Sugath Kulatunga

Lessons from History

Let us revisit that historic conjuncture of the early 1980s. The military dictatorships were collapsing not only because of internal resistance but also because key external actors such as the United States, European Union, the World Bank, and International Monetary Fund (IMF) withdrew their support from them. Now, one of the major reasons for this about face was that the dictatorships had lost the credibility, legitimacy, and minimum support to impose the economic reform programs, better known as “structural adjustment,” that these influential forces demanded. Promoted as necessary for economic efficiency, these programs were designed to more widely open these economies to foreign capital and foreign trade and to enable countries to pay off their enormous foreign debts.

The democratic governments which displaced authoritarian regimes soon confronted their own dilemma. On the one hand, redistributive policies were blocked by elites that had joined the anti-dictatorship coalition, a development that we have already discussed. At the same time, expansionary fiscal policies were discouraged by the World Bank and the IMF. It soon became clear that what the multilateral agencies wanted them to do was to use their democratic legitimacy to impose structural adjustment programs. In Argentina, for instance, the international financial institutions pressured the new government of Raul Alfonsin to abandon neo- Keynesian policies, implement tax reforms, liberalize trade, and privatize public enterprises. When the regime quailed, the World Bank “concluded that the government had not made sufficient progress toward its reform goals and suspended disbursements on a structural adjustment loan.”

Electoral democracy became the prime mechanism for the imposition of stabilization or structural adjustment programs in Jamaica, Haiti. the Philippines, Peru, and Pakistan. In Jamaica, the progressive Manley government suffered a devastating loss of legitimacy when it caved in to pressure to impose an IMF stabilization program blessed by Washington. The program eroded living standards. It led to Manley’s crushing defeat in the 1980 elections by a successor who proceeded to continue the same policies at the behest of the IMF. In Peru, the government of Alberto Fujimori was elected on a populist, anti-IMF platform, but proceeded to impose a neoliberal “shock” programs that included steep price increases in the rates charged by state enterprises as well as radical trade liberalization. These measures provoked a deep recession, leading to popular discontent that in turn provoked Fujimori to suspend the constitution, close Congress, and rule as a strongman with little respect for constitutional restraints.

In the Philippines, the US and the multilateral agencies abandoned Marcos. Not only was his political position untenable owing to massive popular resistance, but his government’s lack of legitimacy had made it an ineffective instrument for repaying the massive $28 billion foreign debt and for implementing IMF stabilization policies. An economic crisis accompanied the end of the old regime, but that did not stop the World Bank and the IMF from demanding that the fledgling democratic government of President Corazon Aquino make debt repayment its top national economic priority. People were shocked, and some of Aquino’s economic advisers protested, but the government submitted, issuing a decree that affirmed the “automatic appropriation” of the full amount needed to service the foreign debt from the budget of the national government. With some 40 to 50 per cent of the budget going to service the debt, this practically precluded national development, since all that was left went to salaries and operational expenses, with little left over for capital expenditures. In some years, 10 per cent of the country’s GDP was spent servicing its foreign debt. Thus, it is hardly surprising then that the Philippines registered average growth of below 1.5 per cent per annum between 1983 and 1993.

As in Peru, Argentina, and the Philippines, the return of democracy to Brazil was accompanied by scarcely veiled warnings from the IMF and the US that the first order of business for the new regime was to accomplish what the exiting military regime had failed to do, that is, to impose stabilization programs raising interest rates, cutting back government expenditures, devaluing the currency, and liberalizing trade. From the mid -eighties to the 2002, a series of governments eroded the credibility of democracy by undertaking unsuccessful efforts to impose on a recalcitrant population the economic stabilization desired by Washington and the IMF.(8)

The latest victim is the government of “Lula” or Luis Inacio da Silva of the Brazilian Workers’ Party, one of the most committed anti-neoliberal parties on the continent. Before he even won the presidential elections in the fall of 2002, Lula did the unprecedented in Latin America: he promised the IMF that he would honor the high- interest, expenditure-restrictive conditions of a stabilization loan negotiated with the outgoing President Fernando Henrique Cardoso. Lula acted under duress. The Fund made it clear it would not release the remaining $24 billion of the stabilization loan unless he behaved.

Lula was true to his word. Consequently, in 2003 Brazilian GDP contracted by 0.2 per cent in Lula’s first year; unemployment surged to a record 13 per cent.

Reversal of the third wave of democratization now looms as a threat throughout Latin America, where a poll conducted by the United Nations Development Program in 2004 that showed that 54.7 per cent of Latin Americans polled said they would support authoritarian regimes over democracy if the shift would resolve their economic woes. 

Post-mortems of Pakistan’s parliamentary democracy tend to focus on corruption, collapse of the rule of law, ethnic and religious polarization, and economic failure. Certainly, all this played a part. But also crucial was the role played by the IMF and World Bank, which pushed the democratic regimes of both Benazir Bhutto and Nawaz Sharif to impose stabilization and structural adjustment programs that contributed significantly to the rise of poverty and inequality as well as fall in the growth rate. Noted one eminent Pakistani economist: “The almost obsessive concern with short-term macroeconomic stabilization has with it the danger…that some of our basic social programs might be affected, and this would have inter-generational consequences on development in Pakistan.” 

Since democracy became associated with a rise in poverty and economic stagnation, it is not surprising that the coup was viewed with relief by most Pakistanis, from both the middle classes and the working masses.

Extracted from the Global Policy Forum file:///Volumes/Data%20Backup%20HDD/Data%20Backup%20New%202021/Sugath/Desktop/Files%20From%20e.localized/Development/Legitimacy%20Of%20Capitalism.htm

Sugath Kulatunga