CHAPTER ONE: STRUCTURAL ADJUSTMENT PROGRAMS AND

THE COMPREHENSIVE DEVELOPMENT FRAMEWORK; THE

DEBATE

Introduction

The development process in a country relies on the interrelationship

between several actors. It is difficult for a country, in the era of

globalization, be independent of external actors in managing its activities

to achieve national priorities. The influence of external actors such as

developed countries, the World Bank, and the IMF is widely recognized.

Due to their power, knowledge, networks, and finance, these international

actors have created a form of supremacy in the development process in

many parts of the world. Their dominant influence began in the second half

of the twentieth century. Developing countries are most influenced by

these international actors. Economic crises, poverty and a lack of financial

resources are some of the problems that attract international institutions’

involvement in the processes of development in developing countries.

The involvement of international actors in the development process,

however, can not be seen as neutral. There are political, economic,

cultural and social interests embedded in their involvement. The paradigm,

policies and strategies of development favoured by international actors

serve specific interests that are not necessarily the same as those of

developing countries.

This chapter examines the Bretton Woods institutions policies and

development towards developing countries. This chapter assesses the

historical development paradigm, policy and strategies adopted the World

Bank in the 1980s, and 1990s.

8

The Concepts and the debates on the Bretton Woods

Institutions’ Approach to Development

In the 1980s, many developing countries, especially in Latin America,

experienced economic crises. Some of these developing countries,

moreover, could not sustain their economic growth, which led to an

increase in poverty and foreign debt. The Bretton Woods Institutions

responded with liberalization strategies under its Structural Adjustment

Programmes (SAPs), which it argued, could effectively tackle economic

crises and lead to an increase in economic growth within developing

countries (SAPRIN 2004, p.2). The poverty problem, according to supporters

of structural adjustment, would be reduced automatically as soon as the

developing countries restored high levels of economic growth as a result of

economic liberalization (Soubbotina and Sheram 2000, pp.7-8, Harvey 2007,

p.7).

After 10 years of SAPs, however, the effectiveness of this approach was

questioned. In reality, despite the implementation of SAPs, the poverty

problem and lack of economic performance were still embedded in many

developing countries (Mosley, P and Weeks, J 1994, p. 71). Very few

countries in Africa, Asia and Latin America benefited from economic

liberalization. The rest remained trapped by poverty and huge debt.

Sustained economic growth and poverty reduction were not automatically

achieved by implementing structural adjustment. This has created a debate

about the effectiveness of SAPS. On the one hand, Lustig (2001) stated that

the failure of SAPs was not a result of economic liberalization approaches,

but rather a result of internal situations within developing countries (pp.

90-91). On the other hand, it was argued by others that SAPs were

responsible for the continuing economic crisis and poverty in developing

countries. Economic liberalization itself, it was claimed, was the cause of

poverty and failure to achieve improved economic performance within

developing countries (Nuruzzahman 2005, p.111).

9

In the Bretton Wood Institutions themselves, problems with policy were

recognized. At the end of 1990s the World Bank adopted a new approach

called the Comprehensive Development Framework (CDF) which it argued

could effectively tackle the poverty problem and lead to sustained

economic performance.

Bretton Woods Institutions Policy in the 1980s: The

establishment of Structural Adjustment Programmes (SAPs)

The World Bank and the IMF were two institutions created in 1944 after the

meeting in Bretton Woods, New Hampshire. The meeting’s aim was to

create an international trading environment to foster free market economic

activities at the international level (Rapley 2007, p.13).

As an international institution which was established largely by developed

countries, especially the USA and Britain, the World Bank and the IMF have

specific interests in, and views about, how to assist developing countries.

This assistance, moreover, has been linked with intellectual discourse on

development. In the 1970s, the concept of development relied on

Keynesianism. The idea of Keynesianism supported state intervention in

development in order to ensure the economic progress (growth,

employment and structural change) and social progress (health, education,

welfare) (Fine, Lapavitsas, Pincus 2003, p.15). World Bank development

policy of the time promoted modernization by the state as a core solution

for developing countries (Fine 2006, p.4-5). In the 1980s, however, there

was a major change in Bretton Woods Institutions policies. Its new

approach was based on neoclassical liberal economic theory, and at the

practical level, its revised policy was to construct a new world order. This

aim is enshrined in the Washington Consensus.

1. The Washington Consensus: The Beginning era of Neoliberalism

The Washington Consensus is a term which was introduced by John

Williamson who examined World Bank policies for developing

countries in 1980s. This term was used to describe ‘a set of

10

economic policy reforms and instruments approved by the United

States Congress, the IMF, the World Bank, the International

Development Bank, economic agencies of the US government, and

other economic institutions based in the USA’ (Williamson 1990 cited

in Montiel 2007, p. 115). More specifically, the Washington

Consensus was ‘a set of structural reforms’ imposed by International

institutions based in Washington for developing countries (Parkin

n.d., p. 1)”. Structural reform imposed under the Washington

Consensus, then, could not be seen as neutral. The political interests

of western societies were embedded in the Washington Consensus

(Pender 2001, pp. 398-399).

The significant interest embedded in the Washington Consensus was

the need to liberalize the world economy. The focus of the

Washington Consensus was to establish conditions for rapid economic

growth guided by market mechanisms (Waeyenberge 2006, p. 27;

Onis and Senses 2005, p. 256). Development, then, was to be

measured by the achievement of high and sustained economic

growth. Control of inflation and sound public finance were two

important objectives to be pursued in economic development (cited

in Harvey 2005, p. 93). In order to achieve these goals, the

developing country had to allow the market to lead the development

process.

Further, according to the Washington Consensus, to ensure the

effectiveness of free market operation, the role of the state in

development had to be minimized and only act in support of market

mechanism (Peet and Hartwick 1999, p. 49; Pender, 2001, p. 399).

Furthermore, the Washington Consensus promoted new roles for the

state: (a) maintaining macroeconomic stability by controlling

inflation and reducing the fiscal deficit; (b) opening the market to

international trade and capital mobilization; and, (c) promote

privatization and deregulation as a main element of liberalizing the

internal economy (Gore 2003, p.318).

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It can be argued that the need to reduce the role of the state was

necessary in order to guarantee the operation of the market as a

mechanism for economic growth (Fine 2006, pp. 5-6; Rapley 2007,

p.79). This was a significant change in the dominant development

paradigm. As stated by Pender (2001), the major approach in terms

of development before the establishment of the Washington

Consensus was mainly state-led development (p. 399). The

Washington Consensus has influenced development practice and can

be considered a victory of market-oriented policies over state-led

development (Gore 2003, p. 319). The state was no longer the

principal actor in development, but now steered agendas set by the

market. This dramatic shift from also defined the beginning era of

neo-liberalism. The 1980s Latin American debt crisis provided the

momentum for the Bretton Woods institutions to enforce free market

fundamentalism in the region (Harvey 2007, p.29).

2. Structural Adjustment in Developing Countries

The implementation of the Washington Consensus was widespread in

developing countries. It began in Latin America, where countries

such as Mexico and Brazil were in economic crisis. The problems of

development within these countries, according to supporters of the

Washington Consensus, could be solved by economic solutions:

improving economic growth by liberalizing the economic

environment. In short, structural adjustment involved the

reconstructing of developing countries’ economic environments so

that they could integrate into a global liberal economic environment

(Peet and Hartwick 1999, p.56).

The purpose of structural adjustment programs was to make the

economy less vulnerable to future shocks by eliminating balance of

payment deficits, achieving a high rate of economic growth,

stabilizing the economy and ensuring future payment of debts

(Streeten 1987, p.1470). According to the supporters of structural

12

adjustment, there were many structural blockages in developing

countries that reduced the market’s capacity to foster economic

growth. Thus, developing countries were “asked to change their

economic situation especially via the use of fiscal austerity and de-

inflationary policies, the privatization of state-owned enterprises,

trade liberalization, currency devaluation, and the general

deregulation of the economy” (Rapley 2007, p.79).

Economic crisis and a lack of economic achievement, according to

proponents of structural adjustment, arose because developing

countries did not operate in a liberal economic environment.

Supporters of structural adjustment asserted that market

liberalization, deregulation and privatization (key strategies

embedded in SAPs) would lead to an increase in economic

achievement (SAPRIN 2004. p.2).

The mass implementation of structural adjustment programs in

developing countries did not occur merely because the approach was

so influential at the time. There was another factor: loans. A country

that experienced economic crisis and a lack of economic growth

needed to obtain money as fast as possible. This situation

encouraged developing countries to agree to adjust their economic

environment in order to get ‘fresh’ money from the World Bank

(Lafay and Lecaillon 1993, pp.72-73).

Structural adjustment, according to its supporters, could overcome a

deficit in the balance of payments and problems with inflation (cited

in Streeten 1987, p.1470). To obtain these objectives, the

developing country should carry out three major actions. The first

action was to ensure budget discipline. The deficits caused by

inflation, a negative balance of payments and capital flight could be

reduced by cutting expenditure rather than increasing taxes. The

second action was to open up the economic environment.

Governments needed to welcome foreign capital, technology and

13

international trade. The third strategy was to liberalize the market

economy and let the market manage economic activities (Lafay and

Lecaillon 1993, pp.72-73). With these three actions, the countries

were supposed to be able to overcome balance of payment deficits

and inflation and this would then be followed by sustained economic

growth.

3. Poverty and Structural Adjustment

In countries that had already experienced an economic crisis and

poor economic performance, the implementation of structural

adjustment unavoidably increased the burden on people who were

already suffering due to the economic crisis. People who were

experiencing difficulties in their economic conditions and standards

of living would suffer more with the implementation of structural

adjustment. At the very beginning structural adjustment, however,

did not pay attention to poverty and poor people (Drache 2001,

p.10). The implementation of structural adjustment programs did

not address poverty directly, even though the architects of

structural adjustment recognized that the implementation of

structural adjustment would increase the burdens of people who

were already suffering (Lafay and Lecaillion 1993, p.17). This

approach was chosen on the basis of the argument that structural

adjustment only emphasizes the restructuring of economy as a

precondition to sustained economic growth. As described by

Waeyenberge, the concerns of the World Bank in the era of

structural adjustment were the establishment of a market-friendly

environment in developing countries, rather than dealing with

poverty and the problems of the poor (2006. p.250).

According to the supporters of structural adjustment, the problem of

poverty would reduce when the developing country achieved high

economic growth (Sanford 1988, p.265; Mavroudeas & Papadatos

2005, p. 4). Economic liberalization would lead to increased wealth

14

for all. It was just a matter of time before the fruits of economic

liberalization would reach poor people. This idea was known as the

‘trickle-down’ effect. In other words, poor people would gain the

benefits of structural adjustment after market liberalization had

been fully implemented in their country.

The Comprehensive Development Framework

After a decade of imposing structural adjustment in developing countries,

the results did not match its promise. Many developing countries that had

implemented structural adjustment programs did not achieve sustained

economic growth and poverty reduction (Mosley, P and Weeks, J 1994, p.

71; Fine 2003, p.1). Moreover, a decrease in the even distribution in terms

of wealth and income, a significant reduction in wages, health

deterioration, and an increase in unemployment were some of the social

effects associated with the implementation of liberalization and structural

adjustment (UNRISD (1995) cited in Petras and Veltmeyer 2004, p.30). In

the middle of the 1990s, 1 billion people still lived in extreme poverty

(measured by per capita income of less than a dollar per day) and many

countries had between 25 and 50 percent of their total populations living in

poverty (Vries 1996 cited in Fine 2003, p.1). In Africa, structural

adjustment failed to bring economic growth and alleviate poverty, even

though it had already undergone liberalization (Mafeje 2001, p. 18).

Further, UNICEF reports that most of the 36 African countries studied

experienced ‘a decrease in capital accumulation, public investment, direct

foreign investment, and industrial and export growth’ (cited in Lopes 1999,

p.512).

To some extent, the Bretton Woods institutions themselves recognized the

poor results of their strategies, especially poor results in poverty reduction

(cited in Mafeje 2001, p.21). In contrast to opponents of structural

adjustment, the World Bank considered that the problem was not the

strategy itself, but the internal conditions within developing countries. As

stated in the World Bank’s report entitled, “Adjustment in Africa” (1994),

15

the poor economic performance in Africa was due to a failure to adjust and

not a failure of adjustment itself. Moreover, proponents of structural

adjustment still argued that adjustment was the initial step for achieving

the other major objective of development: poverty reduction (cited in

Chossudovsky 1997, p. 70). This argument was followed by Lustig who

examined the link between growth and poverty reduction in Latin America.

According to Lustig (1995), poor performance in terms of growth and

poverty reduction in Latin American countries, especially Mexico, during

the implementation of structural adjustment was mainly caused by the

debt crises and its consequences rather than as an effect of structural

adjustment (p. 46). Without structural adjustment, Lustig argued (1995),

the result would have been even worse (p. 46).

Thus, for supporters of market liberalization, the solution to the poor

performance of developing countries in the late 1990s was to continue

using market mechanisms to boost economic growth, combined with

strengthening state capacity in designing and implementing development

policies and putting poverty alleviation as a new agenda (Cling,

Razafindrakoto and Rouboud 2002, p. 12; World Bank cited in Waeyenberge

2006, p.29). This approach became known as the Post Washington

Consensus.

1. The Post Washington Consensus: State Reform for the Market

The Post Washington Consensus (PWC) tried to redefine the

relationship between state and market. The architects of the Post

Washington Consensus still believed that economic liberalization led

by the market was the best way to achieve positive results in

development. Lack of success in the structural adjustment era was

because the state within the developing country was incorrectly

approached. The active role of the state in development, according

to the architects of Post Washington Consensus, should not be

viewed as an obstacle to market-led liberalization. An active role by

the state could be complementary to the market and could lead to a

16

high level of achievement in development (Onis and Senses, p.275).

In other words, the market and the state needed to be reformed

simultaneously in order to make these institutions more effective in

supporting each other (Olis and senses, p.275).

Thus, the Post Washington Consensus promoted a more active role

for the state: to correct market imperfections. The state’s role was

to regulate the financial system in order to make capital more

mobile, improve security for the banking system, and provide more

money for investment. The state also had to provide infrastructure,

technology and social services for its citizen. In addition, the state

should promote equality and alleviate poverty in their programs

(Onis and Senses 2005, p.275).

The Post-Washington Consensus not only constructed a new role for

the state in economic matters, but also sought to create a new

approach in political matters. The policy of good governance was

proposed to create a democratic, transparent and accountable state

within developing countries (Onis and Senses, p.173 or p.276). The

economic decision making process was no longer formally

depoliticized, because proponents of the PWC argued that

democracy could foster market-based economic reform (Olis and

Senses 2005, p. 276). This shift in approach also meant that Post

Washington Consensus reduced its adherence to the view that the

free market could automatically deliver wealth for all. More

specifically, by establishing the Post Washington Consensus,

supporters of neoliberalism changed their previous opposition to any

state intervention (Harvey 2007, p. 20).

The need for reform of the state was not without importance. The

Post Washington Consensus agreed that the market could not be

expected to run perfectly all the time. The new role of the state was

mainly to address market imperfections (Olis and Senses 2005, pp.

276-277). Thus, reconstruction of the state-market relation was due

17

to the need for correcting market failures. The Post-Washington

Consensus still believed that the market was the most significant

factor for positive economic achievement. The state was necessary

to support the operation of the market. Thus, development was not

simply regarded as solely an economic matter, as was the case when

the World Bank introduced structural adjustment. Development was

also a social and political matter which created a significant impact

on economic matters (Stiglitz 1998, World Bank 1999 cited in

Waeyenberge, pp.32-33). In practice, the Post-Washington

Consensus was implemented by the World Bank via its

Comprehensive Development Framework.

2. The Comprehensive Development Framework

The Post-Washington Consensus introduced a combination of

economic, social and political approaches to support the

development process. The policy of structural adjustment was

considered unsuccessful because it only used a single approach,

namely an economic one. The new approach was more holistic:

reconstructing not only the economic environment, but also the

social and political conditions within developing countries (Stiglitz

1998, World Bank 1999 cited in Waeyenberge, pp.32-33; Pender

2001, pp. 407-408). This approach was known as the Comprehensive

Development Framework (CDF). It was introduced in the late 1990s

by James Wolfensohn and has become the central policy of the

Bretton Woods Institutions since (Pender 2001, p.407).

The important elements of Comprehensive Development Framework

(CDF) are:

1. a development strategy which combines economic dimensions,

governance and social dimensions;

2. a development strategy that can be operated in terms of a

country-based approach and provides access for stakeholders

18

to participate in formulating and implementing development

programs;

3. a partnership between government and international

development agencies which should be strengthened based on

its comparative advantages

4. a strategy where progress on poverty reduction and sustained

growth are considered prior to examining progress on

investment and institutional reform (Hanna and Agarwala

2000, p.9)

The Comprehensive Development Framework made the notion of

partnership an essential strategy of development. Partnership was

needed both at the external level, between a country and an

international institution, and at the internal level, between

government, civil society and the poor (Pender 2001, p.408).

According to the World Bank, both types of partnership were

needed in the development process. Internal partnerships provide

benefits for governments which lacked the capacity and resources to

run development programs alone. External partnerships provide a

balance between national development strategies and external

assistance (World Bank 2004, pp. 14-15)

Along with the idea of partnership, the Comprehensive Development

Framework also introduced the idea of ownership. The idea of

ownership in the development process was necessary because it

provide significant freedom to the government to plan and operate

its development policies (Pender 2001, p.409). Overall, the

Comprehensive Development Framework has moved the focus of the

development process from economic growth to a more holistic

approach, with more emphasis on poverty reduction as a major goal

in that process (Drache 2001, p.2).

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3. The Poverty Alleviation Program as a New Strategy in

Development

Since the beginning of the 1990s, poverty has become an important

issue in development discourse. International development agencies

began to make poverty reduction a priority in their agendas (Thomas

2000, p.10). Since 1999, the World Bank has begun to use the

Comprehensive Development Framework as a new strategy for

development where poverty reduction is an immediate objective.

The introduction of the Comprehensive Development Framework by

the Bretton Woods Institutions shows that the Bank itself considered

that there was a disconnection between sustained growth and

poverty reduction (cited in Hanna and Agarwala 2000, p. 1). The

shift from development defined only as economic growth to one

which included poverty reduction as well, indicated that the Bretton

Woods Institutions had begun to consider that market-led economic

approaches did not provide direct benefits to the poor. The poor,

poverty reduction and non-market approaches then became central

to Bretton Woods Institutions policies and strategies (Pender 2001,

p.406; Hayami 2003a, p. 57). This approach, then, insisted that

governments of developing countries make a significant commitment

to use ‘pro-poor policies’ in all regulations and activities (Pender

2001, p. 408).

The approach of the Bretton Woods Institutions to the conception of

poverty has also changed significantly. The World Bank now

measures poverty using a human poverty approach. Rather than

measuring poverty only by income per capita, the human poverty

approach gives much attention to well being as indicated by

nutritional status, educational attainment and health status (Pender,

p.406). In simple terms, the World Bank has changed the indicators

for measuring development progress from per capita GDP to the

Human Development Index (HDI).

20

The conceptual change has had a significant impact on the Bretton

Woods Institutions’ strategies for alleviating poverty. Alleviating

poverty has led to the provision of social services such as education,

health and social safety nets. This action was supposed to be done

by internal actors within a country, that is, by the government and

the people (Hayami 2003a, p. 57). This strategy has been combined

with the idea of empowerment of the poor, where the power and

the voices of the poor are expected to be included in the

development process (Hayami 2003b, p.21). Thus, the active role of

the state in providing social services related to poverty reduction

and fostering poor people empowerment was central to the

argument for the need for some state intervention in the Neoliberal

era of ensuring free market operation.

4. Criticisms of the Post Washington Consensus

The benefits of the emerging PWC have been widely praised.

Reducing poverty as an ultimate objective of development has

resulted in some development theorists beginning to applaud to the

change in the Bretton Wood Institutions. But, others are not

convinced about the impact of the changing paradigm on reducing

poverty and inequality around the world. The new approach of the

Bretton Woods Institutions is only an “illusion”. As Roddik (2001)

points out, the PWC is inclusive in its ideas and objectives, but it

fails to give strategic direction at the practical level. This cynical

assessment arises because the PWC ignores the existence of unequal

power relations both inside and outside of a country. As pointed out

by Onis (2003), the existing domination of a particular class and its

interests both in developing countries and in the global environment

has not been given significant attention (p.28). One factor that was

considered to be missing in the new Bretton Woods institutions’

approach was a failure to address the existing international

economic system which tends to discriminate against developing

countries (Kay 2006, pp.488-490). Without reconstructing the

21

international economic system it was hard to foresee significant

improvement in economic development in developing countries.

Furthermore, in effect there were limited changes in the new

approach compared to the previous approach. As stated in the report

of World Development Movement, there were no clear poverty-

reduction consequences embedded in the policies of CDF (cited in

Peet 2003, p. 100). Moreover, economic growth was still the main

concern with less focus on how to market liberalism benefits to the

poor. There was no clear explanation of how poor people participate

in the global economy, what should be done by poor people to win in

global competition, and how to change the structural economic

conditions of the poor so that they could gain advantages of market

liberalization.

Added to this, macroeconomic policies continued to stress the need

for privatization, liberalization and a limitation of the state’s role in

economic activities, which was not so much different from structural

adjustment (Marshall and Woodroffe 2001 cited in Peet 2003, pp.99-

100)

Another critique concerned the clash with the interests of the

Bretton Woods institutions themselves. It is widely recognized that

one of the roles of the IMF is to assist a country which has an

economic crisis by conducting short-term financial discipline and

regulatory reform. This role, however, provides significant obstacles

to poverty reduction efforts due to the need for a massive reduction

in public spending embedded in the IMF approach (Oniz 2003, p. 28).

These conflicting interests have made some critics skeptical of the

promise of PWC. Moreover, for Mosley (2001), the changing Bretton

Woods approach served its own interests (p.312). The emerging Post-

Washington Consensus, according to Mosley (2001), was needed for

the survival of the Bretton Woods Institutions in a global market

place. The Bretton Wood institutions’ business has little place in high

Comment [SS1]: Explain more

22

income countries, so it needs low income countries in which market

economies are not yet effective and economic growth is not yet

sustainable (Mosley 2001, p. 312-313). There has been evidence

shown that loans under structural adjustment caused long-term

dependency in developing countries without creating significant

improvement in economic performance (Johnson and Schaefer 1999

cited in Peet 2003, p. 102). Loans under Comprehensive

Development Framework would become a new mechanism for

Bretton Woods institutions to invest their money in developing

countries. Furthermore, there was not much different between

structural adjustment and Comprehensive Development Framework

as it only served developed countries’ interests to open all part of

the world to make capital easily to flow among countries (Harvey

2005, p. 93).

Conclusion

Since the 1980s the Bretton Wood institutions’ increased involvement in

developing countries’ development has been widely recognized. The

assistance of these institutions was also accompanied by a certain paradigm

of development. In the 1980s these institutions promoted liberalization by

imposing structural reform within developing countries in order to achieve

high and sustained economic growth. The result of that approach was not

as expected. Many developing countries did not achieve substantial growth

and poverty reduction.

To respond to this situation, the Bretton Wood institutions developed a new

approach called Comprehensive Development Framework in the late 1990s.

Under this approach, the reduction of poverty was the ultimate goal of

development. To achieve that goal, the developing countries were

obligated to continue the liberalization process and at the same time

reform the state so as to protect against the failure of market mechanism.

Comment [SS2]: Is the bank or imfreally under threat?

23

Some criticisms exist of this new approach by the World Bank. The main

argument by critics has been that poverty reduction would not be achieved

without alleviating unequal power relation among actors both within a

country and across the world. A comparison of the impact of

Comprehensive Development Framework and of Structural Adjustment

Policies is necessary to assess whether the promise of the latest CDF was

realized or whether it had similar results as the earlier SAP approach. Thus,

the following two chapters explore the implementation and consequences

of SAP and CDF in Mexico, respectively.