reducing the role of the state in the economy: a conceptual exploration of imf and world bank...

Reducing the Role of the State in the Economy: A Conceptual Exploration of IMF and WorldBank PrescriptionsAuthor(s): Thomas J. BierstekerSource: International Studies Quarterly, Vol. 34, No. 4 (Dec., 1990), pp. 477-492Published by: Wiley on behalf of The International Studies AssociationStable URL: http://www.jstor.org/stable/2600608 .

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International Studies Quarterly (1990) 34, 477-492

Reducing the Role of the State in the Economy: A Conceptual Exploration of IMF

and World Bank Prescriptions

THOMAS J. BIERSTEKER

University of Southern California

A policy and scholarly consensus is emerging on reducing the role of the state in the economy, but with relatively little consideration of its meaning and potential consequences. Six different forms of state economic intervention are distinguished in this article (influence, regulation, mediation, distribution, production, and planning) and combined to characterize different national economic regimes. IMF and World Bank recommendations for policy reform are then identified, and the consequences of those recommendations are assessed for different forms of economic intervention. On balance, stabilization and structural adjustment programs would appear to facilitate a major continuation of some forms of intervention (influence and mediation), redirect others (regulation, mediation, and distribution), and reduce those associated with state production and planning. These differential effects of the programs have far-reaching political implications, can be internally inconsistent, and are not necessarily conducive to development.

In nearly every developing country in the world today, short-term stabilization measures, structural adjustment programs, liberalization efforts, and economic reforms are being considered, attempted, or adopted. Although there is tremendous variation in the details of the programs being initiated, nearly all entail a reduced role for the state in the economy (especially in the area of expenditures and ownership of productive enterprises) and greater reliance on market mechanisms (especially in the areas of exchange rate adjustment, trade liberalization, and the use of subsidies). These tendencies are a far cry from the extensive state interventionism, economic nationalism, and state socialist experimentation found in much of the developing world during the 1960s and 1970s.

These policy reforms have been accompanied and strongly encouraged by the official reports, studies, and declarations of the major international financial organizations (most notably the World Bank and the IMF), a number of private transna-

Author's Note: This article is part of a larger project on the structural, long-term implications of debt, austerity, and adjustment in developing countries. I am grateful to Eileen Rabach and Mark Oliver for research assistance, to the Center for International Studies at the University of Southern California for financial assistance, and to Richard Ashley, Robert Bates, Charles Becker, Jeffrey Frieden, Nora Hamilton, Stephen Krasner, Joan Nelson, Richard Newfarmer, John Odell, Guillermo O'Donnell, Carol Thompson, and Albert Yee for thoughtful com- ments on an earlier draft.

(C) 1990 International Studies Association



478 Reducing the State

tional banks heavily involved in commercial lending to developing countries, and the U.S. Government. The rhetoric contained in the official reports of the Bank and the Fund has gone from a general call for a reordering of priorities (Berg Report, IBRD, 1981) and more appropriate policies (IMF, 1983) to explicit statements about the need for structural changes (Baker Plan, 1985) and extensive policy reforms (IBRD, 1985; U.N. declaration, 1986). There is certainly no unanimity on all the details or the specific content of the policy reforms thought needed in the developing countries, and a more detailed discussion of the general positions of the Bank and the Fund will be elaborated below. However, they all seem to agree on one point: the need to reduce, cut, or pare back the role of the state in the economy.

Sometimes this is the immediate objective of IMF conditionality, and sometimes it is taken as a proxy or indicator of national resolve or "political will," such as evidence of what needs to be done in order to obtain international approval for what other- wise might be considered "sovereign" economic policy. In either case, there appears to be a growing and largely unchallenged consensus on the issue. What began as a critique of developing country policy from inside international financial institutions has become more generally characterized as "a new mood of realism" about state economic intervention (IBRD, 1983; Council on Foreign Relations, 1985) and even as evidence of "a worldwide movement" (former U.S. Secretary of State Schultz at the U.N. special session on Africa, June 1986). A growing number of important scholarly studies have made similar points about the historical consequences of state intervention in the economy (Lipton, 1977; Bates, 1981).

However, despite all of the evident enthusiasm for it, there has been relatively little discussion of precisely what it means to reduce the role of the state in the economy. There has been even less explicit discussion of the far-reaching political implications of the undertaking. It is significant that most of the discourse on the subject treats it as a technical rather than a political issue, and employs a neutral terminology of "adjustment" and "reform".

Everyone seems to want to change the role of the state, but it is not clear in what ways, in whose interest, and for what ends they wish to do so. This article will begin to answer the first of these questions by (1) considering some of the different ways in which the state intervenes in the economy, (2) examining the prescriptions of IMF and World Bank stabilization and adjustment programs, and (3) combining the two to assess the ways in which Bank and Fund prescriptions would in the abstract affect the nature of state intervention.

This article is intended to clarify and illuminate the meaning of "reducing the role of the state in the economy" for the purpose of raising a number of hitherto unasked questions about the enterprise. Much of the text is concerned with a definitional exploration of the meanings of a widely used concept and will be drawn upon to generate a number of research hypotheses at the conclusion of the article, including a consideration of some of the political risks, inconsistencies, and potential implications of IMF and World Bank approaches. Before we can address these issues, however, we first must examine the nature of state intervention in the economy itself.

The Nature of State Intervention in the Economy

There is a broad scholarly and popular consensus that the role of the modern state in the economy is considerable, and that it has expanded rapidly since the end of World War II (Shonfield, 1965; Miliband, 1969; Alavi, 1972; Cameron, 1978; Stepan, 1978; Skocpol et al., 1985). The precise meaning of state intervention in the economy remains underdefined, however. Even the best empirical and theoretical treatments of the subject (Cameron, 1978; Evans, 1979; Duvall and Freeman, 1983) tend to rely



THOMAS J. BIERSTEKER 479

on a univariable definition or indicator of state intervention rather than present much of an elaboration of the variety of ways in which the state intervenes in economic life. The variety of forms of state intervention is considerable and has become more elaborate over time. This is especially true in the countries of the developing world.

The idea of state intervention in the economy is not exclusively a contemporary one. Indeed, the idea that the state should emerge to ensure the safety of people, including the protection of their property, is one of the fundamental purposes for which it was constituted and its existence justified in modern political thought (Held, 1983:4-14). Utilitarians elaborated on the legitimacy of state intervention, arguing that whenever laissez-faire was unable to ensure the best possible (most utilitarian) outcomes, state intervention was justified (Held, 1983:14-23). Marx, however, chal- lenged the impartiality of state intervention in the economy with the introduction of the issue of the class basis of its actions, thus generating the important and ongoing debate on the class basis and relative autonomy of the state (Miliband 1969, 1983; Lindblom, 1977; Poulantzas, 1978; Offe, 1984; Skocpol et al., 1985).

At some levels, there is broad agreement among liberal and Marxist theorists on the principal reasons for state intervention in the economy Uessop, 1977:353). Most begin their analysis by examining the tendency of the state to intervene to overcome or compensate for difficulties, problems, or contradictions within capitalism result- ing from failures of market mechanisms, unbridled economic competition among capitalists, or what Hilferding called "the chaos of capitalist markets" (quoted from Crouch, 1979:21). Indeed, the proposition that "capitalism cannot be counted on to provide full employment or even socially adequate capital utilization without state intervention . . . is at the heart of all Keynesian analysis" (Schott, 1982:294). Liberal and Marxist theorists obviously differ on the degree of volition or autonomy they allow the state in its intervention, but the idea that it chooses to (or in the Marxist variant, is often forced to) intervene in the economy is common to both.

Non-Marxist scholars stress the degree to which the state needs to maintain its legitimacy, overcome modest levels of economic performance in the face of frequent electoral competition (Cameron, 1978:1251-53), or simply see to it that businessmen perform their appointed tasks (Lindblom, 1977). Scholars in the Marxist tradition emphasize that the state intervenes to overcome contradictions created by capitalism (ordinarily in the service of the interests of capital) (Miliband, 1969), to sustain the process of accumulation and thereby preserve the long-term framework of capitalism as a system (Poulantzas, 1978), or-in a synthesis of elements of both the Marxist and non-Marxist traditions)-to satisfy the interests of the self-interested state (Offe and Ronge, 1975).

In the context of developing countries, several other reasons are frequently ad- duced for state intervention in the economy. The post-independence inheritance from the colonial state provided both the institutions and a historical justification for extensive state intervention in the economy in many parts of the developing world (Alavi, 1972). In addition, developmental performance has been virtually equated with legitimacy of the regime in many developing countries (Hirschman, 1971; Evans and Rueschemeyer, 1985; Senghaas, 1985) and has frequently made state intervention in the economy necessary for regime self-preservation. Finally, the widespread concern with the issue of control (anti-dependence) that fueled economic nationalism in the 1960s and 1970s (Seers, 1983) simultaneously reinforced the expansion of state intervention (Biersteker 1987).

The questions of why the state intervenes in the economy and in whose interests are important ones and have appropriately occupied a prominent place in the recent theoretical literature on the state. The central focus of this study, however, is not on why or for whom, but rather on how the state intervenes in the economy. While the




issues are closely related, and it is difficult to develop an inventory of different forms of state economic intervention without considering why the state intervenes in the first place, they may be separated analytically.

Before discussing the variety of ways the state intervenes in the economy, the state itself needs to be defined. In general terms, the state can be defined as consisting of those institutions of governance-the bureaucracy, the police, the military, the judi- ciary, the legislative assemblies-ordinarily identified as the apparatus of government and the system of order or domination they enforce, either through coercion or appeals to legitimacy. This definition incorporates both senses of the conception of the state found in the works of Anthony Giddens and Ralph Miliband, in which the state as apparatus and the state as the system subject to that apparatus are distinguished (Giddens, 1985:17; Miliband 1969:49, 54). For the purposes of this discussion, however, the state will be defined in narrower terms to refer principally to the instrumental institutions with a capacity to influence and structure society (or the state apparatus, as described above).

The system of order enforced by the institutions of governance is not altogether unchallenged or unchallengeable, even though the modern state is associated with the capability or legitimacy of administration and control of a given territory through its monopoly over the legitimate use of force (Weber, reprinted in Held et al., 1983:111) and over the extraction of taxes within that territory (Engels, 1972). Thus, the state is not a unified, fixed, or static entity (Held, 1983; Skocpol, 1985), but rather it is territorial, and it is partially constituted by the international system within which it resides.

The state intervenes in the economy in a number of distinguishable ways. First, it can attempt to influence the behavior of private entrepreneurs positively, through fiscal, monetary, investment, and trade policies designed to promote, maintain, or accelerate their activity. Second, it can attempt to regulate or constrain their behavior (to influence them negatively) and direct their activity into socially acceptable production through consumer or environmental protections, worker safety programs, and wages legislation. Third, it can attempt to mediate conflicts among capital and labor through corporatist or less structured forms of intermediation. Fourth, it can attempt to distribute (or redistribute) the social and private product of capital through the use of subsidies, transfer payments, or industrial location policies. Fifth, it can attempt to produce goods and services itself, either by subsidizing the infrastructure necessary for an expansion of national production or by embarking on high-risk or high-capital projects through the financing and creation of state enterprises. And sixth, in some cases, it can attempt to plan and therefore rationalize the entire process through the establishment of a comprehensive planning process.

These six different forms of state intervention in the economy are not mutually exclusive and should be viewed more as a partial inventory than as a strict typology. State policies designed to influence and those designed to regulate private entrepreneurs are essentially the inverse of one another: one promotes while the other constrains behavior. Furthermore, state mediation effQrts at one point in time can affect its ability to influence at another, and vice versa. Finally, depending on its efficacy, the planning function affects each of the others in some way. The different forms of intervention identified above could be combined into fewer, more exclusive categories of state economic intervention such as influence, mediation, distribution, and production. To do so, however, would produce greater parsimony at the ex- pense of the kind of disaggregation and detail useful for the conceptual analysis which follows.

These different forms of intervention also are not mutually exclusive in the sense that given policy packages or newly-introduced economic programs regularly combine several of them. The coherence of a given state's economic program is contin-




gent on the extent to which these forms of intervention are complementary. Not all states or their agents intend to be successful when a program or policy is enacted, and it is in this sense that Poulantzas's conception of the state as contested terrain is most informative (Poulantzas, 1978). The power or capability of a state should not be taken for granted, hence the emphasis above on the ways in which the state can attempt to influence, regulate, mediate, and so on. Individual states can enact or pass any program, but their ability to implement it is the more crucial test of their power-and, more often than not, their true sincerity about those programs (Hall, 1983:24).

Many disagreements exist about the state and the nature of its intervention because different aspects of state intervention are being considered. Thus, much of the literature on state economic intervention in Latin America (Stepan, 1978; Evans, 1979) has tended to concentrate on the state in its capacity as a producer of goods and services, while the literature on Europe (Poulantzas, 1978; Habermas, 1976; Offe, 1984) has focused on the state's capacity as corporatist mediator and influencer through its fiscal and monetary policies. The literature on Africa and other multi- ethnic states has often concentrated on the state's capacity as distributor and regulator. These different emphases illustrate the extent to which the nature of the principal economic problems and thus the principal reason for state intervention differ over time and across different regions of the world. While it is appropriate that these different regional characteristics be considered, much theoretical confusion could be eliminated if different forms of state intervention in the economy were identified, qualified, and distinguished before sweeping generalizations were made about its nature.

For example, it is entirely possible that state intervention could be advancing in one or more of these areas while retreating in others. That is, the state's role as producer could be increasing in a particular historical or national context while its role as mediator is declining, or vice versa. Therefore, if we want to say anything very meaningful about the nature and direction of state intervention in the economy, we need to begin by making distinctions between its different forms. Making these distinctions also enables us to identify potential inconsistencies within comprehensive policy packages of the sort currently being prescribed by the World Bank and the IMF.

Every state intervenes in its economy, and nearly all intervene in each of the ways identified above. There are significant differences, however, in the degree of intervention. Classically dirigiste regimes, such as France, Japan, or Brazil, have tended to intervene to a degree that far exceeds the levels of state intervention in the more self- consciously laissez-faire United States or Great Britain. Further, the degree of state intervention can and does obviously change over time. However, even in the U.S., with the exception of the planning function, each of these forms of state intervention has taken place in varying degrees since the end of the second world war.

It is possible to go a little further than the national characterizations presented above, however, and combine the forms and degrees of state intervention into a broader characterization of national political economic regimes. These illustrations of some common combinations of forms of intervention should certainly not be viewed as rigid in any way; their existence in a particular national context tends to be momentary and contextually defined. At one end of the scale is the minimalist state regime, which employs limited fiscal or monetary instruments and modest regulatory policies and distributive programs, but tends to avoid corporatist mediation and eschews both production and planning. Schott characterizes this as limited Keynesi- anism, or "the neoclassical synthesis," associated with writers like Tobin, Samuelson, or Modigliani and "spelled out in numerous macroeconomic textbooks" (Schott, 1982:295). It describes well the postwar economic regimes prevailing in the United




States, Britain, and other members of the Organization for Economic Cooperation and Development (OECD) not governed by social democratic coalitions (even with all their variations during this period). In the developing world, one is hard-pressed to come up with any historical examples of this regime, with the possible exceptions of territories like Puerto Rico and Hong Kong.

At the other end of the scale are the consistently interventionist state capitalist regimes which extend the neoclassical Keynesian synthesis into extensive regulatory controls on production, elaborate corporatist structures, extensive distributive programs, formal planning mechanisms, and a major state role in production and capital accumulation. Much of the work on development by structuralist writers (Hirsch- man, Seers, Streeton, Galtung, and Senghaas) can be associated with these kinds of prescriptions in one way pr another. Forms of state capitalism can be found in many parts of the developing world during the postwar period, most notably in Brazil, Mexico, Nigeria (after 1970), India, and Indonesia. These are the countries in which import-substitution industrialization was most vigorously pursued, a development strategy which combined inward-looking statism with populist social reform.

Between the minimalist state and state capitalism, an infinite variety of forms and degrees of intervention can be found-applicable to most countries and illustrative of some of the most creative examples of state intervention. For example, forms of corporatism long identified with much of Latin America and southern Europe provide an important illustration of an intermediate political economic regime. Here the emphasis is on the state's role as mediator. Neo-corporatist or bureaucratic authoritarian regimes (O'Donnell, 1973, 1978) contain a variety of degrees of regulation and can cover a wide range of state intervention in production, from Turkey's elaborate state enterprise network to Argentina's more limited form. The extent of their distributive or redistributive intervention also varies a great deal, depending on the historical context-their immediate predecessors-and the political coalition upon which they are based.

Kalecki and Robinson suggest another intermediate regime, a variant of Keynes- ian intervention that is far more extensive than the neoclassical synthesis described above (Kalecki, 1971; Robinson, 1979). Their version of Keynesianism prescribes a wider state role, including greater regulation, distribution, mediation, the introduction of planning, and a commitment to large public investments. This form of "wider Keynesianism" (Schott, 1982) was introduced in Britain during the World War II and has been adopted to varying degrees by a number of social democratic regimes in Scandinavia and northern Europe, at least until recently.

Table 1 summarizes the range and types of state intervention described above. The objective is not to provide an elaborate typology in which every developing country regime can be safely accommodated. (Operationally, that would often mean trying to identify and characterize phases of the terms of each finance minister.) The immediate objective is far more modest: to provide a heuristic illustration of the range and degree of state intervention that can exist in a capitalist economy, and to identify what one must look for when assessing the direction and magnitude of changes in that intervention. Table 1 provides some of the vocabulary needed for the subsequent discussion.

The Policy Recommendations of the World Bank and the IMF

The rhetoric of both the World Bank and the IMF has provided an important rationale for reducing the role of the state in the economy. They are not the only sources of influence in this matter, since many regimes impose similar or occasionally more extensive policy reforms on themselves (Foxley, 1983). Bank and Fund inter-




TABLE 1. Heuristic illustrations of the variety of forms of state intervention in the economy.

Minimalist state intervention Neo-Corporatism Wider Keynesianism State capitalism

Influence as little as necessary frequent enough to ac- consistent intervention complish objec- intervention

tives

Regulation modest, as required varies considerable extensive

Mediation occasional (to restrain essential form frequent (on elaborate labor of intervention behalf of labor)

Distribution little (strong aversion to significant extensive market intervention)

Production utilities only varies large public major role in investments accumulation

Planning none introduced introduced formal

vention can be significant, however, and hence it is important to examine the logic behind their efforts to influence policy reform.

The IMF and the World Bank are, of course, functionally distinct international financial institutions. The Fund has historically been associated with short-term stabilization of the economies of countries with severe balance of payments disequi- libria, while the Bank has concentrated on medium and longer-term adjustment lending. However, the functional division of labor between the two institutions no longer holds up very well, and in recent years they have operated virtually inter- changeably in many areas. For example, when talks with the IMF break down and the World Bank steps in with structural adjustment lending, the requirements for policy reform are virtually unchanged. This should not be surprising, since the Bank and the Fund both come out of the same postwar economic reconstruction and development context and currently play a central role enforcing the prevailing international financial regime. Thus, for the purposes of this discussion, their broad policy recommendations on the role of the state will be considered together.

The Bank's influential Berg report stressed the ways in which economic growth in Africa had been impeded by "domestic policy inadequacies" (IBRD, 1981:4) and deficiencies (IBRD, 1981:24). Similarly, the IMF has focused on domestic policy failures in its analysis of the external debt problems of developing countries: "Exter- nal debt problems are generally symptomatic of underlying balance of payments difficulties arising, in part, from the adoption of inappropriate economic and financial policies by the debtor country" (IMF, 1983:20). However, it is through their actions and not through their words that the real influence of these international financial organizations has been most observed and felt. Conditionality, the details of specific letters of intent, and what is euphemistically called "the policy dialogue" or "support for policy reforms" (Council on Foreign Relations, 1985; IBRD, 1985), illustrate most clearly the ways in which the Bank and the Fund are attempting to change the role of the state in the economy. The accumulation of developing country debt and the persistence of the global debt problem have considerably increased their role and influence in recent years.

There is tremendous variation in the specific details of programs the Bank and the Fund recommend to countries with balance of payments difficulties. There is also




considerable variation in the forms in which these recommendations are adopted by developing countries. The discussion which follows is intended to provide a general sketch of the principal components of and rationales for the stabilization and adjustment programs the international financial organizations ordinarily require. Their influence is a separate matter which will be considered in the conclusion of this essay.

Currency devaluations and market-determined exchange rate adjustments are associated with nearly every program (Friedman, 1983:119, 122; Killick et al., 1984:79; Helleiner 1986:73). These are usually the first components of stabilization and adjustment to be imposed, although subsequent devaluations designed to estab- lish a realistic exchange rate may be considered as necessary to a longer-term adjustment program. The principal rationale for these measures is to provide a relatively neutral and comprehensive way to stabilize or adjust the economies of countries with significant short-term problems with balance of payments. Devaluation is often considered especially useful for adjusting the current account and trade balance, since it simultaneously makes imports more costly and exports more competitive. Market- determined adjustments of the exchange rate are increasingly recommended for longer-term adjustment programs and have been considered essential, for example, to the revitalization of African agriculture (Helleiner, 1986:73-74). There is widespread consensus within the Bank and the Fund on the need to "get the prices right," or correct according to the terms set by the international market. Devaluation and exchange rate adjustment are certainly not without their problems, such as inflation, loss of control of money supply, and, under certain conditions, capital flight (elaborated in Katseli, 1983). However, these difficulties go beyond the concerns of this analysis.

The adoption of a package of anti-inflationary, demand management measures (Killick et al., 1984:77) is a second principal component of most stabilization and adjustment programs. They are viewed as necessary in part because devaluation alone would create considerable and unacceptable inflationary pressures. Therefore, some kind of demand management, deflation, or economic contraction is ordinarily prescribed. The specific policy reforms recommended generally include some com- bination of slowing the rate of growth of the money supply, government fiscal adjustment, and wage restraints.

On the supply side, monetarists tend to favor reduction in the rate of the growth of money supply as a way of managing demand, assuming that a tighter money supply will force the state to confront the sources of its payments difficulties rather than inflate its way out of them (Friedman, 1983:122; Eckaus, 1985:4-6). Scholars less inclined toward monetarist interpretations stress the need for fiscal adjustment by the government, based on the assumption that the public sector deficit is a principal source of many balance of payments problems and a barrier to longer-term adjustment due to its effect on the private sector.

One way for a government to accomplish fiscal adjustment is for it to reduce its deficits, both by reducing current spending and improving the efficiency of its investments (Friedman, 1983:122). For this reason, the former president of the World Bank, A. W. Clausen, applauded the government of Ghana for laying off 18,000 employees (Clausen, in an address delivered at a conference on African debt and financing held at the Institute for International Economics, Washington, D.C., Feb- ruary 1986). Another way for a government to accomplish fiscal adjustment is to increase revenues, altering or improving its revenue base from reliance on import tariff revenues to individual or corporate income taxes. Finally, a government can pursue fiscal adjustment by improving the efficiency of public enterprises (Please, 1984:30; Friedman, 1983:119).

On the demand side, wage restraints of one form or another are also ordinarily prescribed (Friedman, 1983:122; Payer, 1974:33). Since so much employment exists




in the public sector in developing countries, wage reductions are expected to produce a smaller fiscal deficit, which in turn implies a smaller increase in the money supply. Those who believe that inflation is principally wage-pushed contend that wages should be a principal object of control. As in the case of devaluation, there are many problems associated with these measures (recession, growing income distribution and wealth disparities, decline of real wages, industrial concentration). How- ever, they again go well beyond the scope of this paper.

The restoration or, in some cases, construction of market mechanisms is a third basic component of most Bank and Fund stabilization and adjustment programs, and it has both an internal and an external dimension. Within the domestic economy restoration ordinarily entails the reduction of price controls (ending subsidies, especially on food and energy) (Please, 1984:29; Friedman, 1983:119; Killick et al., 1984:78), increasing interest rates by eliminating subsidized credit (Killick et al., 1984:71, 80; Helleiner, 1986:73-74), and ending any wage indexation, if it exists. In the area of external economic relations, the restoration of market mechanisms ordinarily entails the liberalization of trade through lowering or simplifying tariffs, eliminating trade licensing, and phasing out export incentives (Please, 1984:29; Helleiner, 1986:73-75). The liberalization of restrictions on foreign exchange transactions (such as foreign exchange controls or restrictions on foreign investment profit remit- tances) are also often associated with the reforms recommended in the area of external economic relations (Friedman, 1983:119).

The principal rationale for the restoration of market mechanisms is to increase competition and thereby improve the efficiency of domestic production. There is a broad consensus within the Bank and the Fund that it is important to send the "correct" -market determined-signals to potential producers and consumers in order to increase total production, rationalize distribution, and eliminate potential channels of corruption. Once again, a great many problems can develop with the restoration or introduction of market mechanisms, such as inflation, urban discon- tent, unemployment, concentration of production, displacement of local producers, and capital flight, but these go beyond the concerns of this analysis.

Privatization is a fourth and final principal component of most Bank and Fund programs. It was originally associated with only the most radical regime changes (such as Pinochet's Chile) but has become increasingly common in the adjustment programs recommended by the World Bank in recent years. Privatization involves an attempt to change both behavior and institutions. It ordinarily entails divestment, or the selling off of parts of the public sector (Helleiner, 1986:73, 75). In some instances, privatization can also involve either the sub-contracting of existing public- sector activities to private-sector entities or the abandonment of those activities altogether (in a process sometimes called "load shedding" (Bailey, 1987). Privatization can be expanded to include the creation of incentives for private sector development as well. Such measures might include the provision of new tax incentives, increasing the private sector's role in agricultural marketing (Please, 1984:29), creating private capital markets, or reducing indirect taxes such as pollution controls, worker safety programs, or insurance schemes (Friedman, 1983:119).

The principal rationale for privatization is the assumption that the private sector will be able to increase the efficiency of production. The sale of state enterprises is designed to prevent the private sector from being squeezed out by the public sector, and it can also reduce the channels of and therefore possibilities for public-sector corruption. Problems, of course, can develop from efforts to privatize the economy. For example, there are occasions when no one is willing to buy shares of the state enterprises placed for sale. Hence the state can be left with the worst performing enterprises, further aggravating its economic performance and deficit. Signals to the private sector may not work or may not be acted upon, unemployment may increase,




TABLE 2. Principal components of stabilization and adjustment programs.

A. Devaluation and Exchange Rate Adjustment (temporally the first component, though subsequent devaluations may accompany a long-term program)

B. Anti-Inflationary, Demand-Management Measures (deflation, contraction, other anti-inflationary measures) 1. reduce rate of growth of money supply 2. pursue fiscal adjustment

a. reduce government deficits i. reduce current spending ii. improve investment efficiency

b. increase revenues c. increase public sector enterprise efficiency

3. reduce costs, primarily through wage restraints C. Restore Market Mechanisms

1. within the domestic economy a. reduce price controls (end subsidies, especially on food and energy) b. increase interest rates (eliminate subsidized credit) c. end wage indexation (if any exists)

2. in external economic relations a. trade liberalization (lower tariffs, eliminiate licensing, phase out export incentives) b. payments liberalization (provide DFI incentives or reduce disincentives, ease foreign

exchange controls) D. Privatization (change both behavior and institutions)

1. divest or sell off parts of the public sector 2. sub-contract or eliminate public sector services 3. create incentives for private sector development (provide tax incentives, increase private

sector role in agricultural marketing, create private capital markets, reduce indirect taxes [such as pollution controls, worker safety regulation, insurance schemes], tightly manage unions)

Note: These components are rarely introduced in isolation, they are mutually reinforcing, and they change over time (different components have been emphasized by different international actors over the last thirty years).

and regional tensions may intensify, especially in multi-ethnic states with histories of differential economic performance by different ethnic groups. Some of these difficulties will be taken up in the concluding section of this paper.

Table 2 summarizes the principal components of the stabilization and adjustment programs ordinarily recommended by the Bank and the Fund. Not every program or set of policy recommendations necessarily includes each of these four principal components (and certainly not every policy measure indicated in the text). After all, many countries already have some of them in place, and there would be no reason to add them to a list of policy reform conditions. However, both the Bank and the Fund are doing their best to ensure that realistic, market-based exchange rates are being established, anti-inflationary demand management measures adopted, market mechanisms restored, and privatization attempted.

The Effects of World Bank and IMF Programs on the Role of the State in the Economy

Some generalizations can be made about the ways in which these general programs affect the six forms of state intervention in the economy identified above (influence, regulation, mediation, distribution, production, and planning). First, they tend to increase, or at least maintain, state efforts to influence the economy. A major devalua-




tion involves direct intervention by the state, and the establishment of mechanisms to maintain a realistic exchange rate could involve new institution building by the state, such as the establishment of currency auctions or the creation of a crawling peg system. Efforts to restrain the rate of growth of the money supply also entail a direct intervention by the state. The pursuit of fiscal adjustment is another way in which state intervention as influence is enhanced, even though fiscal adjustment is usually associated with a decrease in several other forms of state economic intervention (see below). Both trade and payments liberalization involve more of a change of the way in which state influence takes place rather than a reduction of its efforts to influence. All of this is consistent with the thrust of the proposals by Killick et al., for a "real economy" approach to adjustment: "The approach to adjustment discussed here envisages a large and active role for the state; in no sense does it advocate a laissez- faire solution" (1984:79). Thus, on balance, stabilization and adjustment programs tend to increase or at least maintain the degree of state intervention to influence the macro-economy.

State attempts to regulate the economy tend either to be reduced or to be redirected in support of private-sector investment. Efforts to privatize the economy have the most immediate effect on state regulatory functions, since they often entail the dismantling of restrictive legislation (such as direct and indirect taxation or manda- tory joint venture programs). The reduction of government spending also tends to reduce the state's capacity to implement remaining regulations. Liberalization of trade and foreign exchange controls similarly indicates an important reduction of active state regulation, since the market replaces elaborate state licensing and incen- tive schemes.

Stabilization and adjustment programs are not designed to reduce state efforts to mediate conflicts among capital and labor. Rather, they assume that the state will continue to play an active role in facilitating greater cooperation. In effect, however, their policy recommendations tend to redirect mediation against the immediate material interests of urban-based, formal-sector labor. Managing demand by impos- ing wage restraints or eliminating indexation programs entails a redirection of state mediation, not its reduction. Similarly, the tight management of unions involves a further redirection of state efforts to mediate.

Most-but not all-of the policy reforms recommended by the Bank and the Fund entail a reduction of state attempts to distribute (or redistribute) the social or private product of capital. The elimination of subsidies, the phasing out of price controls, the termination of wage indexation (if any exists), and the increase of interest rates all reduce the state's distributive intervention in the economy. Simi- larly, increasing the efficiency of public-sector activity often means changing the criteria used to determine the location of new enterprises away from concerns about regional distribution and toward reliance principally on criteria of economic efficiency. The most important exception to these tendencies is devaluation and exchange rate adjustment. This can be an important redistributive intervention by the state, since devaluation can change the urban-rural terms of trade in favor of the latter (Please, 1984:29). Whether the benefits of this urban-rural redistribution are widely disbursed within the rural sector itself, however, is a different matter.

The policy reforms generally recommended by the Bank and the Fund nearly always entail a reduction in the state's efforts to produce goods and services directly. This is what privatization is all about. The general reduction in government spending prescribed also mitigates any extension of state productive activity. Where state production cannot be eliminated or avoided, stabilization and adjustment programs attempt to redirect it, principally by altering the criteria by which its investment decisions are made in the direction of greater reliance on economic efficiency.

Finally, although most of the policy measures recommended by the Bank and




Fund are not directed specifically against the planning function, as they leave more and more of the economy to the market, they should in fact reduce state efforts to plan economic activity. Privatization and greater reliance on market mechanisms reduce the amount both of direct state monitoring and of information about the production process. The decrease in current government spending also reduces resources available for planning.

Thus, on balance, stabilization and structural adjustment programs associated with the Bank and the Fund do not appear to form a blanket attack on state intervention in the economy. In fact, if they were to be implemented fully, they would probably facilitate a major continuation or extension of some forms of state intervention (especially influence and mediation), a redirection of other forms (most notably regulation, mediation, and distribution), and a major reduction only in one area (production). Thus, in the abstract, the programs are directed principally against the more extensive forms of state intervention associated with state capitalism and wider Keynesianism (summarized in Table 1). As such, they have important political implications both for domestic relations of production (between capital and labor, as well as between foreign, local, and state sectors) and ultimately for the position of countries in the international division of labor (generally moving them away from forms of state-led, socially-reformist, import-substitution industrialization, toward private sector-led, export-oriented growth). What initially began as a series of short-to medium-term measures for stabilization and economic adjustment turns out to have significant long-term implications for the choice of development strategy.

Table 3 presents these conclusions by integrating the items contained in Tables 1 and 2 and summarizing the likely effects of proposals for stabilization and adjustment on state intervention in the economy. It is important to consider these conclusions in light of the preceding arguments and to contemplate the ways in which they are contextually defined. That is, the likely effects of a stabilization or adjustment program on state intervention in a particular country will depend significantly on the degree and nature of its previous intervention. Historical precedents will invariably influence the possibilities for change (Stepan, 1985). Furthermore, the consequences of these programs are likely to change over time, as well as over different time horizons.

Conclusions

Once the meaning of reducing the role of the state in the economy is clarified and examined, a number of important theoretical issues and research questions arise.

TABLE 3. The effects of stabilization and adjustment on state intervention in the economy.

Influence Regulation Mediation Distribution Production Planning

Devaluation and maintained redirected Exchange Rate or in- (change Adjustment creased urban-rural

terms of trade)

Anti-Inflationary increased decreased redirected decreased decreased decreased Measures slightly

Restoration of redirected decreased decreased Market Mecha- slightly significantly nisms

Privatization redirected decreased decreased dramatically




First, it should be apparent that the recommendations for policy reform emanating from the IMF and the World Bank lead these institutions far beyond the politically neutral and technical role they publicly claim for themselves. Their recommendations for a change in the role of the state in the economy have far-reaching political implications because they cut to the core of critical questions about the nature of the state, the justification for its intervention, and the most appropriate forms for its intervention. Both the Bank and the Fund are inter-governmental organizations, proscribed by their charters from becoming involved in domestic politics. However, their policy recommendations are not neutral in effect and are designed to reorient state intervention away from a particular strategy of development. The historical conflation of import-substitution industrialization and social reform in many parts of the developing world (however unsatisfactory or little realized in practice), means that both appear to be under attack by the reform and adjustment process. This may provide a broad basis for political resistance to many of the reforms in the near future. Questions about models and strategies of development raise fundamental issues, and the practice of describing them as "technical" is itself a political act (Habermas, 1971).

Furthermore, the Bank and the Fund are investing a great deal of time and resources in pursuit of the belief that a reduction of the role of the state in the economy will produce greater efficiency and better economic performance. How- ever, even if the Bank and the Fund were able to succeed in redefining state economic intervention, it would be naive to assume that developing countries would have found the path to sustained, non-inflationary growth and development. Ineffi- cient and unwise state intervention in the economy have certainly contributed to stabilization and adjustment problems, but they are not the only sources of economic difficulty. Structural features of the world economy, such as producer price declines and import price swings, have combined with cyclical changes such as interest rate increases and protectionism by industrial countries to produce conditions that have been and remain central to problems of development (Wheeler, 1984; Helleiner, 1986). Until the Bank and the Fund begin to analyze the ways in which external conditions interact with specific economic reform measures, the severity of the debt crisis and the "consensus" it has generated could be used simply to redirect state intervention in the economy without regard for its developmental consequences (a point some officials in the World Bank and IMF are beginning to realize).

Finally, the package of policy recommendations the Bank and Fund recommend, when taken as a whole, is neither without problems nor free of significant contradic- tion. There is already an extensive literature on policy inconsistency (Helleiner, 1986), policy inadequacy (Killick et al., 1984), policy paradoxes (Eckaus, 1985) and policy overkill (Diaz-Alejandro, 1981; Dell, 1982). The preceding analysis of the political implications of recommendations for qualitative changes in state intervention in the economy suggests additional problems and potential difficulties.

The fact that state intervention in the economy is not unidimensional and that the economic reforms recommended by the Bank and the Fund have differential effects on state intervention (increasing some while reducing others), leads to three concluding research hypotheses about efforts to reduce the role of the state in the economy. In the first instance, reducing the state's intervention in production may undercut its ability to redirect its regulatory intervention on behalf of the private sector. In many parts of the developing world, there is a high degree of interdependence between the public and private sectors. In some countries, the private sector relies on state contracts for its accumulation, either through the supply of goods or services to the state or from the procurement of production sub-contracts from it. In others, the line between the public and private sector is blurred, due to the number of joint ventures (often mandated by the state) that exist between state and local capital (Evans, 1979; Biersteker, 1987). At times, the form of interdependence is more




indirect, as in Brazil, where the state provided generous subsidies to the private sector to finance its high rates of absolute growth during the early 1970s (Stepan, 1985:332; Frieden, 1986).

It is because of these basic features of the public sector-private sector relationship that privatization, at least in the form of the sale of state enterprises, will not always be welcomed by the private sector. Local capital that has developed alongside the state in many developing countries has not necessarily been waiting for an opportu- nity to flourish and expand in the space currently occupied by the state. Explicit incentives and extensive guarantees are likely to be required before it agrees to participate more actively in these areas. Furthermore, the private sector may not welcome or find supportive a newly liberalized and competitive environment, an environment that can inflame ethnic and regional tensions. Even the foreign private sector may oppose a more competitive business environment (Evans and Ruesche- meyer, 1985). More often than not, the private sector is in search of a state that will nurture, reinforce, insure, and subsidize its development (Amsden, 1985). Accord- ingly, the behavioral assumptions upon which the current enthusiasm for privatization rests deserve much greater scrutiny.

In the second instance, the policy recommendations of Bank and Fund programs are not entirely consistent and in some cases could undermine the fiscal basis of the state. For example, simultaneously reducing the state's productive and regulatory roles may undercut its ability both to influence the activities of significant economic actors in a country and to provide essential services. In particular, the privatization of successful state enterprises, in conjunction with the reduction of import duties, could serve to undermine a country's domestic revenue base. Since many developing countries lack the administrative capacity to construct an effective tax monitoring system to deal with a radically reformed economy, the consequences for the fiscal basis of the state, especially in the short term, could be serious. Another problem with pursuing privatization without effective regulation is the possibility that new monopolies could be created. Inefficient public monopolies could be replaced by inefficient private ones, without the potential benefits of regional distribution stem- ming from state procurement, employment, or industrial location policies.

Finally, by failing to mobilize the private sector adequately and by weakening the fiscal basis of the state, Bank and Fund programs could undermine the legitimacy of the state itself. As discussed above, legitimating ideologies are an important part of the definition of the state. However, many of the policy reforms pursued by the international financial institutions could produce significant challenges to the legitimacy of the existing state. For example, reducing or redirecting the state's distributive intervention in the economy may undercut its ability to mediate effectively between conflicting factions within civil society, especially between capital and labor. This process may have already begun in Mexico, where the Partido Revolucionario Institutional (PRI) has begun to lose critical support from labor. The elimination of subsidies on food and energy is likely to mobilize an important segment of the urban population and effectively undercut the ability of the state to mediate in labor dis- putes, many of which are urban based. The elimination of subsidies is also likely to make it far more difficult for the state to build a broader coalition on behalf of the continuation of major policy reform. The construction of this coalition is essential for the sustainability and eventual success of the policy changes sought by the Bank and the Fund. Although they are proscribed from becoming directly involved in domestic politics, the success of Bank and Fund programs may in the end depend on more explicit and extensive political intervention. Without it, there may be no way for them to avoid having their programs promote political instability in reforming countries, along with the authoritarianism instability has historically engendered.

In the final analysis, there is plenty of evidence to suggest that the World Bank and the IMF are not omnipotent and that, for good or for ill, their effectiveness is limited




(Killick et al., 1984:60). At present, the extent and durability of the policy changes they recommend are unclear, requiring much more detailed empirical study. Both institutions are devoting a considerable amount of energy and financial resources to the task, and their current rhetoric is designed to create the impression that there is a strong consensus to reduce the degree of state intervention in the economy. When considered in detail, however, these recommendations for policy reform have important political implications for the choice of development models and, if they are pursued to their logical conclusion, it is by no means clear that either the Bank or the Fund is prepared to manage or contend with the political consequences. The road ahead is likely to be a rocky one, made all the more difficult by the policy inconsistencies identified here.

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