OPINION: IMF and WB conditionalities, and domestic policy — IV

In the aftermath of the Covid-19 pandemic, there was talk of moving away from the previously held austerity consensus – to basically narrow current account, and fiscal deficits, and in turn, to manage debt distress – for the International Monetary Fund (IMF) programme countries. Programme conditionalities under International Monetary Fund (IMF) structural adjustment programmes – mostly received through short-term standby arrangements (SBA), and more medium-term extended fund facility (EFF) programmes –implemented this austerity agenda.

Similar austerity-centric and overall neoclassical economics-based structural adjustment conditionalities were provided through World Bank’s development policy loans.

These aggregate demand curtailing policies led to economic growth sacrifice, with negative impact on employment, and with enhancing impact on poverty, and income inequality. As a remedy therefore, these structural adjustment programmes called for provision of targeted subsidies for social protection, along with making, at least, some minimum level of social expenditure, for example, mainly in health and education sectors, and only in passing in terms of making expenditures to reduce gender disparities.

READ MORE: IMF and WB conditionalities, and domestic policy—III

These structural adjustment programmes comprised of binding, and non-binding conditionalities that required implementing austerity policies, more broadly they called for implementing neoliberal-minded policies that see little role of government and regulation, mainly focusing on deregulation, liberalization, and privatization. Both neoliberal- and related austerity-based policies over the years neither allowed reaching sustained macroeconomic stability nor achieving inclusive and sustainable economic growth within programme countries; while resilience to shocks could also not be built in any meaningful way.

Structural adjustment programmes also negatively impacted foreign investment due to once again lack of role of public sector, which is otherwise important in providing needed governance and incentive structures for domestic and foreign investment

The (2008) book ‘Beyond the World Bank agenda: an institutional approach to development’ pointed out in this regard: ‘The third approach – the use of modified control studies – attempts to control for differences in the external environment when comparing the countries that adopted structural adjustment programs to those that did not. An example of this type of work is Elbadawi (1992). His paper uses several before-and-after analysis and concludes that the countries that undertook structural reforms suffered from exogenous shocks and were weaker, thus explaining the lack of economic improvement.’

In addition, structural adjustment programmes also negatively impacted foreign investment due to once again lack of role of public sector, which is otherwise important in providing needed governance and incentive structures for domestic and foreign investment.

READ MORE: IMF and WB conditionalities, and domestic policy—II

Moreover, such programmes, curtailed public expenditure under over-board fiscal austerity policies hurting, in turn, the scope for public-private partnerships along with reduced or low-level investment in research, which otherwise plays an important role in laying the basis for incentivizing private investment. Also, over-board role of monetary austerity unnecessarily enhances cost of capital, which, in turn, feeds into overall cost of doing business and creates an important disincentive for investment.

With regard to impact on investment, the same book highlighted, ‘Elbadawi then uses a modified control group analysis to determine other effects of structural adjustment. He finds a… negative and statistically significant impact on investment. …Several other authors, including Corbo and Rojas (1991), have also echoed the important finding that investment rates drop in countries that are undergoing adjustment.’

It is naïve to say the least that authorities, economists in general and media overall continue to see these structural adjustment reforms as ‘hard reforms’, something which need to be overall adopted for putting the economy on strong footing, instead of seeing them in the broad sense of their performance over the years, and in the sense of seriously outlandish underlying neoclassical economics assumptions that they are based on – reference the two models they are primarily based on and which, as discussed in earlier parts of the article, being ‘Polak model’ and ‘Swan-Salter model’ – and therefore rightly view them as highly dangerous, and wrong reforms!

It also needs to be emphasised that the initial approach of the World Bank to focus on funding infrastructural projects, contributed in building industrial base in programme countries, which in turn, a significant determinant of bringing sustainability to macroeconomic stability, and economic growth, and in turn, in putting the economy on stronger resilience-bringing pathways. It needs to be noted here that sustainable macroeconomic stabilisation, and economic growth served as a more reliable, deeper and stable source for programme countries in terms of creating financing for social sector, than dependence on foreign aid in the shape of World Bank financing for social sector projects directly.

READ MORE: IMF and WB conditionalities, and domestic policy– I

Financing of projects by World Bank for the social sector was done through its lending arm created in 1960, International Development Association (ID), although at relatively more generous terms than IBRD (International Bank for Reconstruction and Development), which as per the book was the ‘original unit of the World Bank, [and] was created at the Bretton Woods Conference in 1944’, but as indicated earlier, with less efficacy for the programme countries in creating a sustainable source of funding into the social sectors, from otherwise less dependable foreign aid flows, that mostly came with structural adjustment conditionalities, and their serious misgivings-bringing neoliberal, and austerity policies for the overall economy.

Tracing this shift of funding emphasis by World Bank, from infrastructure to social sector spending over time, the same book pointed out: ‘Eight-three percent of all pre-IDA loans to poor countries went to power and transportation projects; not a single loan was for education, health, or other social sectors… Overall… more than 60 percent of all loans went to infrastructure in the 1950s and 1960s. …The new lending focused mostly on agriculture, with some additional commitment to social spending such as education and water supply and to “technical assistance,’ which aimed to build technical capacity in the newly independent states where it was particularly weak. By 1965, 15 percent of overall spending was going to agriculture (compared to 9 percent in 1960) and 5 percent to social spending (compared to 0 percent in 1960)… Overall… social and agricultural spending amounted to about 19 percent of the total, compared to 4 percent in the 1950s.’

In addition, World Bank shifting over time away from investing into infrastructure projects did not allow build-up of financial sources in programme countries. This is because direct funding into social sectors, which, as indicated World Bank did increasingly over time, did not allow creating capacity of programme countries to generate stable sources of finance, given for instance, funding for building more schools, hospitals, etc., rather than funding economy’s overall infrastructural base attracting investment, into deepening industrial base – in terms of increased domestic production, and exports – and, in turn, accruing greater revenues, and foreign exchange, which then getting channelled into building-up social sector.

Hence, putting investment into social sector on a stronger and sustainable footing – one that also did not generate significant debt responsibilities – by putting it away from foreign aid dependence to domestic revenues, and country’s non-aid foreign exchange. This, in turn, also leads to lesser debt build-up, and diminishing exposure to aid-attached policy conditionalities, which in the case of neoliberal- and austerity-based structural adjustment programmes, are detrimental to bringing sustainable macroeconomic stability, and economic growth; allowing overall to avoid the economic policy control of the creditor countries, and bringing in greater policy independence.

Moreover, less dependence on foreign aid reduces impact of neoliberal mindedness of multilateral agencies, whereby allowing greater independence from foreign economic consultants and multilateral agencies’ backed policymakers – also generally called ‘Chicago boys’-styled policymakers trained in major foreign universities in the tradition of neoclassical economics –from working in important domestic policymaking positions. To elaborate further about these policymakers leads to pointing out that they hold similar policy mindset as that of the multilateral agencies, and which has shown significant inclination towards neoliberal, and austerity-based fundamentals for many decades now, and only shifting somewhat in the aftermath of Global Financial Crisis of 2007-08, and later on in the wake of fast-unfolding climate change crisis, and the related ‘Pandemicene’ phenomenon, not to mention the happening of the Covid-19 pandemic; all occasions when the serious limitations and negative implications of these policies in terms of stability, growth, distribution, and resilience, for instance, were significantly exposed.

Here, it needs to be pointed out that global geopolitical considerations also seemed to have played a part in who received aid from the World Bank, and how much; calling in turn for the need to have meaningful level of parity among countries in terms of voice at the Bretton Woods institutions so that allocation of resources is made only on technical requirement of countries, and not because of the political interests of countries with major voting rights. That, in turn, will also help bring greater plurality of economic thought at these institutions away from the heavy influence of economists/policymakers from major universities in the Global North and, in turn, reducing the impact of otherwise high inclination of these universities on neoclassical economics thought process.

For instance, as per the book, ‘In the 1960s, the recipients who most benefited from the new commitment to social spending were not the newly emerging African nations but India and Pakistan. This concentration was not incidental; it represented a concerted effort to counter Chinese and Soviet influence. These two countries received 86 percent of all IDA loans to poorest countries between 1961 and 1968… Yet despite the disproportionate increases in lending to India and Pakistan, overall Bank loans to Africa still increased from 5.7 percent in 1960-61 to 14.7 percent in 1966-67. In addition, African nations received more than half the technical assistance projects awarded in that year…’

It is indeed shocking to see that World Bank continued to defend dismal performance of structural adjustment programmes, for instance, in the case of Africa, and with regard to which the book pointed out: ‘Increasingly neoclassical economic writers – including those with close association with the Bank – have recognized that even with all of their sophisticated statistical techniques, it is difficult to counter the overwhelming signs of economic and social deterioration in Africa and elsewhere during the adjustment period. Instead of denying these trends, they have attempted to explain these patterns not by challenging the neoliberal model but by running large-scale cross-country regressions and using variables outside of their models.’

The above statement calls for looking at performance of structural adjustment policies, which the same book examined from instance by taking three data points ‘…1980, 1990, and 2002’ pointing out in turn that ‘The data reveal how badly sub-Saharan Africa deteriorated over the entire structural adjustment period. Food production was unable to keep up with population growth. Merchandise exports fell dramatically in nominal dollar terms in the 1980s; there was some recovery in the 1990s, however, particularly after 1998, when export prices recovered somewhat… In a twenty-two-year period during which many regions of the world experienced phenomenal growth of international trade, sub-Saharan Africa was a mere 20 percent above the 1980 level. …Living standards, as measured by gross national product (GNP) per capita, plummeted by 31 percent in the 1980s and a further 20 percent between 1990 and 2002. Although identifying trends in Africa says nothing about causal factors, the ubiquity of adjustment is undeniable. By 1995, thirty-seven sub-Saharan countries had received at least one World Bank adjustment loan, and thirty-three had two or more loans.’

Moreover, with regard to employing weakly warranted model-building approaches, and carrying out over-exploration of statistical techniques to provide at best, weak justification of structural adjustment programmes – similar to wrongly employing institutional economics to defend these policies by the World Bank – the book pointed out that World Bank’s employment of, for instance ‘ethnicity’, and ‘social capital’ falls short of convincing that these exogenous variables significantly explain the reason for poor performance of countries undergoing structural adjustment programmes in general. The same book pointed out in this regard: ‘Arguments by Collier and Hoeffler (1998), and Easterly and Levine (1997), and others that Africa and other regions have done poorly because of their social structure (high levels of ethnic diversity and lack of social capital) have the same purpose. The aim is not to challenge the post-Washington consensus but rather to preserve it in a manner that supports its neoclassical economic microfoundations.’

The main underlying reason behind poor performance of structural adjustment programmes is not shifting the focus away from their neoliberal, and austerity basis, and increasingly towards institutional emphasis of programme conditionalities. This is because, the neoclassical-based IMF, and World Bank policies – also called in a loose sense as ‘Washington Consensus’ policies because their ambit is narrower than the structural adjustment programmes, and the neoclassical assumptions they follow – saw little role of transaction costs – that is ‘search and information costs’ – and, in turn, of institutions resulting also in lack of provision of otherwise much-needed governance, and incentive structures for both better price discovery, and for reaching much more improved level of productive- and allocative efficiencies.

For instance, highlighting the limitations of ‘Washington Consensus’ policies, in their (1998) World Bank published report ‘Beyond the Washington Consensus: institutions matter’ Shahid Javed Burki and Guillermo E. Perry, among other contributors to the Report, pointed out: ‘Subsequent experience has convincingly demonstrated that the policies prescribed by the Washington Consensus are paying off. …But with one exception (namely, the protection of property rights), the policy prescriptions of the “Washington Consensus” ignored the potential role that changes in institutions could play in accelerating the economic and social development of the region.’

Moreover, renowned economist, and economics Nobel laureate, Gunnar Myrdal in his (1968) famous book ‘Asian Drama: An Inquiry into the Poverty of Nations’ pointed out with regard to the importance of adopting an institutional approach: ‘The main hope must be that the economic profession will gradually turn to remodeling our framework of theories and concepts in the direction characterized as institutional. …With strong ideological influences and vested interests working to retain the Western approach to economic analysis… attempts to change it will meet resistance from the producers and consumers of economic research in South Asia, as well as in the West.’ Sadly, this approach has continued to be engaged only at the margins, at most, while formulating domestic policies in programme countries in particular, and in policy formulation, including shaping conditionalities, for instance, at the Bretton Woods institutions.

While dismal record of structural adjustment programmes over the years became very much evident, yet stickiness of the Bretton Woods institutions with the neoclassical, and related neoliberal, and austerity-basis of these programmes is strange to say the least. In the (2023) book ‘A thousand cuts: social protection in the age of austerity’ for instance highlighted in this regard: ‘…when countries in the Global South faced crisis over the few decades and turned to the IMF for financial assistance, austerity was the default policy recommendation, backed up by strict conditionality. …Critics have been quick to point out the self-defeating logic of such policies: austerity deepens pre-existing problems and undermines economic activity, thereby plunging countries into protracted crises… Even so, the consensus among policy elites in the Global North has been that low- and middle-income countries have no alternative than to introduce austerity as a prerequisite for gaining access to international financial assistance, lest moral hazard problems emerge.’

(To be continued)

Copyright Business Recorder, 2026