Countries Manage Reforms, Not IMF

The Fund and Bank should be seen as advisors and not policy makers, says Swaminathan S Anklesaria Aiyar

Indians leftist hold that the standard IMF-World Bank reform package never works. They look at the wide range of countries under IMF discipline. Wherever the reforms have succeeded, the leftists say this was due to factors other than the IMF package: wherever the reforms have failed, they say the IMF is to blame.

This methodology is propagandist, not analytical. PROs of the IMF use exactly the same methodology but in reverse — they ascribe every success to IMF medicine and every failure to lousy governments. The reality is more complex. The IMF and Bank have prescribed similar policies for countries all over the world. The main ingredients are macroeconomic stability, market-friendliness, outward-orientation and (more recently) human resource development. This mix of policies has been an outstanding success in Asia, where the four tigers have now become richer than erstwhile colonial powers like Portugal and Spain. The same policies have failed widely in Africa, and succeeded in much of Latin America only after a painful transition of up to a decade.

The 1980s have been denounced by the left as a lost decade, since per capita income tell in Latin America and Africa. But growth accelerated in Asia, which has three-quarters of the Third World’s population. Between 1981 and 1993, per capita income in the Third World as a whole grew by an impressive 3.4 per cent annually. This was no lost decade.

If the same mix of policies succeeds in some countries and not in others, clearly the policies by themselves are neither good nor bad — it all depends on whether the countries in question have the right attitudes and institutions. The IMF and Bank can nudge a country in the right direction, but the country has to complete the journey itself.

Before the 1980s, when the IMF tackled only short-term balance of problems, it believed it had a magic formula that worked everywhere. Then came the debt crisis of 1982, and the IMF and Bank attempted to oversee structural adjustment in almost 100 countries. They had some successes but plenty of disasters too, enough to induce a new humility in the once cocksure Bretton Woods organisations.

The organisations then came out with a new thesis: that if reforms are to succeed, they must be ‘owned’ by the borrowing government. Their research suggested that the borrower’s commitment to reform was the single most important reason explaining the success or failure of adjustment programmes.

In other words, only countries can makes reforms work:the IMF and Bank by themselves cannot. Where the IMF and Bank seek to impose market-friendly reforms on resisting governments, the reforms will fail. Where the governments themselves want reforms, these will succeed. And the most successful Third Worlders have been those following the four key policies on their own, not as part of an IMF package.

This has not been understood by critics like Dr Ashok Mitra, who warned in 1991 that hellfire and damnation would wrack India if it accepted an IMF-Bank package. What history demonstrates is that such a package would unquestionably have failed had Dr Mitra been finance minister, since in that case the reforms would have been an imposition. But in practice the finance ministry is occupied by Dr Manmohan Singh, who needs no convincing about the four key ingredients. This is an important reason why, despite half-baked implementation, the reforms have, by and large, succeeded.

The literature of the IMF and Bank is by now replete with homage to the concept of ‘ownership. In fact, this concept is simnlistic. and needs fleshing out. In many countries, the government has been keen on reforms, yet has failed because of resistance from powerful groups in society, street riots and the like. Global experience suggests that, ownership apart, at least four other ingredients are necessary — good governance; local ability to tailor IMF advice to local conditions; the ability to tackle political barriers to reform; and the existence of local groups and institutions that help generate more widespread support-for reform than the government alone can.

Good governance is now a standard IMF-Bank mantra. In retrospect, it seems obvious that neither reforms nor anything else will work where there is civil war, weak or non-existent administration, or a general absence of rule of law.

The second key factor is the ability of borrowers to tailor IMF-Bank advice to local conditions. Such advice is by no means limited to conditions attached to structural adjustment loans — the Bank engages in a continuing policy dialogue with borrowers. The three most fruitful examples of this have been its policy dialogue with Japan and Taiwan in the 1950s and Korea and Taiwan in the1960s and 1970s, and with China in the 1980s. In all these cases the borrowers used the Bank as their principal source of external economic advice. They used foreign advice as a tool in charting out their own strategies, which included the fundamental ingredients of the Washington formula but with many major variations. By contrast, African countries lacked the technical capacity or political inclination to do the same.

The third factor, and one completely beyond the competence of the IMF or Bank, is the management of the polity of a borrower. Consider Argentina, where the Peronists controlled powerful trade unions which sabotaged all earlier attempts at reform. The only way out of the impasse was to have a Peronist leader who would come to power on a socialist slogan and then make a U-turn and become market-friendly, coaxing and arm-twisting the unions into acceptance. Mr Carlos Menem did precisely this. The IMF and Bank could have never provided the right advice on managing the transformation — only the country’s own polity could bring this about. A similar transformation took place in Peru, where Mr Fujimori was elected on a socialist platform but then did a Li-turn. In India, Mr Narasimha Rao has managed the political economy of transition so skillfully that the party of Neh-ruvian socialism has become the party of reform. Elsewhere the management of the polity has been bungled, and in such cases the reforms have ground to a halt.

Finally, it is not enough for the political leadership to be convinced of the need for reform — the whole of society must be prepared for change, and must have spokesmen in every walk of life who understand the need for change and generate far more public support than politicians alone can. Reform is more than a change in policy, it is a change in mind-set. A successful country needs a large and vigorous number of economists, bureaucrats, journalists, technicians and businessmen who believe in change and can help transform the mind-set of a country. India had all these for decades, even if they represented a minority view. Come 1991, they became the new intellectual elite. Their coming to the fore represented an internal change with strong indigenous roots, not one foisted from without. The left wailed that the whole thing was indeed foisted on India but soon proved wrong. The IMF loan programme has ended but the reforms continue. That represents the triumph of the new Indian thinkers, not of the IMF.

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