De la valoración y abono de los trabajos 1 Formas varias de abono de las obras

As discussed in sections 1.2 and 1.3, while the early development economists displayed an unquestioning faith in the ability of the state to correct market failures and to effectively direct the economic process towards development goals, the neo-classical economists^ emphasised “public failures” of regulatory states.

With the renewed emphasis on neo-classical principles, markets, prices and incentives became central (Meier, 1989;p.84). It was argued that markets are collections

' These included for example Krueger (1974 and 1978); Balassa and Associates (1982); Little (1982) and

Lai (1985). The World Development Report 1987, also contains a full review of the studies carried out.

of optimising, self-seeking buyers and sellers who interact with each other in trading goods, services, and factors of production at prices ‘determined’ by impersonal market

conditions. These markets lead to pareto-optimum outcomes as the unintended

consequence of individual attempts to maximise profits or utility. The state, on the other hand, is exogenous to the economic process, “it is simply that undefined organisation that

solves problems arising in markets” (Dutt, et a l, 1994:p.4).

An equally important focus of the neo-classicals criticism is the role envisaged for

the state. The style and extent of interventionism favoured by early development

economists has been especially criticised, as has their apparent belief that governments would and could intervene in order to improve the incomes and welfare of the poor. The neo-classical economists allege that the slow progress made by developing countries has been caused mainly by excessive intervention in the economy by government.

Trade policy is the core area for neo-classical reform. It is argued by the neo- classicists (Little, Scitovsky and Scott, 1970; Krueger, 1978; Bhagwati, 1978; Balassa and Associates, 1982) that export expansion has been associated with rapid economic growth; countries that have tended to do well in terms of one of these variables have also tended to do well in others. Import-substituting industrialisation which had shaped the development effort of a number of developing countries since the 1950s, was put forward as the primary cause of price ‘distortions’ and macroeconomic disorders. Thus, according to the mainstream view (Balassa and Associates, 1986; World Bank, 1991a), the Latin American failure is due to internal causes such as excessive government interference and inappropriate government policies such as inefficient import substitution. Therefore, just as import substitution was associated with a large and direct role for government and the public sector, the outward looking approach has been linked to an emphasis on “minimal” government and a strong reliance on the market over all sectors of the economy.

1,4.2 Structural adjustment through pro-market reforms

The concepts of “economic reform” and “structural adjustment”, therefore emerged during the 1980s when developing countries were forced to adjust their economic structures to respond to the debt crisis, and to the falling terms of traded These SAPs were supposed to first stabilise the macro economy and then adjust the market so that it could perform more efficiently.

Stabilisation is the domain of the IMF. Its policy prescription aims to reduce the external deficit (and especially the volume of imports) by cutting aggregate demand. Typical policies include cuts in public spending for both current purposes and capital formation, high interest rates and credit restraints (especially for the public sector). Exchange rate adjustment is the second main component of most of the Fund’s packages (Taylor and Pieper, 1996:pp.7-9).

In conjunction with the World Bank package, the Fund usually pushes for liberalisation of foreign trade restrictions, market deregulation (often with an emphasis on curtailing labour power and cutting real wages) and privatisation. The basic aim of the

Fund’s package is to reduce trade and fiscal deficits {ibid.).

Structural adjustment is the speciality of the World Bank and is aimed at improving prospects for medium-term GDP growth. The Bank’s main thrust has been to improve the

allocative efficiency of the price system. Producer output subsidies and consumer

purchase subsidies should be eliminated for all goods. Domestic prices should be driven towards border prices (import or export dollar prices times the exchange rate). Labour market “distortions” should be outlawed. The Bank’s views rest on a fundamental theorem of neo-classical welfare economics — referred to earlier — which asserts that a

’ The heavily indebted developing countries experienced a strong terms-of-trade shock in 1981-83 and, after a brief reversal in 1984, deterioration in their terms of trade continued from 1985 to 1988 (Toye, 1993:p.217). The case was the same in Oman when its terms of trade declined sharply between 1980 and 1986, as we shall see in Chapters IV and V.

fully competitive market will make an economy use its resources optimally^ and on an

average everybody will be as well off as they possibly can be {ibid. :pp. 10-11).

Other components of the Bank’s package include; foreign trade liberalisation, beginning with the replacement of import quotas by tariffs and the subsequent reduction of the tariffs and export subsidies; removal of barriers to external capital flows — such as controls on foreign exchange transactions and profit remittances; and a third target is deregulation of the domestic financial market, the aim of which is to equalise rates of

return to different financial assets^ {ibid.).

Privatisation of SOEs^ also became a major preoccupation of the Bank in the late

1980s. The irony of this is, as Cook and Kirkpatrick (1988) point out, that the

international agencies are advocating dismantling of publicly-owned institutions that they themselves created in the 1960s.

Finally, by reducing state intervention and adding “transparency” to the economy, all the above prescriptions are supposed to cut back on unproductive resource diversion due to corruption and seeking “rents”, the returns guaranteed from a state-assured market

position, such as the possession of an import quota {ibid. :p. 12).

Under the cross-conditionality restrictions imposed under the SAPs, a country which is not in compliance with the IMF is usually denied access to credits from the World

' Despite its alleged origin from Adam Smith, supply-side economics has little relevance in practice. All governments intervene in setting prices and some of the most interventionist ones, such as Taiwan and South Korea have seen their economies grow the fastest. These issues are discussed in Chapter III of this thesis.

^ The view in the 1980s was that raising previously “repressed” interest rates would stimulate savings. ^ As Taylor and Pieper (1996:p.7) state that “It is a phenomenon of a particular time and place, amalgamating long-standing IMF macroeconomic stabilisation policies, the World Bank’s self-doubts about its anti-poverty agenda of the 1970s (which led it to try to speed up output growth rates and income “trickle-down” by adopting the market deregulation and supply-side economics ideas in vogue in Washington after the turn of the decade) and London’s zeal for privatisation of public enterprises which emerged at about the same time ... [A] synthetic product of the 1980’s the consensus appears less and less capable o f dealing with many of these difficulties as they persist a decade later”.

Bank or to the possibility of rescheduling its official debts and its commercial bank debts (zW.:p.8).

As the contents of the SAPs indicate, a central part of the neo-classical strategy was, of course, to dismantle many institutions, particularly those of the state. “[T]he theory was that changing the structure of incentives would empower market-oriented groups and eventually make them sufficiently strong to enforce new role of behaviour in both state and society to develop new institutions” (UNRISD, 1995:p.49).

However, towards the end of the 1980s, the evident failure of the orthodox neo­ classical strategy in both economic and environment terms and particularly the high cost of social upheaval caused by the SAPs (as we shall see in section 1.5) was leading the IFIs to rethink their approach. This confirms Toye’s (1993;p.89) analysis that “over-simplified ‘solutions’, resting on little more than the political perceptions of a distant ideologue, are incapable of resolving the real dilemmas of development satisfactorily”. The contribution

that arguably has had the greatest impact is the UNICEF’s sponsored report Adjustment

with a Human Face (Comia, et a l, 1987). As a result, the World Bank started to move away from economic idealism and pay more attention to social and political considerations.