Indeed, Camdessus resigned in mid-November 1999, shortly after Larry Summers, the new US Secretary of the Treasury and one of Camdessus biggest backers, told the US Congress that henceforth, the US would support a "new framework for providing international assistance to [developing] countries-one that moves beyond a closed IMF-centered process that has too often focused on narrow macroeconomic objectives at the expense of broader human development." (1)

The Frenchman's 13-year reign had been identified with a paradigm of development that he fervently believed in: structural adjustment. In the two decades since 1980, structural adjustment programs (SAPs) were imposed jointly by the World Bank and the IMF on close to 90 developing countries, from Guyana to Ghana. Despite important differences among the various economies, SAPs had the same basic elements: long term "structural" reforms to deregulate the economy, liberalize trade and investment, and privatize state enterprises, coupled with short-term stabilization measures like cutbacks in government expenditures, high interest rates, and currency devaluation.

SAPs multiplied during the Third World debt crisis of the early 1980's, and an important reason was strong pressure from the Bank and IMF on governments to restructure their economies along lines designed to yield the financial resources to pay off their massive debts to the international commercial banks. But the objective of SAPs went beyond debt repayment or the attainment of short-term macroeconomic stability. The Bank and the Fund sought nothing less than the dismantling of protectionism and other policies of state-assisted capitalism that IMF and World Bank theorists judged to be the main obstacles to sustained growth and development.

When the socialist economies of Eastern Europe and Russia collapsed in the early 1990's, structural adjustment was also extended to that part of the world, and in a manner that was even more radical than in the South-a process that Harvard's Jeffrey Sachs, then one of its vocal proponents, appropriately labeled "shock therapy." IMF technocrats went to these countries with even more dogmatic confidence in their one true model than the Marxist bureaucrats they supplanted had in theirs. By the early 1990's, shock therapy and structural adjustment had become cornerstones of what economist John Williamson called "the Washington Consensus" on the desired macroeconomic framework that would create a truly global economy fueled by market forces.

Retreat

Two decades after the first structural adjustment loan, the Bank has formally abandoned structural adjustment, replacing it with the "Comprehensive Development Framework." The new paradigm, according to a statement of the Group of Seven Finance Ministers and Central Bank Governors, (2) has the following elements:

* "increased and more effective fiscal expenditures for poverty reduction with better targeting of budgetary resources, especially on social priorities in basic education and health;
* "enhanced transparency, including monitoring and quality control over fiscal expenditures;
* "stronger country ownership of the reform and poverty reduction process and programs, involving public participation;
* "stronger monitorable performance indicators for follow-through on poverty reduction; and
* "ensuring macroeconomic stability and sustainability, and reducing barriers to access by the poor to the benefits of growth."

What brought about the 180 degree turn?

Failure. Spectacular failure that could no longer be denied at the pain of totally losing institutional credibility.

The World Bank—or rather James Wolfensohn, President Bill Clinton's nominee to head the Bank in 1993—was the first to recognize that something was amiss. Coming from outside orthodox development circles, Wolfensohn sensed what most World Bank officials did not want to acknowledge: that with over a 100 countries under adjustment for over a decade, it was strange that the Bank and the Fund found it hard to point to even a handful of success stories. In most cases, as Rudiger Dornbusch of the Massachusetts Institute of Technology put it, structural adjustment caused economies to "fall into a hole,"(3) wherein low investment, reduced social spending, reduced consumption, and low output interacted to create a vicious cycle of decline and stagnation, rather than a virtuous circle of growth, rising employment, and rising investment, as originally envisaged by World Bank-IMF theory.

With much resistance from the Bank's entrenched bureaucracy, Wolfensohn moved to slowly distance the Bank from hard-line adjustment policies and even got some of his staff to (grudgingly) work with civil society groups to assess SAPs in the so-called "Structural Adjustment Review Initiative" (SAPRI). For the most part, however, the change of attitude did not translate to changes at the operational level owing to the strong internalization of the structural adjustment approach among Bank operatives.

While self-doubt began to engulf the Bank, the IMF, in contrast, plowed confidently on, and the lack of evidence of success was interpreted to mean simply that a government lacked political will to push adjustment. Through the establishment of the Extended Structural Adjustment Facility (ESAF), the Fund sought to fund countries over a longer period in order to more fully institutionalize the desired free-market reforms and make them permanent.

The Philippine Case

The Philippines, together with Turkey and Costa Rica, was one of the guinea pigs of structural adjustment. Its experience under adjustment was representative of the Third World experience. Between 1980 and 1999, the Philippines became the recipient of nine structural adjustment loans from the World Bank, and participated in three standby programs, two extended fund programs, and one precautionary standby arrangement with the IMF.(4) The country, in short, was in continuous adjustment for nearly 20 years, its macroeconomic policies being micromanaged by the Bretton Woods twins.

The first phase of adjustment, which focused on trade liberalization, saw quantiative restrictions removed on more than 900 items, while the nominal average tariff protection was brought down from 43 per cent in 1981 to 28 per cent in 1985. But the program failed to factor in the onset of a global recession, so that instead of rising, exports fell, while imports coming in to take advantage of the liberalized regime severely eroded the home industries. As the late economist Charles Lindsay noted, "Whatever the merits of the SAL, its timing was deplorable."(5) Instead of allowing the government to set in motion countercyclical mechanisms to arrest the decline of private sector activity, the structural adjustment framework intensified the crisis with its policy of high interest rates and tight government budgets. Not surprisingly, the GNP shrank precipitously two years in a row, contributing to the political crisis that resulted in the ouster of Ferdinand Marcos in February 1986.

Under Corazon Aquino the second phase of adjustment saw economic recovery subordinated to the repayment of the country's $26 billion foreign debt. This was achieved via fiscal austerity and more intensified export of natural resources and export-oriented production. A financial hemorrhage ensued, with the net transfer of financial resources coming to a negative $1.3 billion a year on average between 1986 and 1981, according to the Freedom from Debt Coalition.(6) To service the debt, the Aquino administration was forced to borrow heavily from domestic financial sources, forcing it to channel much of its budgetary expenditures from development and social spending to meeting both domestic and foreign debt obligations. By 1987, some 50 per cent of the budget was going to service the national debt.(7)

Not surprisingly, this "model debtor" via structural adjustment institutionalized stagnation, with the country registering zero average GNP growth between 1983 and 1993. Stagnation led to a worsening of social conditions, with families living under the poverty line coming to 46.5 per cent of all families in 1991 and the share of the national income going to the lowest 20 per cent of families dropping from 5.2 per cent in 1985 to 4.7 in 1991.(8) The Philippines also provided one of the best documented studies of the correlation between environmental destruction and structural adjustment, with a World Resources Institute study concluding that adjustment "created so unemployment that migration patterns changed drastically. The large migration flows to Manila declined, and most migrants could only turn to open access forests, watersheds, and artisanal fisheries. Thus the major environmental effect of the economic crisis was overexploitation of these vulnerable resources."(9)

When the Ramos administration took over in 1992, the focus of adjustment shifted back to accelerated privatization, deregulation, and liberalization of trade, investment, and finance. Petron and several government enterprises and services passed to the private sector; a substantially free trade regime was targetted for 2004, when tariff rates would be reduced to a uniform five per cent or less for all products; and nationality restrictions on foreign investment were relaxed considerably. Capital account liberalization, an IMF prescription, resulted in massive inflows of speculative capital into the financial and real estate sector, triggering an artificial boom in Manila. But the liberalized capital account also became the wide highway through which billions of dollars exited in 1997 and 1998, at the onset of the Asian financial crisis, bringing the GDP growth rate to below zero in 1998.(10)

Adjusted and readjusted for nearly 20 years, Manila simply could not climb out of a deepening hole.

Crisis of Legitimacy

It was the Asian financial crisis that finally forced the IMF to confront reality. In 1997-98 the Fund moved with grand assurance into Thailand, Indonesia, and Korea, with its classic formula of short-term fiscal and monetary policy cum structural reform in the direction of liberalization, deregulation, and privatization. This was the price exacted from their governments for IMF financial rescue packages that would allow them to repay the massive debt incurred by their private sectors. But the result was to turn a conjunctural crisis into a deep recession, as government's capacity to counteract the drop in private sector activity, was destroyed by budgetary and monetary repression.(11) If some recovery is now discernible in a few economies, this is widely recognized as coming inspite of rather than because of the IMF.

For a world that had long been resentful of the Fund's arrogance, this was the last straw. In 1998-99, criticism of the IMF rose to a crescendo and went beyond its stubborn adherence to structural adjustment and its serving as a bailout mechanism for international finance capital to encompass accusations of its being non-transparent and non-accountable. Its vulnerable position was exposed during the recent debate in the US Congress over a G-7 initiative to provide debt relief to 40 poor countries. Legislators depicted the IMF as the agency that caused the debt crisis of the poor countries in the first place, and some called for its abolition within three years. Said Rep. Maxine Walters: "Do we have to have the IMF involved at all? Because, as we have painfully discovered, the way the IMF works causes children to starve."(12)

In the face of such criticism from legislators in the IMF's most powerful member, US Treasury Secretary Larry Summers claimed that the IMF-centered process would be replaced by "a new, more open and inclusive process that would involve multiple international organizations and give national policymakers and civil society groups a more central role."(13).

But Is this for Real?

So structural adjustment is dead, and the Bretton Woods institutions have seen the light. But wait, isn't there something too easy about all this?

The fact is, in the case of the IMF, as well as that of the World Bank and the Asian Development Bank (ADB), jettisoning the paradigm of structural adjustment has left them adrift, in the view of many critics, with just the rhetoric and broad goals of reducing poverty, but without an innovative macroeconomic approach. Wolfensohn and his ex-chief economist Joseph Stiglitz talk about "bringing together" the "macroeconomic" and "social" aspects of development, but Bank officials cannot point to a larger strategy beyond increasing lending to health, population, nutrition, education, and social protection to 25 per cent of the Bank's total lending. The ADB is even more of a newcomer in the anti-poverty approach, and its strategy paper issued this year is long on laudable goals but, even ADB insiders agree, breaks no new ground in terms of macroeconomic innovation. Most at sea are IMF economists, some of whom openly admitted to NGO representatives at the September IMF-World Bank meeting that so far the new approach was limited to relabeling the Extended Structural Adjustment Fund (ESAF) the "Poverty Reduction Facility, and that they were looking to the World Bank to provide leadership.(14)

It is not surprising that, in these circumstances, the old framework would reassert itself, with, for example, the IMF telling the Thai government, already its most obedient pupil, to cut its fiscal deficit despite a very fragile recovery; the Fund's pushing Indonesia to open its retail trade to foreign investors, despite the consequences in terms of higher unemployment; and technocrats of the ADB making energy loans and Miyazawa funding contingent on the Philippine government's accelerating the IMF-promoted privatization of the National Power Corporation, despite the fact that consumers are likely to end up paying more to the seven private monopolies that will succeed the state enterprise.

"It's the old approach of deregulation, privatization, and liberalization but with safety nets" is the not inappropriate description of one Filipino labor leader much consulted by the multilateral institutions.(15)

Then, there is the issue of accountability. One cannot just walk away from the scene of the crime without admitting wrongdoing. The Bank and the Fund have been responsible for tremendous economic and social damage wrought on Third World economies for over two decades. Shouldn't they be held to account for that? Should not Camdessus and the whole top leadership of the IMF, including his deputy Stanley Fischer and Asia-Pacific division chief Hubert Neiss, who blindly embraced adjustment to the end, take responsibility for their massive blunders? Despite their announced resignations, both Camdessus and Neiss are unrepentant when it comes to their policies.

Many of the Fund's long-time critics have a darker view of things. To them, Camdessus served as a sacrificial lamb to blunt real efforts at reform at a time that the Fund "desperately needs" credibility and legitimacy, as the Financial Times put it.(16) This fear is well-grounded, for in his most recent statements, Larry Summers, the pivotal figure when it comes to the future of the IMF, appears to have forgotten about the need for a paradigm shift. When speaking about the elements of a "new" IMF strategy, Summers says that the "approach looks to the IMF to continue to certify that a country's macro-economic policies are satisfactory before debt is relieved of new concessional lending is advanced."(17) Is this what is meant by "moving away from an IMF-centered process that has too often focused on narrow macroeconomic objectives at the expense of broader human development"?(18)

Bearing in mind that trade liberalization was one of the most controversial dimensions of the old structural adjustment approach, even more revealing is Summers' view that the new IMF must have as one of its priorities "strong support for market opening and trade liberalization."(19) Trade liberalization, Summers continues, "is often a key component of IMF arrangements. In the course of negotiations, the IMF has sought continued compliance with existing trade obligations and further commitments to market opening measures as part of a strategy for spurring growth. For example: As part of its IMF program, Indonesia has abolished import monopolies for soybeans and wheat; agreed to phase out all non-tariff barriers affecting imports; dissolved all cartels for plywood, cement and paper; removed restrictions on foreign investment in the wholesale and resale trades; and allowed foreign banks to buy domestic ones. Zambia's 1999 program with the IMF commits the government to reducing the weighted average tariff on foreign goods to 10 per cent, and to cutting the maximum tariff from 25 per cent to 20 per cent by 2001. In July, the import ban on wheat flour was eliminated."(20)

Calling this a "new approach" is, let us face it, stretching the truth.

Radical Reform or Decommissioning?

Now what would a real process of transfromation look like? It would be something that would include more than the open selection process for the new managing director-one that would open the recruitment process to non-Europeans-endorsed by Jeffrey Sachs.(21) For the problem lies in the very structure and culture of the institution: a lack of accountability except to the US Treasury Department; a belief in non-transparency as a condition for effectiveness; and a deeply ingrained elitism that renders the bureaucracy incapable of learning from outsiders.

If this is the heart of the matter, then surgery must be more radical. I would propose the following measures:

* First, so embedded is the old adjustment framework in current programs that a clean break with the past can only take place not just with a renaming but with the immediate dismantling of all structural adjustment programs in the Third World and the ex-socialist world and the IMF adjustment programs imposed on Indonesia, Thailand, and Korea following the Asian financial crisis.

* Second, immediate reduction of the IMF professional staff from over 1000 to 200, and major cuts in both capital expenditures and operational expenses of the agency. Most of the Fund's economists are today employed in micromanaging adjustment programs and would definitely cease to be necessary if, as the G-7 Finance Ministers and Central Bank governors suggest, developing countries be given more authority in formulating and implementing their poverty reduction programs; and if, as Jeffrey Sachs advises, the Fund's main work is limited to monitoring world capital markets and the world's monetary system.(22)

* Third and most important is the creation of a Global Commission on the Future of the IMF to decide if the Fund is to be reformed along the lines suggested by Sachs and others or, to borrow a phrase applied to aging nuclear plants, it is to be decommissioned, which this author favors. Half of the members of such a body should come from civil society organizations since it is these groups that were instrumental in bringing to light the destructive impact of adjustment programs and are now engaged in many of the most innovative experiments in grassroots social development. Energy from below and decentralized operations are the trademarks of so many successful organizations that the top-down centralized IMF looks positively Jurassic.

With its credibility and legitimacy in tatters, the Fund is in severe crisis. Unless international civil society intervenes, and intervenes forcefully now, the powers that be will wait for the storm to blow over while talking, as Larry Summers does, about reform. Radical reform or decommissioning? That is the question of the hour around which we must frame our strategies for intervention.

Dr. Walden Bello is professor of sociology and public admininstration at the University of the Philippines and executive director of Focus on the Global South, a program of research, analysis, and advocacy of the Chulalongkorn University Social Research Institute based in Bangkok. He is the author or co-author of 10 books and numerous articles on Asian economic and political issues, including A Siamese Tragedy: Development and Disintegration in Modern Thailand (London: Zed, 1998), Dark Victory: the US, Structural Adjustment, and Global Poverty (San Francisco: Food First, 1994), and Dragons in Distress: Asia's Miracle Economies in Crisis (London: Penguin, 1991).

References

1 Op-ed piece in Washington Post, reproduced in Today (Manila), Nov 15, 1999.

2 Communique, Sept. 25, 1999.

3 Rudiger Dornbusch, quoted in Jacques Polak, "The Changing Nature of IMF Conditionality," Essays in International Finance, Princeton University, No. 184 (Sept. 1991),p. 47.

4 Data from Freedom from Debt Coalition (Philippines).

5 Charles Lindsey, "the Political Economy of Economic Policy Reform in the Philippines: Continuity and Restoration," in Andrew MacIntyre and Kanishka Jayasuriya, eds., The Dynamics of Economic Policy Reform in Southeast Asia and the Southwest Pacific (Singapore: Oxford University Press, 1992).

6 Freedom from Debt Coalition, "Revisiting Philippine Debt," Paper presented at the National Debt Conference, Innotech, Commonwealth Avenue, Oct. 9-10, 1997.

7 Freedom from Debt Coalition, Primer on Philippine Debt (Quezon City: FDC, 1997).

8 Leonor Briones and Jenina Joy Chavez-Malaluan, "New Social and Political Challenges within the Framework of the Structural Adjustment Process in Southeast Asia (with Focus on the Philippines): Effects on New Population Trends and Quality of Life," Paper prepared for the Population and Quality of Life Independent Commission, Manila, May 1994, unpublished.

9 Wifredo Cruz and Robert Repetto, The Envrionmental Effects of Stabilization and Structural Adjustment (Washington, DC: World Resources Institute, 1992), p. 48.

10 See Walden Bello, Addicted to Capital: the Ten-Year High and Present-Day Withdrawal Trauma of Southeast Asia's Economies (Bangkok: Focus on the Global South, 1997).

11 See Nicola Bullard, Walden Bello, and Kamal Malhotra, Taming the Tigers: The IMF and the Asian Crisis (Bangkok: Focus on the Global South, 1998).

12 Quoted in AP, reproduced in Business World, Nov. 15, 1999.

13 Op-ed, Washington Post, reproduced in Today, Nov. 15, 1999.

14 Personal communication, Ted Van Hees of Eurodad, New York, Nov. 1, 1999.

15 Comment of Luis Corral, political affairs director of TUCP, Nov. 6, 1999.

16 "The IMF's New Leader," FinancialTimes, Nov. 18, 1999, p. 16.

17 Treasury Secretary Larry Summers, "the Right Kind of IMF for a Stable Global Financial System," Remarks to the London School of Business, London, England, Dec. 14, 1999.

18 Op-ed piece in Washington Post, reproduced in Today, Nov. 15, 1999.

19 Treasury Secretary Larry Summers, Testimony before the US Senate Committee on Foreign Relations, Washington, DC, Nov. 5, 1999.

20 Ibid.

21 Jeffrey Sachs, "Time to End the Backroom Poker Game," Financial Times, Nov. 15, 1999.

22 Ibid.

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