By Anis Chowdhury, Adjunct Professor at Western Sydney University & University of New South Wales (Australia), who has held senior United Nations positions in New York and Bangkok, and Jomo Kwame Sundaram, a former economics professor, who was Assistant Director-General for Economic and Social Development, Food and Agriculture Organization, and who received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007. Originally published by Inter Press Service
According to their own internal evaluations, both the World Bank (WB) and the International Monetary Fund (IMF) have huge credibility deficits due to the policy conditionalities and advice they have dispensed to developing countries in recent decades.
Washington Consensus
Taking advantage of debt distress in many developing countries early in the 1980s, the WB championed neoliberal reforms, telling countries to ‘privatize, liberalize and globalize’. The IMF added ‘stabilization’ – primarily cutting government expenditure to contain inflation and balance of payments deficits – to the list of conditions for countries to qualify for BWI financial resources.
Accepting these packages of WB advice for economic restructuring, known as ‘structural adjustment programs’ (SAPs), became a condition for access to concessional credit. These claimed to reflect agreement on ‘good’ and necessary policies between the two Washington based BWIs and the US Treasury Department, later dubbed the ‘Washington Consensus’.
WB research later admitted the failure of IMF-WB inspired policy reforms, acknowledging that “…the expected growth benefits failed to materialize, at least to the extent that many observers had forecast. In addition, a series of financial crises severely depressed growth and worsened poverty… both slow growth and multiple crises were symptoms of deficiencies in the design and execution of the … reform strategies that were adopted in the 1990s…”
BWIs’ Lost Decades
Assessing SAPs in Latin America, where they were first imposed, Sebastian Edwards concluded, “The adjustment process has been quite costly, generating drastic declines in real income and important increases in unemployment. In fact, … in a number of Latin American countries in 1986 real per capita GDP was below its 1970 level!”
William Easterly, then a senior WB economist, noted that during 1960-1979, median per capita income growth in developing countries was 2.5 per cent, compared to zero per cent during 1980-1998. With SAPs including trade liberalization, Africa de-industrialized and turned from a food exporter into a net food importer.
By advising developing countries to liberalize their capital account and financial market, the BWIs also advanced the interests of big finance. Professor Jagdish Bhagwati argued that this ‘Wall Street-Treasury complex’ was responsible for the 1997-1998 Asian crisis. The WB and the IMF have provided credit as a means of influencing government policies.
Worsening Financial Crises
Evaluating the IMF’s role in two 1997-1998 Asian crisis countries, namely Indonesia and South Korea, its Independent Evaluation Office (IEO) observed that Fund surveillance failed to ‘adequately appreciate’ the implications of their financial sector weaknesses and vulnerabilities. The IMF also mishandled the crises, deepening some of their worse consequences.
Raghuram Rajan, then IMF chief economist, is often credited with having warned of the imminence of the 2008-2009 global financial crisis before he left the Fund. If so, the IMF ignored his advice, failing to alert its membership of the coming 2008-2009 financial crisis, leading to the Great Recession and its ongoing aftermath.
In July 2007, a month before the first tremors of the US ‘sub-prime’ mortgage crisis, the IMF updated its World Economic Outlook, claiming: “The strong global expansion is continuing, and projections for global growth in both 2007 and 2008 have been revised (upwards)”!
The IEO attributed IMF inability to recognize risks to “a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches, [w]eak internal governance, lack of incentives to work across units and raise contrarian views…”
Beware BWI Policy Advice
The IEO found member countries wary of IMF involvement in policy advice due to its “inadequate knowledge of country-specific circumstances, frequent changes of mission chiefs and teams, a perceived lack of even-handedness… and insufficient use of cross-country perspectives or cross-cutting analysis.”
The IMF also displayed double standards, exposing its developed country and other biases. After then UK Prime Minister Gordon Brown raised over US$800 billion in additional IMF funding at the London G20 summit in April 2009, Eurozone bail-outs accounted for four-fifths of total IMF lending between 2011 and 2014, even though the currency bloc had the means to look after itself, with its lower aggregate debt ratio than in the US, the UK and Japan.
Greece, Ireland and Portugal were allowed to borrow twenty times their quotas, thrice the normal limit; such generosity has never been available to Asian, Latin American and African countries in trouble. For the global South, the IMF has imposed fiscal austerity, causing large-scale destitution, distress and malnutrition, according to the Lancet medical journal.
Meanwhile, even The Economist, usually a neoliberal cheerleader, pointed out several flaws of the WB’s most influential publication, the Doing Business Report (DBR). It considered DBR ranking unreliable as countries might amend regulations, as urged by the BWIs, only to improve their rankings to impress foreign investors and donors.
Dubious Track Record
After two decades of IMF-WB promoted fiscal contraction, liberalization and privatization, then WB President James Wolfensohn acknowledged, “… if we take a closer look, we see something alarming. In developing countries, excluding China, at least 100 million more people are living in poverty today than a decade ago. And the gap between rich and poor yawns wider.”
China, which has contributed most to reducing global poverty in recent decades, has gone its own way during this period, constantly revising development policies to accelerate economic growth and social progress, instead of simply implementing Washington Consensus prescriptions.
More recently, especially under its last President Jim Yong Kim, the WB has reinvented itself yet again, from a creditor for major development projects, to a broker for financialized private sector investment, a “creature of Wall Street”, according to The New York Times. Kim left the Bank early in his second term to join a private investment firm figuring in its proposed new reorientation.
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Of course. It’s lamentable that this should be news to anyone at this stage. To obtain wider historical background for these events it’s important to read books like Vijay Prashad’s The Darker Nations, and to understand what an extraordinary threat events like the Bandung Conference presented to the West and U.S. (John Perkins’s Confessions of an Economic Hitman describes the mechanics of this oppression from an insider/Anglo point of view, but that frame is more familiar to regulars here.) We’ve spent the last 60 years squashing one beautiful emerging mildly socialist national project after another, and we’re hardly done yet.
Well said, Mattski. One can’t help think that the Washington Consensus was not naive and just plainly mistaken in their evaluations. It had to be intentionally orchestrated policies to engage in neo-financial colonization of third world economies for profit of the haves. Why we allow self-serving cretins like this dictate how our world is run is a question we need to answer, particularmy if we want humanity to continue on this planet. A new world is really possible.
In the very instant the WWII ended the seeds for the following wars were planted. We are now fertilizing and watering them.
The IMF’s research side warned decades ago that these neoliberal policies did not work. Their findings were widely known, else how would I know the names Olivier Blanchard and Raghuram Rajan? Yet the executive side has never changed the demands they make? It should have been clear to everybody for decades that the executive side had different goals than what the research side was studying. There’s even a book out called Confessions of a Financial Hitman that explains everything clearly.
Before monetarists took over and Keynesianism was sent to the scrapheap, average per capita GDP growth in the OECD was 3.5%, the advent of neoliberalism slashed that growth down to 2% per year. The picture is even worse for the global south with growth rates of 3.2% in the 60s and 70s collapsing to 0.7% after the BWI led imposition of free market principles, with Sub-Saharan Africa, where average real income is only now slowly recovering to 1970s levels, the worst affected.
The evidence is clear and compelling, the historical record is unambiguous, neoliberalism has failed. How much more lipstick can the establishment, through its vast network of think tanks, foundations, captured journalists etc, put on this pig before it collapses under its own weight?
As evidenced by the fall of the Rand from 1 per US dollar, to 14.
ZA used to have a policy of “Local Manufacture,” more or less centered on the Reef, but I believe the Neo-Liberal order decided that was inefficient.
Are Cars still built in PE?
Well, the rand kicked off the day down to 15.25 against the USD so the commodity exporters are happy right now. VW and Mercedes-Benz still build cars in the Eastern Cape yes, BMW are the only ones as far as I know that are still manufacturing in the reef. Toyota are in Natal
““… if we take a closer look, we see something alarming. In developing countries, excluding China, at least 100 million more people are living in poverty today than a decade ago. And the gap between rich and poor yawns wider.””
…so much for the trope that we are raising the living standards in developing countries as we lower our own…
““The adjustment process has been quite costly, generating drastic declines in real income and important increases in unemployment. In fact, … in a number of Latin American countries in 1986 real per capita GDP was below its 1970 level!””
I read that as looting.
Indeed. Never mind what was claimed on the bottle — the contents were an elixir for local elites, Western bankers and their shareholders whilst poison for the local poor.
20th Century European imperialists never had it so good …
They try to make it seem complicated. But the essence of this global economic cluster &^%$ is this:
Every country wants every OTHER country to raise living standards faster for the benefit of their elite corporations, but they all were sucked into a system that says “no, you can’t raise raise the living standards of the people in your country.” WTF did they think was going to happen with every country trying to pay slave wages????
Huh, I was writing a novel in the 1990’s one aspect of which was the role of the WB/IMF in acting as economic shock troops for the wealthy elites, i.e. they were not friends. I thought this was common knowledge even back then.
I thought it was common knowledge way back when as well. And I thought even the World Bank and IMF had recently been admitting to “mistakes” (mistakes that persisted over decades, so I don’t think they were mistakes so much as policy).
So after decades of these bad economic ideas, they wonder where all the foreign demand is located and we get proposals like the one mentioned in the water cooler:
“Forget Tariffs. Here’s a Better Way to Close the Trade Gap” [Barron’s]. “But bipartisan legislation introduced last week by Sens. Tammy Baldwin (D., Wis.) and Josh Hawley (R., Mo.) could help. For nearly four decades, Americans have been consistently spending more than they earn. This is not because Americans have been living large—average spending on consumption and investment grew at the same stable rate from 1947 through 2006—but because people in the rest of the world have been living below their means. Foreigners have been consuming less than they produce and dumping the excess into the U.S. market, displacing American output…”
Doesn’t look like any consumers have been living above or below their means, they’ve been trying to navigate decades upon decades of bad economic policy.
It is almost as if Neo Liberalism was designed to both crush workers, keep the poor impoverished, and enrich the 0.1%
That would be a ridiculous conspiracy theory, and cannot possibly be true.
Pretty much the story of how the Nigerian economy was ruined in the 1980s, a quagmire we still cannot get out of
I lived in Nigeria as a Child, before the Oil was discovered in the Niger Delta. I liked it. But, that was then, and I was a child.
Lagos has grown substantially since then.
Oil is a curse. Oil companies appear to go hand in hand with corruption.