Over the course of the 1980s,
implementation of neo-liberal economic reform in the developing world repeatedly forced
both international advisers and national economic policy makers to attempt (often with
little success) to impose a relatively standard set of policy recommendations on
stubbornly complex and idiosyncratic societies. In the realm of economic performance
alone, results were extremely mixed. By the early 1990s, most African countries were still
mired in recession, while a few grew rapidly; and a number of Latin American countries
experienced their first growth in almost a decade.
In some cases, international technical assistance and
advice undoubtedly played a role in overcoming the immediate crisis and re-establishing
order in the national economy. The threat of conditionality could also be utilized at
times to give national policy makers greater room for manoeuvre within their own domestic
political context. In a number of instances, in fact, Third World leaders were at least as
convinced of the benefits to be obtained from radical neo-liberal reform as were
counterparts in the international financial community.
Nevertheless one of the lessons to be learned from
accumulated experience with economic reform over the past several decades is that
neo-liberal economic policy prescriptions are of limited utility to governments of
indebted countries and can in fact be dangerous.
Perhaps the most dramatic examples of this point are
provided by the disastrous experiments in free-market economics initiated during the 1970s
in the Southern Cone of Latin America. With the support of military régimes, policy
makers in Argentina, Chile and Uruguay adopted free-market models then gaining adherents
in the United States. Both the trade and financial systems were (in varying degrees)
liberalized, exposing the national economy to severe shocks with serious long-term
Unlike the situation in the 1980s, this was the halcyon
time when international credit was widely available and cheap. The opening of financial
markets in the Southern Cone therefore allowed an enormous accumulation of private foreign
indebtedness, which financed both a flood of imported goods and unprecedented speculation.
The experiment ended in the collapse of the financial system, the bankruptcy of many
national enterprises and the generation of massive private debt, later assumed by the
public sector. A significant part of that debt was attributable to capital flight, as
people took advantage of easy credit to buy dollars and send them out of the country.
Ironically, then, the onset of the debt crisis in the
Southern Cone was directly related to an early adoption of radical neo-liberal adjustment
strategies in the 1970s. Examples of the problems created during the following decade by
more piecemeal adoption of certain policies, designed in the abstract and applied with
little understanding to local realities, could be recounted for many parts of the world.
Although general advice to balance the budget, export a sufficient amount to cover the
cost of imports, and otherwise exercise responsible economic judgement was
unobjectionable, difficulties quickly arose when designing concrete measures for attaining
those ends in many different national economic settings.
By the mid-1980s, the repeated failures of most
free-market adjustment programmes promoted experimentation with new approaches which
retained the goals of imposing fiscal discipline, liberalizing internal markets and
promoting export-oriented growth while adapting the means employed to attain these ends.
The extreme view that stabilization and adjustment could best be attained by entirely
liberalizing all markets, and allowing all prices to be set by the unfettered play of "free-market
forces", gave way to recognition that such "orthodox" programmes seemed
less effective than more "heterodox" strategies relying on fixing and defending
certain key prices in the economy.
The majority of the debt-related adjustment experiences
now considered to have been relatively "successful" and they are a small
number in relation to the total group of countries engaged in stabilization and adjustment
programmes have restored economic order through reliance on "heterodox"
programmes. They have defended the exchange rate from sharp fluctuation (often allowing it
to suffer very small daily changes), imposed price controls on a few strategic goods and
services, fixed interest rates within certain limits, and brought workers and employees
into agreements guaranteeing relative stability of wages and mark-ups or profit margins.
At the same time, trade and financial régimes have remained relatively open to
This requires a strong state, not a weak one. It also
requires effective mechanisms for agreement among representatives of the government,
business sector and working class as well as channels which, in turn, link
representatives of these sectors to their clientele. (In some cases, such agreement has
been reached through relatively democratic consultation; in others, through the imposition
of conformity through repression.) Beyond this, "heterodox" success stories seem
to require fulfilling other, more specifically economic, conditions.
The first of these is obtaining access to large reserves
of foreign exchange, or to a continuous flow of fresh outside resources. Defending
exchange rates, interest rates and other elements of the economy which ensure
predictability and attract foreign capital takes foreign exchange. Therefore it is not
surprising that "successful" experiments like those in Chile and Mexico were
carried out by governments owning major export industries (copper in the first instance
and oil in the second). These industries were never privatized. It is possible, however,
for governments to sell large state-owned industries to foreign investors, precisely to
generate the foreign exchange for supporting stabilization measures, as was the case in
Foreign aid or lines of international credit can also play
a central role in permitting relatively "successful" stabilization and
adjustment efforts. This has certainly been the case in Ghana, where the international
community has poured resources into the adjustment experiment, and in Costa Rica, where
the United States provided large amounts of new foreign aid. Very large revenues from the
drug trade have also supported stabilization programmes in Bolivia and strengthened the
balance-of-payments position of Colombia and Peru.
Such external support does not, of course, guarantee
recovery. A number of countries are large oil or copper exporters, or have obtained
foreign aid without being able to stabilize their economies. Prudent economic management,
as well as an efficient institutional structure, is essential. But it is still important
to note that most indebted Third World countries have not had access to the level of
external resources which would be required to support a thoroughgoing economic reform with
some chance of success.
Although it has become fashionable to say that the debt
crisis is over, this is true on a global level only to the extent that sufficient time has
elapsed since 1982 for the international banks to build protection against default and
ensure the stability of the system. For most developing countries, debt continues to
constitute an enormous stumbling block in the way of any "successful"
stabilization and adjustment effort, which could lay the groundwork for renewed growth.
Some private and public debt has been rescheduled (often repeatedly) and an increasing
proportion of the bilateral debt of least developed countries has been cancelled; but
multilateral financial institutions still resist any suggestion that they institute
programmes of debt relief. In the meantime, continuous pressure to settle back accounts
produces constant new borrowing. Between 1982 and 1991, in fact, the total foreign debt of
sub-Saharan African countries grew from 57 billion to 144 billion US dollars, and that of
Latin American countries from 354 billion to 470 billion.1
A significant reduction in international interest rates
over the past few years has temporarily decreased the cost of servicing this debt. And
declining interest rates in the industrialized world have also provided an important
incentive for investors to turn toward "successfully adjusting" Third World
countries which boast relatively stable economic and political conditions and offer
significantly higher levels of interest than those which can be obtained in Europe, Japan
or the United States. During the past few years, an unprecedented volume of foreign
private investment has flowed into these "emerging markets", sustaining renewed
growth in some countries whose economies have been stagnant for decades.
This is, however, an extraordinarily fragile arrangement.
Interest rates in the industrialized world are beginning to rise again, thus tempting
capital to return to Northern markets and simultaneously increasing the volume of
expenditure required to service Third World debt. Furthermore massive flows of foreign
capital toward "emerging markets" in recent years have created onerous
obligations. Investors in stocks and bonds expect high returns and are prepared to
withdraw on very short notice. Therefore economic policy in "successfully adjusting"
countries is fundamentally constrained by the potential for instability inherent in the
current model of recovery, based so precariously on foreign private capital markets.
1 For sub-Saharan Africa, this meant an increase in the ratio of debt to gross
national product, from 60 per cent in 1982 to 110 per cent in 1991; while for Latin
America, somewhat better growth reduced the ratio from 52 to 41 per cent. United Nations,
Department of Economic and Social Information and Policy Analysis, World Economic Survey,
1993, New York, 1993, Tables A-35 and A-36.