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The Bretton Woods Institutions and the Third World:
Impacts of Loan ‘Conditionalities’ on Domestic Economy - with emphasis on Nigeria

Victor Dike
vdike@edcenter.egusd.k12.ca.us

Introduction

After World War 1 (1914-1918) the world’s economy was in shamble, and the political and economic landscapes of the world were altered. For this, the League of Nations was founded in 1919 to maintain the peace. The impacts of the war culminated in the Great Depression of the 1930s. Neither the United States nor Great Britain had the resources to single-handedly prevent the worldwide depression. As a result, ‘a set of multilateral institutions’ was needed to rebuild, to provide a safety net, and to structure the postwar economy. With this vision at heart, a meeting held in Bretton Woods, New Hampshire, in July 1944 by the big nations (the United States and the major European nations) founded the IMF, the IBRD (later called the World Bank), and the International Trade Organization (ITO). Thus, these institutions are popularly known as the Bretton Woods Institutions. However, in this essay I will concentrate on the impacts of the loan policy of the World Bank and the IMF on the Third World nations.

The IMF provide short-term financial assistance to needy nations, while the World Bank was set up to provide long-term development loans. As the Third World nations gained nominal political independence (nominal because their economic dependence on the colonial masters restrained their political independence) they began to take loans from the Bretton Woods Institutions, often with destructive conditions. Nigeria is among the Third World nations that have depended on the IMF and the World Bank, for the needed development cash. As Girling points out ‘when a country is dependent, it is likely at least to listen politely, if not attentively’ (1985, p.69). Some of theThird World nations would even compromise their sovereignty to secure a loan, as the Fund is known to have dictated to debtor countries how they should run their political and economic lives. Is that because he who pays the piper dictates the tone?

The Third World Nations

Alfred Sauvy claimed he coined the term the ‘Third World’ in 1952, patterned on the Third Estate of the 1789 French Revolution. But in 1956, a Paris journal, Tiers Monde, adopted the term. Who are the Third World nations? This term identifies a group of the new states of Africa, Asia and the Latin American nations. It is also a political alternative other than that presented by the United States [and Britain] (the first nations) and the old Soviet Union (the second nations). The Third World nations are often called the less developed, developing, underdeveloped, the non-industrialized, the poor, the backward, and or the South (Harris, 1986, p.18).

Since the countries of the Third World are poor and underdeveloped the World Bank and the IMF, as I have earlier mentioned, are their last resort for loans with strings. Have the loans and the bitter pills that accompany them improved the economy of the debtor nations? What are the loan conditions?

Conditions for Loan

When a country wants to borrow funds from the IMF or the World Bank the specific conditions for the loan are usually agreed upon. This is quite different from a private bank loan, where the debtor determines how and where to invest the fund. The ëConditionality in the International Monetary Fund refers to the policies that members are expected to meet or follow when using the Fundís resources in order to be able to cope with their balance of payments problemsí (Brau, 1981, p.16).

For lack of a better definition, balance of payments simply means a summary of the international transactions of a country or region over a period of time, including commodity and service transactions and of course gold movements. The Fundís prescriptions to debtor countries include: liberalization or abolition of foreign-exchange and import controls; devaluation of the local currency; a domestic anti-inflationary program that will control bank credits and the government deficit by reducing government spending, increase taxation, and the abolition of consumer subsidies on basic food stuffs; and a program of greater hospitality to foreign investment (Hooke 1981).

The IMF contends that the devaluation of an overvalued local currency will raise the value or price of imports and reduce their domestic consumption of foreign goods. This step will at the same time lower the price of exports, thereby making their export commodities more competitive in the international market. With this, the country will close the gap in its balance of payments and move away from consumption and toward production. The Fundís anti-inflationary measures are designed and instituted to increase domestic savings for investment by business establishments rather than subsidizing consumer purchases, even for basic needs. Have all these prescriptions been effective? What are their impacts on the domestic economies of the Third World?

Impacts on Domestic Economy

Reports from all over the globe indicate that the imposition of the Fundís policies on the Third World countries has not improved their political and socioeconomic conditions.
...weak currency is mainly good for countries with industrial products to export, and key local industries to protect from foreign competition. But since the local industries are not providing the needed basic goods to the starving population, is the continued implementation of the IMF and World Bank policies necessary? Outside petroleum products, what else does Nigeria export that would warrant the constant devaluation of her currency?
It has instead adversely affected the peopleís living standards by increasing the prices of basic necessities without the corresponding wage increases. This has often provoked riots in countries such as Nigeria, Peru, Jamaica, Egypt, Chile, among others. The Third World has noted that domestic currency devaluation has frequently encouraged a shift in food production from domestic to export markets, thereby depressing the living standards of the poor.

Lamenting over the recent devaluation of the naira by the Central Bank of Nigeria (CBN), the Deputy President of the Nigerian Labor Congress, Lucas Damulak, noted that the devaluation is ëa right step towards destroying workers ‘productivity and ruining the economy’ (see the Guardian, May 18, 1999). In addition, the prescribed devaluation of local currency inflicts heavy losses on domestic producers by raising the costs of essential imports and interest on past debts. Because of their weak industrial base and relative limited resources, most of the domestic industries in the Third World use imported material inputs. And trade liberalization has opened their doors to foreign competition, thereby robbing their weak industries of their protections.

To buttress the argument of the Third World, Gandhi believed that Indiaís economy was penetrated and dominated by their British colonial interests so that Indianís economy no longer served domestic needs. He said:

“Free trade for a country which has become industrial, whose population can and do live in cities, whose people do not mind preying upon other nations and therefore, sustaining the biggest navy to protect their unnatural commerce may be economically sound. Free trade may be good for England [and the United States] which dumps down her manufactures among helpless people and wishes her wants supplied from outside at the cheapest rate. But free trade has ruined Indiaís peasantry in that it has all but destroyed her cottage industry. Moreover, no new trade can compete with foreign trade without protection” (Gandhi 1967, 46)

Nevertheless, these issues are not novel, but the recent spate of currency devaluation in Nigeria has resurrected the debate. It is not my intention to bore our educated readers by recounting the familiar details of the devastating effects of the Bretton Woods prescriptions on the individual countries, but a few example will enable me to elucidate my points. For this, I will leave out the gory details here.

In Peru the IMF austerity measure in 1976 cut workers’ buying power in half. As a result, the price of bread climbed to 1,000% and infant mortality moved up to 30% (Carrizo 1979). Peru also witnessed social conflicts and riots. The Fundís policy had the same effects on Chile. The low tariffs in Chile in the 1980s made imports so cheap that few domestic investments could compete. By early 1983 Chileís economy was in shambles, and unemployment skyrocketed.

The story was the same in Jamaica. The country had a bitter experience with the IMF between 1977 and 1979. Her currency was devalued, among other things. What devaluation really meant was that the country received less foreign currency for its exports while paying more in Jamaican dollars for imports. Consequently, internal inflation soared, class conflicts boiled, and capital flight increased. In 1977 Egypt was forced to end food subsidies and reduced clothing subsidies to meet the stipulations of the IMF. Riots ensued, and ìabout 78 people were killedî (Lappe et. al.1980, p.126). The above brief and rough sketch is purely intentional.

The Case of Nigeria

Nigeriaís external borrowing dates back to the colonial period. The last colonial loan was a 1958 World Bank loan to finance the Borno Railway extension (Dike 1990, p.163). As we have seen, the experiences of other developing nations suggest that devaluation exert a contradictory impact on real output and employment. Yet they have continued with it. Why? The reasons are contradic-tory. When Nigeria approached the International Monetary Fund in 1983 for loan, the Fund characteristically gave Nigeria the bitter pills and forced them down her throat. The massive cuts in public subsidies in Nigeria (e.g. gasoline) made life difficult for the people. In June 1986 General Babangida announced the Structural Adjustment Program (SAP) for the period of July 1986-June 1988 for the country.

As social scientists have noted, the SAP was a recipe for a chain of social and political instability in Nigeria. There were riots in urban areas across the nation during this period. Many local plants were closed for lack of material inputs and spare parts. The impacts culminated in massive retrenchment of workers. The adverse effects of the SAP programs are still with Nigeria today. The economic recovery programs (the austerity measures and the SAP) were within the policy-framework recommended by the World Bank and the IMF.

The key elements of the SAP programs include: 1). Exchange rate devaluation; 2). Liberalization of export trade; 3). Cut in budgetary spending; 4). Reduction of subsidies; 5) Abolition of subsidized commodity board; 6). Privatization of public enterprises; 7). Rationalization of civil service employment; and 8). Tight monetary policy (Usman, March 1999, as cited in The Guardian, April 28, 1999).

Comparatively, it is appropriate to indicate that the IMF and the World Bank operate loan policies that are favorable to the G10 nations (the United States, Great Britain, Germany, France, Italy, Japan, Canada, the Netherlands, Belgium, and Switzerland.

In retrospect, given the devastating effects of the Fund’s prescriptions on Nigeria in the 1980s and beyond, is it not stupid for Babangida to suggest the re-introduction of the structural adjustment program in an already bastardized Nigerian economy? If the program was not successful during his reign of terror, what makes him to think that it will succeed now? Probably he wants the people to remain pauperized so that he and his cronies will remain the only rich Nigerians. As I have noted earlier, practical sense and convention detect that expensive import leads to increase in general price level. It was, however, expected during the time of SAP that the local production base would be boosted and export increased. But what the policy designers failed to insert in their economic equation was that for a Third World country such as Nigeria with a weak industrial base to apply this policy successfully, it must first overcome all the limitations of Import Substitution Industrialization (ISI). That means the creation of a good industrial environment for the society, such as good roads, electrifica-tion, water, good communication system, affordable (and relevant) education and (basic) health services, etc.

Investment in human capital is a critical area Nigeria has neglected for too long. And as Anya O. Anya has rightly noted, ëNational competitive advantage is no longer conferred merely by the nationís natural resources but by the pool of skilled technical manpower and innovative technical processes in manufactures and industriesí (see The Guardian, April 26, 1999).

And as I emphasized in my previous article “Reward System in Nigeria: Workers Morale and Productivity” NEPA, NITEL, NIPOST and our refineries are not performing. These basic needs are preconditions for meaningful growth and development in any society. The question has been, had Nigeria the adequate industrial base to implement and sustain the ISI policies? Contrary to expectation, the ISI policy caused high unemployment and inflation (stagflation) in the country.

Experience is suppose to guide us towards our future endeavors, but Nigeria has not learned anything from her past mistakes. Sadly, the country is still engaged in the destructive exercise of currency devaluation, apparently to satisfy the insatiable demand of the IMF and World Bank. The main economic objective of the Vision 2010 committee is ëTo make Nigeria a major industrialised nation and economic power that continually strives for sustained economic growth and development towards improving the quality of life of all NigeriansÖí(see the Vision 2010).

Is the constant devaluation of the naira a way to achieve the noble objective? Will it resolve the problems of misapplication of resources or inefficiency and corruption in financial dealings in Nigeria? Can it deal with the technological deficiency that constitutes the heart of the problems facing Nigeria? Can this revive the Nigerian agricultural sector that is now anemic? Or can external trade liberalization open more foreign markets for Nigerian industrial products that are not there? If the answers to these questions are not affirmative, then we need a “paradigm shift” (to borrow Thomas Kuhnís term, treated in his 1962 book, The Structure of Scientific Revolution).

The CBN has been entrusted with the important function of implementing sound monetary policies for the nation, but it is not putting into consideration the adverse impacts of its actions on the masses. It has instead followed sheepishly the prescriptions of the IMF and the World Bank. By the end of March 1999, there was a sudden devaluation of the naira from N86.25 to N90 to the dollar by the Central Bank of Nigeria. This weakened the currency by 4.65% against the dollar. The step, according to the CBN, was taken due to demand pressure on foreign exchange. The CBN again devalued the naira in the first week of May 1999, dropping it from N90 to N94.88 to one United States dollar.

In as much as there are some good reasons not to overvalue the currency (e.g. it will weaken the export sector), it is a bad policy to reduce the currency to nothing considering (as I have noted) the fact that Nigeria has not the industrial products to export. The apex bank has to put into consideration the fact that the workersí wages and salaries are not reviewed each time the naira is devalued for their pay to catch up with the adjustment. Sadly, cost of living adjustment or increase is out of the question in Nigeria.

Many Nigerians have spoken against the naira devaluation, but the comments of the two prominent economists mentioned below attracted my attention. Prof. Sam Aluko, Chairman of the National Economic Intelligence Committee (NIEC) has pointed out that ‘one major problem of ours [Nigeria] like any other develop-ing country is undue interference with the currency. He noted that ëonce you interfere with your currency, it affects everything.’

The Director-General of Nigeria Institute of Economic and Social Research (NISER) Prof. Adedotun Phillips seems to agree that the devaluation of the nationís currency is not a good economic strategy, given the import dependent nature of the Nigerian economy. He pointed out that ‘when the naira is devalued, it leads to increase in cost of imported inputs and machinery. This in turn leads to increase in production costs, increase in local product prices and rise in inflation. The devaluation of the currency also leads to increase in prices of imported finished goods and services. This in turn leads to inflation’ (see The Vanguard, April 28, 1999, for Phillips). With an increase in inflation the peopleís purchasing power is reduced.

Thus weak currency is mainly good for countries with industrial products to export, and key local industries to protect from foreign competition. But since the local industries are not providing the needed basic goods to the starving population, is the continued implementation of the IMF and World Bank policies necessary? Outside petroleum products, what else does Nigeria export that would warrant the constant devaluation of her currency?

Bruising the naira is a bad policy judgment, in my modest opinion. Dependence largely on a fragile, crude, slippery and unpredictable oil export, means that the economic well-being of the country hangs precariously on the state of the world oil markets, which Nigeria cannot control. The CBN should, therefore, desist from its destructive policy of currency devaluation. In addition, the Director of the CBN, Dr. Paul Ogwuma should be made to understand that his continued employment as the director of the apex bank depends on the effectiveness of his economic judgments.

The economic contraction that has pulled at the social fabric of Nigeria has raised interesting questions. Is Nigeria failing? Is Nigeria declining? If so, whose fault? What remedies? The IMF commonly defends the failure of its policies by maintaining that countries typically delay their approach to the Fund until their economies are barely breathing and beyond the reach of reasonable efforts at resuscitation. Do we accept this? The real issue is that not only does the Fund often miscalculate the anatomy of the domestic economy (the Fund does not put into account the chaotic political-administrative infrastructure) of the needy nations, but the proposed policy measures to control inflation are often inflationary themselves (Girling 1986, p.103). Why are the Third World still listening and following the ineffective advice of the Bretton Woods Institutions?

Conclusion

Most of the Third World that are adopting the policies of ‘import-substitution industrializationí and ëexport promotion’ do not have the local industrial base for the successful implementation of the programs. As Nigel Harris has rightly pointed out, ëWhen a government is faced with a sudden imbalance between the revenue generated by exports and the cost of imports, it may well limit imports, without this being ‘import-substitution industrialization.’ And in the interests of getting enough foreign exchange, virtually all governments promote exports, without this being a strategy of export promotioní (1986, p.118).

How can a government implement a successful import-substitution strategy without creating a strong national economy - a growth of the domestic market that is ‘self-sustaining?’ The Nigerian society has to motivate her labor force so as to improve their productivity. This is the most potent measure in reviving the national economy that is barely limping. Without this, the substantial diversion of money and skilled labor resources away from our poorly managed economy is almost inevitable.

Therefore, to prepare Nigeria (the Third World) for economic competitiveness, the local labor force should be trained; local companies should be owned local people, and managed by competent hands; profit should be invested at home rather than sent to other countries; innovations in technology should be developed in the country rather than imported, among other things. Any country that depends solely on foreign capital for development is bound to loss, if and when the capital is withdrawn in the face of an economic downturn.

For this, Nigeria should not depend mainly on foreign capital (this is not to discount the importance of foreign capital in Nigeriaís quest for economic development) for her much trumpeted privatization program. The privatization program will benefit the government in terms of generating revenue to the government and economic efficiency. Local investors should be encouraged.

We have to do it our way, and not on the terms of the Bretton Woods institutions. Nigeria should ignore any policies dictated to her by the institutions that will guarantee the perpetual poverty of its population, and frustrate the possibility of economic development. As Joel Barker says in the conclusion to his video The Business of Paradigms, “Those who say it cannot be done should get out of the way of those who are doing it” (1990).