The IMF'S Role in Structural Adjustment

Abstract

In the 1980s conditional lending for structural adjustment in developing countries moved the IMF beyond its role of macroeconomic crisis management. Fund-supported adjustment programmes have often been flawed by a lack of distributional analysis and by poor sequencing of reforms, notably premature financial liberalisation. As a result they have caused avoidable hardship. In addition, the attempt to taper out aid as part of the reform programme leads to avoidable reductions in post-stabilisation growth. An important role for the Fund in poststabilisation environments is to provide credible signals to private investors. As macroeconomic crises spread across Latin America and Africa during the 1980s, the IMF became much more involved in low-income countries. Whereas following its interventions in developed countries the Fund had rapidly withdrawn post-crisis, in the low income countries its involvement became continuous. This was partly because stabilisation often took longer. However, additionally, by the 1980s it was already evident that whereas those poor countries which had adopted market-based development strategies were developing, those which had adopted inward-oriented, high-regulation strategies were in decline. Unlike the economic crisis of 1998, the crises of the 1980s were concentrated among the inward-orientated. Hence, a reasonable diagnosis was that the crises were not merely manifestations of fiscal imbalance, but that many other policies needed reform. The task thus went beyond the conventional one of rectifying a crisis, to reorienting a development strategy. The Fund joined with the World Bank in an attempt to induce these reforms through sustained conditional lending. Hence, the IMF moved beyond its traditional role of short run, macroeconomic crisis management. Fund and Bank conditions were linked through cross-conditionality, but with the Fund as the lead agency on many areas of policy. This gave the Fund a critical role in structural adjustment. The Fund's instrument for concessional lending in low-income countries is its Extended Structural Adjustment Facility (ESAF). In 1997 the Board of the Fund commissioned an external review of its ESAF programmes, in which we participated. The Report of the evaluation (Botchwey et al., 1998) suggested three lines of criticism of Fund adjustment programmes and these form the basis of our analysis in this paper. The first is that through flawed design the programmes have sometimes had adverse consequences for the poor, either directly through reducing incomes, or indirectly through reductions in social service provision. Our criticism is of the sequence sometimes adopted by Fund