In Defense of World Bank and IMF Conditionality in Structural Adjustment Programs

Abstract:     
It is an open secret that the two Bretton Woods Institutions (BWIs) – the World Bank and the IMF – are the main architects of structural adjustment programs (SAPs) that are prevalent in much of the developing world. The very nature of "conditionality" – the policy strings that the BWIs attach to SAP loans to developing nations – does affect the operations of companies, whether these are publicly-owned or private. Conditionality imposes on the program-country (one with a BWI-inspired SAP in place) such measures as: the adjustment/devaluation of local currencies and/or floating of hitherto fixed exchange rates; the decontrol of internal price systems as well as external and internal trade flows (trade liberalization); removal of legal restrictions on private entrepreneurship; abolition of state enterprises and monopolies in both production and marketing; reforming of banking policy, including interest rate decontrol; cutting the state budget, including the removal of all consumer subsidies and other social expenditures; and reduction in money supply accompanied by a general public sector wage and salary freeze to control inflation. These measures, invariably, affect the operations of companies, as well as the socio-economic welfare of the nation involved. It is not surprising, therefore, that some of the negative impacts of SAPs have led to heavy criticism of both the IMF and the World Bank. Based in part on the author's attendance and presentations at conferences in Africa, Europe and North America (on structural adjustment programs in Africa), this paper explores some of the major arguments for and against "conditionality". It argues that whichever way one looks at it, some form of conditionality in structural adjustment programs is unavoidable. It concludes that there are some sound arguments to be found on both sides of the conditionality debate, most of which – in and of themselves – will be of interest to managers.

Keywords: World Bank, IMF, Structural Adjustment

JEL Classification: F00

Accepted Paper Series