Economic reform in developing countries: Some conceptual issues

Pergamon

World Development, Vol. 23, No. 4, pp. 557-575, 1995 Elsevier Science Ltd

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Economic Reform in Developing Countries: Some Conceptual Issues

RADHA SINHA” Sophia University, Tokyo, Japan

Summary. - This paper is an effort to show that the outcome of stabilization and sbuctural adjustment policies, largely based on the neoclassical economic rationale, was justifiable neither in terms of the analytical nor the historical literature. The very ideological nature and the inherent contradictions of policies inhibited successful implementation and accentuated poverty and inequity in developing counties. By drawing on the views of various contemporary schools of economic thought, the paper also questions the validity of the international financial institutions’ claims of consensus on development policy. The paper emphasizes that in social science research and. more so in policy prescriptions, the search for consensus may in fact be futile.

1. INTRODUCTION

The “Bretton Woods twins,” - the World Bank and the International Monetary Fund (IMF) - began their stabilization and structural adjustment policies pur- portedly to help highly indebted developing countries cope with debt servicing in the face of their serious balance-of-payments crises in the early 1980s. The original expectation was that the intervention of these international financial institutions (IFIs) would be “a finite process whereby appropriate policies, with the help of external aid flows, would permit countries to restore growth and to tackle long-term development problems” (UNCTAD, 1993, p. 95). Sadly, the hoped- for restoration of long-term growth remains an ever- receding goal for most countries undergoing the discipline - a verdict not only of independent scholars and UN agencies, but also internal reviews by IFIs staff. Most studies find that “structural reform remains incomplete and external viability elusive, at least for the near term” (IMF, 1993, p. 40). With a few excep- tions in sub-Saharan Africa and Latin America, “the balance of experience in the 1980s was undoubtedly negative” (Stewart, 1991, p. 1848; Helleiner, 1993, p. 2,059). On the whole, the impact of structural adjustment programs, in most cases, has been positive on the exports and external account but negative on investment (Mosley, Harrigan and Toye, 1991, Vol. 1, p. 301). Hard-core poverty worsened significantly even in countries implementing structural adjustment suc- cessfully (Toye, 1991, p. 169). In spite of the continuing criticisms,1 these two most powerful international financial institutions (IFIs) have not altered

their course except marginally. Their power comes not so much from the financial resources they provide - regional banks such as the Inter-American Bank may now be providing more resources -but from the fact that the London Club, the informal association of international banks, and the Paris Club, collectively representing the donor countries, will not lend until a country is prepared to accept stabilization and stmctural adjustment (Cooper, 1992, p. 150; Seers, 1981, p. 139).

This paper attempts to show that the outcome of stabilization and structural adjustment policies, largely based on the neoclassical economic rationale, was justifiable neither in terms of the analytical nor the historical literature. The very ideological nature and the inherent contradictions of policies inhibited successful implementation and accentuated poverty and inequity in developing countries. By drawing on the views of various contemporary schools of economic thought, the paper also questions the validity of the

* I acknowledge with thanks the intellectual stimulation ren- dered through discussion and commentary on my papers by Professors Robert Ballon, William Cur&, Peter Myers, Peter Preston, Paul Streeten and David Wank. I am also grateful to Sean Hackett and Gloria Pan for their help in preparing this paper. I alone am responsible for any errors, either conceptual or otherwise. This paper is based on an earlier paper prepared for Sophia University’s Advanced Development Management Program (ADMP). The ADMP is financed by the Foundation for Advanced Studies in International Development (FASID). Final revision accepted: October 11, 1994.

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558 WORLD DEVELOPMENT

IFIs’ claims of consensus on development economics and policy. In fact, the paper emphasizes that in social science research and, more so in policy prescriptions, the search for consensus may be futile.

2. OBJECTIVES OF THE BRE’ITON

WOODS TWINS

On the surface, the IFIs set out to help the debt-rid- den developing countries of the 1980s in solving their twin deficits, the budget and trade deficits, by stabilization (the responsibility of the IMF) and structural adjustment (the responsibility of the World Bank). The two sets of policies together have come to be known as economic reform. While stabilization aims at controlling inflation and improving balance of payments in order to maintain a reasonable flow of debt- servicing, structural adjustment stresses the opening of a country to foreign trade by reducing trade barriers (particularly nontariff barriers), changing the sectoral balance in a country’s development strategy (from heavy capital goods to textiles and other consumer goods industries and toward agriculture and from import-substituting industrialization (ISI) to export- promoting ones), and enlarging the domain of the private sector (including those of foreign enterprises).

In some sense, the term structural adjustment used by the IFIs may be seen as restrictive, because widely defined, the term may refer to the continuous process of adjustment in an economy, developing or developed, resulting from changes in incomes, tastes, and technology as well as ever changing patterns of world trade. “In this very general sense, development is synonymous with structural adjustment.. .” (Streeten, 1987, p. 1,469).

Yet, in another sense, the IFIs’ prescriptions, taken together, amount to a social engineering on a vast scale to transform developing countries into “market economies,” many elements of which even Adam Smith would have found unacceptable. It needs to be emphasized that various components of a structural adjustment package are different in nature. For instance, tariff reduction, the tariffication of nontariff barriers, or devaluation are policy changes, while alteration of the sectoral balance is a revision of development strategy. The reduction in direct taxes and increase in indirect ones, the cut-back in the public provision of social security, health and higher education or the privatization of social services and public enterprises are aimed at altering property relations, and hence the distribution of wealth and political power toward the greater empowerment of the rich, big business, and the rentiers at the cost of what Galbraith calls “the underclass” (Galbraith, 1992, p. 30).

Behind an “uneasy collaboration” (Kahler, 1990, p. 47) the IMF and the World Bank both support privati-

zation of social services and public enterprises; the IMF on grounds of fiscal austerity and the World Bank for allocative efficiency. In both cases however, the motivation is largely ideological (Seers, 1981, p. 139).

Although the World Bank often appears to be more involved than the IMF with sustained growth of income, equity, or the empowerment of people below the poverty line, much of this has not transcended the realms of methodological debate or platitudes. Commenting on the 1987 World Development Report - presented by the World Bank as a symbol of its concern for the poor - Singer, the doyen of development studies, said that “as a proclamation of the ‘human face’ of the World Bank, it is not particularly impressive or convincing” (Singer, 1989, p. 1,3 13).

3. THE FOUNDATIONS OF THE POLICIES OFTIIKIFQ

The lFIs’ policies are largely grounded in the neo- classical2 belief that public sector enterprise deficits are the main culprits responsible for rising budget deficits. To finance these fiscal shortages, govem- merits have to resort to increasing the money supply or borrowing, often from foreign sources, which leads to a rapid rise in inflation. Public borrowing on a large scale also promotes high interest rates with adverse implications for private investment; public investments, in fact, “crowd out” private ones. Inflation, in turn, makes traded goods more expensive relative to imports. This results in balance-of-trade deficits. In this line of analysis, the twin deficits (in budget and in trade) and inflation are all related and emanate mainly from the budget deficits of public sector enterprise, which, in the eyes of neoclassical economists, is inherently less efficient than private enterprise. Needless to say, the efficiency criterion based on profit maximization alone is rather simplistic. As Wiles argues, the maximization criterion, which he calls “maximands,” depends on the type of the enterprise. For instance, a peasant farm employing only family members - a pertinently relevant case for many developing countries - aims at maximization of total output rather than profit (Wiles, 1977, p. 67). The behavioral and the managerial theories of firms also refute the neoclassical theories of firms. In the former, the firm is conceived as a coalition of conflicting interests with multiplicity of goals, while in the latter, the managerial utility function may include nonpecuniary vari- ables such as security, status, prestige and professional excellence (Koutsoyiannis, 1975, pp. 371-398). A Japanese firm tends to aim for market share and promoting new product development (Ballon, 1992, p. 71). Appropriate market share ensures ranking, a symbol of social esteem (Nakane, 1970, p. 155; Boltho, 1975, p. 83).

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Neoclassical economists further argue that the highly protective trade regime, necessary for the support of public sector industries, creates a group of privileged elite. Consisting of businessmen, politicians and civil servants, this elite is mainly interested in maximizing rent, rather than productive economic activities.3

Another development policy often criticized by the neoclassical orthodoxy is import-substituting industrialization (1%). Some economists (and not necessarily all of the neoclassical persuasion) argue that highly protected trade regimes that divert scare resources from export sectors and agriculture to import-substituting ones are often more stringent than those that prevailed in today’s developed countries in their early stages of development (World Bank, 1991, p. 97).4 This, in turn, leads to resource misallocation within ISI-oriented countries and the loss of any possible gains from trade.

Because much of IS1 tends to occur in the public sector, attacks on IS1 often come from the very same neoclassical opponents of public sector enterprise. At the same time, other activities, such as the domestic production of cotton textiles or even drives toward self-sufficiency in food production, though import substituting, are not criticized (Singer, 1984, p. 288). Singer mentioned only self-sufficiency in food and felt that “the objections were perhaps more to industrialization than to import substitution” (Singer, 1984, p. 288). In fact, the conventional wisdom is not opposed to labor-intensive (cotton textiles, leather products, etc.) industrialization intended for export promotion. The term IS1 is, thus, inadvertently reserved for the statist industrialization; i.e. the development of heavy capital goods industries with public sector initiative. This is reflected in the term Stalinist, commonly used for ISI-oriented development strategies not only for China but also India (Lipton, 1977, p. 20; Eckstein, 1977, pp. 50-54).s Finally, neoclassical economists also believe that the primacy of export- promoting development strategy, with its emphasis on agriculture and textiles as the leading sectors, was the basis for the rapid economic development in Japan and the other East Asian economies.

4. THE RATIONALE OF NEOCLASSICAL ORTHODOXY AND ITS WEAKNESSES

(a) Allocative efJicienc_y

The neoclassical case rests mainly on allocative efficiency. The argument in its simplest form maiu- tains that an individual or firm aiming at maximizing its own self-interest also maximizes social welfare. The explicit or implicit assumption is that given perfect competition, it is the price mechanism, the market, or the invisible hand as Adam Smith called it, that

determines the optimum allocation of resources among various productive uses and the distribution of goods and services among consumers.

If public policy is directed purely toward allocative efficiency, then the neoclassical case may have some intellectual justification. In any society, however, as Wiles (1977, pp. 6.63-96) has shown, policy makers are invariably faced with multiple, often conflicting objectives, something that most policy makers know from their own personal experiences.

Furthermore, the theoretical basis on which rests the rationale of the neoclassicists is selectively incomplete, for even in the Smithian schema and free play of market forces is not totally unhindered. As O’Brien points out:

while the Classical writers were the earliest fully to appreciate the allocative mechanism of the market and the power, subtlety, and efficiency of this mechanism, they were perfectly clear that it could only operate within a framework of restrictions. Such restrictions were partly legal and partly religious, moral, and conventional, and they were designed to ensure the coincidence of self and community interest (O’Brien, 1975, p. 272).

This is what is often forgotten by its modem protagonists.6 As Hirsch emphasized:

the principle of self-interest is incomplete as a social organizing device. It operates effectively only in tandem with some supporting social principle. This fundamental characteristic of economic liberalism, which was largely taken for granted by Adam Smith and by John Stuart Mill in their different ways, has been lost sight of by its modem protagonists. While the need for modifications in laissez-faire in public policies has been increasingly accepted, the need for qualifications to self-interested behavior by individuals has been increasingly neglected. Yet correctives to laissez-faire increase rather than decrease reliance on some degree of social orientation and social responsibility in individual behaviour. The attempt has been made to erect an increasingly explicit social organization without a supporting social morality. The result has been a structural strain on both the market mechanism and the political mechanism designed to regulate and supplement it (Hirsch, 1977, p. 12).

Another important question is whether the workings of a free market necessarily maximize social welfare? The question has remained contentious for a long time. Alfred Marshall, a leading neoclassical economist, was “the lirst theorist to prove theoreti- cally that laissez-faire, even with perfect competition and independently of those evils of inequality, did not assure a maximum of welfare to the society as a whole. . . ” (Schumpeter, 1978, p. 765). The social welfare could be increased by levying “taxes on commodities which obey the law of diminishing return, and devote part of the proceeds to bounties on commodities which obey the law of increasing


return” (Marshall, 1920, p. 475; Schumpeter, 1978, p. 1,070).

This proposition was later amplified, particularly with reference to externalities, by Pigou in his Economics of Welfare (Pigou, 1932, pp. 172-203). Pigou saw at least four main barriers to the maximization of a society’s welfare: unequal income distribution, the existence of monopolies undermining the workings of the free market, competitive advertising and, finally, the existence of externalities. In a situation where the distribution of income is unequal, the market will respond to the preferences of those who have the most money, resulting in the production of luxuries at the expense of necessities. Monopolies tend to raise prices by restricting output much below the optimum. As a corollary to the conditions of monopolistic competition, Pigou believed that competitive advertising may also cause a deviation between the private and social net product. Further deviations occur when externalities are present. In such situations there arises a discrepancy between the marginal private and social costs and the marginal private and social returns. For optimization of welfare the marginal private and social costs have to be equal to the marginal private and social returns. Pigou felt that in cases in which this does not occur, appropriate taxation or subsidies are necessary to maximize social welfare.

As has recently been argued by Stewart and Ghani, externalities are of major significance in “generating dynamic development” in various ways: strengthening human capital, increased mobility of skilled labor, creating networks of technology diffusion and inter- actions with other industries or sectors and so on. In such situations, government intervention may be justifiable, with the nature and the type of interventions depending on local situations (Stewart and Ghani, 1991, p. 578; Porter, 1990, pp. 62&621).

(b) Product-quality considerations

Recent research on pricing and selling of items of poor quality, whose inferiority cannot be easily determined by the purchasers, raises further doubts about perfect competition or perfect contestability being the ideal forms of the market (Baumol, 1991, pp. 8-17). Market analysts suggest that what prevents the sellers from selling items of poor quality, is the importance they attach to their reputation, which presupposes that the sellers must not be anonymous and must have sufficiently long-term commitment to the market they serve. The customers, at the same time, may have inexpensive means to differentiate between trustwor- thy or untrustworthy sellers, either through repeated transactions on their own, or by consulting past buy-

ers or agencies certifying quality (Baumol, 1991, p. 5).

In Baumol’s view, the two attributes of perfect com-

petition, the small and anonymous firm and the ease of entry and exit, are not very congenial to ensuring the integrity and quality of products:

A large crowd of suppliers, each of them tiny, is the contradictory of this necessary requirement of effective market enforcement of integrity in relation to product quality. Thus, the requirement of perfect competition that its firms be minuscule and homogeneous, with none dis- playing any features that lead customers to single them out, is by itself enough to undermine the working of the market mechanism in this arena. An anonymous supplier who looks like every other supplier to potential customers will risk little or no loss of reputation by product degradation (Baumol, 1991, p. 9).

Under the circumstances, Baumol suggests that the costlessness and rapidity of entry and exit, the comer- stones of the abstract concept of perfect competition (or perfect contestability), create a situation where a firm can enter a market and after “milking” the consumer by fair means or foul, quit it when further continuance becomes uncomfortable. Under the circumstances, Baumol concluded “that in terms of reli- ability of the product quality and pertinent information, perfect competition and contestability - the two “ideal” market forms we are considering here - may fall somewhat short of the perfection that the name suggests” (Baumol, 1991, pp. 9-10).

(c) Privatization and eficiency

Those believing in the inherent superiority of private enterprise over public enterprise in terms of “efficiency,” may inadvertently be comparing two inherently different species, the owner-operated firm, and a publicly owned firm managed by salaried managers. As Pigou had stressed, in a small scale private business,

the personal interest of the head of the business in its success provides a stimulus to efficiency that is lacking in both joint private concerns and in public concerns. Over a large field of industry, however, the practical choice is, not between private businesses and public concerns, but between joint stock companies and public concerns. Here the initiative, freedom and interest of the captain of industry working his own comparatively small business cannot be had in any event (Pigou, 1932, p. 386).

Pigou felt that there was a risk of public authorities

using “aggressive non-commercial methods” such as a “differential bounty” or attempting to suppress technological changes to protect their own enterprise; and in a world of uncertainty, public enterprises may not be flexible enough to take quick decisions. Yet, in situations of monopolistic competition and wasteful advertising as well as in cases where structural economies could be reached by vertical integration,

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Pigou was in favor of creating public enterprises. With respect to the choice of one or the other form of enterprise, he felt that the decision must rest on comparative productive efficiencies as well as on the ease of applying public regulations (Pigou, 1982, pp. 381408). More recently, much the same conclusion is reached by Baumol:

The case of large enterprises (as opposed to small scale ones) is quite different. Here the efficiency advantage of private enterprise. apparently, often disappears. One can easily find cases in which a public firm seems much more efficient than its private counterpart, as well as cases where the reverse is true. Thus, where large industry is concerned one must be pragmatic and be prepared to act differently from case to case in choosing between public and private ownership (Baumol, 1980a, p. 21).

Studies in developing countries also have shown that not all public enterprises lose money, nor are all necessarily more inefficient than private enterprises (UNCTAD, 1992, pp. 124-125; UNDP, 1993, p. 48).

(d) Rent-seeking

On rent-seeking, the contemporary neoclassical critique of public enterprise has ample justification. Even before their criticisms appeared, Myrdal had pointed out that low prices of scarce commodities and services (such as electricity and transport), and credit and foreign exchange were the breeding grounds for self-perpetuating discretionary controls, official corruption and rent-seeking. He devoted the whole of chapter twenty of the Asian Drum to corruption, its causes and effects (Myrdal, 1968, p. 923).7

Even Pigou devoted attention to the misuse of power by public authorities both in the cases of regulation of private enterprise and in running public enterprises. In cases of continued public regulation of private industry, Pigou thought that the private companies “may employ corruption, not only in the getting of their franchise, but also in the execution of it” (Pigou, 1932, p. 332). Quoting the US experience, he argued that to protect their interests, the companies “maintain a continuing lobby” which funds the cam- paign funds of the politicians (p. 332).

This evil has a cumulative effect; for it checks the entry of upright men into government, and so makes the cor- rupting influence more free.. Yet, when public authorities mn enterprises, the officials directly will be handling millions of dollars to be paid to the tradesmen, builders, architects, etc., and would employ “tens of thousands of additional public servants” (p. 333).

This will provide the party leaders with enormous scope for patronage and enhancing their self-interest at the cost of the common interest (pp. 332-333). The

analysis was not followed by a partisan recommenda- tion for nonintervention by public authorities; a bene- ficial intervention depended on “the structure and the methods of governmental agencies.. .” (Pigou, 1932, pp. 332-335).

Contrary to contemporary neoclassical beliefs, rent-seeking is not the exclusive domain of the public sector. In Williamson’s model of managerial discretion, the managers are seen as maximizers of rent in terms of “expense accounts, luxurious offices, company cars, etc.” (Koutsoyiannis, 1975, p. 371). Galbraith notes many examples of “revenue enhancement by management” in the form of salaries, stock options, retirement benefits and various perquisites including aircraft (Galbraith, 1992, p. 55). The merit of the various plans of “golden parachutes,” a “self- initiated severance pay” of millions of dollars, in the case of take-overs, is doubted by transaction economists (Williamson, 1985, pp. 314-315).

Incidentally, even Adam Smith was suspicious of the directors of a joint stock company who, by

being the managers rather of other people’s money than their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company (Smith. 1979, p. 741).

Those who favor privatization for reducing rent- seeking would certainly be disappointed by what has happened in the cases of recent privatizations. In many developing countries, the sale below market prices - in the absence of a well developed stock market, it is anybody’s guess - was often supplemented by gen- erous conditions to the private purchasers. The British example of course comes from a developed country with a developed stock market. According to one - perhaps not totally impartial - estimate, if the total cost (this includes payments to underwriters, financial advisers, accountants, solicitors, stockbrokers, bankers, debt write-offs, new cash injections, depart- mental costs in advertising, etc.) of privatization was taken into account, net earnings from the sales of public enterprises were only 39% of the gross returns (Whitefield, 1992, 18 1, Table 7-7). The British experience also shows that the chief executives of all pri- vatized industries increased their salaries severalfold. In the case of Cable and Wireless, the directors’ salaries increased by 1100% between 1982 and 1990-91, while workers’ wages were not allowed to exceed the rate of inflation, which was equivalent to only 52% during that period (Whitefield, 1992, pp. 273-274). Much of the revenue generated was spent not on industrial and infrastructural regeneration but on keeping the PSBR low.


(e) Zkzissezfaire andfree trade

(i) Free trade The neoclassical economists recommend reduced

government intervention and free (more accurately liberal) trade as universal remedies without proper appreciation of the historical context in which the concept of laissezfaire and the Doctrine of Comparative Advantage were developed. As is well-known, both ideas were developed by the classical economists in reaction to mercantilism. On the other hand, Torrens, whom Schumpeter (1978, p. 607) gives credit for “baptizing” the theorem of Comparative Costs in the very mercantilist traditions, favored restrictions which had “the effect of enriching the mother country at the expense of the colonies” (quoted in Semmel, 1970, p. 61).

Both Zaissez faire and free trade became popular in the first half of the 19th century only after the English industrial success, a product of considerable state intervention both in the domestic economy (such as wage controls), and in foreign trade consisting of prohibitive import duties or a total prohibition on textile imports, and on exports of machinery, designs, speci- fications and or skilled craftsmen (Mantoux, 1961, pp. 2X-258).

Similarly, not many “late-comers,” including France, Germany, the United States, and Japan, experienced rapid development within a free trade regime, nor could their governments be honestly described as noninterventionist. As Schumpeter suggests

on the Continent free-trade or quasi-free trade policy was never supported by public opinion as strongly as was the case in England: it was imposed by bureaucracies... Those economists who, like the majority of the French, were free traders elicited little response form the public. In the United States, too, free trade was never popular except with economists and not with all of them (Schumpeter, 1978, p. 397).

“From the Civil War to the 1930’s the American tariff policy was essentially protective” (Faulkner, 1951, p. 64). Bhagwati suggests that the role of the East Asian government was prescriptive rather than prohibitive (Bhagwati, 1989, p. 98). Such a view certainly underestimates the “proscriptive” role of the government in the only democratic country in the region, Japan. (Bronfenbrenner, 1988, p. 237; Komiya, 1990, pp. 292-296). Almost all the late developers among the present-day developed countries began to favor free trade, in varying degrees, only after reaching technological maturity.

In fact, even in England the long history of mercantilism had only a short interruption of less than half a century. The repeal of the Corn Laws and the Navigation Acts came in England in the 184Os, and the

revival of mercantilism as a “powerful policy move- ment” began with the Great Depression (Johnson, 1975, p. 271). The colonies rarely had the autonomy to decide their commercial or economic policies. The short interlude of free trade was also the period of considerable “diplomatic and military aid to commerce” in the name of “freedom of seas” leading to the forced opening of China and Japan by the then leading powers, including the United States (Faulkner, 195 1, p. 54). The partition of the African continent among the Western powers also came during this period. These wars of annexation “were applauded by such Radicals as Joseph Hume” (Semmel, 1970, p. 206). Some British economists and politicians even advocated “free trade” as a tool of imperialism (Semmel, 1970, pp. 8,204).

Undoubtedly, post-WWII years experienced considerable reduction in tariffs but they were largely off- set by nontariff barriers (Bhagwati, 1989, p. 3). Even in 1960, all major trading nations including the EEC, the United Kingdom, and the United States had sub- stantial “residual reductions” covering agricultural and food products (Dam, 1970, p. 165). Restrictions on cotton textiles, which began in 1961 as a short-term arrangement, subsequently became increasingly restrictive (Trela and Whalley, 1990, p. 13; Cline, 1990, p. 220). Other restricted products included steel, steel products, machine tools, cutlery, footwear, automobiles, and consumer electronics (Trela and Whalley, 1990, pp. 13.42; Corden, 1987, pp. 26-27). High tariffs and tariff escalation for developing country exports resulting in high effective rates of protection for semi-processed and processed products remain serious problems (UNCTAD, 1993, p. 36). One may add competitive subsidization of agriculture, public procurement, and “informal” protection (Corden, 1987, p. 3). Major trading countries continue to blame each other for continued protectionism. All this gives sufficient credence to Johnson’s view that mercantilism has remained a potent force in popular and political thinking (Johnson, 1975, pp. 267-281). To Johnson, contemporary commercial policy has a lot in common with its “mercantilist ancestry” in its emphasis on protection against imports to promote national income, wealth and employment, as well as in a concern for balance-of-payments surplus more by import restrictions, rather than export promotion (p. 271). Whether the Uruguay Round will provide the developing countries with “level playing fields,” only the future can tell.

In a world of incessantly upgraded technology however, it is

too optimistic to expect that industries to sustain the economy of the next generation will come up automati- cally through the activities of the private sector. Some measures for fostering industry [by the government] are required (OECF, 1991, p. 7).

ECONOMIC REFORM 563

It is in the fostering of the industries for the next generation that the OECF finds the structural adjustment approach having a regrettable omission (p. 7). Another omission is, of course, in the fact that structural adjustment of any kind entails social costs and “on balance there are likely to be some net losers since full compensation rarely takes place” (Corden, 1987, p. 15). A systematic phasing out of the industries losing comparative advantage, providing a safety net for those who cannot be reemployed, facilitating of retraining, providing location grants, and regenerating depleted infrastructure in the declining areas, need more government intervention than less, a lesson one learns from the rapid implementation of structural change in Japan (Bronfenbrenner, 1990, p. 18; Dare, 1986, pp. 148, 122).

(ii) Laissez faire Even though the contemporary neoclassical econo-

mists do not advocate laissezfaire, in their evangelism “to get government off the backs of the people,” they certainly outdo even Adam Smith. Neither he nor his followers nor the early neoclassicals argued for emas- culating the role of the government as much as the contemporary neoclassicals. The classical economists felt that in addition to defense, internal security, and the provision of justice for the enforcement of contract and security of property, the state must also ensure certification of the purity of metals and textiles, provision of infrastructure such as roads, canals, harbors, lighthouses, coinage, postal services, regulation and taxation of mortgages for discouraging undesirable leases and the regulation of interest rates to deter the “prodigals” from diverting investable funds from productive to wasteful expenditures as well as the regulation of public health (O’Brien, 1975, p. 275).

Those who ardently wish “to get government off the backs of the people” need to be reminded that it was the very same administrators in England (i.e. Robert Peel in 1840s) which had, on one hand, liber- alized trade and, on the other, introduced factory leg- islation reducing hours of work, prohibiting the employment of women and children in mines, and providing for the safeguarding of dangerous machinery for correcting some of “the most grievous industrial abuses” (Mitchell, 1967, pp. 489-492). To anyone interested in knowing “some of the most hor- rible stories” of the industrial abuses in the early days of the English industrial revolution, Mitchell recom- mends a reading of “the celebrated Report of the Commission of Inquiry Into the Employment of Children and Young Persons in Mines and Collieries and in the Trades and Manufactures in which a Number of Them together.. . First Report (1842)” (p. 489). Currently, one might simply recommend a quick visit to the mushrooming small and medium enterprises in countries, including China, undergoing economic reforms cf la the IFIs.

Another element of the conventional wisdom favors agriculture as a precondition for economic development, or insists on textiles (primarily for export promotion) as the tirst desirable stage of industrialization because of the low capital intensity. A proper analysis however, of the historical experiences leading to today’s assumptions may make those who believe in the conventional wisdom rather uncomfortable.* Perhaps with the exception of the United States and other land-abundant countries, early developers did not experience rapid agricultural development in their initial stages of industrialization, nor did they generate vast agricultural surplus to finance their economic progress (Sinha, 1969 and 1984). In both England and Japan, even cotton textiles first evolved as import-substituting industries which ventured into foreign markets only when they became sufficiently strong. The cotton textile industry in Japan remained import substituting virtually until 1910, “when for the first time exports surpassed imports. Import substitution was completed by 1919” (Ohkawa and Kohama, 1989, p. 26). It also remains debatable whether the English textile industry would have become as important as it did without the heavily protected regime of a mercantilist England and without the colonies with extensive markets and cheap raw materials. Both countries would have paid for cotton - in those days the cost of raw cotton could be between half to two- thirds of the total cost of production - with hard- earned foreign exchange, if their colonies had not come to the rescue.9

Other countries defying the simplistic formulations of the Doctrine of Comparative Advantage were Denmark and Holland, which, in spite of their high human/land ratio, created a “refining” dairy industry on the basis of imported feed grains. Later, Japan, Korea (South) and Taiwan followed a similar strategy in developing steel and machinery industries based on imported iron ore. Of these countries, none had a comparative advantage in steel production, yet nurtured by their respective governments, these industries created competitive advantage. On the contrary, IS1 policies pursued by Brazil, China, and India - three countries possessing natural comparative advantage for steel, and a large domestic demand for steel for housing, irrigation, and transport-have been unjustly criticized.

5.LIMITEDVAJXDlTYOFTHE NEOCLASSICAL SYSTEM FOR DEVELOPING

COUNTRIES

Most of the above criticisms of the neoclassical system apply to both developed and developing countries. The appropriateness however, of the neoclassical system for developing countries -with all of their rigidities and imperfections - becomes all the more questionable. Indeed, imperfections can arise in the


most important markets such as credit and capital goods. In such cases, as Arrow pointed out, the failure of a market for future goods most likely occurs because of, first, large enforcement costs with respect to future contracts as compared to contemporaneous contracts, and second, uncertainties about the future. The nonexistence of, or imperfections in, a single market has spill-over effects on other markets, thereby destroying the optimality of competitive equilibrium (Arrow, 1974, p. 8; quoted in Srinivasan, 1984, pp. 54-55).

Furthermore, for the study of societies undergoing rapid economic, political and social change in the process of development, acceptance of the premises of neoclassical economics amounts to abstracting from changing realities and to assuming that various propensities (with respect to savings, investments, family size, attitudes to life and property, and toler- ance toward inequality and social injustice) will be stable over time or will necessarily follow the pattern undergone by developed countries; this is difficult to sustain.

In this context it may be interesting to note the views of Fritjof Capra, a physicist who argues that:

The evolution of economic patterns, by contrast [to bio- logical evolution], takes place at a much faster pace. An economy is a continually changing and evolving system, dependent on the changing ecological and social systems in which it is embedded. To understand it we need a conceptual framework that is also capable of change and continual adaptation to new situations. Such a framework is sadly lacking in the work of most contemporary economists, who are still fascinated by the absolute rigor of the Cartesian paradigm and the elegance of Newtonian models, and so are increasingly out of touch with current economic realities (Capra, 1982, p. 196).

6. INNER-CONTRADICTIONS AND NONIMPLEMENT’ABILITY

The inherently contradictory nature of some of the policies magnified the problems of implementation. For example, currency devaluation in countries dependent on high imports of food, machinery and intermediate goods, raised costs of production and the living costs, thus further fueling inflationary pres- sures. Even if such devaluations raised the prospects for increased export earnings, part of the stimulus effect. was undercut by the increase in production costs. Besides, the very act of devaluation imposed on the debtors an enlarged burden of debt repayments and servicing; consequently, IFIs’ policies became an exercise in debt enhancement rather than debt reduction. At the same time, the prospect of further devaluations brought greater risks of currency speculation, creating serious uncertainty for the future which is

inherently inimical to long-term investments for growth. All this happened at a time when currency speculation was forcing down the exchange rates of some major currencies to which the currencies of the developing countries were linked, formally or infor- mally, or in which their commodity prices were quoted.

This, in effect, meant that they had a squeeze on their terms of trade both from the domestic devaluation and from the foreign devaluation of the currencies (often the US dollar) in which their commodities were priced. If some countries succeeded in increasing their volume of trade, despite the squeeze on their terms of trade, it came through expanding the output of cash crops, perhaps at the cost of domestic food production, thereby increasing food imports. Several countries attempting to export the same or similar products also had a further depressing effect on world prices of such products (Hussain, 1993, p. 6; quoted in UNCTAD, 1993, p. 101).

Above all, devaluation generated increased costs of living, drastic reductions in government expenditures, and a reduction in wages. This, as well as a contrac- tionary monetary policy, and the resulting “import compression,” - apart from being politically divisive and destabilizing at the very moment where social cohesion was most desirable - had a dampening impact on growth itself and thereby any hope of amelioration of the conditions of the poor became an ever-receding prospect.

The most important barrier to implementation of the IFIs’ policies can, in fact, be inferred from a comment made by Bhagwati in the context of endogeniz- ing politics and policy making in trade theory:

In the orthodox 2 X 2 X 2 model with two factors, two traded goods, and two countries, we know that free trade is the best policy for a small country without domestic distortions. Therefore, the “optimal” response to import competition - that is, terms of trade improvement - is to retain free trade and to profit from the improved terms of trade. But this standard economic policy prescription ceases to be relevant if we endogenize policy. Thus, if we were to model a two-party political system, so that the standard model is now a 2 X 2 X 2 X 2 model and there are cost functions for the political process of lobbying for and against a tariff, the model can be solved for an endogenous tariff. But as soon as we do this, the result of import competition is yet another endogenous tariff. To ask, in this model of endogenous policymaking, what free trade implies is to ask an unrealistic question, for who shall bring this free trade policy about? (Bhagwati, 1984, p. 204).

This question as to who will bring about changes in economic policy is fundamental to the present debate on economic reforms. It is beside the point whether the IFIs should have acted as “debt collectors” for rich country banks when the loans were made commer-

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cially, without any guarantees by or even consultation with the IFIs. Arguably, the logic of the market should have been allowed to play unhindered. Instead, the IFIs were brought in by the very same countries which incessantly advocate nonintervention in the free play of the market to impose discipline on the debtor countries.

The actual implementation of IFIs’ policies however, had to be vested in the elite of the debtor countries irrespective of their administrative, technical or political abilities to do so.‘O Besides, it does not need much imagination to see that the local elite will not implement policies that would directly cut into their own privileges. In fact, if the purpose of the exercise was to reduce the powers and privileges of the elite in developing countries, it was misconceived.

It is ironic that those who advocate the winding down of national governments gave their unqualified support to IFIs’ bureaucracies, with enormous potential for patronage in terms of project contracts, consultan- ties and lucrative jobs. This bureaucracy is hardly responsible to any representative body. For instance, according to a 1970s Brookings Institution study, the Bank’s president “dominates the organization and encounters few internal checks and balances” (Mason and Asher, 1973, p. 86). The bureaucracy at lower levels shows

familiar signs of the hardening of the arteries that is characteristic of bureaucracies (p. 66). [It shows] extensive concern with procedural and presentational details and produces an avalanche of papers for distribution to a grow- ing list of recipients whose status and psyche require them to receive the papers but not necessarily to read or act upon them (p. 66).

It is not particularly known for its discretion either. Sen, at one time - to the best of the author’s knowledge -an alternate governor for India at the IMF, finds the “arrogance of some of the World Bank and the IMF officers, especially from developed countries, vis-&vis the smaller countries.. .worse than the pro-consuls of Britain when the Empire was at its zenith” (Sen, 1991, p. 1737).”

7. UNSUSTAINABLE CLAIMS OF CONSENSUS

The IFIs have tended to claim that “In the past twenty years, a consensus has emerged among economists on the best approach to economic development” (World Bank, 1993, p. 85) (italics are mine). Williamson nick- names this ‘the Washington Consensus” (WC) (Williamson, 1993, p. 1329).i* Even a brief survey of the literature, as presented in this paper, shows that the claim of consensus is untenable in view of the continuing criticisms both of the neoclassical economics

as well as the lFIs’ policies by various schools of economics.

The predilection of classifying them into distinct cat- egories is amply highlighted by Streeten (1984). One of the various ways of classifying development theorists, h la Hirschman, groups them into

whether they asserted or rejected the claim of mutual benefits in Nor&South relations; and whether they asserted or rejected the claim of monoeconomics that there is a single economic discipline, applicable to all countries and at all times. Using this classification, he [Hirschman] derived four types of theories. Orthodox (neoclassical) economics asset% both claims. Neo-Marxist and dependence theorists reject both claims. Development economists tend to reject the monoeconomics claim - the reason for their existence calls for a distinct subject-but to assert the mutual benefit claim, whereas paleo-Marxists assert the monoeconomics claim (except insofar as class determines consciousness) but reject the mutual benefit thesis (Streeten, 1984, p. 337).

Streeten added a few more. He pointed out that some development economists may reject claims to mutual benefit, but yet may not be neo-Marxists or dependency theorists. There may even be others who accept the claims of monoeconomics, but wish to include development economics as a special branch of such a monoeconomics. Even within the same group there may be serious differences. For instance, dependency theorists could possibly be divided into two groups: those who believe in “delinking,” such as Frank and Amin, and those who do not, such as Warren, who argued in favor of increased economic interaction between developed and developing countries (Warren, 1980, p. 184; also Kay, 1989, p. 183-184). Similarly, among the neoclassical economists the Chicago School and Public Choice economists are not the same as Bhagwati (1989) who recognizes the importance of the role of government, ideology and institutions. Under the circumstances, any classification can be open to question.

In this paper, a classification which is close to Hirschman’s (and to some extent Tarp’s) is adopted, with the only exception that various groups of Marxists are put under a broad category of dependency theorists.

Critics of the neoclassical orthodoxy can be broadly categorized into four groupsi3: the eclectics; structural adjustment with a human face; the dependency theorists; and the structuralists.

(a) The ecZecticP

The first group of critics consists of a diverse group of scholars in both developed and developing countries who do not adhere to just one paradigm. This group probably represents the majority. They, by and large, believe in the Smith-Ricardo-Mill-Marshall-Pigou- Keynesian heritage. While they see the market as an


institution facilitating the allocation and distribution of outputs and inputs, they do not believe in its infal- libility. Hence, they assign an important role to the state, and to the participatory institutions in applying correctives to the excesses of the market. For this group of scholars, economic development encom- passes economic, social, political, ecological and distributional issues, resulting in multiple and conflicting objectives, to be dealt with by the state. Thus, the decision-making process is full of messy com- promises, providing considerable scope for misuse of power by the state unless checked by participatory institutions.

The eclectics may or may not accept monoeconomics, but they do think that unique conditions require unique combinations of incentives and policy mixes. As such, they are critical of the IFIs’ uniform, across-the-board recommendations for all developing countries. The eclectics are convinced that the success or failure of policy instruments depends also on structural and institutional forces operating in a society - forces which need correcting if they hinder the economic and sociopolitical change needed for rapid economic and social development. In this they may have much in common with structuralists.

Unlike the proponents of the Washington Consen- sus, the eclectics believe that a social science cannot be value-free. Methodologically too, the search for consensus may be questionable. As Myrdal has stressed, a “disinterested” social science is logically impossible.

Research, like every other rationally pursued activity, must have a direction. The viewpoint and the direction are determined by our interest in a matter. Valuations enter into the choice of approach, the selection of problems, and the definitions of concepts, and the gathering of data, and are by no means confined to the practical and political inferences drawn from theoretical findings (Myrdal, 1968, p. 32).

McCulloch, one of the classical economists, had unequivocally argued that “Observations are scarcely ever made or particulars noted for their own sake”; he added that it is “the effectual demand of the theorist that regulates the production of the facts or raw materials, which he is afterwards to work into a system” (McCulloch, 1828, p. 29; Semmel, 1970, pp. 207-208). Schlesinger, a leading historian states,

When private interest dominates, public morals are very different.. Economics and political science too abandon a larger vision of history, retreat from public responsibility and become behavioral, quantitative, mathematical, antiseptic, ‘value-free.’ History itself turns from delin- eations of conflict to myths of consensus (Schlesinger, 1986, pp. 41-42; see also Capra, 1982, p. 197).

(b) Structural adjustment with a human face

The second group of social scientists critical of the IFIs’ orthodoxy consists of civil servants within member governments and within the UN system, particularly those affiliated with the United Nations Conference on Trade and Development (UNCTAD), the United Nations Development Program (UNDP), the International Labor Organization (ILO), the United Nations Children Fund (UNICEF), and non- governmental organizations (NGOs).

Furthermore, it would not be difficult to find some social scientists even within the IFIs, who would be highly critical of the policies of their respective orga- nizatlons, but they risk career stagnation if they take a critical public stance against IFIs. This, however, does not rule out their making a critical noise within their own organizations (Mosley, Harrigan and Toye, 1991, p. 95). Some differences of opinion are voiced also in the occasional papers published within these institutions, some of which are available for public circulation.

International civil servants are included in this paper as a separate category because the officials of this group often have to abide by an implicit consensus between their organizations and the IFIs. As a result, they tend to avoid taking a highly critical public position against the IFIs or influential member countries. There have been occasions when such stances have brought reprisals from powerful member countries, such as their withdrawal from particular organizations, or the cessation of financial contributions. UNCTAD has always been suspect for its advo- cacy of developing countries’ interests.

It is UNICEF, however, that has been the source of probably the mildest, yet most effective criticism of the IFIs’ policies in recent-years. On the basis of accumulating evidence of the poorest women and children suffering most from the recession of the 198Os, UNICEF came out with a position paper in 1983, drafted in active consultation with the IMF and the World Bank which, while acknowledging the need for adjustment policies rather than muddling through, argued for an integrated approach to the adjustment process which must take into account the impact of policies on poor women and children, particularly in the poorest developing countries (Jolly and Van Der Hoven, 1991, p. 1,802). The elements of the UNICEF approach can be summarized as follows:

1. . a clear recognition of the importance of preserving a minimum level of nutrition, household income (in cash or kind) and basic services for all age groups, as a means toward protecting and maintaining productivity and welfare of the whole population.

2. . ..the maintenance or creation of a network of basic services and support for young chiidren, the most vul- nerable section of the population, yet also the one most

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important for the future of a country and, in most respects, the one least costly to protect.

3. .a serious restructuring within health, education and related social services to achieve maximum cost effec- tiveness and internal efficiency in the provision of those services. This restructuring should involve a hard-headed review of the ways to economise on imported supplies and more efficiently to greater use of local resources in health, education and other services. One also needs to look into the long-run dimen- sions of adjustment to ensure a pattern of economic restructuring which can sustain these services through domestic resources.

4. . .more creative reliance on community action and the informal sector, which tend to use more local and low- cost resources and less high-cost and imported supplies. This said, attempts to exploit the benefits of community action too crudely need to be guarded against. If poor communities are left to rely entirely on their own resources for the supply of services when better off communities receive subsidized provision, one can hardly expect an enthusiastic response. In contrast, a combination of community action with public resources has often proved highly effective, as has the use of informal sector production and approaches.

5. .more concern with income distribution, not less - especially in the sharing of the burden of economic adjustments and cutbacks. The arguments for this are strong, in line with the elementary principles of welfare economics. These are reinforced by the arguments of reducing foreign exchange (requirements) and increasing employment, since both would be generally encouraged by the greater sharing of adjustment (Jolly, 1991, pp. 1.81t&1.811).

The UNICEF initiative, amplified by similar noises from other UN agencies, NGOs, some prominent social scientists, and a few governments, led to a change in the rhetoric of IFIs. The “protection of human needs” and equity began to appear in state- ments of the president of the World Bank and the man- aging director of the IMF. Nevertheless, as Jolly stressed “these concerns have still not been incorpo- rated in the dominant economic paradigms which guide the World Bank and the IMF in their main- stream activities” (Jolly, 1991, p. 1,819) and that the IFIs, as always, continue to “overwhelmingly work within a neoclassical economic paradigm” (p. 1,817).

(c) The dependency theorists

Another set of criticisms comes from the dependency theorists, who have drawn inspiration partly from Marxian analysis and partly from Latin American structuralism (Seers, 1981, p. 14; Kay, 1989, pp. 125-162). Both the Marxists such as Paul Baran, Paul Sweezy, Charles Bettelheim, Gunder Frank and Samir Amin, and the reformists such as Fernando Cordoso, Enzo Faletto, Osvaldo Sunkel, Celso Furtado, in spite of their differences, saw stag-

nation, underdevelopment, or lack of industrialization in developing countries in terms of the extraction of surplus from the periphery for the benefit of the center.

Contemporary dependency theorists in general per- ceive IFIs and the General Agreement on Tariffs and Trade (GATT) as important instruments for the “pen- etration of imperialism, both within the metropole and in the peripheral underdeveloped countries.. ” (Frank, 1975, p. 63). More recently, in writing about the present day economic crisis, Frank added:

The economically and politically strongest have obliged the weaker and poorer countries to bear the brunt of the world economic crisis and to pay its greatest cost in the attempt to protect the rich from the same (Frank, 1992. p. 458).

In a similar vein, Amin argues that the chronic food crisis and famine, the debt crisis and the virtual cessation of imported technology in Africa have led to

a series of surrenders to the dictates of transnational capital, organized around the Paris and London Clubs, the IMF, the World Bank and the consortium of the large Western banks.. The axis of the new world conjuncture is Western capitalist aggression against the Third World peoples, with the aim of subordinating their further evolution to the demands of redeployment of transnational capital (Amin, 1990, p. 48).

Amin concluded that a developing country can attain economic advancement not by adjusting its economy within the international division of labor, but by delinking itself from that logic.

Amin, like other dependency theorists, does not explicitly analyze the economic costs of delinking, but he concedes that attaining delinked development has been made more difficult because of the failure of the developing countries in achieving the objectives of the New International Economic Order (NIEO). He sees however, the main opposition coming from the domestic privileged elite, the “class allies of the international capital’; it is their interests that are promoted by the structural adjustment policies of the IFIs in order to create a ‘comprador’ state and society (Amin, 1990, p. 164).

Criticisms of the IFIs by Frank and Amin are echoed by dependency theorists from other parts of the world. Chossudovsky, writing from Canada, recently described the structural adjustment program as an effort to internationalize the macroeconomic policies of a large number of developing countries “under the direct control of the IMF and the World Bank, acting on behalf of powerful financial and political interests (e.g., the Paris and London Clubs, the G-7)” (Chossudovsky, 1991, p. 2,527). In his view, it is a new form of “market colonialism” in which the “Washington-based international bureaucracy” is


used to shape the destinies of 80% of the world population residing in sovereign countries (p. 2,527).

Bag&i, a leading Jndian dependency theorist, sees structural adjustment impoverishing people in three ways: firstly, the policies directed to deflation and the reduction of public and private expenditures for reducing domestic absorption and increasing exports, lead through the Kahn-Keynesian multiplier process to reduce gross national product. Drawing on Taylor (1991), and Stein and Nafziger (1991), Bag&i further argues, that a policy-induced “severe import-compression” reduces investment and consequently national income, since in many of the developing countries investments are import-intensive.1s Second, the income decline is further accentuated by the decline in terms of trade of developing countries because of the “transfer burden of debt.“16 Bag&i stresses that attempts by the highly indebted countries to unload a narrow range of primary products and simple manufactures in the face of changing tastes and technologies as well as increasing protectionism in developed countries depress the terms of trade.17 Finally, the financial liberalization policies aimed at eliminating most selective credit controls and subsidies to the priority sectors including agriculture, public distribution of food and secondary and higher education lead to further immiserization (Bag&i, 1992, pp. 1,133-1,134).

This is a powerful analysis with which not many economists might disagree. Yet Bagchi offers nothing constructive other than an unconvincing clarion call for “the working classes and scientists of advanced capitalist countries” to join the “struggle to wrest hegemonic control from the clutches of the generals, the financiers and the arms merchants” (p. 1,136).

The rapid economic development of newly indus- trialized economies (NIEs) of East Asia has also been analyzed in the dependency framework. In so doing, Frank has argued that

their swxess was not the result so much of free enterprise as of state intervention. Moreover, their state’s ability to do so was in turn based on three earlier political factors: pre-war Japanese colonialism, post-war American imposed land reform, and massive cold war subsidies (Frank, 1991, pp. PEG-97).

In the same vein, Hall&y, drawing analogy from the Japanese case, states: “Just as Japan’s restoration and re-insertion into the world economy were precip- itated by the fight against socialism, so South Korea and Taiwan were reshaped not only to ‘contain’ the Korean and Chinese revolutions, but also as Japan’s periphery” (Ha&day, 1980, p. 11).

Does it mean, then, that the East Asian experience undermines the dependency theories? After a detailed examination of the dependency theorists on the East Asian NJEs, Preston concludes that “the rise of the

NJCs does not render irrelevant or otiose the depen- dencylneo-Marxian line” (Preston, 1987, p. 171; also Preston, 1986, pp. 173-251).

Ironically, the ideologues of the World Bank, not unlike Frank and Halliday, explain the “extraordinary growth” of the East Asian countries in terms of “highly unusual historical and institutional circumstances” (World Bank, 1993, p. 366) (italics mine). These unusual historical circumstances included US assistance in rebuilding Japan, US military spending in the region throughout the Cold War, US military expenditures during the Vietnam War and stationing US troops in Korea (p. 80). On what the other developing countries can learn from the East Asian experience, the dependency theorists do not offer much; however, the World Bank supplies a long list (pp. 366367), which virtually amounts to a reiteration of their “market-friendly policies” and “getting funda- mentals right.” In this sense, The East Asian Miracle, is simply one more effort at rationalization of what the IFJs have already been saying.

(d) Structuralists

Structuralism was primarily developed by the social scientists working for the Economic Commission for Latin America (ECLA) under the leadership of Ratil Prebisch (Kay, 1989, p. 232).r* The structuralist approach sees underdevelopment in terms of the unequal relationship between an advanced “center” and an underdeveloped “periphery,” leading to “an uneven distribution of the gains from trade arcl economic progress” (Streeten, 1981, p. 217). As a result of this unbalanced relationship, the technological change that spreads to all sectors within the center, raising the levels of living of the people in general, in the periphery remains confined largely to the primary products for exports. Hence, the periphery is left with a dualistic economy which is charac- terized by low productivity occupations supplied by a huge amount of surplus labor (earning low wages); and, at the same time, there is a technologically advanced export sector, largely based on imported technology. The low income elasticity of demand for imports of primary products by the centres and the secular decline in terms of trade act as mechanisms to siphon off disproportionately the fruits of technical progress from the periphery to the center. A conclusion similar to this was drawn independently by Singer, hence, the hypothesis is known as the Prebisch-Singer Thesis. Erebisch further argued that transnationaJ corporations, apart from acting as agents for the siphoning-off of income from the periphery, by catering to the demands for luxuries by the privileged consumers, also inhibit reproductive capital accumulation and employment (Prebisch, 1984, p. 185).

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Among many policies aimed at attaining a fairer distribution of the gains from international trade, Prebiscb gave primary importance to altering the periphery’s structure of production, primarily by import substituting industrialization, something he believed to be achievable only through active state par- ticipation and direction.

In this the structuralists had much in common with Indian development thinking on the eve of India’s independence. The Indian leadership was certainly impressed by the accomplishments of the Soviet plan- ning. Yet, like the British Fabians, they considered themselves socialists, but rejected the Marxist doctrine of surplus value and of class-conflict bringing revolution and the demise of capitalism. They (including some Marxists) followed the Fabians in working within a parliamentary system of government to ensuring economic development with social justice.19 With this objective in view, the Indian leadership opted for a “mixed economy” within the framework of a devel- opmental state, in some ways, a legacy of the British colonial era. Neoclassical orthodoxy remained a rare phenomenon in India until recently when it became popular due to the emergence of the nouveau ticher and due to increasing numbers of Indian students with degrees from US universities, and, tinally, due to civil service returnees from the IFIs.

It should be remembered that the structuralist disil- lusionment with import substitution in Latin America had already begun much before neoclassical criticisms came to be articulated. The IS1 strategy had neither ameliorated foreign exchange shortages, nor had it pro vided hoped-for linkages with other economic activities. The capital-intensive nature of industrialization and the dominance of foreign capital inhibited the reduction in unemployment and the inequality of income and wealth as well as the internal autonomy of the periphery from the center (Kay, 1989, p. 46).

In some ways, the neoclassical and the structuralist controversy regarding the Latin American inflation and balance-of-payments crises of the 1950s and early 196Os, and particularly Chilean inflation, had set the scene for future debates. Monetarists had always regarded inflation as a monetary phenomenon, resulting from excess money supply, while the structuralists saw inflation as the outcome of structural maladjust- ment and rigidities in the economic system (Kay, 1989, p. 49). To the structuralists an increase in money sup ply passively responded to the “pressure of economic growth on an underdeveloped social and economic structure” (Wachter, 1979, as quoted in Killick, 1984a, p. 23).

In the 196Os, and more so in the early 197Os, the structuralists-monetary debate became somewhat less intense for a number of reasons: first, world trade was buoyant; second, the creation of the Compensatory Financial Facility (CFF) in 1963 to assist developing countries facing balance-of-payments deficits in times

of falling primary commodities’ prices was seen as a concession by both the IMP and the United States to structuralist ideas (Kahler, 1990, p. 39). Finally, the structuralist inspired programs in Chile (196%70), Chile (1970-73) and Peru (1968-75) had turned out to be rather disappointing (Sutton, 1984, pp. 19-42). One must remember, however, that the demise of Allende’s government and its “Chilean Road to Socialism” was not purely due to its own weaknesses; it was engi- neered by the US government and, as usual, the IMF, the World Bank, and the international banking frater- nity had fallen into line with US foreign policy (Kay, 1989, p. 200; Seers, 1981, p. 137).

In view of changes in the global situation since the early 1970s specifically the rise of oil prices and the breakdown of the Bretton-Woods System, balance of payments became the focal point of world attention. The mid-1970s and early 1980s also witnessed the strengthening of the neoclassical orthodoxy, particularly of the Chicago School, in developed countries which were suffering stagflation in the post-1973 world of high oil prices. This environment provided the basis for the elections of Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States; the two major developed economies put into power extremely ideologically dogmatic world leaders who believed in strict monetarist policies.

These policies and the resulting recessions in developed countries led to a drastic decline in the demand for primary products and in their terms of trade. The precipitous fall in export earnings forced developing countries to default on debt-servicing. It was in their efforts, primarily to save the commercial banks of the developed world, that the IFIs began enforcing stringent stabilization and structural adjustment measures on the debtor countries. The results were often disas- trous in terms of economic stagnation, poverty, inequality and unemployment.

This period brought a new intensification to the neoclassical-structuralist debate, even though some influential neoclassical scholars had begun to accept the basic premises of the structuralists. Chenery stressed that:

The conventional separation between stabilization and development, or short-term and long-term policies, has become increasingly inappropriate to me international economic problems of this decade, in which the adjustment policies of individual countries must be assessed over periods of tive to ten years and are heavily dependent on actions by other countries (Chenery, 1981, p. 115 as quoted in Nelson, 1990, p. 41).20

Prompted by the widespread social distress resulting from the IFIs’ policy packages, the neostructural- ists, as the structuralists of this period are called, began to argue that increasing income inequality, declines in the relative shares of wage incomes and the conse-


quential social unrest would lend to output decline and stagnation rather than economic development (Taylor, 1987, pp. 154-161 as quoted in Nelson, 1990, p. 49).

In a recent book, Taylor (1993) also questions the neoclassical assumptions that monetary and fiscal austerity reduces inflation but not the level of economic activity. To him, changes in relative prices and in the composition of output resulting from monetary and fiscal austerity alter the distribution of income and wealth, thereby influencing the level of consumption and savings. One may also add that the policies that influence development strategies and policy mixes will have their own respective distributional implications affecting growth of output, income and employment (Sinha et al., 1979, p. 128).

According to Taylor, shifts in the distribution of income and wealth operate “as the keys to changes in capacity utilization, capital inflows, the public sector borrowing requirement or PSBR, and capital forma- tion” (Taylor, 1993, p. 50). He argues further that causality often nms from demand injections such as exports and investments to savings and output, with income distribution and foreign exchange and fiscal restrictions acting as constraints on capacity utilization and growth (p. 53). He therefore, concludes that “macroeconomic policy is always desirable” but “If ‘soundness’ means austerity, it runs a grave risk of inducing secular stagnation” (p. 87).21 Be- sides, sociopolitical constraints may make implemen- tations unlikely (Taylor, 1993, p. 87; Cooper, 1992, P. 60).

8. CONCLUSION

In summing up, one may not be unjustified in point- ing out that the IPIs’ policies, together with the neoclassical economics in which they are grounded, suffer from serious limitations both on analytical as well as historical grounds. The very complexity of the policy package and the contradictory nature of the policy instruments has made implementation difficult. The main prerequisites of successful implementation

-honest and skilled bureaucrats, technical personnel (e.g., accountants, management consultants, investment bankers) and politicians - were in short supply in most developing countries undergoing the IFIs’ discipline. The IPIs’ policies, by their very nature, were divisive; social cohesion as well as government morale was undermined at a time when these were most needed. It was not surprising, therefore, that the policies have had limited success and imposed dispro- portionate suffering oh the very poor.

A considerable amount of responsibility does, necessarily, rest on national leaders who had borrowed indiscriminately without allowing for future uncertainties. Private banks share a major portion of the blame for their indiscriminate lending without due regard to creditworthiness. But those neoclassical economists who provided the philosophical underpin- ning for the IPIs’ policies cannot escape blame either, for they had advocated policies based on ideas which had limited intellectual or historical support. A major share of the blame rests also with the IPIs for their dogma at the cost of human suffering and thereby irrevocably damaging their credibility as intergovem- mental organizations.

Rather than focusing on assigning responsibility, however, what is most important is the devising of meaningful policies that will put developing countries once again on the growth paths they were on before the oil crises and the stringent anti-intlationary polices of the West in the 1980s.

Nevertheless, in view of the “standard complaint that the IMP [and the World Bank] squeezes debtor nations too severely and in the wrong ways” (Cooper, 1992, p. 151), and that it is their dogma and the lack of impartiality that brings enormous suffering to the poor in developing countries, there is a plausible case for the establishment of a high-Powered commission on the lines of the Pearson and the Brandt Commissions (since internal or external assessments by the funding institutions rarely bring out the truth) to look into the workings of the IMP and the World Bank. Truly objective evaluations may even be the first step for restoring the credibility of the IFIs in the eyes of the developing world.

NOTES

1. See for some of the major studies, Brnno et al. (1991); World Bank (1989); World Bank (1991); and World Bank Cooper (1992); Gbni (ed.) (1991); Haggard and Ranfmnn (1993) ( nrranged alpbabeticnlly). Many more contributions in (1992); IMF (1993); Killick (1984a and 1984b): Moslev, this field have been oublished in manv academic ioumals and &r&m and John ?oye (1991); Nelson (1990); Perkins add particulnrly in Wori Development o&r several {ears. Roomer (1991); Taylor (1988); Taylor (1993); UN (1991); UNCTAD (1992,1993); UNICEP(1983); Willinmson (1990); 2. One has to be very careful in identifying economic

ECONOMIC REFORM 571

scholars belonging to this group; the leading neoclassical economists such as Alfred Marshall, A.C. Pigou, and D.H. Robertson, would not have gone along with many of the views of present-day neoclassical economists.

3. The intellectual basis for some of these arguments come from the works of Ian Little, Maurice Scott, Bela Balassa, Jagdish Bhagwati, T.N. Srinivasan, Max Corden, Anne Krueger, and Helen Hughes on trade regimes, trade liberalization as an instrument of growth, and their criticisms of import substituting industrialization.

4. On methodological grounds, such historical compar- isons are suspect because in the “gun boat” days of diplomacy and the imperialistic control of the colonies, what counted in real life was power, not tariffs. Arguably, the Opium War was fought by the then developed countries for opening China to free trade, including that in opium. Japan was also forced open and had to accept “unequal trade treaties.” There is a present-day resonance of 19th century “gun boat” diplomacy in the unilateral use of Super 301 by the United States, which is illegal under GAIT rules. (For GATT illegality, see Bhagwati, 1991, pp. 51-57.)

5. It is important to note that Bhagwati has been critical of the attitude that does not differentiate between different types of ISIS and “downgrades the IS and romanticizes the export- promotion strategies” (Bhagwati, 1984, p. 202). He also defends the Indian ISI strategy (pp. 202-203).

6. It is strange that avowed libertarians associate with murderous dictatorships, or advocate crushing of labor unions by ruthless dictators. For comments on this double-think see Bienefeld (1981, p. 93; Streeten, 1993, p. 1.284).

7. The author has learned from Paul Streeten that Myrdal had written a few articles on rent-seeking even before writing Asian Drama.

8. Contrary to the conventional wisdom, as the East Asian experience shows, agricultural development in Asian countries, requiring huge investments in irrigation, flood controls, transport, electricity, fertilizers, etc., often become highly capital intensive (Ishikawa, 1967, pp. 57-214). One might add that the capital intensity of irrigation and transport would be much higher in South Asia, much more so in sub-Saharan Africa, than Korea and Taiwan because of the scale differences. The East Asian experience also shows that agricultural development brings great equality of income only if land ownership is equitable. Even Scitovsky’s comments (1984, p. 954) referring to the Taiwanese success in locating light industries in rural areas have to be seen in the context of the size of a country; in large countries, infrastructural investments even for this type of policy may be enormous (Sinha, 1984, p. 75).

9. For instance, in the Japanese case, reparations from China alone took care of the balance of trade deficit between 1896 and 1903; the reparations made possible the accelera- tion of growth by making up the deficit in the balance of payments (Shinohara, 1964. p. 229). The story of the drain on Indian resources by the East India Company is widely known. After 1765, the profits from revenue collection in

Bengal amounted to an annual transfer of 1.7 million pounds (Dutta, 1946, pp. 89-90). This has to be seen in the context of total English exports of around 10 million pounds, including reexports of nearly a third of the total (Minchinton, 1969, p. 1.5; Schumpeter, 1960, pp. 15-16 Tables II-IV).

10. There is a lot of evidence to suggest that the implementation of IMF programs meet considerable difficulties. For instance, Killick, 1984b, pp. 251-255, 260-261; Haggard, 1990, pp. 215-255. The scarcity of requisite skilled personnel for privatization has been widely commented on by scholars such as Van De Walle, (1989), p. 608.

11. For lack of sensitivity of the IFIs’ staff see also Mason and Asher (1973) and Morris (1963).

12. Willamson calls the “Washington Consensus” “the common core of wisdom embraced by all sen’ous economists” (Willamson, 1993, p. 1334) (Italics mine). He wonders why “some critics have condemned the Washington consensus as a neoconservative tract” (p. 1334). The answer is not hard to find. On his own admission, WC is “the conventional wisdom of the day among the economically influential bits of Washington, meaning the US government and the intema- tional financial institutions” (p. 1329). In so doing he inadvertently gives credence to the Marxist criticisms of the IFIs as the instruments of the US government.

13. Economists involved in methodological debate on economic modelling both within the IFIs, and their critics including Tarp may be treated as a separate category. Tarp in a recent book finds IMF/World Bank models too simplistic to capture the complexities of real world and to form the basis for policy prescriptions, more so of sub-Saharan Africa (Tarp, 1993, pp. 150-166). Many of Tarp’s comments on sub-S&ran Africa however, are nearer structuralist thinking. (Because of limited knowledge of mathematical model- ing, the present author does not comment on developments in this field.)

14. This group would include scholars such as Ajit Bhalla, V.M. Dandekar, Mahbub ul Haa. G.K. Helleiner. Michael Lipton, Kurt Martin, K.N. Raj, ,&nartya Sen, Hans Singer, Frances Stewart, Paul Streeten, John Toye, and many more, including the author of this paper (names arranged alphabetically).

15. See also Cooper (1992, p. 51).

16. This term, referred to by Sarkar (199 1, quoted in Bagchi, 1992, p. 1,133), was based on the Keynesian analysis of the debt burden of the German Reparations after WWI (Keynes, 1971, pp. 71-142).

17. The question that [later Lord] Keynes had asked in relation to defeated Germany has considerable relevance even for the present-day indebted countries. He said:

It is for those who believe that Germany can make an annual payment amounting to hundreds of millions ster- ling to say in what specific commodities they intend this payment to be made, and in what specific markets are to be sold (Keynes, 1971, p. 127).


18. See also Prebisch (1984). For the development of the

secular decline in the terms of trade argument see also Singer

(1984).

19. For Fabian ideas see Mitchell (1969, Vol. 2, pp.

118-l 19).

20. One must also remember that Chenery, as early as 1958,

had commented on the limitations of the free market forces

in allocating investment resources and advocated govem-

ment intervention (Chenery, 1958, pp. 55f quoted in Amdt, 1987, p. 126). Tarp calls Chenery and his close associates,

such as A.M. Strout and M. Bruno, “neoclassical stmctural-

ists” because they accept, in principle, the neoclassical model of resource allocation but, at the same time, concede that supply responses and substitution possibilities in developing

countries are more limited than in developed countries

because of the imperfections of the market (Tarp, 1993, pp. 127).

21. Taylor lists some counterpoints to the Washington Consensus and calls it non-Washington consensus but he

emphasizes that: “Consensus is too strong a word for any set of policy recommendations.. .” (Taylor, 1993, p. 86).

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Documents

Economic reform in developing countries: Some conceptual issues