The Divide

by Jason Hickel

  But the protests had little effect. The ultimate targets of rioters’ discontent were suited men shuffling loan papers in Washington, where the IMF and the World Bank headquarters sit side by side just off Pennsylvania Avenue, a short walk from the White House and Capitol Hill. They were remote and unreachable, insulated from the cries of the displaced farmers and workers in the streets, invulnerable to any political pressure from below. And that was precisely how it was meant to work.

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  Why did structural adjustment have such a negative effect on growth and incomes? With the benefit of hindsight, the answer is relatively easy. Forcing governments to repay their debts at exorbitant interest rates – and forcing them to take out new loans in order to cover the old ones – meant that many countries ended up spending large proportions of their national budgets on debt service. Cutting spending on social services meant that hospitals and clinics fell apart, and investment in education fell to the point where it became impossible to produce the skills necessary for development. Cutting subsidies meant that farmers no longer had access to affordable inputs like seeds and equipment, that families spent increasing proportions of their income on food, and that infant industries no longer received the support they needed to become competitive on the global stage. Privatisation meant that key public services were run at a profit, which raised prices out of reach of the poor. Reducing trade tariffs meant that customs revenues collapsed, while foreign goods and competitors flooded in and undercut local producers, driving them out of business. Liberalising the financial sector meant that investors could pull their money out at the drop of a hat, which left finance dangerously unstable and unpredictable.

  In short, structural adjustment reversed the very policies that global South governments needed for development and poverty eradication, and which they had used to such great effect in the past. It was de-development imposed in the name of development.

  We shouldn’t be surprised that structural adjustment yielded these results, for there is a flagrant double standard at play. Western policymakers told developing countries that they had to liberalise their economies in order to grow, but that’s exactly what the West did not do during its own period of economic consolidation. Every one of today’s rich countries developed its economy through protectionist measures. In fact, until recently, the United States and Britain were the two most aggressively protectionist countries in the world: they built their economic power using government subsidies, trade tariffs, restricted patents – everything that the neoliberal playbook denounces today. Structural adjustment allowed the West to ‘kick away the ladder’ they had used to climb the heights of development, ensuring that no one else would be able to follow. The development narrative has it wrong. It is not that poor countries have been unable to climb the development ladder; it is that they have been specifically precluded from doing so.

  There were, however, some global South countries that did not implement across-the-board free-market principles and, not surprisingly, they managed to develop reasonably well – like Turkey, China and the East Asian Tigers.

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  How could the IMF and the World Bank get away with imposing structural adjustment when it clearly wasn’t working – indeed, when it was actively causing harm? Why could nobody stop them? One key reason is that the World Bank and the IMF enjoy special ‘immunity’ status. In the United States, they claim this status under the International Organizations Immunity Act of 1945, which was intended to grant diplomats and international organisations like the Red Cross and the United Nations immunity from lawsuits in their host countries so that they can get on with their work without interference. Most countries in the world have similar laws. The IMF and the World Bank are covered by these laws even though they are very unlike other international organisations; after all, they actively determine economic policy in global South countries. By virtue of this arrangement, no one can sue them – even when their policies cause tremendous damage. As a result, they have no incentive to be careful when manipulating the macroeconomic policy of other countries, because there are no consequences for them if they screw up. All of the risk belongs to the debtor country, which is denied any means of recourse or compensation in the case of disaster. Many have tried to sue the IMF and the World Bank for damages. All have failed.

  But there’s a second reason that the IMF and the World Bank have been able to power through with structural adjustment programmes despite their dismal record, and it has to do with how these two institutions are governed. Voting power in both is apportioned according to each member nation’s share of financial ownership, just as in corporations. Major decisions require 85 per cent of the vote. Not incidentally, the United States holds about 16 per cent of the shares in both institutions, and therefore wields de facto veto power. The next largest shareholders are France, Germany, Japan and the UK – all members of the G7. Middle- and low-income countries, which together constitute some 85 per cent of the world’s population, have only about 40 per cent of the vote. In other words, even if every single country in the global South united in disagreement against an IMF and World Bank policy, they wouldn’t be able to block it. And of course it doesn’t help that the leaders of these institutions are not elected, but are appointed by the US and Europe: according to an unspoken agreement, the president of the World Bank is always an American, while the president of the IMF is always European.

  This minority (and white) control over global decision-making – not only through the World Bank and the IMF but also through the UN Security Council – functions as a form of ‘global apartheid’. There have long been calls by global South countries to democratise the World Bank and the IMF, but for decades they were ignored. A reform package was finally introduced in 2010, but it turned out to be little more than window dressing: only 3 per cent of voting power shifted from rich countries to poor countries (about half of that going to China), and the US retained its veto.

  A number of World Bank and IMF insiders have defected from these organisations and set out to expose what they see as their misdeeds. Joseph Stiglitz, chief economist of the World Bank from 1997 to 2000, has written books highly critical of the institution. William Easterly worked as a senior adviser to the Bank’s Macroeconomics and Growth Division before resigning, and has since become a trenchant critic of structural adjustment. But perhaps none have captured attention like Davison Budhoo, the IMF senior economist whose job it was to implement structural adjustment programmes in Latin America and Africa during the 1980s. In 1988, Budhoo, a native of Grenada, resigned with a lengthy letter addressed to his former employer, IMF managing director Michel Camdessus. He wrote:

  Today I resigned from the staff of the International Monetary Fund after over twelve years, and after 1,000 days of official Fund work in the field, hawking your medicine and your bag of tricks to governments and to people in Latin America and the Caribbean and Africa. To me resignation is a priceless liberation, for with it I have taken the first big step to that place where I may hope to wash my hands of what in my mind’s eye is the blood of millions of poor and starving people. Mr Camdessus, the blood is so much, you know, it runs in rivers. It dries up too; it cakes all over me; sometimes I feel that there is not enough soap in the whole world to cleanse me from the things that I did do in your name and in the names of your predecessors, and under your official seal.

  When the failure of structural adjustment programmes became too apparent to ignore, and as pressure from social movements mounted against them, the IMF and the World Bank ostensibly backed down. At the end of the 1990s, they made a show of replacing structural adjustment programmes with ‘Poverty Reduction Strategy Papers’. The new PRSPs were supposed to bring in more local ownership of structural adjustment, and require countries to focus on poverty reduction as a condition for receiving loans. But it was little more than a PR exercise, for the underlying policies remain almost exactly the same – the only substantive difference is that they allow a bit more room for social s
pending.

  Capital’s Iron Law

  In the lobby of the World Bank headquarters in Washington DC, one prominent wall bears the words ‘Our dream is a world free of poverty’ – the slogan reproduced next to the logo on all of the Bank’s major publications. The formal mission of the IMF, for its part, is to reduce economic instability. If the Bank is so committed to reducing poverty, and the IMF so committed to reducing economic instability, then how do we explain the fact that they continue to pursue policies that appear to increase poverty and economic instability? Some critics argue that these institutions are just a bit too overzealous about free markets and don’t fully realise that their policies can be so destructive. Once they understand the consequences of their policies they will change course, the thinking goes. But there is another possible explanation, namely that these institutions continue with their policies because they are not failing at their actual objectives.

  In the early 1980s, the G7’s goal was to use the World Bank and the IMF to cripple the South’s economic revolution and re-establish Western access to its resources and markets. On this point, they certainly didn’t fail. But there was another, deeper purpose that the World Bank and the IMF served, and that was to save Western capitalism itself. We know that from time to time capitalism bumps up against limits to the creation of new profits. There is the market saturation limit, for instance: when consumers have more than they need, buying slows down and businesses can’t turn over as many products. There is the ecological depletion limit: when natural resources run low, the cost of essential inputs begins to rise. And there is the class conflict limit: as workers bargain for higher wages, the cost of labour becomes more expensive; and if you deny their demands, or indeed if you try to push wages down to increase your profits, you risk sparking social instability. All of this makes it increasingly difficult for firms to extract big profits.

  When capitalism hits these limits, investors find themselves with fewer options for investing their capital, since nothing gives an acceptably high return. They can’t just put it into savings because interest rates on savings accounts are typically lower than inflation, and that means losing money. This is what economists call a crisis of over-accumulation. In a crisis of over-accumulation, capital begins to lose its value – and according to the driving logic of capitalism, this cannot be allowed to happen. In order for capitalism to carry on, crises of over-accumulation have to be solved; someone needs to step in to provide a way to mop up the excess capital, to funnel it into some kind of profitable investment. It is an iron law.

  There are a number of ways to solve a crisis of over-accumulation. One is with a ‘temporal fix’. Capital can be invested in long-term projects like infrastructure, education and research that will improve the future productivity of capital. This is what happened in the United States with the New Deal and after the Second World War: the government mopped up huge amounts of over-accumulated capital by investing in roads and bridges and dams, putting people to work with good wages, and sending more than 2.2 million citizens to university on the GI Bill – all of which paid off handsomely a decade down the line. This kind of temporal fix works well, but because it requires wealth redistribution – and because the benefits come only after a lag – it is not very popular with the capitalist class.

  There are also quicker, often more draconian fixes available. You can drive down the price of oil – a constant foreign policy objective of the United States – which makes the costs of production cheaper. Or you can release new labour into the market or make existing labour cheaper, such as with the entry of women into the workforce in the latter half of the 20th century and the successful attempts by President Ronald Reagan in the 1980s to weaken the power of trade unions. Another option is to create new markets in sectors that are normally protected from market forces, such as with the privatisation of the railways in Britain and ongoing attempts to dismantle the country’s National Health Service. Yet another option is to create new markets for investing in debt, such as the student loan industry in the United States, or to encourage consumers to spend beyond their means with credit cards. Capitalists tend to prefer such fixes because they offer faster returns – particularly for companies that are under legal pressure to maximise shareholder value. But some of these fixes – such as privatisation, wage reductions and wars for oil – can be difficult to achieve because they often inspire impassioned political resistance. Think of how citizens across the US and Europe mobilised to protest the invasion of Iraq in 2003, for instance; or consider the long-standing campaign in the UK to defend the public health system, for which Britons regularly take to the streets.

  To avoid having to confront domestic resistance, which can be politically costly, policymakers might solve a crisis of over-accumulation by resorting to a ‘spatial fix’ – in other words, by opening up new consumer markets, labour markets and investment markets abroad.

  This is where the World Bank and the IMF have come in handy. When the West’s economy stagnated in the late 1970s, they offered a spatial fix by creating opportunities for investment in the sovereign debt of foreign countries, with high returns that were basically guaranteed. To get a sense of the scale of this investment opportunity, consider the fact that the Bank sold around $58 billion of AAA-rated sovereign-debt bonds on Wall Street in 2015. That’s a substantial market. On top of this, the large-scale development projects funded by World Bank loans required recipients to hire American contractors to carry out the work and to purchase equipment and materials from American businesses rather than local ones, even though this can be up to 30 per cent more expensive. Through these ‘tied aid’ arrangements, the World Bank stimulates demand for American products with every loan. Some studies suggest that American businesses get up to 82 cents in new purchases for each dollar that the US government contributes to the Bank.

  In addition to these new investment and business opportunities, the World Bank and the IMF also prised open the markets of foreign countries so that Western multinational firms could access much cheaper labour, thereby restoring their profit levels. In the past, American manufacturers not only had to pay American wages, they also had to bargain with their workers. If workers were unhappy with their compensation or working conditions, they could go on strike and pressure their employers for a better deal. If employers wanted to keep production ticking along, they would have to make concessions to workers’ demands – or at least bargain with them in good faith. But as structural adjustment forced open markets across the global South during the 1980s and 1990s, companies – enabled by new transport technologies such as containerised shipping – suddenly had another option open to them: they could just pull up stakes and move to Bangladesh or Mexico, where labour was a fraction of the cost.

  In fact, companies found they had the power to scan the globe in search not only of cheaper labour, but of the cheapest possible labour. And developing countries, in turn, found that in order to successfully attract foreign investment they had to compete with one another to drive wages down. It became a global ‘race to the bottom’ towards ever cheaper labour and ever lower standards. The solidarity that marked the rise of the South in the 1960s was suddenly replaced with cutthroat competition. In the countries of the G7, corporations gained the upper hand over their workers at last – at least in industries that were amenable to offshoring, like manufacturing. If their workers become too demanding, they could always threaten to move elsewhere. And workers, for their part, quickly learned that if they wanted to keep their jobs they shouldn’t risk speaking up – better to remain quiet and docile. All of this had a powerful disciplining effect on labour – not just in Western countries but around the world.

  Because of all of this, structural adjustment turned out to be highly profitable for Western corporations. US investments abroad grew to more than $10 trillion, and income from those investments increased from about 20 per cent of domestic profits in the late 1970s to about 80 per cent by the end of the 1980s. What is more, Ame
rican companies began to enjoy an increasing rate of return on those investments during the structural adjustment period, up from 5 per cent in 1975 to over 11 per cent in 1990.

  Some of this profit came from productive processes in the market – in other words, from the creation of new value in global South countries. But given that structural adjustment destroyed growth rates, we can conclude that much of it came instead from the appropriation of already existing wealth. By requiring debtor countries to privatise public assets, the World Bank and the IMF created opportunities for foreign companies to buy up telecoms, railroads, banks, hospitals, schools and every conceivable public utility at a handsome discount, and then either run them for private gain or strip them down and sell off the parts at a profit. The privatisation of public assets releases a tremendous asset into the market that was previously inaccessible to capital, creating new opportunities for profit. The World Bank alone privatised more than $2 trillion of assets in developing countries between 1984 and 2012. That amounts to an average of $72 billion per year of profitable opportunities for Western investors in addition to the $58 billion of high-interest bonds that the Bank sells on Wall Street each year.

  While privatisation creates wonderful new opportunities for investors, it quite often has disastrous consequences for the poor. When utilities are publicly owned, they generally have a mandate to provide service to the whole population. But for privately owned utilities the mandate is to make a profit, so they have no reason to serve those who cannot afford to pay. That’s exactly what happened during World Bank privatisations during the 1980s and 1990s. Bolivia provides a powerful example. In the mid-1990s the World Bank pressured the government of Bolivia to privatise the water supply of the city of Cochabamba. The contract went to Bechtel, an American corporation, which raised the price of water by 35 per cent. Unable to afford this most basic resource, in 2000 the people of Cochabamba erupted in protests that became a worldwide symbol of resistance against privatisation. But the World Bank continued to stand by their policy. As late as 2008, a leading Bank official was asked to explain why the Bank supports water privatisation, despite mounting evidence that it hurts the poor. He replied by stating: ‘We believe that providing clean water and sanitation services is a real business opportunity.’