4. What price aid? The folly of the Washington Consensus

Debt rescheduling has destabilized economies, compromised social services

For many developing countries, structural adjustment programs (SAPs) have turned out to be synonymous with poverty, inequality and environmental degradation. Introduced in the early 1980s, structural adjustment was a quid pro quo tabled by the International Monetary Fund and the World Bank in exchange for a rescheduling of developing countries' escalating debts. In return for loans, recipient countries undertook to cut social spending and to sell off state-owned assets.

In many instances, structural adjustment has failed to deliver its objective of bringing economic growth to developing countries. In the worst cases it has decimated education and health services, driven up unemployment and pushed poor families to the brink of starvation.

The idea behind SAPs, as embodied in the so-called Washington Consensus, was that heavily indebted countries in the developing world could, in return for loans and economic liberalization, reposition themselves as thriving participants in the global economy. Trade barriers would fall, public subsidies would be drastically reduced, and tighter controls would be imposed on money supply.

However, far from becoming prosperous trading partners, many countries that adopted SAPs have seen their domestic industries collapse and unemployment rise. During the 1990s, per capita income in most African and Latin American countries was lower than in 1980.

Although structural adjustment has often led to a rise in exports, they are typically of low-value commodities. At the same time there has been a sharp rise in imports of higher-value processed goods. Because the latter require more labour, they are more expensive--and this has typically had the effect of cancelling out any economic benefit.

To make matters worse, the process of negotiating loans in return for SAPs has often been secretive and undemocratic. Partly because of time pressure, leaders of developing countries have been encouraged to short-circuit the normal channels of consultation and decision-making. In some cases, the wheels have been oiled by offering politicians a slice of the proceeds from government privatization programs.

Joseph Stiglitz, who was chief economist at the World Bank until he resigned at the end of 1999, is now an outspoken critic of structural adjustment. "Officially, the IMF doesn't 'impose' anything. It 'negotiates' the conditions for receiving aid," he wrote in his book "What I Learned at the World Economic Crisis." "But all the power in the negotiations is on one side -- the IMF's -- and the fund rarely allows sufficient time for broad consensus-building or even widespread consultations with either parliaments or civil society."

Underlying structural adjustment has been a belief that in many developing countries, protectionist policies are inhibiting economic growth by interfering with free trade. Experience has shown that the opposite is often true: developing countries have maintained tariffs and subsidies precisely in order to support their industries. Once these protection measures are stripped away, many exporters simply collapse.

Some critics have gone as far as to argue that SAPs were more than a costly mistake; they were a conspiracy by wealthy countries to force down the cost of imported raw materials, while opening up vast new export markets.

Although SAPs were replaced in 1999 by the Poverty Reduction Growth Facility, under which developing countries were required to draw up Poverty Reduction Strategy Papers (PRSPs), critics maintain that the fundamental objection remains: wealthy countries, from their position of strength, are still able to dictate the terms under which they provide aid.