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The politics of adjustment: lessons from the IMF's Extended Fund Facility

Published online by Cambridge University Press:  22 May 2009

Stephan Haggard
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The international debt crisis has forced painful economic adjustments on the developing world. In the short run it has forced governments to seek to correct payments imbalances through stabilization programs, usually undertaken with conditional assistance from the International Monetary Fund (IMF). The crisis has also revealed deeper weaknesses in many Third World economies, weaknesses demanding more basic reforms in the structure of incentives, prices, and investment.

Type
The Political Economy of Debt
Information
International Organization , Volume 39 , Issue 3 , Summer 1985 , pp. 505 - 534
Copyright
Copyright © The IO Foundation 1985

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References

1. On the politics of stabilization see Nelson, Joan, “The Politics of Stabilization,” in Feinberg, Richard E. and Kallab, Valeriana, eds., Adjustment Crisis in the Third World (New Brunswick: Transaction, 1984)Google Scholar;Foxley, Alejandro, Latin American Experiments in Neoconservative Economics (Berkeley: University of California Press, 1983)Google Scholar; Sheahan, John, “Market-Oriented Economic Policies and Political Repression in Latin America,” Economic Development and Cultural Change 28 (01 1980)CrossRefGoogle Scholar; Diaz-Alejandro, Carlos, “Southern Cone Stabilization Plans,” in Cline, William and Weintraub, Sidney, eds., Economic Stabilization in Developing Countries (Washington, D.C.: Brookings, 1981)Google Scholar; Pion-Berlin, David, “Political Repression and Economic Doctrines: The Case of Argentina,” Comparative Political Studies 16 (04 1983)CrossRefGoogle Scholar;Skidmore, Thomas, “The Politics of Stabilization in Postwar Latin America,” in Malloy, James, ed., Authoritarianism and Corporatism in Latin America (Pittsburgh: University of Pittsburgh Press, 1977)Google Scholar; and Roberto Frenkel and Guillermo O'Donnell, “The ‘Stabilization Programs’ of the IMF and Their Internal Impacts,” in Fagen, Richard, ed., Capitalism and the State in U.S.-Latin American Relations (Stanford: Stanford University Press, 1979)Google Scholar.

2. Cited in Killick, Tony et al. , The Quest for Economic Stabilization: The IMF and the Third World (New York: St. Martin's, 1984), p. 261Google Scholar.

3. EFFs were designed to run for three years. When coupled with the liberalizing policy of “floating” a facility, i.e., excluding currency holdings under a specific facility in determining potential drawings under the reserve and credit tranche policies, the EFF, enlarged access policy, and supplementary financing facility permitted cumulative access to up to 600% of quota by the early 1980s.

4. Dec. no. 4377 (74/114), 13 September 1974, in IMF, Annual Report 1975, pp. 88–90.

5. Guitián, M., Fund Conditionality: Evolution of Principles and Practices (Washington: IMF, 1981), p. 26Google Scholar.

6. For longitudinal studies noting the difficulties of compliance with fiscal targets see Reichmann, Thomas M. and Stillson, Richard, “Experience with Programs of Balance of Payments Adjustment: Stand-by Arrangements in the Higher Tranches, 1963–1972,” IMF Staff Papers 25 (06 1978)Google Scholar, and W. A. Beveridge and Margaret R. Kelly, “Fiscal Content of Financial Programs Supported by Stand-By Arrangements in the Upper Credit Tranches, 1969–1978,” ibid. 27 (June 1980).

7. For a discussion of this problem see Williamson, John, “On Judging the Success of IMF Policy Advice,” in Williamson, , ed., IMF Conditionality (Cambridge: MIT Press for the Institute for International Economics, 1983)Google Scholar, and Guitián, Fund Conditionality.

8. For the debate on alternatives to the “IMF model” of stabilization and adjustment see William Cline, “Economic Stabilization in Developing Countries: Theory and Stylized Facts,” in Williamson, IMF Conditionality; Foxley, Latin American Experiments; Dornbusch, Rudiger, “Stabilization Policies in Developing Countries: What Have We Learned?” World Development 10, 4 (1982)CrossRefGoogle Scholar. Taylor, Lance, Structuralist Macroeconomics (New York: Basic Books, 1983), chap. 11Google Scholar. Killick, et al. , Quest, and the companion volume of case studies, The IMF and Stabilization: Developing Countries' Experiences (New York: St. Martin's, 1984)Google Scholar; and Killick, Tony, ed., Adjustment and Financing in the Developing World: The Role of the International Monetary Fund (Washington, D.C.: IMF in association with the Overseas Development Institute, 1982)Google Scholar.

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10. The most general critique of the IMF along political lines is still Payer, Cheryl, The Debt Trap: The IMF and the Third World (New York: Monthly Review Press, 1974)Google Scholar. See also Sheahan, “Market-Oriented Economic Policies”; Frenkel and O'Donnell, “Stabilization Programs.”

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12. See Nelson, “Politics of Stabilization”; Cooper, Richard, Currency Devaluation in Developing Countries, Princeton Essays in International Finance no. 86 (Princeton, N.J., 1971), pp. 28–29Google Scholar; and Johnson, Omotunde and Salop, Joanne, “Distributional Aspects of Stabilization Programs in Developing Countries,” IMF Staff Papers 27 (03 1980)Google Scholar.

13. While Olson's pluralist analysis assumes that “distributional coalitions” will be made up of societally based interest groups, his analysis can be extended to include state actors, including civil servants, parastatal managers, and the military. In fact, these groups may be the most difficult to control or circumvent.

14. Skidmore, , “Politics of… Latin America,” p. 149Google Scholar.

15. Cooper, , Currency Devaluation, pp. 28–29Google Scholar; Sheahan, “Market-Oriented Economic Policies”; Skidmore, , “Politics of… Latin America,” p. 149Google Scholar.

16. Diaz-Alejandro, , “Southern Cone,” p. 122Google Scholar.

17. See Collier, David, ed., The New Authoritarianism in Latin America (Princeton: Princeton University Press, 1979)Google Scholar.

18. Jackson, Robert and Rosberg, Carl, Personal Rule in Black Africa (Berkeley: University of California Press, 1982), pp. 43–44Google Scholar. The same point has been made from a Marxian or class perspective in discussions of the “state bourgeoisie”; see Sobhan, Rehman, The Crisis of External Dependence (Dhaka: Dhaka University Press, 1982)Google Scholar.

19. The following is drawn from Thomas Callaghy, “The Political Economy of African Debt: The Case of Zaire,” in Ravenhill, John, ed., Africa in Economic Crisis: Problems and Strategies (London: Macmillan, forthcoming)CrossRefGoogle Scholar, and Callaghy, , The State-Society Struggle: Zaire in Comparative Perspective (New York: Columbia University Press, 1984), pp. 194–204Google Scholar.

20. See the World Bank's uncharacteristically blunt Zaire: Current Economic Situation and Constraints (Washington, D.C., 1979)Google Scholar, sections 5 and 6.

21. Institutional Investor (international ed.), September 1983, p. 284.

22. Economist Intelligence Unit, Quarterly Economic Review (hereafter QER), 3d quarter, 1979; Latin America Weekly Report (hereafter LAWR), 14 March 1979; New York Times, 29 September 1984.

23. LAWR, 20 February 1981.

24. Latin American Regional Reports: Caribbean (hereafter LARR:C), 27 March 1981.

25. LARR:C, 20 August 1982; 1 October 1982.

26. For background see Hintzen, Percy and Premdas, Ralph R., “Guyana: Coercion and Control in Political Change,” Journal of lnteramerican Studies 24 (08 1982)Google Scholar; Mandle, Jay R., “Continuity and Change in Guyana's Underdevelopment,” Monthly Review 28 (09 1976)CrossRefGoogle Scholar; Enloe, C., “Civilian Control of the Military: Implications in the Plural Societies of Guyana and Malaysia,” in Welsh, C., Civilian Control of the Military (Albany: SUNY Press, 1976)Google Scholar; and Premdas, , “Guyana: Socialist Reconstruction or Political Opportunism?” Journal of Interamerican Studies 20 (05 1978)Google Scholar.

27. Jameson, Kenneth P., “Socialist Cuba and the Intermediate Regimes of Jamaica and Guyana,“ World Development 9 (09–10 1981)CrossRefGoogle Scholar.

28. LARR:C, 16 January 1981.

29. Cited in LARR:C, 22 March 1981.

30. QER, 1st quarter, 1980.

31. LARR:C, 16 July, 20 August, and 30 September 1982.

32. See Jackson, and Rosberg, , Personal Rule, pp. 130ff.Google Scholar; Bechtold, Peter, Politics in Sudan: Parliamentary and Military Rule in an Emerging African Nation (New York: Praeger, 1976)Google Scholar; and Wai, Dunstan M., “Revolution, Rhetoric, and Reality,” Journal of Modern African Studies 17, 1 (1979)CrossRefGoogle Scholar. For a review of the period under question with an emphasis on the agricultural sector see Curry, Robert L. Jr, “The Global Economy's Impact on Planning in Kenya and Sudan,” Journal of African Studies 9, 2 (1982)Google Scholar.

33. See African Contemporary Record (hereafter ACR), 1981–82, p. 392.

34. See Nashashibi, Karim, “A Supply Framework for Exchange Reform in Developing Countries: The Experience of Sudan,” IMF Staff Papers 27 (03 1980)Google Scholar; IMF Survey, 7 May 1979, 1 September 1980.

35. IMF Survey, 7 May 1979.

36. See Jeune Afrique, 1 July and 8 July 1981.

37. QER, 3d quarter, 1979.

38. QER, 3d quarter, 1981.

39. Africa Research Bulletin, Economic ser., 15 December–14 January 1982.

40. ACR, 1981–82.

41. The democratic regimes are Costa Rica, the Dominican Republic, India, Jamaica, Kenya, Peru, and Sri Lanka. Mexico, Senegal, and Zambia are one-party dominant systems that operate under some electoral constraints, while Brazil and Honduras were undergoing transitions to democracy at the time of their EFFs.

42. The notoriety of the Jamaican case has generated its own literature. The IMF explains its position in IMF Survey, 15 December 1980. See Jennifer Sharpley, “Economic Management and IMF Conditionality in Jamaica,” in Williamson, IMF Conditionality, Girvan, Norman, Bernal, Richard, and Hughes, Wesley, “The IMF and the Third World: The Case of Jamaica, 1974–1980,” Development Dialogue, 1980/1982Google Scholar; James, Winston, “The Decline and Fall of Michael Manley: Jamaica, 1972–1980,” Capital and Class no. 19 (Spring 1983)Google Scholar; Bannick, Gladstone, “The Experience of Jamaica,” in Dell Report, The Balance of Payments Adjustment Process in Developing Countries, UNCTAD/MFD/TA/5 (New York, 1980)Google Scholar; Burkholder, Richard Jr, “The International Monetary Fund's Presence in Jamaica, 1976–1980: Its Effect on Factional Struggle within the People's National Party Government of Michael Manley” (ms., Harvard University, 1984)Google Scholar; and for background on the Jamaican political system Stone, Carl, Democracy and Clientelism in Jamaica (New Brunswick: Transaction, 1980)Google Scholar. I am particularly indebted to the definitive study by Stephens, Evelyne Huber and Stephens, John D., Democratic Socialism in Jamaica: The Political Movement and Social Transformation in Dependent Capitalism (Princeton: Princeton University Press, forthcoming)Google Scholar, and to comments by the authors.

43. See Stone, Carl, “Democratic Socialism in Jamaica, 1962–1979,” Journal of Commonwealth and Comparative Politics 20, 2 (1982), p. 40Google Scholar, for electoral data.

44. Ibid.

45. Sharpley, , “Economic Management,” p. 246Google Scholar.

46. The Fund later admitted a political motivation in negotiating the EFF despite its harsh terms.

47. See Burkholder, “IMFs Presence in Jamaica,” for a discussion of the PNP's internal deliberations.

48. See Stone, “Democratic Socialism.”

49. See LARR:C, 24 August 1984; Stephens and Stephens, Democratic Socialism in Jamaica, chap. 7.

50. IMF Survey, 3 June 1980. This also draws on Nelson, Joan, “The Political Economy of Stabilization in Small, Low-Income Trade Dependent Nations” (ms., ODC, Washington, D.C., 11 1983)Google Scholar, and Stern, Joseph, “Liberalization in Sri Lanka: A Preliminary Assessment” (ms., Harvard Institute for Internnational Development, 1984)Google Scholar. See also Herring, Ron, Land to the Tiller: The Political Economy of Reform in South Asia (New Haven: Yale University Press, 1983)CrossRefGoogle Scholar.

51. Isenman, Paul, “Basic Needs The Case of Sri Lanka,” World Development 8 (1980)CrossRefGoogle Scholar.

52. QER, 2d quarter, 1978.

53. For example, in the 1981 budget announced in November 1980 the finance minister sought to cut spending on the Mahaweli project 25%, from Rs. 4 billion to Rs. 3 billion. The special minister in charge of the key project, however, asked for Rs. 4.5 billion, finally receiving Rs. 3.8 billion, over protests from both the World Bank and the IMF. See Far Eastern Economic Review (hereafter FEER), 16 October 1981, and Wriggins, Howard, “Sri Lanka in 1981: Year of Austerity, Developmental Councils and Communal Disorders,” Asian Survey 22 (02 1982)CrossRefGoogle Scholar.

54. FEER, 20 February 1981.

55. QER, 4th quarter, 1980.

56. FEER, 20 February 1981.

57. For a review and critique of the literature on European corporatism see Panitch, Leo, “Recent Theorizations of Corporatism: Reflections on a Growth Industry,” British Journal of Sociology 31 (06 1980)CrossRefGoogle Scholar.

58. Mexico's memorandum to the IMF notes, for example, “Strong opposition must be overcome before it will be politically possible to stop the provision of consumer subsidies on basic consumption items and to dismantle the associated bureaucracy. Perhaps it will be even more difficult to get it recognized that the wage rises of recent years caused Mexico's loss of competitiveness and to obtain the necessary support for a policy of real wage cuts.” Confidential text leaked to El Heraldo, 7 November 1977, quoted in Whitehead, Lawrence, “Mexico from Bust to Boom: A Political Evaluation of the 1976–1979 Stabilization Program,” World Development 8 (11 1980), p. 849CrossRefGoogle Scholar.

59. Reyna, Jose Luis, ’El movemiento obrero en una situación de crisis: Mexico, 1976–1978,” Foro International 19 (01–03 1979)Google Scholar. For a critique of labor's concessions see Proceso, 10 July and 13 November 1978.

60. LAWR, 8 April 1977.

61. In late June, López Portillo announced that “[These sectors] cannot be developed without modifying what we have called the IMF padlocks on deficit spending and external indebtedness… we are in a vicious cycle. We cannot get out of the trap because we do not have financial resources and we do not have them because we cannot get out of the trap.” Business Latin America, 10 July 1977.

62. While this nationalist posture had clear historical and political roots and found support in the labor movement, it was given new intellectual justification by a group of economists in the Ministry of Patrimony and influenced by Cambridge School economics. See “Mexico's Cambridge Connection,” New York Times, 24 October 1982 (sec. 3, p. 1), and the response by Eatwell, John and Singh, Ajit, New York Times, 29 11 1982Google Scholar.

63. See the essays in El Economista Mexicano 15 (07–08 1981)Google Scholar.

64. Miami Herald, 30 August 1982.

65. LAWR, 19 April 1982.

66. For an overview of the de la Madrid administration, see Cornelius, Wayne, “The Political Economy of Mexico under De La Madrid: Austerity, Institutionalized Crisis and Nascent Recovery,” Mexican Studies 1 (Winter 1985)CrossRefGoogle Scholar.

67. Tony Killick, “Kenya: The IMF and the Unsuccessful Quest for Stabilization,” in Williamson, IMF Conditionality.

68. Ibid., p. 400.

69. Ibid.

70. The following is drawn from QER, various issues. See also Waterbury, John, The Egypt of Nasser and Sadat (Princeton: Princeton University Press, 1983)CrossRefGoogle Scholar.

71. See the essays in Collier, New Authoritarianism, and Haggard, Stephan and Moon, Chung-in, “The South Korean State in the International Economy: Liberal, Dependent or Mercantile?” in Ruggie, John Gerard, ed., The Antinomies of Interdependence (New York: Columbia University Press, 1983)Google Scholar.

72. Cohen, John M., Grindle, Merilee S., and Walker, S. Tjip, “Policy Space and Systems Research in Donor Led Rural Development,” Harvard Institute for International Development Discussion Paper, 04 1984Google Scholar.

73. See the World Bank's World Development Report 1983 (New York: Oxford University Press for the World Bank, 1983)Google Scholar, pt. 2.

74. Nelson, , “The Politics of Stabilization,” pp. 114–18Google Scholar.

75. See Tony Killick, Graham Bird, Jennifer Sharpley, and Mary Sutton, “The IMF: Case for a Change in Focus,” in Feinberg and Kallab, Adjustment Crisis.

76. One study of these transnational relations in the context of an EFF is Broad, Robin, “Behind Philippine Policy-Making: The Role of the World Bank and the International Monetary Fund” (Ph.D. diss., Princeton University, 06 1983)Google Scholar.

77. One example of this is India's EFF. See Catherine Gwin, “Financing India's Structural Adjustment: The Role of the Fund,” in Williamson, IMF Conditionality.