The World Bank and the IMF were originally set up after the Second World War. The World Bank was tasked with rebuilding Europe whilst the IMF was given the job of ensuring trade flowed smoothly and give short term loans to countries that had balance of payment problems. They are made up of member countries and the power each member has is based on their contributions to each institution.
As Western countries are the biggest contributors, they have the lion’s share of the power to determine policies. Over time they have taken on the role of setting the economic policy for many of the countries around the world, especially developing countries. They have the power to decide if a country is credit worthy or not and, in order to receive the seal of approval, countries have to follow the economic prescription the two institutions offer.
Structural Adjustment Programmes
Ever since the 1980s this prescription has been in the form of Structural Adjustment Programmes (SAPs) which were sold to the developing world as the magic bullet that would free them from rising debt and set them on the path to economic development. Yet it was all a lie and Africa paid a terrible price.
The African debt crisis has its roots in the oil crisis of the 1970s when OPEC dramatically increased the price of oil, crashing Western economies and garnering a windfall in the process. That massive windfall was largely invested in Western banks who in turn looked to loan the money back out.
The prevailing economic wisdom was that the path to economic development lay in taking out loans to accelerate economic development so borrowing was heavily encouraged and Africa borrowed heavily, especially as the loans on offer came with low interest rates. It didn’t matter to the lenders that the money was going to political elites who promptly wasted the money on luxuries, white elephant projects and, in many cases, the money was simply stolen and then reinvested in those same western banks.
Whilst interest rates remained low in the 70s, no-one paid much attention to the orgy of corruption that swept through Africa but as the 80s arrived everything changed. Facing rising inflation the US raised interest rates dramatically and European banks followed suit. Those loans given to African countries now saw the interest rates rise significantly. In 1980 the total debt of developing countries was $567 billion.
From 1980 to 1992 these countries paid back $1662 billion but the craziness of the situation was that, to repay their initial debts, developing countries had been encouraged to take more loans. As a result, their debt in 1992 had grown to $1419 billion, despite the huge amount of repayments they had made over the decade.
As their debt ballooned the IMF insisted that further loans would only be offered if African countries accepted SAPs. These involved deregulation of trade protections, the ending of price controls and subsidies, export led economic policies, privatisations and the ending of free health care and education. Basically, countries had to export their raw materials, end any welfare programmes and accept higher prices for food. The theory was economic growth would ultimately trickle down, leading to poverty reduction. The results were disastrous.
The Export Trap
On the economic front, it may seem that the development of export goods such as minerals, coffee, cotton and other crops would bring benefits by increasing revenue to the exporting countries but it is an unequal exchange.
A country may get revenue for exporting unprocessed goods but they would lose that revenue (and more) by importing processed goods. Instant coffee costs more than exported coffee beans and all the extra value created in processing the beans goes to the country that does the processing. So countries became economically dependent on the price of raw materials, over which they had little control, leaving them at the mercy of big industrial conglomerates whose interest lay in driving down the prices. Unemployment soared and wages declined.
On the social front the results were equally disastrous. Government healthcare programmes collapsed and were replaced by western NGOs. Few families could afford to educate their children and illiteracy rates, which had been falling, began to rise again. Diseases like malaria and cholera began to increase again.
All the while political elites, who had grown wealthy on corrupt appropriation of the loans on offer, continued to thrive and invest their ill-gotten gains back in to the west. As always the effects were mainly felt by the poor and women in particular as the burden of caring for the sick fell on them and an increase in divorce rates meant women were stuck with all the costs of supporting the children.
In West Africa the effects were particularly devastating. The lack of education, health and jobs led to the growth of a disenfranchised population of young men with no prospects. They were easily recruited by a new generation of politicians like of Charles Taylor in Liberia who saw civil war and conflict as the most profitable way to advance their ambitions.
The shocking fact about SAPs was not that the economic theory underpinning them was bankrupt but that their main aim was to ensure debt repayment and in this they were hugely successful. The world continues to live with the consequences.