New Internationalist

5. Shock Treatment

Issue 168

new internationalist
issue 168 - February 1987

5. Shock treatment [image, unknown]
Countries with balance of payments problems often seek help for the International Monetary Fund. But the IMF treatment can leave them in deeper trouble than ever.

A common thread links the following events. It should be easy enough to work out what it is. Any suggestions?

1977: riots in Cairo as food subsidies are removed - 79 people killed.

1981: army and police attack a demonstration in Casablanca against wage cuts - 600 die, 2,000 arrested.

1984: a revolt in Tunisia over the price of bread - 80 deaths.

North Africa? Food? Riots?

Strangely, they are all the result of 'stabilization' programmes.

They don't sound very stable to me.

Chilean demonstrators are disperesed by riot police using CS gas in Santiago in 1985.
Photo: Julio Etchart

It is a very particular use of the word. The IMF's idea of stabilization is for a government to balance its financial books; if financial stability is also socially destabilizing this is a regrettable side-effect

There is a similarly neutral label for the kind of shock treatment that a nation must go through to balance its books in the long term. This is called 'adjustment'.

We're playing verbal games. Who cares what the IMF calls things?

Neutral words cloaking something completely different should serve to put you on your guard. As a sceptical reader you will appreciate this.

I'm more sceptical about NI language than IMF language.

Good for you. But you're probably less worried about the IMF because you don't have to deal with them. Many developing countries have no choice - they regularly subject themselves to the language of the IMF and a stiff dose of the medicine it prescribes.

Doctor's orders, I suppose. If you want the medicine you have to do what you're told.

You really do have an authoritarian streak in there. Maybe we should have a talk about fascism. But I suppose you could see IMF as a firm physician insisting that Third World countries take their medicine - for their own good.

No matter how unpleasant the dose may be, it needs to be swallowed in one gulp; people who complain about any nasty flavour and occasional side-effects are being weak and irresponsible.

Bleeding-heart liberals.

Maybe so. But nowadays many economists have their doubts about the IMF treatment. Far from reliably curing the patients, the medicine has steadily been poisoning them, with some of the toxic effects being passed on to the rest of us. The doctor, when he intervenes, is not to be trusted.

Intervenes? Why on earth should the IMF intervene at all? It should mind its own business.

I should watch my language. Maybe intervention is a bit unfair. Countries invite visits from the IMF when they get into trouble - usually with their balance of payments. In the 1970s and 1980s it was developing countries, many of them newly independent, who were asking for the help. Such help did not, however, come without strings - or, in IMF-speak, 'conditionality'.

Conditionality?

Elegant, isn't it? It means that the more money you ask for the more conditions you have to fulfill.

Like what?

The conditions are usually very predictable - and very stiff. Regardless of the immediate cause of the balance of payments crisis the IMF's prescription is always much the same: reduce consumption. It says that exports are being drawn in because people are trying to consume more than their economy can produce. Hence the balance of payments problem.

But I thought that the exchange rate would take care of that

It would do if the exchange rate were floating. But most developing countries have exchange rates fixed by the government. If the economy is very weak the government likes to control the flow of foreign exchange.

Indeed one of the conditions that the IMF usually makes is that there should be a devaluation. But on top of this it insists that consumption be reduced. And among the first targets are government subsidies.

What have subsidies got to do with consumption?

Well, if the government is subsidising basic foods or public transport this allows poor people to consume more of them. Removing subsidies will make food, for example, more expensive and reduce demand. (This is to use the word 'demand' in an economic rather than nutritional sense.)

And this would help the country's balance of payments?

Directly, if the food were being imported. But it could also help indirectly if it moved farmers towards growing cash crops like coffee or groundnuts for export.

Similarly, reducing investment in public transport could release equipment and fuel for private (and hopefully exporting) industry. In general terms the IMF likes to see expenditure move from the public to the private sector. It also insists on cuts or freezes in wages to make business more profitable.

There's something familiar about this.

True. It's the sort of package that any right-wing politician would advocate anywhere in the world: allow the market to do its job and the economy will be more efficient and everyone better off. They're entitled to their opinion, of course. And any country which freely elects politicians with such policies will know what they are in for. But developing countries get such policies from the IMF whether they believe in them or not

And many of the governments of poor countries don't. A more left-leaning administration would have introduced food subsidies precisely because it saw that the free market would not feed the poorest people. This is a decision that is now taken out of their hands.

But whatever their politics, they've got to balance the books somehow.

True. But let's go back to the origins of the problem. The IMF's original purpose was to offer countries with internal problems (like wages which were too high or taxes which were too low) a brief breathing space to bring themselves back into line with international conditions.

But the problems which poor countries get into are often external. That's not to say they don't have incompetent or badly managed bureaucracies. But beyond this they are often hit by things which are not of their making. If the price of copper falls, Zambia, 90 per cent of whose export earnings come from copper, sees its balance of payments go into deficit. So the cause of the problem is not fundamentally that Zambians are consuming too much.

Moreover, one country's deficit is another country's surplus. So it could be argued that the people who can and should make the adjustment are those who are now paying less for their copper.

How can they do that?

Increasing aid flows would seem to be the simplest way. And there has been assistance from the World Bank and other international agencies - as well as special funds set up within the IMF - to help compensate the producers of primary products for sharp price fluctuations.

But the bulk of the burden, especially in recent years, has fallen on the poor countries themselves. And they have often found themselves getting deeper into debt as they borrowed money to get over such crises.

Is this where the debt crisis came from?

The beginnings of it. But the debts of the 1960s and early 1970s were more likely to be to government and international aid agencies than to banks. They weren't on the same scale, or as uncontrolled, as they are today.

Back to the IMF. The kind of immediate solutions that they proposed were aimed at stimulating industry and exports.

Did they work?

Generally no. They did sometimes solve the immediate balance of payments problem: at the cost of making the population go hungry and provoking the kinds of riot that we started out with. But they often left the economy, as well as the people, in an even weaker state than before.

Wage cuts for example might not bring much economic benefit. In industrialized countries cutting wages might help the balance of payments: manufactured goods will then be more competitive overseas. But if the wages of Zambian copper miners are cut this will make no difference to the price at which copper can be sold. Prices are determined on the floor of the London Metal Exchange.

What will happen instead is that the copper workers will spend less, so a lot of local enterprises which supply them will go out of business and the economy will contract.

So everybody is poorer.

Yes. Cutting wages might, of course, help in the short term to reduce imports. But its effect on the local economy can be very depressing too. If the local market (for food or transport, or anything else) contracts, businesses may stop investing and so the chances of developing efficient production for export in the long term can actually be reduced. The result has been that countries like Chile and the Philippines have kept traipsing back to the IMF year after year for further funds.

Surely the economists at the IMF could see what was happening.

Yes, they could. But the initial response was that it was none of their business. Their job was to take a short-term view and get international payments balanced as quickly as possible - even if the effect of their policies was to stifle future development.

Whose business was it to care about the poor then?

More a job for the World Bank and the other more development-centred agencies. They would be more interested in helping poor countries restructure their economies to be more self-sufficient and less vulnerable to external shocks.

But governments which genuinely want to develop manufacturing industries of their own can still face fierce opposition from the IMF. If they want to start up a local TV assembly plant, for example, it probably makes sense to protect it initially from cheaper foreign competition. Most Western countries did precisely the same thing when they were industrializing. But that is not permitted if you need a loan from the IMF: it doesn't fit in with the IMF's free trade ideology.

Countries which don't need such loans, of course, don't have the problem. So North American and European industries get away with protecting their industries from cheaper manufactured goods from the Third World.

Best to avoid the IMF then.

If you can. But if you want to continue trading that's not easy. In the late 1970s some countries thought they had managed it - but finished up catastrophically in debt and also had to contend with the folks from the IME.

Some of the implications of protection are spelled out on the two pages which follow. You'd really like a collection of facts and numbers to pore over, wouldn't you?

Don't count on it.

[image, unknown]
CLOSE-UP ON...

The Human Impact

When services of food supplies are cut in developing countries it is children who are in the most vulnerable position. A study by UNICEF has documented the decline in child welfare in recent years.1 These declines within countries can often be associated with IMF stabilization programs.

The government of Costa Rica, for example, accepted an IMF stabilization programme with strict austerity measures in 1981. The number of children treated fir severe malnutrition doubled between 1981 and 1982, In this case the programme didn't so the Government much food either - it was voted out of office n 1982.

In Chile typhoid fever and hepatitis are on the increase while the Government has been 'adjusting' its economy by cutting spending on drinking water and sanitation. The Chileans, however have not had the opportunity of expressing their disapproval through the ballot box.

The IMF seems to have taken little interest in the impact that the kind of adjustment policies it advocates might have on the welfare of the poorest families. In one study of 30 countries with had received upper-tranche standby credits during 1964 - 79 there was only one case where an objective of the arrangement had been to protect the poorest against the possible adverse effects of the programme.2

Humanitarian questions aside this makes little economic sense. Healthy human beings are a vital resource, The World Bank warned back in 1980m of the 'serious danger that economic stringency in the next few years will lead to cut back in human development programmes, despite the importance of their contribution - often exceeding that of additional physical investment - to Africa's long term development'.3

UNICEF and other organizations have been arguing for 'adjustment with a human face' - pointing out that many of the measures which could protect children could be taken very cheaply and have little effect on the balance of payments. It remains to be seen whether the IMF can be persuaded of the wisdom of this.

1 The Impact of World Recession on Children, Pergamon Press, 1984.
2 The Quest for Economic Stabilization, the IMF and the Third World, Tony Killick, Gowar Press, 1984.
3 World Development Report, World Bank, 1980.

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