Photograph: Rex Features/Sipa Press
The world in the 80s
At the stroke of the 80s, there was an emergent need for the fostering of economic development in the poorest corners of the world, namely Latin America, sub Saharan Africa and East Asia. This had been a going concern since after the summary of World War II but the global development trajectory was losing steam and leftist economic practices had shown signs of bearing glaring flaws. Direct State involvement in nations pursuing economic prosperity e.g. by participating in health, education provision, employment creation etc had proven to be inefficient.
The capitalist ideology had started to be more forcefully propagated by its two loudest cheerleaders Ronald Reagan, then American president and his counterpart Margaret Thatcher, in the UK who had used that platform to unflinchingly crush the trade unions in her country, earning her the ‘Iron lady’ moniker.
Africa in the 80s
Poor countries in a bid to extricate their populace from the throes of poverty had, on the recommendation of respected policy experts, racked up piles of debt in form of foreign aid. From 1980 to 1992 debt held by developing countries grew exponentially from 567 billion USD to 1662 billion USD despite continuous repayment. Rising interest rates meant that countries would borrow to pay ever increasing debt commitments. The transfer of wealth from the south to the north was on a scale that made it impossible to sustain. It was so astronomical it led then French president Francois Mitterrand to remark in light of that economic reality “…despite the considerable sums spent on bilateral and multilateral aid, the flow of capital from Africa to the developed world toward industrial economies is greater than the flow of capital from industrialized countries to the developing countries…”.
This precarious situation many African countries found themselves in led to their being declared highly indebted poor countries (HIPC), an elite group in the arena of indebtedness and poverty.
Enter IMF
The International Monetary Fund (IMF) or the Bretton Woods institution controlled by rich industrialized nations was then given official mandate to enable the poor countries restructure their economies to be able to pay their debts and as conditionality for getting more debt and in the broad sense create a development storyline. This gave the organization carte blanche to institute economic reforms in these countries in form of policy prescriptions from ‘top brains’ in the economic fold.
The Washington consensus; easy as A B C.
The free market lobby had since grown in stature and importance and given that capitalist purists of the US and UK were steering the IMF ship, small wonder that the Washington consensus was born, in the form it was. This document delineated ten policy reforms whose major theme was “stabilize, liberalize, privatize,” the ethos preached open kimono approach to markets. Governments were to offload enterprises to private sector owners, open Forex markets, do away with price and capital controls and commit to fiscal responsibility. This was an overtly ideological approach to the complex problem of getting impoverished countries out of a rut and safely onto the path to sustainable development. There was little doubt at that time that these prescriptions seemed remarkably tame and innocuous and would deliver the hitherto elusive sustainable development.
Not quite…
The debate surrounding these reforms and what it has resulted into has been filled with great acrimony but there seems to be general consensus that the Washington proposition in reality did not go far in bridging the development gap. Privatization processes were bungled by greedy state operators, with many state parastatals sold for a song. Others were awarded state enterprises for the purpose of political expediency and trade and capital market liberalization led to the proliferation of foreign currency and companies with ease of profit repatriation that had huge adverse effects on local enterprise. Scores lost jobs through knee jerk government downsizing.
A noticeable decrease in real wages was experienced, and deregulation of the financial markets allowed for an influx of foreign banking institutions that led to rise in domestic lending rates. Indeed research shows that output in sub-Saharan Africa and Latin America actually reduced in the 90s as the sour medicine of the IMF was being administered. Countries that originally were doing well under the reforms often cited as Uganda, Tanzania, Mozambique stalled a decade later, failed to take off and like many other African economies, remain fragile. Argentina in Latin America who had been the poster boy for these reforms crashed heavily in 2002.
Why did it fail?
Obviously, a number of stakeholders have willingly offered their two cents on reasons for its failure but the most convincing argument in my opinion was made by Columbia University Professor Joseph Stiglitz who blamed it on the lack of attention paid to sequencing. In his informed view, these markets were not ready to be opened and liberalized and certainly not to that extent. He rightly suggested that even the foremost capitalist economies like the UK only liberalized its capital markets in the 1960s by which time its economy was already considerably more resilient to external shocks than the HIPC were in the 80s. The process was rushed and the after effects were dire. The Asia currency crisis of 1998 was to a large extent due to adoption of capital market liberalization that engendered high levels of volatility causing local currencies to crash.
Lessons
The most important lesson that can be gleaned from this experience is that as Stiglitz says, ‘there are no magic solutions to development’. It was also discovered that issues to do with ‘best practices’ and ‘standard’ strategies for development were an intellectual fad and there did not exist any data to support that claim. The World Bank conceded in 2005 that “different policies can yield the same result, and the same policy can yield different results, depending on the country institutional contexts and underlying growth strategies”. At the Barcelona 2004 development agenda summit there was the conclusion that no single set of policies can be guaranteed to ignite sustainable growth.
Sources:
- ‘Goodbye Washington Consensus, Hullo Washington Confusion’, Dani Rodrik (2006), Harvard University
- ‘Globalization and its Discontents’, Joseph Stiglitz
- ‘Structural Adjustment Programs-their origin and international experience’, Herbert Jauch (Labour Resource and Research Institute), Namibia
- Erick Kashambuzi, blog
