-net programs.
There has been no independent assessment of the massive Poverty Reduction Strategy loans
from the IDA, the IMF, the bilateral lenders, and the NGOs. Nor is there evidence of the
creation of adequate safety-net programs “ an idea that works at cross-purpose with a central
thrust of the Poverty Reduction Strategy approach which is to reduce the role of the state to a
minimum. Yet by 2003 the situation regarding aid and the multilaterals had changed funda-
mentally “ the World Bank was touting aid as the chief force behind the twenty-year increase
in life expectancy in poor nations since 1960, while cutting their illiteracy rate by 50 percent
(Kahn 2002: W1, 7). At this level the “Washington Consensus” was widely disparaged, the
critical thrust of Assessing Aid was no longer a touchstone for a radical policy shift, and
the Millennium Development Goals suggested the possibility that the UN™s “Sustainable
Human Development approach” could move into a position of dominance in development
policy. By 2007 bilateral ODA aid had reached the record level of $106.4 billion. In 2006
the EU was expected to have 0.43 percent of its gross national income devoted to aid. The
United Nations anticipates that the Development Assistance Countries of the OECD will
reach their goal of raising development assistance to $130 billion per year in 2010 “ a
step largely consistent with the ambitious demands of the Millennium Development Goals.
These are positive steps that should be respected. Nonetheless, it is well to recall that this
chapter began with an attempt to contextualize aid: nations must, in the final analysis, rely
upon their own capabilities to mount a process of sustainable development. Aid may help
push a nation over crucial thresholds, if it is used strategically to meet the objectives of the
developing nation.
Thus, at one and the same time, the Washington Consensus approach seems to be gaining
ground and losing ground. But, much more threatening to the neoliberal Washington Consensus
approach is the possible rise of what Charles Gore termed the “Southern Consensus.” Gore
envisioned a possible new development paradigm based on the understanding of the process
of development as experienced in East Asia and upon the critical analytical work of the UN™s
research centers such as CEPAL (ECLAC) and UNCTAD. This neostructural consensus
would call for the strategic integration of developing nations with the world economy based
on a carefully sequenced opening of the trade sector. Strategic integration would call for
limited capital account liberalization and safeguards against “hot money” flight from devel-
oping nations leading to massive currency devaluations. Under this approach inbound FDI
would be constrained to activities that actually contribute to building the productive base
of the developing nation. Dynamic comparative advantage would form the basis of inte-
gration, while trade policy would emphasize improvements in supply capacity, education
and training of the labor force, and independent technological capabilities. Policy-making
International institutional linkages 591
would be embedded, while capable policy-makers would formulate dynamic policy incen-
tives based on performance criteria for national firms (Gore 2000: 789“804). Which way
will development economics go now? Toward (1) an entrenched neoliberalism, (2) a “growth
with equity” approach based in Sustainable Human Development, meeting the Millennium
Development Goals, or (3) toward a new “Southern Consensus”? Will the nations of the
South seize the golden opportunity of the commodities boom of the twenty-first century
to redirect their economic surplus toward an aggressive project of national development?
Unfortunately, there are very few signs that such a bold initiative is under way. Perhaps the
near future will hold a bit of each approach “ and the debates over development economics
will continue.


Questions and exercises
1 You have been selected as the chief negotiator to represent your country, which is facing
an economic crisis and must seek assistance from the IMF. You must draw up a draft
version of a letter of intent and a secret document which will represent the bargaining
position of your nation as negotiations open with the IMF. First, describe the economic
conditions which have created a crisis for your nation. Second, explain the “policy
actions” which will be undertaken by government to improve the functioning of the
economy during the program period. Third, what “prior actions” is your government
willing to undertake in order to obtain an IMF stand-by loan? How does your position
differ from that which the IMF will probably present? How will you attempt to bargain
with the IMF in order that your nation is adequately represented?
2 “The Fund and the World Bank tend to assume that endogenous, policy-related errors lie
at the base of a nation™s difficulties. In fact, exogenous difficulties are usually more of
a factor. Consequently, adjustment programs fail to address the causes of an economic
crisis. Such problems are invariably brought on by structural problems.” Discuss this
statement. Do you agree? Why, or why not?
3 Based on your reading of this chapter, identify five major public misconceptions
regarding foreign aid.
4 How might a typical IMF stand-by program, or a typical World Bank structural adjust-
ment loan, contradict some or all of the basic objectives of “sustainability”? Imagine
that this SAL is applied to a nation which has little industrial or manufacturing capa-
bility. How might a structural adjustment loan lead to new burdens being placed upon
the environment of the nation?
5 “Governments often achieve objectives they have long held, but have been unable to
achieve, while operating under an IMF or a World Bank adjustment program.” Why
might this be so?
6 Go to the World Bank™s website and select a nation undergoing a PRSP. After reading
the nation™s PRSP, evaluate it in terms of the critique offered by those who are convinced
that the PRSP is an inadequate strategy for the development of poor nations. Do you find
reasons to dissent from the view of the critics?
7 “Aid has been a failure, a naïve dream.” Evaluate this assertion in light of the material
presented in this chapter. Can you make a convincing case in support of this statement?
8 Why are small northern European nations the largest aid contributors with the highest
ratings in terms of the quality of their aid programs?
9 Find an NGO involved with aid on the web. To what degree do the policies and programs
of this NGO conform to the material presented in this chapter?
592 The Process of Economic Development
10 Can you find evidence of “pro-poor growth” in a nation undertaking a PRSP, or in any
other nation? If so, what conditions were necessary to produce this outcome?
11 Has the Washington Consensus gone “underground” or has it been essentially repudiated?

Notes
1 Foreign aid is defined as the receipt of concessional lending and grant funds, as well as technical
assistance. “Concessional lending” involves loans that are received at a discount of 25 percent
or more below the normal market rate of interest. Normally, a concessional loan will also have a
longer-than-average repayment period, with a “grace” period of several years when no payment
of interest or principal is required. A “grant” is aid received which never requires repayment.
“Technical assistance” constitutes advice and guidance, as well as training, offered by a donor
and received by a developing nation. Most foreign aid is bilateral, that is, direct donor-to-recipient
assistance. But some foreign aid comes via the World Bank and the regional multilateral develop-
ment banks, such as the InterAmerican Development Bank. A third source of foreign aid funds
comes from the non-governmental organizations (NGOs), such as Oxfam and others. The NGOs
are of growing importance in the distribution of aid; in 1990, they channeled $7.2 billion into the
less-developing nations, of which $2.2 billion came from donor governments, and the rest came
from funds directly raised by the NGOs.
2 A third pillar of the Bretton Woods conference, the World Trade Organization (WTO), designed
to mediate trade disputes and to eliminate trade wars and reduce tariffs among nations, was not
ultimately approved. Instead, a looser organization, known as the General Agreement on Tariffs
and Trade (GATT), became the means by which trade and tariff disputes were resolved and through
which freer trade has been achieved since 1945. Only in 1995 was the WTO finally reborn as a
vehicle for managing international trade disputes, following a period in which the world economy
had passed through more than a decade of crisis from the debt debacle of the 1980s to the global
slow-down of the early 1990s.
3 When members borrow hard currencies under stand-by arrangements, they can have access to 100
percent of their quotas. In addition, such members may be able to access other so-called “Facili-
ties” of the Fund, such that during a three-year period, they could, at a maximum, have access to an
amount equivalent to 600 percent of their subscribed quota, through stand-by drawings and special
facility loans.
4 It may not, however, be a simple task for a less-developed nation with limited resources and few
trained professionals to successfully bargain with the Fund; the IMF has vast resources, which
include a staff of 2,600 highly trained professionals, who endeavor to impose the Fund™s preferred
package of conditions, if possible.
5 “Hard” currencies are those that are readily convertible into other currencies and which are rela-
tively stable in value over time. As a rule, the US dollar and the pound sterling meet these general
conditions, but preference for the strongest, or hardest, currencies is subject to change, with the
Japanese yen and the German mark being held in high regard in the early 1990s. “Soft” currencies
are more volatile in value and are potentially more difficult to convert into hard currencies; in other
words, with soft currencies, there is a risk of devaluation which is carried by the holder of such
currencies.
6 The continued importance of primary product exports reflects the difficulty, or unwillingness, of
less-developed nations to transform their productive and export structures more toward secondary
and tertiary commodities. You will remember from Chapter 6 the terms of trade problems that
being a primary product exporter and a manufactured good importer can impose on less-developed
nations.

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