The International Monetary Fund and World Bank, also known as the Bretton Woods institutions, have been created in 1944 to rebuild the European economies that have been destroyed during World War II. Harold Nyikal, author of the article, Neo-Colonialism In Africa: The Economic Crisis In Africa And The Propagation Of The Status Quo By The World Bank/IMF And WTO, declares: “The IMF's role was to stabilize international trade by harmonizing its members' monetary policies and maintaining exchange stability and to provide temporary financial aid to countries encountering difficulties with their balance of payments. And, the World Bank was responsible of lending money to war-ravaged and impoverished countries and financing their reconstruction and development projects.” (Nyikal 2) The Washington consensus, founded on the principles of macroeconomic stability and integration into the international economy. To do so, national currencies could be convertible and interchangeable to the fixed American dollar. This meant currency was traded freely. When foreign countries started stocking up on gold reserves instead of the American dollar, the US lost its economic influence. As a result, President Nixon ended the gold standard, which is the convertibility of the US dollar to gold. Consequently, the new world order, known as the Bretton woods system, collapsed. Its two main institutions had to adapt to this change by finding new roles in the international sphere. During the debt crisis of the Third World in the 1980s, they became multilateral aid agencies that ensured creditors got reimbursed by restructuring the debts of developing countries through Structural Adjustment Programmes.
Structural Adjustment Programmes (SAPs) are economic policies for developing countries that have been promoted by the World Bank and the IMF since the early 1980s by the provision of loans conditional on the adoption of such policies. (World Trade organization, 2013) To what extent are Structural Adjustments Programmes a form of neocolonialism? Neocolonialism is a notion that was introduced by Kwame Nkrumah in his article Neocolonialism: The Last Stage of Imperialism. It describes a new form of colonialism, whereby dominant states exercise political and economic control over less developed countries (LDC) through capitalism, globalization and economic imperialism instead of direct military control and geographic conquest. SAPs implemented by international financial institution like the World Bank and the IMF have had drastic impacts on the economies of developing states and have increased debt, poverty and underdevelopment.
Debt is the money owed to creditors. It is in the form of loans giving by governments, international organizations, private banks and foreign investors. It existed since the 1950s, mainly in Latin American countries, however, debt has increased exponentially in the 1980s. The main origins of external debt are the increase exportation of primary commodities by developing nations, the end of the gold standard in the US and the oil crisis in 1973-4. More than half of underdeveloped countries' economies depend on the exportation of primary commodities like livestock, oil, cotton, diamonds… In 1991, the exportation of manufactured goods from industrial nations rose as the exportation of primary and agricultural products from underdeveloped countries fell. Moreover, the decision of President Nixon to end the gold standard in America created the devaluation of the US dollar. After War world II, the United States was a powerful. As a result, Organization of the Petroleum Exporting Countries (OPEC) decided to raise the price of oil. The oil crisis of 1973-4 resulted in the increase of import prices. To finance their exportations and importations, less developed African countries had to loan money from private banks and investors.
Debt is a huge burden for the economies of less developed states especially the poorer ones. Since 1981 to 2000, external debt of underdeveloped countries has increased drastically from
755 billion dollars to 2 375 billion dollars. (Bibeau and Corriveau-Dignard 120) The external debts of African states, excluding North African countries that have an abundant supply of oil, are significantly higher than their national incomes. According to Susan George, the author of A Fate Worse than Debt, debt is an efficient tool which ensures access to other peoples’ raw materials and infrastructure on the cheapest possible terms. Due to Northern protectionism and their lack of cash to invest in diversification, dozens of countries must compete for shrinking export markets and can only a limited range of products. Market saturation ensues, reducing exporters’ income to a bare minimum while the North enjoys huge savings. She adds that the IMF doesn’t understand that investing in … [a] healthy, well-fed, literate population is the most intelligent economic choice a country can make. (George 143)
To repay their lenders, who invested in them during the oil price shocks, the IMF and World Bank have been charged with ensuring private investors and commercial banks got reimbursed. They would loan large sums of money as a last resort if indebted countries agreed to abide by certain rules and conditions known as SAPs. In a way, commercial debt turned into multilateral debt. Less developed countries had to restructure their macroeconomic politics to satisfy the interests of their lenders. Loans were given in instalments that can be terminated if the reforms were not well respected.
The two phases of SAPs are macroeconomic stabilization and structural reforms. Macroeconomic stabilization includes the devaluation of exchange rates. This means the abolition of regulated exchange rates and prices, which creates inflation of domestic prices and destabilizes the national currency (Chossudovsky 48) The consequence of this practise is that the prices of products increase, while the power of the consumers diminishes. Macroeconomic stabilization also means the dollarization of prices, which increases the national prices of goods and services. (Chossudovsky 49) Also, government are required to diminish the circulation of money to fight inflation. Due to this economic reform, states must diminish their spending by decreasing salaries and firing employees. (Chossudovsky 49) The IMF also ask for independence of the central banks from the political influence of the government. (Chossudovsky 51) In that, governments have no power when it comes to monetary policy like the finance of its spendings and economic development. Moreover, functionaries of the central banks are not subject to control of the parliament. (Chossudovsky 51)
The International Monetary Fund also requires that government cut their spending’ on social programs and public-sector workforce. Governments are also encouraged to cut back on public investments like schools and hospitals. (Chossudovsky 52) Another condition is the liberalization of prices, which means the abolition of subsidies on products and services like grain products. As a result, prices of the material used to produce these goods are substantially high. (Chossudovsky 53) Finally, the fixation of oil prices by the state through the supervision of the World Bank, is a sort of tax imposed of national commerce of carburant national producers and cost less to import oil that is subsidized.
The second phase of the SAPs is structural reforms. The first reform is the liberalization of commerce, which consists of diminishing tariffs on the exportations of goods to facilitate trade and freeing up your market to the world. ( Chossudovsky 54) Secondly, the privatization of state owned enterprises suggested by the plan Brady, was a condition that had to be met in order for a country to renegotiate their debts.(Chossudovsky 54). According to the World Bank, internal producers had to pay taxes based on their sales and revenues. The privatization of lands was also a form of debt reimbursement. This business consisted of selling land to prospective customers. (Chossudovsky 55) The Bretton woods institutions insisted on the free circulation and flows of capitals and the liberalization of banking systems. Canadian economist, Michel Chossudovsky said the failure of the SAPs is indisputable. The therapy proposed by the IMF destroys the economy, disrupts the civil society of indebted countries and leads the world to the abyss. (Chossudovsky 62). These programs are ineffective because they damage the national economy and the power of the state, they reduce the quality of life of the indebted population and they benefit the countries of the North to the detriment of the countries of the South.
The SAPs have increased poverty in underdeveloped nations. Third world countries are forced to adopt strict reforms to repay colossal debts. Bretton Woods institutions, based on the neoliberal approach, encourage governments to export more, spend less, reduce consumption, remove financial regulations and compete with other nations. As a result, labour becomes cheaper, raw material exports become cheaper, capital flows become volatile and exchanges rates determined by International monetary institutions all serve the interests of the wealthy countries.
These programs force less developed countries into the global market without any economic stability or foundation. Consequently, the circulation of money decreases in poorer countries when they export commodities (which are cheap), when they are denied from industrial capital and technology transfer and when they import finished products (which are more expensive because of the high cost of labour). More than 50 % of developing countries' economies depend on the exportation of commodities and raw material. (Carbonnier 145)
Structural adjustment policies impede development of poor countries. The LDCs are a group of countries classified by the United Nations as least developed in terms of their low gross domestic product per capita, weak human assets and high degree of economic vulnerability. Undeveloped countries or LDC's are characterized by poor living standards. Third World countries, especially poor African nations, are subject to high mortality, poverty and inflation rates as well as low employment, income and literacy tolls.
Reforms and “restructuring” programmes imposed by the IMF and World Bank have made reimbursement of loans the ultimate goal of poor states. Instead of focusing their resources and energy on the development of their nations, governments are forced to achieve so called “economic prosperity”. Budget austerity cuts the government’s spending money funding for social systems, civil servants, schools, healthcare, etc. are dismantled. Citizens do not have access to satisfy their primary needs like water, food, shelter, education. Diseases are widespread because government have not invested in the control and prevention of lethal viruses. In general, the welfare of the population is tragic, and the quality of life is unbearable. Institutions that claim to fight poverty and aid development create poverty and underdevelopment. As a result, many Third World countries are economically and politically unstable, war-ravaged and impoverished. An example would be Somalia, where a reform imposed by the World Bank to compensate its debt, diminished the salary rate of a public-sector employee to 3 $/ month and caused a civil war. (Carbonnier 143)
Globalization is a neoliberal phenomenon that facilitates market deregulations and liberalization while, capitalism is an economic system founded on profit gain. Both factors helped facilitate economic imperialism, also known as neocolonialism. Kwame Nkrumah explains that multilateral aid provided by the IMF and World Bank to developing countries, is a means of controlling a recently decolonized/independent country's resources and economy. (Nkrumah 3) He also adds that it allows exploitation and social inequalities to expand on a global scale (Nkrumah 4).
According to the neo-Marxist approach, founded on Karl Marx's historic materialism theory, multilateral aid is a tool of domination by powerful states on lesser influential nations and it serves the interests of the rich (Carbonnier 145). Thus, the rich get richer while the poor get poorer. Another Marxist theory is Immanuel Wallenstein’s world system analysis. Our current capitalistic system is based on the world systems model, which is the international division of labour that divides the world into three types of countries: the core, the periphery and the semi periphery. The core countries include the West, the industrialized nations, the highly skilled and the politically and economically independent. The periphery encompasses the weak states, the least diversified and industrialized and the least economically and political unstable. The semi-periphery is in between the core and the periphery. This model explains that due to their disadvantageous position in the world system, underdeveloped countries will always be powerless in international trade, economically unstable and dependent to core countries.
In the late 1950s, Raul Prebisch, Director of the United Nations Economic Commission for Latin America, developed the dependency theory, which states that the economic development of a country is based on external political, economic and cultural influences. (Ferraro 58) This theory explains that the capitalistic system created dependency of developing nations towards the dominant states. This unequal relationship between dominant and dependent countries has reduced the development of LDCs because their economies rely on the help of the West. In his article, "Dependency Theory: An Introduction”, Vincent Ferraro states that according to dependency theorists, the capitalist system has enforced a rigid international division of labor which is responsible for the underdevelopment of many areas of the world. Capitalism requires a division of labor between states for efficient allocation of resources. In our current system, however, there is an unequal division of labor which results in the underdevelopment and poverty of African nations. Dependent states supply cheap labor, commodities and goods towards the outside (i.e. dominant states), so the flow of money, services and goods stay within the West. Also, the distribution of these resources is determined by the economic interests of the dominant states. (Ferraro 61)
To conclude, Structural adjustments policies, imposed on underdeveloped states by Bretton woods institutions, are a form of neocolonialism. Powerful countries of the West oversee these institutions and "restructure the economies" of LDCs according to their own self-interests. To receive loans to pay off their debts, countries are subject to harsh reforms like the privatisation of resources, the liberalization of their markets, austerity plans, etc. SAPs are inefficient because they create more debts, poverty and underdevelopment. Harold Nyikal gives many examples, Data shows that in 1994, of the 29 countries the World Bank assisted, only 6 (Gambia, Burkina Faso, Ghana, Nigeria, Tanzania and Zimbabwe) performed well, which displays a failure rate of 79 %. One year later, only two (Burkina Faso and Ghana) of the 29 countries benefitted from structural adjustment programs. By 2001, Ghana became one of the heavily indebted poor countries which proves that these funding programs are ineffective and continue to drive African countries into more debt. (Nyikal 12) He elaborates by saying that SAPs were a solution for European countries that have been devastated by the Second World War. It is not a solution for African countries, which, at the time, were coming out of the era of colonialism. The World Bank and IMF are two financial institutions created and run by Western powers, who have historically exploited African resources and labor. The West cannot be given the power to restructure African economies because it is will continue to put its own interests above the interests of African countries. As a result, African nations will continue to be driven into debt and poverty, while Western economies benefit tremendously from their markets.