Reaganism and Rollback:
Harnessing the World Bank

by Walden Bello

Aid policy became the key weapon in the Reagan administration's disciplining of the South. For most Reaganites, there appeared to be a consensus that aid was mainly a political instrument, one that should be deployed primarily to bolster the position of the US in international power politics. Indeed, over the Reagan years, non-military bilateral aid tied to security goals grew in real terms by over 80 per cent, while development assistance and food aid declined. The top five recipients of 'Economic Support Funds' between 1981 and 1986 were all countries that were regarded as strategic to the US in either the anti-communist struggle (El Salvador, Pakistan, and Turkey) or the anti-Third World campaign (Israel, Egypt).

Bilateral assistance disbursed by the Agency for International Development, it was argued, should be conditioned on the adoption of policies which promoted the free market and channeled to support the growth of private enterprises in the Third World. Some argued for reducing the US government's role in humanitarian assistance and leaving this task largely to private entities, because 'judgments as to moral responsibility for the world's poor are best left to private individuals and organizations, not government officials.'

US aid channeled through multilateral organizations, which accounted for about a fifth of all US aid disbursements by the late 1970s, was the most controversial proposal. Some Reaganites proposed that it should be phased out, or at the least not increased, because 'the more distant the relationship between the supplier of funds and their user, the more likely that they will be used ineffectively.' Thus the World Bank, with its US $12 billion budget, became the principal focus of the Reaganites' program for putting the South in its place. While some would have been happy to withhold US funds from an institution they regarded as a key promoter of statist economic policies in the Third World, more pragmatic conservatives in the Treasury Department, who oversaw Bank operations, came to view the Bank as a useful, if not central, instrument in their effort to discipline the Third World. Reading the writing on the wall, Robert McNamara, the classical containment liberal, resigned in 1981. With McNamara gone and his key aides (including the Pakistani Mahbub Ul-Haq, head of the elite Planning and Program Review Department and the brains behind the Bank's anti-poverty thrust) following him, the Bank's 'basic needs' program withered on the vine. In McNamara's place the administration, using the time-honored US 'right' to fill the Bank's top job with an American citizen, nominated a pliable personality, A.W. ('Tom') Clausen, the former head of the Bank of America. And, in the mid-eighties, the post was filled by an even more congenial sort - ex-Republican congressman Barber Conable. The way was clear for the Reaganites to mold the 6,000-person agency to push their rollback agenda.

The first salvo in this campaign was the decision to cut the US' promised contribution to the 1982 replenishment of the International Development Association (IDA), the Bank's soft-loan window, by US $300 million. This led the other advanced countries to cut their own contributions, resulting in the soft-loan agency receiving $1 billion less than it originally expected. Since IDA loans were granted on concessional terms to the poorest countries, - for example, India, other Southeast Asian countries, and African countries - the move served as a forceful signal from the Reaganites that the US and its allies were 'cutting off the dole.' This was the first step in a process of changing the criterion for the allocation of IDA funds from countries that needed them because they were defined as poor (having a per capita income of US $400 or less), to those that were regarded as 'making the greatest efforts to restructure their economies.'

Selling SALs

Then, the US pushed the Bank to shift more of its resources from traditional project lending to 'structural adjustment' lending. Formulated in the last years of the McNamara era, structural adjustment loans (SALs) were more systematically used by the Reagan Treasury Department to blast open Third World economies. SALs were quick-disbursing loans which could be used to relieve a country's balance-of-payments deficit or to repay interest falling due to private banks. But to receive SALs from either the World Bank or the IMF, a government had to agree to undergo a program of thoroughgoing structural adjustment (SAP) which was ostensibly designed to make its economy more efficient and capable of sustained growth.

The conditions usually attached to SALs and their rationale were the following: radically reducing government spending, in order to control inflation and reduce the demand for capital inflows from abroad, a measure that in practice translated into cutting spending in health, education, and welfare; cutting wages or severely constraining their rise to reduce inflation and make exports more competitive; liberalizing imports to make local industry more efficient and instituting incentives for producing for export markets, which were seen both as a source of much-needed foreign exchange and as a more dynamic source of growth than the domestic market; removing restrictions on foreign investment in industry and financial services to make the local production of goods and delivery of services more efficient, owing to the presence of foreign competition; devaluing the local currency relative to hard currencies like the dollar in order to make exports more competitive; and privatizing state enterprises and embarking on radical deregulation in order to promote allocation of resources by the market instead of by government decree.

Acceptance of these conditions was not enough to release a SAL. The recipient had to agree to the Bank and/or the IMF strictly monitoring its compliance with 'targets' agreed upon with Bank technocrats. SALs were released in groups, so that compliance released a group while failure to live up to targets would delay, if not foreclose, further disbursement of loan funds. Since the structural adjustment measures covered so many dimensions of macroeconomic policy, agreeing to a SAL was virtually turning over control of a country's economy to the World Bank. Indeed, the former executive director for Canada at the Bank testified that macropolicy advice incorporated in the SALs touches the very core of the development policy process . . . The rate and manner of growth and related societal objectives of the recipient countries are the very stuff of that elusive but important concept called sovereignty.

While World Bank economists tried to sell the SAL as necessary to promote efficiency and sustained growth, Third World leaders accurately perceived from the beginning that the strategic target of structural adjustment programs was the mechanism which the Reaganites had identified as the instrument that made the exercise of economic sovereignty possible and effective -- the Third World state.

The Debt Crisis and the Globalization of adjustment

It should come as no surprise that few governments were eager to receive SALs initially. But with the eruption of the Third World debt crisis in mid-1982, a grand opportunity was presented to the Reaganite agenda of resubordinating the South via structural adjustment. As more and more Third World countries ran into greater difficulties servicing the huge loans made to them by Northern banks in the 1970s, the US and the Bretton Woods institutions, John Sheahan notes, took advantage of 'this period of financial strain to insist that debtor countries remove the government from the economy as the price of getting credit

In accordance with guidelines set by the US Treasury Department, the US private banks invariably made World Bank consent a prerequisite for debt rescheduling. And for the debtor countries, the World Bank's seal of approval and its cash, which they desperately needed to make interest payments to the private banks, came dearly. As one Treasury official involved in the debt negotiations with Mexico put it, 'Only countries that commit to market-oriented economic reform will get the [World Bank's] help.'

Structural adjustment was the centerpiece of the Baker Plan, which the Reagan administration proclaimed during the IMF-World Bank meeting in Seoul in 1985. World Bank and IMF funds to assist the indebted countries make their interest payments were promised on condition that they adopted 'economic policies along Reaganomic lines - privatization of state enterprises, an end to subsidies, opening the economies to foreign investment.' In the debtors' view, notes Lissakers, 'the proposed reforms ... went much further than the standard IMF nostrums on devaluation, reductions in public-sector borrowing requirement and control over the money supply, and decontrol of wages and prices, ' and were tantamount to 'putting the national patrimony on the block.' They realized that structural adjustment was, as Sheahan describes it, a program that 'was more extreme than anything that could have been seriously considered at the beginning of the 1960s.'

But they had no choice but to capitulate. By the beginning of 1986, 12 of the 15 debtors designated by then secretary of the Treasury James Baker as top-priority debtors - including Brazil, Mexico, Argentina, and the Philippines - had agreed to SAPs. From 3 per cent of total World Bank lending in 1981, structural adjustment credits rose to 19 per cent in 1986. Five years later, the figure was 25 per cent. By the end of 1992, about 267 SALs had been approved.

Many of the programs that came with these loans were coordinated with the IMF. Originally, IMF 'standby' programs were designed as short-term programs to rectify a country's external account imbalances by forcing the country to eliminate its budget deficit, restrain its money supply, and devalue its currency. However, IMF technocrats came to the opinion that balance-of-payments problems would continue to recur unless more strategic structural reforms designed to expand the role of the market, reduce the role of the state, and integrate a country more fully into the world economy were undertaken. Consequently, IMF standby programs were either extended and designed to incorporate structural reforms as a condition for the Fund's balance-of-payments aid, or they were closely coordinated with the Bank's structural adjustment efforts.

Thus, whereas in the previous division of labor between the two institutions the World Bank was supposed to promote growth and the IMF was expected to monitor financial restraint, their roles now became indistinguishable as both became the enforcers of the North's economic rollback strategy. The unification of the IMF and World Bank treatments came to be known to its patients as 'shock therapy,' or the simultaneous application of short-term stabilization measures and more long-term structural reforms. It was not without reason that adjusting countries came to label the two institutions with derision as the 'Bretton Woods twins.'

Cooperation between the Bank and the Fund was brought to a higher level with the establishment in 1988 of the Structural Adjustment Facility (SAF), set up to coordinate closely the two institutions' surveillance and enforcement activities, especially in sub-Saharan Africa. Out of a total of 47 countries in that region, 36 have undergone SAPs administered by the Bank or the Fund. Since most of these countries have very weak political structures, under the guise of providing aid an IMF-World Bank condominium has been imposed over much of sub-Saharan Africa.

Indeed, with over 70 Third World countries submitting to IMF and World Bank programs in the 1980s, stabilization, structural adjustment, and shock therapy managed from distant Washington became the common condition of the South in that decade. The common objective was the dismantling of the Third World state as an agent of economic development. In 1988, a survey of SAPs carried out by the United Nations Commission for Africa concluded that the essence of the SAPs was the 'reduction/removal of direct state intervention in the productive and distributive sectors of the economy.' Similarly, a retrospective look at the decade of adjustment in a book published by the Inter-American Development Bank in 1992 identified the removal of the state from economic activity as the centerpiece of the ideological perspective that guided the structural reforms of the 1980s:

In this school of thought, the history of Latin America in the post-war period is the history of a collective error in terms of the economic course chosen, and of the design of the accompanying institutions. To correct that error, the long period during which the public sector has held the center of the economic stage has to be brought to an end, and a radical remedy applied: the withdrawal of the producer State and assisted capitalism, the limiting of the State's responsibilities to its constitutional commitments, a return to the market for the supply of goods and services, and the removal of obstacles to the emergence of an independent entrepreneurial class.

from the book
Dark Victory by Walden Bello

published by
Institute for Food and Development Policy (Food First)
398 60th Street, Oakland, CA 94618

50 Years Is Enough

IMF, World Bank, Structural Adjustment