1

Fulfilling The Reputation

of Being International:
Representation weights; Structural Adjustment
conditions; and Their Effects on Developing
Economies

Mehmet Ali KARADEMİR Submitted to:

INTT511- Term Project Assoc.Prof. Emine Nur GÜNAY

January 2010

Abstract:

Developed Countries have control over Bretton Woods Institutions and those multilateral
financing organizations have control over the global economy –especially on developing
economies- since 1950s. So far the world economy and trade patterns have trend of
liberalization gradually and constantly. Although some of the developing economies
implemented or tried to implement protectionist measures, those financial institutions, on
behalf of their patrons’ interests, imposed privatization, liberalization as binding and
benchmark conditions for the loans they provide. As long as there appears a financial
recession in any developing country, World Bank and IMF are there, willing to provide money
supply in condition of opening the markets and preparing appropriate framework for
privatization of state-owned firms –especially banking sector and energy supplies services.
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Abbreviations:

BIT- Bilateral Investment Treaties LDC- Less-developed Country

BWI- Bretton Woods Institute MAI-Multilateral Agreement on Investment

DC- Developed Country MI- Multilateral Institute

G5, G7- Group of Five, Group of Seven MNC- Multinational Corporation

FDI- Foreign Direct Investment U.S.- United States

HDI- Human Development Index USD- United States Dollar

IMF- International Monetary Fund WB- The World Bank

IFI- International Financing Institutions WTO- World Trade Organization

Contents:
I. Abstract
II. Abbreviations
III. Contents
1. Introduction 3
2. Representation Weights and Outcomes 4
3. Conditions Attached to Lending 5
4. Social and Economic Consequences of Liberalization Process 9
4.1. Structural Conditions, Privatization 12
5. Current Situation and Progress 14
6. Conclusion 15
References 17
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1. Introduction

Liberalization, globalization, industrialization and such kinds of political economical

movements as well as the contrary movements have always affected the trade patterns and

production behaviors of countries. The liberalization process has been promoted mostly by

developed countries (DCs) and less-developed countries (LDCs) are most usually forced to

liberalize their economies by reducing the barriers as much as possible. However, most

interestingly, they are nearly the same instruments that were used by Germany and U.S.A.

through the end of 19th c. and also by other countries in order to sustain growth against the

most powerful states.

Nonetheless the under-going context was different in their period. They were often

interested in security and power issues –both LDCs and DCs. There were trade activities and

relative gains however there existed no Breton Woods Institute (BWI) to regulate

international monetary policies or to force opening-up the doors on behalf of rich nations. At

the fortunate lack of these institutions bilateral agreements between countries according to

their bilateral interaction were more possible. There hadn’t occurred a ‘lender of last resort’

–although it is not a completely lender of last resort now, too. That prevented the lenders

from imposing high conditions as there existed alternatives.

However in 20th c. the creditor countries, with the help of multilateral organizations,

could be able to regulate global economy according to their interests. They, now, can impose

regulatory framework to developing countries which need capital so as to sustain growth or

even to survive. The conditionality attached to the loan provided by DCs has been harshly

criticized in the literature most frequently although it is also regarded innocent, about the

fall-back of poor countries, by a minority of scholars, most of whom are orthodox liberals.
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2. Representation Weights and Outcomes:

Having crucial and central role in global financing, international financing institutions (IFI)

are often criticized to be undemocratic and unaccountable in terms of governance and

approaches. The selection of chief executives in both the IMF and World Bank and the quota

phenomena which gives DCs higher voice are point of discussion. Moreover the transparency

issue both in executive-selection process and in other fundamental decisions is negotiated to

be reformed.

The selection of IMF managing director World Bank president –the former European and

the latter from U.S. (Cohn-2008, p132)- is a stain on the democracy and meanwhile on the

process of fulfilling the, so called, name ‘multilateral institutions’. However the race of the

chief executives does not have a significant effect on global monetary policies or final

decisions although the representation weight in decision making mechanisms is highly

important for global economy.

The quota allocated to individual states among IMF members defines their voting power

and volume of their voice over global economic issues. However most of the power is

allocated to DCs together with quotas. The G5 countries have the largest subscription with

39.1% voting weight in 2006 (Cohn-2008, p131) and the G7 mandate more than 40% of the

decision making power (Makwana-2005) while there are 184 member states. The financial

strength of those countries provides them the ability to impose their interests on world

trade patterns and prevent anything that contradicts their interests.

United States and European Union are distinctly over-weighted relative to the rest of the

member states, despite the weight of the continent is provided by the accumulation of the a

few DCs which are member of the Union. However U.S. has, by itself, 17.4% voting weight
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and subscription in IMF which gives it veto power at any important issue that require 85%

majority such as; forcing a member to withdraw from the ‘fund’ or changing the number of

executive board (House of Commons, Treasury Committee 2005-06).

The executive board –the most crucial part of the decision making mechanism- have the

same composition with the overall voting weights as countries have the right to select

members in the board according to their subscription weights. Therefore most of the

member states are obliged to have coalitions (Cohn-2008) which include a large number of

participants, where a few countries can chose their representatives. Africa for example, with

16 million population has less power in decision making process than Iceland which has

around 250 thousand. Thus it is impossible to talk about equal representation in those

institutions’ operations.

The facts I mentioned above reduce the accountability of those organizations for most of

their members although it is hardly come across their direct effects on global trade patterns

in the political economy literature. However I believe they will illuminate the way in

reasoning the efficiency of structural adjustments, conditionality and regulations imposed

with the aids and loans which are provided by those institutions.

3. Conditions Attached to Lending:

‘Stabilize, privatize, and liberalize’ were the most popular song for the economic technocrats

in 1990s, who ambitiously imposed Washington Consensus ideas to developing world

(Rodrik-2006). In fact, the aggressive liberalization had started at early 1980s –even 1970s- in

a transition process from Keynesian interventionist approach through a ‘market

fundamentalist’ movement that aims the exploitation of, or minimizing, the restrictions on the

free movement of the market itself. However through the 1980s –accelerated and enhanced by
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debt crisis- and early 1990s liberalization and privatization started to be regarded as the

unique way for development and the only measure of development was the economic growth

–Gross Domestic Product (GDP).

Furthermore the Bank and IMF were highly politicized and associated with western ‘core’

policies(Pender-2001) By the way they aimed to converge ‘west &east’ or ‘north & south’ life

style politically and economically, in other words, they targeted the modernization of

developing country in terms of economic policies and especially imposing U.S. government

type. They thought that by the help of liberalization the overall welfare would converge and

the measures would equalize. Fed by the ‘consensus’ rules the structural adjustment programs

asked states to provide stabilization by strict fiscal policies and to shift through a more open

market especially by liberalizing the trade and capital flow. Forcing them to reduce public

investment –and even trying to democratize them or interfering other sovereign issues- those

international monetary institutions prevented autonomous development programs.

Although it is believed that in order to achieve success from reformation, states should

autonomously find the weak points in their policies and fiscal structure and provide a fit

solution for it(Dollar&Swensson-1998), the multilateral finance providers imposed a great

number of conditions to the borrower –especially to those who needed them most urgently.

Moreover those conditions are based on a standard check list of liberalization (Washington

Consensus) which has a small probability of success in all target economies. The priority of

conditional investment has been, debt repayment; market liberalization; and privatization,

therefore they aim to eliminate foreign ownership restrictions, increase interest rates and

implement strict fiscal and monetary policies (Makwana-2005), by the way reducing the

social expenditure, government budget and subsidies for domestic products. A considerable

amount of the conditions that can be observed from Table 1 are privatization and development
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related. However they ignore the health care, education services etc at the expense of

economic growth.

Table 1: Number of conditions contained within current World Bank loans to poor countries

COUNTRIES WORLD BANK LOAN DOCUMENT YEAR OF LOAN NUMBER OF CONDITIONS

Uganda Fifth poverty reduction 2005 197

Senegal First poverty reduction 2005 77
Ethiopia Second poverty reduction 2005 67
Niger Public expenditure reform 2005 54
Burkina Fifth poverty reduction support 2005 54
Rwanda Second poverty reduction support 2005 103
Faso
Bangladesh Third poverty reduction support 2005 53
Armenia Second poverty reduction support 2005 39
Vietnam Fourth poverty reduction support 2005 33
Mali Public fin. management credit 2005 50
Resource: Easterly-2003

Note: The number of the conditions reflect the requirements that are imposed in the named conditions.
The repeated nature of the adjustment loans by WB as well as IMF reflects the failure of the

program although it was defended by ‘hospital-sickness’ analogy which claims that they are

there because they are sick. However the consequence of an empirical research made by

William Easterly shows that the probability of taking a new structural adjustment loan is

positively correlated with the number of loans that are already received (Easterly-2003).

Furthermore the number of conditions is the proof of the dense interference on sovereignty in

terms of regulating domestic policies. Poor countries, by the way are forced to implement

development programs other than what they need.

Burkina Faso, as example, was forced to purchase new software and an education program

instead of health care development when a considerable amount of population had the HIV –

or high risk. Ignoring the social development, 20% of the conditions were economic policy
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relevant and 11% was on privatization and trade liberalization (Eurodan-2006) however I will

try to discuss the economic outcome of the emphasis on liberalization in other sections.

Figure 1: share of issues emphasized in conditions (Resource: Easterly-2003)

It can be observed from Figure 1 that weights of aspects imposed by conditions of loans are

mostly related with sovereign economic regulations. Furthermore, as well as direct

privatization exposition, they force states to regulate privatization related policies and

procedures.

Although it seems that the conditions are reduced as a result of harsh criticism; in fact they

are summarized to key conditions which require most of the old conditions in order to be

fulfilled. Other than the existence or the number of conditions, the cross-conditions imposed

by the IMF and World Bank alliance forced countries to implement the expected regulations

in fear of losing both of the financial supplies (House of Commons, Treasury Committee

2005-06). Some of the low-income countries, for example, were exposed to same

privatization related condition both by the IMF and by the WB (Eurodad Report-2006).
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As a result it can be observed that IMF and WB have put great emphasis on trade and

financial liberalization as well as restructuring agricultural planning systems and export-

oriented industrial investment (Easterly-2003). But the questions ‘who has benefited from

those adjustment conditions?’ or ‘what was the outcome for the subject states?’ and

meanwhile ‘what is the difference between those who accepted the conditional loans and

those who hadn’t –partially or completely?’ have been discussed in international political

economy frequently.

4. Social and Economic Consequences of Liberalization Process:

The developed countries –financial donors- have cursed the protectionist policies that they

highly implemented, not too long ago. With the help of economic power liberalist approach

took over the control of the world economy although economists claimed the government

intervention as a crucial instrument on development. The only way to catch up developed

economies was determined to be liberalization (Babb-2005).

As a result of rapid liberalization, Sarah Babb argues, the domestic economy is harmed

especially in terms of production patterns and income inequalities (Babb-2005). The real

wages have decreased in most of the borrower states as in Latin American case and

privatization of state-owned firms as well as high interest rates (to reduce inflation) led the

countries to unemployment problem.

The reduction of agricultural production and of its share in trade is another consequence of

SALs although it is not meant to be the result. The governments under conditionality has

failed to maintain agricultural production levels reasonably (Dasgupta-1998).

Deagriculturalization is also a matter of labor markets as well as it is a problem of domestic

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production. Over investment on capital intensive industries resulted in reduction of labor

intensive production.

Furthermore there is not an overall growth that can be observed in adjustment process.

Inappropriateness of the standard reform agenda was proved by deep transition crisis and low

levels of growth, contrary to the expectations of liberals who supported liberalization through

structural adjustments (Rodrik-2006). Adjustment led net capital outflow in the transition

process when the developing economies needed resources most (Dasgupta-1998, p384). Much

of the poorest countries couldn’t sustain any significant growth –especially those who

received number of structural adjustment loans.

In Table 2 we can see some important indicators of domestic economies which had used

intensive IMF programs in two decades. In the last column on right hand side we can see how

many stand-by agreements or in other words how many IMF products are purchased by those

countries in that period. In the third and fourth columns we can see the economic growth

performance of those countries and their performance on inflation targets in the next two

columns.

As we can easily see that there is hardly a significant growth in those countries that had

rapid interaction with IMF. Let alone the economic growth, there exists a considerable

amount of minus growth rates in the table. Furthermore the inflation data also predict failure

in implementation. Although one of the main targets aimed by IFIs –especially IMF- is

decreasing the inflation by increasing the interest rates at expense of unemployment, it seems

that considerable number of countries have inflation problem as we infer from the table

below.
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Table 2: GDP growth and Inflation performances of Countries that purchased IMF loans densely

Table 1: Resource: Agarwala & Modwel-2003

The most enthusiastic implementers of those conditionally forced regulations were in

Latin America and Sub-Saharan Africa. However the output growth increase between 1960s

and 1980s when compared to the latter two decades of adjustment period proves the failure

of the program. Latin American general output increased by 75% between 60s and 80s and

Sub-Saharan African by 36% in the same period while the Latin American growth decreased

to 6% through next twenty years and African output grew by -15% dramatically (Babb-2005).

Trade liberalization meant ‘leveling the playing field’ although it was not discussed in a

level decision making ground. The global trade operates unequally and the rich nation
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dominates it (Dasgupta-1998). Around 80% of the multinational corporations (MNC) are

located in U.S. and EU where they can lobby the international financial and trade regulations

with the help of weighted voting system and their voting power. Therefore a liberalization

process without institutional framework and proper infrastructure in LDCs provides easy

competition for DC firms. They open a competition where the result is certain –DC wins.

From that vantage point, trade seems far from being free and competitive and ‘market

failure’ appears partly because of that fact. Therefore the prices ruling the market are

distorting the efficiency of international trade and cannot be basis for production decision

(Dasgupta-1998). The ‘core’ is exploiting the resources in ‘periphery’ with the help of

liberalization imposed by IMF and WB which are ruled under the interests of the rich

countries. They don’t let the developing countries take precautions against the economic

power gap although they implemented the same policies in the process of industrialization.

They even implement protectionist measures recently such as agricultural subsidies in

Europe. Japan and EU are still highly closed economies relative to the developing countries

and their equivalents.

4.1. Structural Conditions, Privatization:

Although the weight of trade liberalization related condition is decreased from the

conditions imposed to poor countries loans, privatization has still a significant ground in the

underpinnings of the structural adjustment loans. Most of the BWI based loans had

privatization related reforms even though they haven’t had direct privatization condition as

before. The recent form of conditions has targeted the institutional infrastructure for it.

World Bank conditions, other than social investments, encourage the public services

privatization such as; telecom, energy and water etc while IMF condition includes banking
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sector to the list and excludes the water services. With the help of cross-conditionality

between two institutes they are able to impose the these regulations to recipient countries

even they don’t have them in their national poverty reduction strategies (Eurodad-2006).

The weights of structural conditions in IMF loans can be observed in Figure 2. It is given that

privatization conditions are more than the rest.

Figure 2: Resource: Eurodad Reoort-2006

Together with the openness provided by liberalization, the great emphasis on

privatization –although imposed hidden between the lines in recent conditions- let private

foreign corporation (domestic for DCs) get into the developing economies and utilize the

resources (Dasgupta-1998) as much as possible. It is stated that over USD 1 trillion FDI flow a

year is operated on privatization and banking sector creation or acquiring (Makwana-2005).

That gives the MNCs a great power of control over domestic economies while exposes the

liberalizing economies to vulnerability problem.

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No matter they provide gains to the domestic economy or not, the MNCs achieve a great

flexibility and capital mobilizing ability via global resources. Moreover Biplab Dasgupta

argues that DCs –especially US- put the burden of their own trade deficits on developing

countries by forcing them to open their resources and markets to the firms that are

originated in DCs (Dasgupta-1998). Furthermore the MNCs, by using instruments such as

intra-firm trade and protectionist tools in their home countries, usually distort trade in host

countries (Cohn-2008). Nonetheless the BWIs are recently trying to eliminate existing

restrictions in front of MNCs that are used by host countries as protection measures, via

Multilateral Agreements on Investment (MAI) (Cohn-2008, p310) and bilateral investment

treaties (BITs) (Cohn-2008, p305), although they are not agreed on yet.

That perspective also shows that the BWIs are working on behalf of DCs and their firms.

Therefore it is possible to claim that the existing (neoliberal) system on trade and investment

aspects usually benefit the corporations’ welfare, by the way, the developed countries. The

regulations give the MNCs flexibility to mobilize capital and use global resources and have

power on strategically important industries and to function their home country interests on

LDC markets.

5. Current Situation and Progress:

Through the rapid crisis and increasing protests against multilateral organization as a

consequence of crisis of confidence in WB and IMF forced those institutes to reform

themselves and their policy regulation incentives. Through the end of 1990s it was

understood that the outcomes of the Washington Consensus failed to succeed and this led

the WB give up ‘market fundamentalist’ approach and accept the significance of the

governmental health in terms of development (Rodrik-2006). Therefore the importance of

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institutional reform before liberalization started to be taken into consideration. Therefore

the Augmented Washington Consensus (Rodrik-2006) or namely Monterrey Consensus puts

more emphasis on institutional reform that would maintain the security of liberalization

process and increase the efficiency of the progress.

Furthermore the World Bank accelerated to create alliances with civil society groups –

especially with those reformists- to make way for dialogue in order to prevent their reaction

in social issues (Pender-2001). Meanwhile the non-material aspects were included to the

development measures as in HDI (human development index). However the liberalization

and economic growth are still the fundamentals of development strategies although they are

regarded to be the initial demand for the overall development.

There hasn’t occurred a considerable change in the voting and subscription weights so far.

However, latest annual meeting of IMF and WB in Istanbul a differentiation was uttered.

Strauss Kahn stated that that there would be at least a 5 per cent representation weight shift

from DCs to emerging countries. He argues that the BWIs should provide representation for

all of its member in order to have a more powerful mandate and to become more

accountable for its members, by the way, to become complete lender of last resort.

Representation gap –or at least those which were not represented at all- was one of the

focus of ‘Istanbul Consensus’. Therefore we can be hopeful from the future in terms of

justice although the progress is slow and still under the effect of DC interests.

6. Conclusion:

Looking through the international political economy literature and empirical researches

we can see that structural adjustment loans have many negative consequences on domestic

economies of the recipient countries. First of all they don’t let autonomous development
 16

strategies to be implemented. It is obvious that the standardized medicines for all kinds of

sicknesses could not bring any improvement. Therefore the emphasis on ‘country-owned

reform’ should be stronger and more intimate.

Besides the BWIs should regulate their roles and give up cross-conditionality in order not

to interfere sovereign issues. They should give the autonomy to define proper regulations

for real weaknesses to the recipient countries. The over emphasis on liberalization and

privatization especially without institutional framework leads poor and developing countries

lose control of their economy. Furthermore forcing them to privatize critical public firms

gives more controlling power to private companies than the state itself.

Moreover the social public investment shouldn’t be ignored as it is not beneficial in short

term. A good strategy of investment on human capital can bring greater revenue in long-

term, which provides developing countries sustainable growth and development.

Together with those aspects and others, however, the most important point I tried to

drive attention is the equality in representation weights. Thus I believe that could resolve all

the problematic issues in international political economy. It can even utilize over-emphasis

on liberalization. Therefore I think, it is a crucial matter that needs emergent reform and

more than ‘five per cent’. The transparency of operations and executives-selection process,

as well as equal representation, is significant matter to be regulated.

Furthermore equalization of the decision making process would cure the ‘market failure’

and by the way prevent trade deterioration. World trade may just achieve perfect

competitiveness by that way. Although it is not a strong probability to make the ‘periphery’

as competitive as the DCs, it is possible to engage them in a fair trade context. As long as the

existing mode (overemphasis on liberalization and privatization, unequal subscription etc) it

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doesn’t seem to be possible to provide market efficiency while giving the whole power to

those who are already strong. It may have a room for mid-income class and emerging

economies but it seems impossible for the poorest group –including African and other nearly

35 countries.

References:

Agarwala, Ramgopal & Modwel, Gauri- Towards a Multipolar World of International Finance
(2003)

Babb, Sarah- Social Consequences of Structural Adjustment: Recent Evidence and Current Debates
2005

Cohn, Theodor- Global Political Economy, (2008-Pearson Education, Inc.)

Dasgupta, Biplab- Structural Adjustment, Global Trade and the New Political Economy of
Development (1998-Zed Books)

Dollar, David & Swensson, Jacob- (IMF Research Group) What Explains the Success or Failure of
SAPs? 1998

Easterly, William- (New York University). What did structural adjustment adjust? The association of
policies and growth with repeated IMF and World Bank adjustment loans. (2003)

Eurodad- report- World Bank and IMF Conditionality: a development injustice (2006)

House of Commons, Treasury Committee, UK- Globalization: The Role of the IMF (report-2005-
06)

Makwana, Rajesh- Decommissioning the IMF, World Bank and WTO (December 2005), Sharing the
World’s Resources- www.stwr.org (1 January 2009)

Pender, John- From ‘Structural Adjustment’ to ‘Comprehensive Development Framework’:

Conditionality Transformed? 2001

Rodrik, Dani- Goodbye Washington Consensus, Hello Washington Confusion 2006