Financial Daily from THE HINDU group of publications
Wednesday, Oct 16, 2002
Money & Banking - RBI & Other Central Banks
A history of renewal
C. P. Chandrasekhar
THIS is not the first time that the World Bank and the IMF, especially the former, have sought to refashion their image to increase legitimacy. The concern with poverty that dominated the McNamara years was one such instance. In the past, this requirement for renewal was more true of the Bank, which was more active in reshaping economic policy in the Third World, while the IMF concerned itself solely with the problems of countries faced with balance of payments difficulties. Though these differences between the Fund and the Bank have narrowed only recently, we must recall that the Bank has always been opposed to any attempts on the part of the Third World countries to break away through conscious state intervention from the pattern of international division of labour inherited from the days of colonialism and semi-colonialism. If such a break is to be achieved then it must be achieved, according to its perception, entirely through the mediation of the market forces, which means, in particular, through the predilections of direct foreign investment.
The Bank has remained absolutely faithful to this position of opposing state-sponsored industrialisation, despite the fact that historical evidence marshalled earlier by Gerschenkron and subsequently by many others shows overwhelmingly that successful industrialisation by late-industrialisers has invariably depended upon active state intervention.
As the Indian experience illustrates, what has changed in the case of the Bank over time is: first, the specific argument used by it for opposing state-sponsored industrialisation; second, the precise tactics it has brought to bear in order to undermine state-sponsored industrialisation in Third World countries; and third, the precise package of programmes around this basic objective.
In the late-1950s and the early 1960s the Bank used a macro-argument to legitimise its position. It argued that substantial unutilised capacity existed in the industrial sector because of a scarcity of foreign exchange. Hence, a combination of import liberalisation and exchange rate devaluation was expected to set up a virtuous circle of "more imports - more capacity utilisation - more exports - still more imports" and so on, which would unshackle the economy from the clutches of an interventionist ideology.
Interventionism, after all, was predicated upon a recognition of demand constraints both in the external and in the internal markets. This was the argument on the basis of which the World Bank pushed the Indian government into adopting an import-liberalisation-cum-devaluation package in 1966 with disastrous consequences.
In the MacNamara years, the emphasis shifted to poverty. But the concern for poverty did not express itself in terms of any argument in favour of an egalitarian redistribution of assets or land. It expressed itself in the argument that the domestic inter-sectoral terms of trade were more unfavourable for agriculture vis-à-vis industry than the terms of trade prevailing in the world market, so that removing trade restrictions and thereby preventing state-sponsored industrialisation would benefit the agricultural sector which is the repository of mass poverty.
This argument was backed up by another one, namely, since the inequality in urban income distribution was larger than that in rural income distribution, a shift in income distribution from the urban to the rural sector, which means in effect from industry to agriculture, would have the effect of lowering overall income inequalities. This argument amounted yet again to an attack on state-sponsored industrialisation; the problem with this argument lay, inter alia, in the fact that the bottom 60 per cent of the agriculture-dependent population in a country like India consists of people, viz. landless labourers and poor peasants, supplementing their incomes through wage-labour, who are net buyers of foodgrains in the market. Since the mechanism for a terms of trade shift in favour of agriculture would be an increase in agricultural prices, this increase would be relative to their money incomes as well. The rural poor in other words would actually be harmed by a rise in food prices, which was espoused by the Bank in the name of poverty reduction.
More recently the Bank has shifted to its current micro-theoretic "marketist" argument which focuses on the allegedly interrelated phenomena of "inward orientation", "price-distortion", and "inefficiency". Much has been written on the problems of this critique. It ignores the fact that "outward orientation" as manifested, for example, in successful export-performance has been accompanied by highly state-interventionist neo-mercantilist policies rather than any attempt to "get prices right" in the conventional sense.
There is also complete silence on the role of the domestic investment effort in explaining growth performance, notwithstanding the overwhelming evidence which exists on its importance, and so on. Besides these problems, the point to note is that the policy-package following from this critique is exactly the same as before, namely, to roll back state-sponsored industrialisation.
Where the Bank did change was in two respects: the first relates to its tactics. In the beginning, up until the end of the 1950s in the case of India, the Bank studiously avoided giving any loans for government programmes. In the early 1960s it modified its stance to give loans for social infrastructure projects, but not for any public sector industrial undertakings. It is only when the policy of boycott of public sector undertakings appeared to be counterproductive from its point of view that it started financing investment in such undertakings but with its own conditionalities, such as global tendering, specifying technological details and the scale of plants, and so on.
This shift from "boycotting" to "infiltrating" the public sector enabled it to exercise great leverage, to induct MNCs directly into the public sector as collaborators, to undermine domestic technological self-reliance and indigenous technological capabilities, to dictate pricing policies and acquire an indirect say on the government budget, and to set up "networks" with bureaucrats and managerial personnel of the public sector. Together with this began the process of World Bank employees shifting to key government positions, especially in the Finance Ministry, even as they were drawing pensions from the Bank, or even as they kept open the option of moving back to the Bank. They provided a powerful lobby working in concert towards "liberalisation-cum-structural adjustment".
The other respect in which the Bank did change was in its new insistence upon a range of financial sector reforms whose overall objective again was to detach the domestic financial institutions and the financial markets from their integration into the domestic development effort (through, for example, low long-term interest rates, subsidised credit, and the allocation of a minimum share of credit-disbursements for "priority sectors" such as agriculture, and so on) and to integrate them more closely instead with global financial markets.
Together with this went the Bank's demand for privatisation not only of the financial domain where the public institutions held sway, but of public sector assets including of natural resources. The economic, as opposed to the ideological, argument for privatisation was again faulty: as a means of closing the fiscal deficit it was no different from money created directly for the government's use; as a means of reducing the government's interest burden it could work only under the palpably impossible condition that the rate of return sacrificed on the sold government assets was lower than the interest rate on public debt (which is impossible because the market would never buy assets at such low rates of return, and in practice of course has insisted on obtaining public assets only at virtually throw-away prices).
This widening of the Bank's package, from simply rolling back state-sponsored industrialisation through a removal of trade restrictions, government controls and the pre-eminence of the public sector, to an integration of the domestic economy with the operations of global finance, reflected a fundamental change that was taking place within world capitalism itself, namely, a tendency towards greatly increased fluidity of finance across national boundaries, a tendency in short towards a globalisation of finance, which is very different from, though often confused with, globalisation of production facilities.
This very tendency also explains the shift which was taking place in the position of the IMF as well. Earlier the IMF was exclusively concerned with "stabilisation". The Polak model, for example, which provided the basis for the IMF's policy-prescriptions, concentrated on a few macro-level identities and made no attempts at modelling "structural adjustment". Its assumptions were questionable (for example, the absence of any recognition of a demand constraint, the attribution of external payments problems exclusively to the government sector's deficit, and the general monetarist bias) but it provided the toolkit for a highly conservative financial institution whose sole concern, especially vis-à-vis Third World countries, was to recover its loans by imposing fiscal discipline upon the latter (the fact that it practised systematic discrimination between the First and the Third World countries, as distinct from its asymmetric ability to "discipline" surplus and deficit countries, is by now well-established). This was the conservatism of a narrow-minded financier, not that of an ideologue of development frowning overtly upon any attempt to alter forcibly the colonial pattern of international division of labour. The latter role was left by and large to the World Bank.
A major change took place between the two oil-shocks. While the recycling of resources to the Third World, such as it was, was organised in the wake of the first oil-shock by the IMF itself, the tremendous growth which took place in the role of the banks in the interim meant that by the time of the second oil-shock it was the banks which were doing whatever recycling was to be done, and the IMF was called upon only to provide "security cover" to the banks. This was the beginning of a process: from being a leading financier, the IMF had got reduced to being a leading "representative" of international rentier interests.
As a "representative" then it had to insist that the countries, which were caught under its "conditionalities" and, thereby, became possible candidates for receiving funds from international rentiers, adopted a host of measures that were to the liking of the rentiers, such as privatisation of public assets, "opening up" of financial markets, removal of exchange restrictions, convertibility of the currency on the current and capital accounts, and so on, all of which amounted to an espousal of the kind of "structural adjustment" which the World Bank had also come around to.
To sum up then, while the conservatism of the Bretton Woods institutions has continued unabated, there have been major changes in the precise texture of this conservatism reflecting changes which have been occurring in world capitalism. Not only have the Fund and the Bank come closer together in terms of outlook, breaking down their earlier separateness, but this coming together has itself been promoted to a significant extent by the vastly enhanced role of globalised finance. Further, to give credence to and push through the strategies they recommend the Bretton Woods institutions have used a range of tactics in the past. The problem they face now is that with almost all developing countries having adopted policies recommended by these institutions, poor performance tends to be attributed to the role these institutions have played.
It is to deal with this problem that the current round of renewal is under way.
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