Trying to Fit Square Pegs into Round Holes Meta- theory and the IMF's

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Trying to Fit Square Pegs into Round Holes Meta- theory and the IMF's Powered By Docstoc
					            Trying to Fit Square Pegs into Round Holes: Meta-
            theory and the IMF’s Structural Adjustment Policy
                                 By: Ian Morrison B.A.


Abstract:

This paper attempts to use the methodological framework that has been advanced by

postmodernist critics of Marxist development theory in order to demonstrate the

problematic nature the International Monetary Fund’s (IMF) Structural Adjustment

Programs (SAPs), and the necessity of the adoption of a policy that examines and

addresses the unique circumstances of each country and region. The analysis will begin

with a discussion of the methodological weaknesses inherent in meta-theoretical

approaches. Following this, economic, and socio-political factors that require distinct

policy responses will be discussed, with the use of examples including sub-Saharan

Africa, and the Asian Tigers. These examinations will demonstrate that IMF Structural

Adjustment policy, as a meta-theory, fails to address the particularities of specific

economic crises, and therefore, must be altered.

Introduction

In the early 1980s “a gale of radical conservative rhetoric blew through” (Toye, 1993: 1)

the world’s centres of power, toppling the post-war Keynesian consensus of embedded

liberalism. Neo-classical economic theories that had been advanced in the 1970s became

generally accepted within the OECD countries and the Bretton Woods institutions.

(Martinussen, 1997: 260)        The perception of the failure of import-substitution

development models, and the welfare state, due to the debt crisis and recession of the first

years of the 1980s led to the election of neo-liberal regimes in America, Britain, and
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West Germany. (Martinussen, 1997: 260) Not only did the effects of this theoretical

alteration resound in the industrialised world, but they also resulted in what John Toye

deemed, “a counter-revolution in development theory and policy.”(Toye, 1993: 1) In

1986, the IMF followed the lead of the World Bank and established a Structural

Adjustment Facility that granted loans based on the implementation of Structural

Adjustment Programs. (Zhang, 1998: 62) The goal of these measures was to ‘solve’ the

structural discrepancies within the economy that resulted in economic imbalance and

failure. Among the proponents of conditionality were two Indian economists, Deepak

Lal and Jagdish Bhagwati. Both rejected the idea that economic theories and strategies

between developed and developing countries should be differentiated. (Martinussen,

1997: 261) According to John Martinussen,

       The principal thesis advanced by these neo-classical economists was that
       free competition and market mechanisms, in all countries and under all
       circumstances, would bring about a more optimal allocation of production
       factors and a more optimal distribution of commodities. (Martinussen,
       1997: 261)

The “near religious belief” (Stiglitz, 2000) in economic liberalisation, evident in IMF

policy, has led them to use a ‘cookie-cutter approach’ in addressing the needs of

countries with significantly divergent historical, structurally-based socio-political

conditions. As Tariq Banuri expresses, the IMF prescribes the same treatment as a

panacea for the economic ills of every country, without regard to specific institutional

arrangements, history, or the costs involved in the cure. (Banuri, 1991: 1) This paper will

demonstrate the necessity of the adoption of a policy that examines and addresses the

unique circumstances of each country and region.         The analysis will begin with a

discussion of the methodological weaknesses inherent in meta-theoretical approaches.

Following this, economic, and socio-political factors that require distinct policy responses
                                                                                           3


will be discussed, with the use of examples including sub-Saharan Africa, and the Asian

Tigers. These examinations will demonstrate that IMF Structural Adjustment policy, as a

meta-theory, fails to address the particularities of specific economic crises, and therefore,

must be altered.

IMF Structural Adjustment as a Meta-Theory

In his various analyses of the ‘impasse’ in development theory, David Booth has focused

on a criticism of the meta-theoretical methodology of crude Marxism. (Booth, 1993)

According to Booth, the search for general, one-dimensional, universalistic theories

during the 1960s and the 1970s resulted in the impasse in development theory in the

1980s. (Booth, 1993: 55) By failing to acknowledge the diversity of experiences within

the Third World, meta-theorists have failed to provide alternatives to the actors in these

states and have furthermore, treated the peoples of the Third World as passive subjects.

(Booth, 1993: 50) Furthermore, by asserting the universal Truth of their theoretical

position, advocates of metatheory inherently posit their position of the vanguard within a

power/knowledge nexus. As can be observed in the recent history of Cambodia, China,

Germany, and Eastern Europe (to name only a few instances) the proposition of a

universal truth allows for some to infringe on the liberties of others in the pursuit of the

telos of their Truth.     Thus, studies by Harris, Bates, Nelson, and others have

demonstrated the need for “increased sensitivity to historically-grounded variations in

national political economies.” (Booth, 1993: 53)

       The methods Booth uses to criticise Marxist meta-theory can be applied equally to

a criticism of the IMF’s Structural Adjustment policies, and the neo-classical

modernisation theories in which they are based. The theory of a universal, teleological
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process of economic modernisation is most generally acknowledged as based in W.W.

Rostow’s 1956 article, The Take-Off Into Self-Sustained Growth. According to Rostow,

this ‘take-off’ results from a process requiring a rise in productive investment from less

then 5 per cent of net national product to over 10 percent. (Rostow, 1980: 164) This

same positivist, teleological approach to development can also be observed in more

contemporary popular works, such as Francis Fukuyama’s The End of History. In this

text, Fukuyama echoes Margaret Thatcher’s notion that “there is no alternative” to neo-

classical economic policies, positing that capitalism and economic liberalisation are the

end-state for human development. (Toye, 1993: 15) Furthermore, he asserts “there is a

fundamental process at work that dictates a common evolutionary pattern for all human

society, something like a Universal History of mankind.” (Toye, 1993: 5) Therefore, any

leader who chooses to pursue alternative paths to development is “regarded as illusory

and misguided.” (Toye, 1993: 10)

       Within this universalistic theory of modernisation rests the policies of Structural

Adjustment Programs.       The IMF has been greatly criticised for this universalistic

approach to solving financial crises. In the neo-classical tradition, IMF officials tend to

view the major, if not sole cause of poor economic performance as arising from policy,

rather than market failures. The assumption that this, and other deep-seated parallels

between the First and Third World are perpetuated by several factors. First, the IMF

tends to employ American-educated economists who are usually unfamiliar with the

individual countries to which they are directing policy. (Stiglitz, 2000) Also, while the

IMF does send advance teams to provide individual country reports, these missions are

only conducted for short periods of time, and in a limited manner. (Stiglitz, 2000)
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Moreover, IMF economists tend to ignore the opinions of local economists – many of

whom are more highly educated than their IMF counterparts (Stiglitz, 2000) - preferring

to stay within their own theoretical paradigm. By refusing to acknowledge diversity, the

IMF treats the Third World as a subject, “not so much as a system of states, still less a

[group] of people in need of a better life, [but] as simply a geographic… terrain.” (Leys

and Saul, 1999: 14) The paternalistic notion of the Third World as the subject, and the

First World as the actor who must exert discipline is at the core of the problematic nature

of the structural adjustment meta-theory. As Aidan Foster-Carter states, there is a need to

study “both the specificities of particular places and the broader forces which shape and

are shaped by local circumstances and histories.” (Booth, 1993: 55 - italicised in

original)

       The following three sections will address the manner in which the historical,

structurally-based factors of economics, sociology, and politics, are not addressed in the

framework of the IMF’s structural adjustment programs. Furthermore, the consequences

of failing to acknowledge such variables will be demonstrated.

Economic Factors

The economic structure, including the level of industrialisation, of a given country or

region must be taken into account when determining the policy response to economic

crisis. This analysis will examine the tenets of neo-classical economics – 1) financial

deregulation, 2) trade liberalisation, 3) currency devaluation, and 4) fiscal austerity and

privatisation – upon which the IMF’s structural adjustment is based.

Financial Deregulation
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A case study of the IMF response to the 1997 Asian economic crisis provides an insight

into the failure of the neo-classical policy of financial deregulation to solve all financial

market failures. Up to, and including 1997, the IMF was still praising the miracle of

Asian capitalist development. (Wade and Veneroso, 1998: 3) In their assessment of the

causes of the crisis the IMF reversed this praise and attributed the financial collapse on

the policies of Asian governments, not the speculatory practices of private firms. (Wade

and Veneroso, 1998: 4) The IMF, blaming structural faults in the Asian economies,

demanded further financial liberalisation as a condition to loans. Critics, such as Jeffrey

Sachs have blamed this measure for worsening the crisis: “Instead of dousing the fire,

the IMF in effect screamed fire in the theatre.” (Wade and Veneroso, 1998: 5) The IMF

declaration of structural weaknesses, and their insistence on allowing for the bankruptcy

of banks (despite the absence of deposit insurance) resulted in mass capital flight. (Wade

and Veneroso, 1998: 5) An examination of the particularities of the economic structure

of the Asian Tigers provides an insight into the failure of the ‘cookie-cutter’ approach in

regard to financial deregulation.

       Robert Wade and Frank Veneroso, in their article The Asian Crisis: The High

Debt Model Versus the Wall Street-Treasury-IMF Complex, label the economies of the

Asian Tigers as high-debt developmental models. (Wade and Veneroso, 1998) Such

models have several characteristics that differ significantly from the neo-classical model,

making it likely that IMF prescriptions will have high costs and low benefits for these

economies. (Wade and Veneroso, 1998: 5) Among these features is the fact that the

savings in East Asian economies are generally equal to approximately one-third or more

of the total GDP level, compared to between fifteen and twenty percent in the West.
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(Wade and Veneroso, 1998: ) As a result of the absence of households and governments

as major net borrowers, Asian banks became biased towards lending to firms. (Wade and

Veneroso, 1998: 6) This, combined with the fact that Asian economies were centred in

export competition, meant firms carried a much larger debt to equity ratio than their

Western counterparts. (Wade and Veneroso, 1998: 6) This higher intermediation debt

meant that in the event of economic shocks, Asian firms were subject to illiquidity,

default, and bankruptcy. (Wade and Veneroso, 1998: 7) Therefore, co-operation between

banks, firms and the government was necessary. In this system, government played an

important role in buffering liquidity against systemic shocks. (Wade and Veneroso, 1998:

7) In such an arrangement it is necessary for the government to limit the access of both

firms and banks to foreign finance, so as to ensure the governments ability to mediate

debt crises. The IMF response to the Asian financial crisis followed their usual neo-

classical recipe – closing financial institutions, allowing foreign financial institutions to

acquire domestic banks, eliminating government intervention in the lending decisions of

commercial banks, and the continuing and increasing liberalisation of capital accounts to

foreign borrowing. (Wade and Veneroso, 1998: 11-12) This resulted in the collapse of

the Asian high-debt development system, due to the high transitional costs that

accompanied the implementation of neo-classical policies in a high-savings environment.

This went far beyond the IMF’s mandate of providing funding to allow for the financial

recovery of Asian economies, and can be observed as the imposition of neo-liberal

ideology. As Jeffrey Sachs reported, the crisis in the Asian economies was “far from

fatal.” (Zhang, 1998: 90) Furthermore, the strengths of these economies, such as a high

savings rate, budget surpluses, a flexible and trained workforce, and low taxation already
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provided the means for recovery. (Zhang, 1998: 90) Thus, the universalistic notion of

financial recovery through financial deregulation proved to be inapplicable in this

situation.

Trade Liberalisation

One of the central tenets of structural adjustment policy is the conviction that if the

market is allowed to get the prices ‘right’ then the rest of the economy will adjust to

recovery. (Martinussen, 1997: 263) Among the primary strategies used to accomplish

this task is the liberalisation of trade. As in the case of financial deregulation, the

elimination of protectionist trade practices in developing countries cannot be viewed as a

universalistic panacea with which to cure the ills of all economies.          While trade

liberalisation can have positive results, it must be accomplished in a manner that

considers both domestic and international demand and supply levels. (Rapley, 1996: 88)

As John Rapley asserts, liberalisation of trade markets may not result in increased

efficiency if it is implemented at an early stage of economic development. (Rapley, 1996:

88) Therefore, trade liberalisation has been more successful in Asia and Latin America,

where it occurred after significant periods of state-led protected industrialisation.

(Rapley, 1996: 89) Furthermore, output response to price changes have generally only

been successful in more-developed countries. A farmer in a country that lacks basic

transportation infrastructure will not be able to adequately respond to market demand

from price changes if he cannot get his product to market. (Rapley, 1996: 91) A further

criticism of the universalistic IMF approach to trade liberalisation is that it has flooded

the export market with certain cash crops, resulting in a decrease of both wages and

prices of Third World export commodities. (Adjibolosoo, 1995: 43) Thus, not only are
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IMF conditions of trade liberalisation not compatible with all economic reforms, the

attempt to universalise these reforms has also created adverse trading conditions for

developing states.

       Furthermore, the IMF structural adjustment programs do not address the structural

inequalities in the international political economy. Under the IMF formula industrialised

countries do not necessarily reciprocate Third World trade liberalisation. Mahbub ul Haq

asserts that due to the disadvantageous positions of industries within liberalised Third

World markets when trading with First World markets, First World protectionism costs

Third World producers ten times the amount that the Third World receives in aid each

year. (Rapley, 1996: 88)

Currency Devaluation

Another instance of the weakness of IMF structural adjustment meta-theory is the failure

for it to acknowledge the lack of universal advantage for currency devaluation. In

assessing the beneficial nature of pursuing a policy of currency devaluation, one must

investigate the structure of an economy, its level of industrialisation, and its place within

the global economic structure. Currency devaluation has had negative consequences for

the development of industrialisation in much sub-Saharan Africa. Many of these states

do not have the basic industrialisation necessary to produce domestic inputs for

production. Therefore, the increase in price of imported inputs, including such basic

products as fertiliser, have damaged the process of developing both an industrial and

export-oriented market. (Rapley, 1996: 93) Furthermore, demand for many Third World

products in their primary export market (the First World) is inelastic. Therefore, while

devaluation lessens the international trading price of these goods, it does not lead to an
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increase in world demand. (Rapley, 1996: 93) For example, Ghana, an IMF “star pupil in

economic reform,” has tripled export production since adjustment began, yet now earns

less export revenues than before entering these programs. (Adjibolosoo, 1995: 43)

Furthermore, the combined conditions of trade liberalisation and currency devaluation

have led to food shortages. Decreases in export prices, combined with a movement away

from the production of staple crops – towards cash-cropping – has had devastating effects

in many developing nations. Mexico, for instance, must now import twenty percent of its

maize consumption, due to IMF policies. (Adedji, 2000: ) Partly as a result of these food

shortages, in 1997, thirty percent of African children were malnourished. (Younger et al.,

1997: 4) Therefore, the results of a universalistic approach to economic reform through

trade liberalisation are unsound.

Fiscal Austerity and Privatisation

Perhaps the most immediately evident aspect of IMF structural adjustment programs is

the call for fiscal austerity, including the privatisation of nationalised industries. Once

again, these conditions fail to acknowledge a diversity of experiences among the

countries of the world.      Contrasting the neo-classical perception that government

spending crowds out private investment, studies by Lance Taylor have shown that in the

case of developing countries, government expenditure ‘crowds in’ private investment.

(Rapley, 1996: 83)      In this view, government spending can compliment private

investment, with private investors waiting for the government to make the first move.

(Rapley, 1996: 83) Furthermore, if governments with already small budgets are asked to

cutback even further, this can result in the deterioration of infrastructure, such as roads

and electricity, and the social services needed to aid in the process of industrialisation.
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For example, user fees for health and education have been instituted in many less-

developed countries (including Tanzania, Ghana, Zimbabwe, Burkina Faso, and Uganda)

in order to comply with the fiscal austerity measures of IMF structural adjustment

programs. (Udsholt et. al, 1996: 53) While small user fees and other semi-private

measures may be feasible in more developed countries, in many poorer countries these

fees simply mean that people will not receive care. Thus, in applying such a policy it is

necessary to address the income levels and distribution within each state.

       As in the field of health-care and education, IMF measures have called for the

privatisation of nationalised industries. A universal application of privatisation theories

can be particular detrimental to the poorest countries. First, public firms in these states

produce externalities that may not be of interest to private companies. For instance,

government involvement in research and development may produce engineers and other

workers with technical expertise.(Rapley, 1996: 85) However, in poor countries the cost

of creating such programs is generally far greater than the immediate revenues they

would bring a firm – even though the externalities produced for society may in the long

run be beneficial to development. (Rapley, 1996: 85) Second, privatisation seldom

manages to raise significant funds for governments. (Rapley, 1996: 87) Money losing

firms must be sold for little, and, due to the time constraints of the structural adjustment

programs, efficient firms are usually sold for less than their true market value. (Rapley,

1996: 87)

Socio-Political Factors

As well as economic factors, historically-based sociological and political structures

within societies must be accounted for in the formulation of responses to economic crises
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and development. The renowned development theorist Colin Leys has devoted much of

his recent work to the explanation of a need to examine class structures in determining

the appropriateness of particular development theories to Africa. In understanding why

sub-Saharan Africa has responded worse then other developing areas to the imposition of

IMF market reforms, Leys states, Africa “exists in a capitalist world, which marks and

constrains the lives of its inhabitants at every turn, but is not of it.” (Leys and Saul, 1999:

13) In Africa there is some capital but not a lot of capitalism. (Leys and Saul, 1999: 13)

Colonial regimes discouraged the development of indigenous capital accumulators,

meaning that much of Africa lacks the sizeable national bourgeois class that many

theorists, including even Rostow, deemed necessary for the development of capitalism.

(Leys, 1994: 45, Leys, 1996: 153, and Rostow, 1980: 161) Furthermore, in calling for

the creation of an export-oriented economy it is necessary to look at the racial and

religious make-up of manufacturing sector employees and owners. (Leys, 1996: 159) Do

the weakness of the capitalist class structure a hierarchy of identities emerges, with those

formed along ethnic or religious lines taking precedence. (Leys and Saul, 1999: 26)

Therefore, it is necessary to examine whether certain ethnic or religious groups are

prominent in the manufacturing industry.        For example, in Kenya manufacturing is

dominated by the Asian minority, which has made it difficult for President Moi to ask the

Black majority to sacrifices for the benefit of the manufacturing sector and allowed him

to exploit ethnic tensions. (Leys, 1996: 159)

       The importance of sub-national identities based on ethnic, religious, or tribal

allegiances has also made difficult the de-politicisation of the economy in many states.

The IMF call for elimination of government and bureaucratic positions has been
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particularly problematic in the effort to forge national unity. In Kenya, this has been a

major source of anxiety as the government no longer has at its disposal the ability to

employ members of all ethnic groups in significant government positions.1 Also, in

former ‘socialist’ states, the Stalinist legacy has resulted in a difficulty in depoliticising

the economy. (Aslund, 1999: 70) As the policies of centrally planned economies were

entirely designed by the Communist bureaucracy, an explanation of economic downturn

due to market adjustments, and not as a result of governmental failure, is difficult to

accept for the citizens of these states.          IMF austerity measures, however, leave the

governments of transitional states little choice but to demand self-sacrifice from the

population, a call that threatens the stability of the new democratic regimes in post-

Stalinist states.

        A further facet of IMF structural adjustment programs that may not be applicable

to all developing nations is the condition of eliminating ‘corruption.’ As Morris Szeftel

states, it is improper to attempt to “impose rules and norms of public behaviour

developed for and within liberal democracies, in environments where liberal democracy

is not established.” (Szeftel, 2000: 287) Many practices that are deemed corrupt by

Western observers can be explained as either cultural practices such as gift giving, as a

means with which to create national alliances, or as a method with which to transfer

public resources in order to create a bourgeois class. (Szeftel, 2000: 287) Furthermore,

the universalistic notion of corruption creating economic stagnation is unfounded. It fails

to explain why in some countries, such as the Asian Tigers, the United States, and Italy,



1
 The problem of tribalism in Africa (particularly Kenya) was suggested by the High Commissioner of
Kenya as one of the major issues facing African states in his presentation at Carleton University, 5
November 2001.
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high levels of corruption accompanied the economic ‘take-off,’ while in others it has

served to undermine growth.



Conclusion

The previous analysis demonstrates that the meta-theoretical methodology behind the

neo-classical approach to recovery from economic crises, as endorsed by the IMF

through its structural adjustment programs, is inadequate in addressing the diversity of

historical and structurally based experiences, both within and between states. First, it was

established that – and explained why - IMF programs have adopted a meta-theoretical

approach within the paradigm of neo-classical modernisation. The problematic nature of

equating First and Third World experiences was shown to be structurally unsound, and

the concept of the Third World as a passive subject was criticised.            Second, the

historically and structurally-based economic factors which require diverse approaches

were analysed.    Each aspect of the IMF structural adjustment program - financial

deregulation, trade liberalisation, currency devaluation, and fiscal austerity and

privatisation – was addressed and shown to require varied policy approaches. Finally, the

necessity of acknowledging various socio-political experiences is outlined in order to

comprehend the inability of certain regimes in implementing structural adjustment

policies. This analysis does not attempt to provide alternative policies with which to

overcome economic crises. Rather, the goal is to demonstrate the need for an alternative,

particular, non-teleological discourse regarding the international political economy.
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Acknowledgements:

I would like to give my thanks to John Serieux, Terry Gibbs, and Agnieszka Czajka for
their help in developing this article.


ianmorrison@hotmail.com