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- Structural Adjustment—a Major Cause of Poverty
Structural Adjustment—a Major Cause of Poverty Author and Page information
- by Anup Shah
- This Page
- Last Updated Sunday, November 28, 2010
- This page:
- http://www.globalissues.org/article/3/structural-adjustment-a-major-cause-of-poverty
.
- To print all information e.g. expanded side notes, shows alternative links, use the print version:
- http://www.globalissues.org/print/article/3
Debt is an efficient tool. It ensures access to other peoples’ raw materials and infrastructure on the cheapest possible terms. Dozens of countries must compete for shrinking export markets and can export only a limited range of products because of Northern protectionism and their lack of cash to invest in diversification. Market saturation ensues, reducing exporters’ income to a bare minimum while the North enjoys huge savings. The IMF cannot seem to understand that investing in … [a] healthy, well-fed, literate population … is the most intelligent economic choice a country can make.
—
Susan George, A Fate Worse Than Debt, (New York: Grove Weidenfeld, 1990), pp. 143, 187, 235 Many developing nations are in debt and poverty partly due to the policies of international institutions such as the International Monetary Fund (
) and the World Bank. Their programs have been heavily criticized for many years for resulting in poverty. In addition, for developing or third world countries, there has been an increased dependency on the richer nations. This is despite the IMF and World Bank’s claim that they will reduce poverty. Following an ideology known as neoliberalism, and spearheaded by these and other institutions known as the “Washington Consensus” (for being based in Washington D.C.), Structural Adjustment Policies (
) have been imposed to ensure debt repayment and economic restructuring. But the way it has happened has required poor countries to reduce spending on things like health, education and development, while debt repayment and other economic policies have been made the priority. In effect, the IMF and World Bank have demanded that poor nations lower the standard of living of their people. This web page has the following sub-sections:
- A Spiraling Race to the Bottom
- Maintaining Dependency and Poverty
- What is the IMF/World Bank Prescription?
- The
State has Helped Today’s Rich Countries to Develop
- IMF and World Bank Reform?
- IMF and World Bank Admit Some of Their Policies Do Not Work
- PSRPs replace SAPs but still SAP the poor
- The Asian Development Bank
A Spiraling Race to the Bottom As detailed further below, the IMF and World Bank provide financial assistance to countries seeking it, but apply a neoliberal economic ideology or agenda as a precondition to receiving the money. For example:
- They prescribe cutbacks, “liberalization” of the economy and resource extraction/export-oriented open markets as part of their structural adjustment.
- The role of the state is minimized.
- Privatization is encouraged as well as reduced protection of domestic industries.
- Other adjustment policies also include currency devaluation, increased interest rates, “flexibility” of the labor market, and the elimination of subsidies such as food subsidies.
- To be attractive to foreign investors various regulations and standards are reduced or removed.
The impact of these preconditions on poorer countries can be devastating. Factors such as the following lead to further misery for the developing nations and keep them dependent on developed nations:
- Poor countries must export more in order to raise enough money to pay off their debts in a timely manner.
- Because there are so many nations being asked or forced into the global market place—before they are economically and socially stable and ready—and told to concentrate on similar cash crops and commodities as others, the situation resembles a large-scale price war.
- Then, the resources from the poorer regions become even cheaper, which favors consumers in the West.
- Governments then need to increase exports just to keep their
(which may not be sustainable, either) and earn foreign exchange with which to help pay off debts.
- Governments therefore must:
- spend less
- reduce consumption
- remove or decrease financial regulations
- and so on.
- Over time then:
- the value of labor decreases
- capital flows become more volatile
- a spiraling race to the bottom then begins, which generates
- social unrest, which in turn leads to
and protests around the world
- These nations are then told to peg their currencies to the dollar. But keeping the exchange rate stable is
due to measures such as increased interest rates.
- Investors obviously concerned about their assets and interests can then
very easily if things get tough
- In the worst cases, capital flight can lead to economic collapse, such as we saw in the Asian/global financial crises of 1997/98/99, or in Mexico, Brazil, and many other places. During and after a crisis, the mainstream media and free trade economists lay the blame on emerging markets and their governments’ restrictive or inefficient policies, crony capitalism, etc., which is a cruel irony.
- When IMF donors keep the
- exchange rates in their favor
, it often means that the poor nations remain poor, or get even poorer. Even the
- 1997/98/99 global financial crisis
can be partly blamed on structural adjustment and early, overly aggressive deregulation for emerging economies.
- Millions of children end up dying each year
.
Competition between companies involved in manufacturing in developing countries is often ruthless. We are seeing what Korten described as “a race to the bottom. With each passing day it becomes more difficult to obtain contracts from one of the mega-retailers without hiring child labor, cheating workers on overtime pay, imposing merciless quotas, and operating unsafe practices.”
—
John Madeley, Big Business Poor Peoples; The Impact of Transnational Corporations on the World’s Poor, (Zed Books, 1999) p. 103 This is one of the backbones to today’s so-called “free” trade. In this form, as a result, it is seen by some as unfair and one-way, or extractionalist. It also serves to
maintain unequal free trade as pointed out by J.W. Smith. As a result, policies such as Structural Adjustments have, as described by Smith, contributed to “the greatest peacetime transfer of wealth from the periphery to the imperial center in history”, to which we could add, without much media attention.
Maintaining Dependency and Poverty One of the many things that the powerful nations (through the IMF, World Bank, etc.) prescribe is that the developing nation should open up to allow more imports in and export more of their commodities. However, this is precisely what contributes to poverty and dependency.
[I]f a society spends one hundred dollars to manufacture a product within its borders, the money that is used to pay for materials, labor and, other costs moves through the economy as each recipient spends it. Due to this multiplier effect, a hundred dollars worth of primary production can add several hundred dollars to the Gross National Product (GNP) of that country. If money is spent in another country, circulation of that money is within the exporting country. This is the reason an industrialized product-exporting/commodity-importing country is wealthy and an undeveloped product-importing/commodity-exporting country is poor. [Emphasis Added]
…Developed countries grow rich by selling capital-intensive (thus cheap) products for a high price and buying labor-intensive (thus expensive) products for a low price. This imbalance of trade expands the gap between rich and poor. The wealthy sell products to be consumed, not tools to produce. This maintains the monopolization of the tools of production, and assures a continued market for the product. [Such control of tools of production is a strategy of a mercantilist process. That control often requires military might.]
—
J.W. Smith, The World’s Wasted Wealth 2, (
Institute for Economic Democracy , 1994), pp. 127, 139. As seen above as well, one of the effects of structural adjustment is that developing countries must increase their exports. Usually commodities and raw materials are exported. But as Smith noted above, poor countries lose out when they
- export commodities (which are cheaper than finished products)
- are denied or effectively blocked from industrial capital and real technology transfer, and
- import finished products (which are more expensive due to the added labor to make the product from those commodities and other resources)
This leads to less circulation of money in their own economy and a smaller multiplier effect. Yet, this is not new. Historically this has been a partial reason for dependent economies and poor nations. This was also the role enforced upon former countries under imperial or colonial rule. Those same third world countries find themselves in a similar situation. This can also be described as
trade:
At first glance it may seem that the growth in development of export goods such as coffee, cotton, sugar, and lumber, would be beneficial to the exporting country, since it brings in revenue. In fact, it represents a type of exploitation called
. A country that exports raw or unprocessed materials may gain currency for their sale, but they lose it if they import processed goods. The reason is that processed goods—goods that require additional labor—are more costly. Thus a country that exports lumber but does not have the capacity to process it must then re-import it in the form of finished lumber products, at a cost that is greater than the price it received for the raw product. The country that processes the materials gets the added revenue contributed by its laborers. (Emphasis is original)
—
Richard Robbins, Global Problems and the Culture of Capitalism, (Allyn and Bacon, 1999), p. 95 Exporting commodities and resources is seen as favorable to help earn foreign exchange with which to pay off debts and keep currencies stable. However, partly due to the price war scenario mentioned above, commodity prices have also dropped. Furthermore, reliance on just a few commodities makes countries even more vulnerable to global market conditions and other political and economic influences. As
also reports, talking to the World Bank:
More than 50 developing countries depend on three or fewer commodities for over half of their export earnings. Twenty countries are dependent on commodities for over 90 percent of their total foreign exchange earnings, says the World Bank.
—
Ken Laidlaw,
Market Cure Proposed For Third World’s Battered Farmers , Gemini News Service, December 4, 2001 (Link is to reposted version on this web site)
Almost four years after the above was written,
reveals that things have not changed for the better:
more than 50 per cent of Africa’s export earnings is derived from a single commodity
; numerous countries are dependent on two commodities for the vast majority of their export earnings; and there are a number of other countries in Africa heavily dependent on very few commodities.
In addition, as Celine Tan of the
explains:
Falling [commodity] prices have meant that large increases in export volume by commodity producers have not translated into greater export revenues, leading to severely declining terms of trade for many commodity producing countries. When the purchasing power of a country’s exports declines, a country is unable to purchase imported goods and services necessary for its sustenance, as well as generating income for the implementation of sustainable development programs.
A vast majority of developing countries depend on commodities as a main source of revenue. Primary commodities account for about half of the export revenues of developing countries and many developing countries continue to rely heavily on one or two primary commodities for the bulk of their export earnings.
—
Celine Tan,
Tackling the Commodity Price Crisis Should Be WSSD’s Priority , TWN Briefings for WSSD No.14, Third World Network, August 2002 Tan also highlights in the above article that “a fall in commodity prices have [sic] also led to a build-up of unsustainable debt.” The lack of greater revenues from exports has knock-on effects, as described further above. The irony is that structural adjustments were prescribed by the IMF and the World Bank due to debt repayment concerns in the first place.
As debt-relief and trade became major topics of discussion during the
, Yaya Orou-Guidou, an economist from Benin (a small African country), also noted that exporting raw materials and agricultural products would not help fight poverty. Those raw materials have to be processed in the same poor country to help create a multiplier effect:
Orou-Guidou believes Benin will need to start processing the raw materials it produces if it is to escape the poverty trap.
“A prime material kept in Africa for processing in our factories is one less thing for Western factories to earn money on,” he notes. But, if “we content ourselves with selling our agricultural or mining products in their raw states, they will always feed Western factories which provide jobs for (the West’s) own people.”
—
Ali Idrissou-Toure,
Debt Cancellation No Panacea for Benin
, Inter Press Service, July 7, 2005
This concern also applies to larger economies. The
that started in 2008 resulted in Brazil’s exports to US falling by some 42%, while it increased with China by 23%. However, almost 75% of Brazil’s export to the US were industrial products, whereas the opposite — about 25% — was for China. Vice president of the Brazilian Foreign Trade Association
explained why this is a concern
to
:
- When dealing in commodities, “the importer decides and controls the quantity and prices, making an unstable market,” in contrast to the situation with manufactured goods.
- Commodities also generate low-grade jobs, whereas manufacturing employs skilled personnel for higher wages, creates a multiplier effect on employment as the production chain is longer, and expands the domestic market.
These concerns are not new. Political economist Adam Smith also provided some insights in his 1776 classic,
, which is regarded as the Bible of capitalism. He was highly critical of the mercantilist practices of the wealthy nations, while he recognized the value of local industry and the impact of imported manufactured products on local industries:
Though the encouragement of exportation and the discouragement of importation are the two great engines by which the mercantile system proposes to enrich every country, yet with regard to some particular commodities it seems to follow an opposite plan: to discourage exportation and to encourage importation. Its ultimate object, however, it pretends, is always the same, to enrich the country by the advantageous balance of trade. It discourages the exportation of the materials of manufacture, and of the instruments of trade, in order to give our own workmen an advantage, and to enable them to undersell those of other nations in all foreign markets; and by restraining, in this manner, the exportation of a few commodities of no great price, it proposes to occasion a much greater and more valuable exportation of others. It encourages the importation of the materials of manufacture in order that our own people may be enabled to work them up more cheaply, and thereby prevent a greater and more valuable importation of the manufactured commodities. (Emphasis Added)
—
Adam Smith, Wealth of Nations, Book IV, Chapter VIII, (Everyman’s Library, Sixth Printing, 1991), p.577 Reading the above, we can say that structural adjustment policies are also mercantilist. We are constantly told that we live in a world of global capitalism, and yet we see that while free markets are preached (in Adam Smith’s name), mercantilism is still practiced! Of course, today it is a bit more complicated too. We do have, for example, products being exported from the poorer countries (albeit some facing high barriers in the rich nations). But exporting rather than first creating and developing local industry and economy, means the “developing” country loses out in the long run, (hardly “developing”) because there is little multiplier effect of money circulating within the country, as mentioned above. Furthermore, with labor being
than their fair wages in the poorer nations, wealth is still accumulated by—and concentrated in—the richer nations.
The Luckiest Nut In The World
is an 8 minute video (sorry, no transcript available, as far as I know), produced by Emily James. It is a cartoon animation explaining the effects of loans, structural adjustment and cashcrops, and their impacts on poorer countries. It traces how Senegal was encouraged to grow nuts for export. In summary,
- As a poor nation without many resources, it took out loans to help develop the industry.
- Other nations saw this was going well, so they followed suit.
- The price of nuts started to drop and Senegal faced debt repayment problems.
- Structural adjustment policies were put in place, cutting spending and reducing government involvement in the nut industry and elsewhere.
- However, things got worse.
- At the same time rich countries, such as the US, were subsidizing their own nut (and other) industries, allowing them to gain in market share around the world.
- Rich countries have tools such as trade tariffs and the threat of sanctions at their disposal to help their industries, if needed.
The luckiest nut in the world
Thus we are in a situation where the rich promote a system of free trade for everyone else to follow, while mercantilism is often practiced for themselves.
- “Free trade” is promoted by the rich and influential as the means for all nations to achieve prosperity and development.
- The wealth accumulated by the richer countries in the past is attributed to this policy to strengthen this idea.
- That such immense wealth was accumulated not so much from “free” trade but from the violent and age-old mercantilism or “monopoly capitalism” is ignored.
- Such systems are being practiced again today, and even though they are claimed to be Adam-Smith-style free trade, they are the very systems that Adam Smith himself criticized and attacked.
In 1991 Larry Summers, then Chief Economist for the World Bank (and US Treasury Secretary, in the Clinton Administration, until George Bush and the Republican party came into power), had been a strong backer of structural adjustment policies. He wrote in an internal memo:
Just between you and me, shouldn’t the World Bank be encouraging more migration of dirty industries to the LDCs [less developed countries]?… The economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable, and we should face up to that… Under-populated countries in Africa are vastly under-polluted; their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City… The concern over an agent that causes a one in a million change in the odds of prostate cancer is obviously going to be much higher in a country where people survive to get prostate cancer than in a country where under-five mortality is 200 per thousand.
—
Lawrence Summers, Let them eat pollution, The Economist, February 8, 1992. Quoted from Vandana Shiva, Stolen Harvest, (South End Press, 2000) p.65; See also Richard Robbins, Global Problems and the Culture of Capitalism (Allyn and Bacon, 1999), pp. 233-236 for a detailed look at this. When looked at in this light, poverty is more than simple economic issues; it is also an ideological construct.  ©
Polyp/New Internationalist
Earn More, Eat Less
Half a world away [from Zambia] in Washington, the architects of this human disaster dine in comfort and seclusion, spending more on one meal than Masauso Phiri’s wife makes in a year of selling buns in their shantytown. Although most World Bank staff work at its Washington headquarters, those unlucky enough to be posted in the Third World receive ample compensation for their misfortune. This includes subsidized housing (complete with free furnishings), an extended “assignment grant” of $25,000 and a “mobility premium” to defray the cost of child education. Salaries are tax-free and averaged $86,000 in 1995, according to a General Accounting Office report to Congress. No “structural adjustment,” then, for this privileged coterie of bankers and policy analysts. Meanwhile, in Africa a hidden genocide lays waste the continent.
“It’s not right for a bank to run the whole world,” says Fred M’membe, editor of the Zambia Post. “They do not represent anybody other than the countries that control them. What this means in practice is that the United States runs our countries.” He continues: “Look at any African country today, and you'll find that the figures are swinging down. Education standards are going down, health standards going down and infrastructure is literally breaking up.”
—
Mark Lynas, , The Nation, February 14, 2000 In some countries,
more is spent on debt servicing than education . For example, even in the former communist countries that are trying to undergo rapid economic “reform”, education is given a back seat . In fact, the UK-based development and relief organization, Oxfam, goes as far as saying that the IMF policies deny children an education . Since the end of the Cold War, even wealthier nations have seen government rollback on some functions, in a similar style to structural adjustment. John McMurtry captures this well, being very critical on the impact of such adjustments on “life requirements”:
Such systematic overriding of life requirements is now clearly evident from the most undeveloped to the most advanced societies of the world. In the case of Canada, again, infant mortality rates, the quintessential indicator of social health, rose an astonishing 43 per cent in the 1995 Statistics Canada figures, the first recorded rise in over thirty-one years, while child poverty had increased by 46 per cent since 1989. In Africa an estimated 500,000 more children died from the imposed restructuring of their countries’ economies to ensure increased flows of money to external banks, while spending on health care declined by 50 per cent and on education by 25 per cent since these structural adjustment programs began.
—
John McMurtry, Unequal Freedoms; The Global Market as an Ethical System, (Kumarian Press, 1998), p.305. And as the crisis of AIDS gets worse in Africa, measures that reduce health budgets in already poor countries contribute to the problems. (See this site’s section on
for more on that issue.) <h3 id="WhatistheIMFWorldBankPrescription">What is the IMF/World Bank Prescription? As economist Robin Hanhel summarizes:
The IMF has prescribed the same medicine for troubled third world economies for over two decades:
Tighten up the money supply to increase internal interest rates to whatever heights needed to stabilize the value of the local currency.
Increase tax collections and reduce government spending dramatically.
Sell off public enterprises to the private sector.
- Financial Liberalization.
Remove restrictions on the inflow and outflow of international capital as well as restrictions on what foreign businesses and banks are allowed to buy, own, and operate.
Only when governments sign this “structural adjustment agreement” does the IMF agree to:
- Lend enough itself to prevent default on international loans that are about to come due and otherwise would be unpayable.
- Arrange a restructuring of the country’s debt among private international lenders that includes a pledge of new loans.
—
Robin Hanhel, Panic Rules!, (South End Press, 1999) p. 52. Joseph Stiglitz is
one of the most cited economists in the world , the former winner of the Nobel prize for economics and a professor at Columbia University. He was also former chief economist at the World Bank, who “resigned” under pressure from criticisms he made of the IMF and World Bank. He was also a member of then-US President Bill Clinton’s cabinet and chairman of the US President’s Council of Economic Advisers. His insights and criticisms are worth paying attention to. He notes that:
The IMF likes to go about its business without outsiders asking too many questions. In theory, the fund supports democratic institutions in the nations it assists. In practice, it undermines the democratic process by imposing policies. Officially, of course, the IMF doesn’t “impose” anything. It “negotiates” the conditions for receiving aid. But all the power in the negotiations is on one side—the IMF’s—and the fund rarely allows sufficient time for broad consensus-building or even widespread consultations with either parliaments or civil society. Sometimes the IMF dispenses with the pretense of openness altogether and negotiates secret covenants.
—
Joseph Stiglitz,
What I learned at the world economic crisis. The Insider , The New Republic, April 17, 2000 In April 2001, Greg Palast conducted an
interview with Joseph Stiglitz which was published in the British newspaper . The World Bank talks of “assistance strategies” for every poor nation using careful country by country investigations. However, as reported in the article, “according to insider Stiglitz, the Bank’s ‘investigation’ involves little more than close inspection of five-star hotels. It concludes with a meeting with a begging finance minister, who is handed a ‘restructuring agreement’ pre-drafted for ‘voluntary’ signature.” Stiglitz then tells Palast that after each nation’s economy is analyzed, the World Bank “hands every minister the
four-step program” (emphasis added), described in the article as follows:
- Privatization. Stiglitz tells Palast that some politicians were corrupt enough to go ahead with some state sell-offs: “Rather than object to the sell-offs of state industries, he said national leaders—using the World Bank’s demands to silence local critics—happily flogged their electricity and water companies. ‘You could see their eyes widen’ at the prospect of 10% commissions paid to Swiss bank accounts for simply shaving a few billion off the sale price of national assets.” According to Palast, Stiglitz asserts that the US government knew about, at least in one case: the 1995 Russian sell-off: “‘The US Treasury view was this was great as we wanted Yeltsin re-elected. We don’t care if it’s a corrupt election.’” (Emphasis added)
- Capital market liberalization. According to Palast, Stiglitz describes the disastrous capital flows that can ruin economies as being “predictable,” and says that “when [the outflow of capital] happens, to seduce speculators into returning a nation’s own capital funds, the IMF demands these nations raise interest rates to 30%, 50% and 80%.”
- Market-based pricing. Palast writes that it is at this point that the IMF “drags the gasping nation” to this third points, described as “a fancy term for raising prices on food, water and cooking gas” which, Palast continues, “leads, predictably, to Step-Three-and-a-Half: what Stiglitz calls, ‘The IMF riot.’” These riots, which the article clarifies are “peaceful demonstrations dispersed by bullets, tanks and teargas[sic],” cause further capital outflows, a situation which, as Palast points out, is not without a “bright” side: “foreign corporations … can then pick off remaining assets, such as the odd mining concession or port, at fire sale prices.”
- Free trade. But a version dominated by “rules of the World Trade Organization and the World Bank,” which according to Palast, Stiglitz likens to the Opium Wars: “That too was about ‘opening markets’,” he said. Palast writes that “As in the nineteenth century, Europeans and Americans today are kicking down barriers to sales in Asia, Latin American and Africa while barricading our own markets against the Third World’s agriculture.” (Note that while even President Bush will claim that we want rules based global mechanisms, the mainstream media often does not ask what the rules themselves are, and whether they are most appropriate.) Palast highlights Stiglitz’s problems with the IMF/World Bank plans, plans that the article describes as “devised in secrecy and driven by an absolutist ideology”: first, they are not open to discourse and dissent, and second, that they don’t work. Palast writes that “Under the guiding hand of IMF structural ‘assistance’ Africa's income dropped by 23%.”
In a 5 minute video clip (available in <span class="transcript">
), the well-respected Martin Khor, director of the
notes similar concerns to Stiglitz’s and adds that rich countries are being hypocritical and aggressive by
- Protecting their own industries while attempting to force open markets of poor countries
- Selling artificially cheaper products in poor countries, undermining local producers
- Promising more aid while real economic development suffers:
Martin Khor,
Structural Adjustment Explained
, July 15, 2005, © Big Picture TV
As part of a wider process of globalization, these policies, he argues in another clip (2 minutes, <span class="transcript">
), create a “straight jacket” for poor countries in terms of policy space to make their own decisions:
Martin Khor,
Debt in the Developing World—Part One
, July 15, 2005, © Big Picture TV
Africa Action, an organization working for political, economic and social justice in Africa is
, noting that, “The basic assumption behind structural adjustment was that an increased role for the market would bring benefits to both poor and rich. In the Darwinian world of international markets, the strongest would win out. This would encourage others to follow their example. The development of a market economy with a greater role for the private sector was therefore seen as the key to stimulating economic growth.” Focusing on Africa, the article points out that the issue wasn’t that African countries did not need corrective reforms, but whether SAPs were the appropriate answers. “The key issue with adjustments of this kind, however, is whether they build the capacity to recover and whether they promote long-term development. The adjustments dictated by the World Bank and IMF did neither.” Joseph Stiglitz explains the effects of
liberalization & subsidized agriculture on poor farmers (see link for transcript) In these ways then, the IMF and World Bank’s encouragement of poor countries to open up for foreign trade is too aggressive; arguing that these policies will help create a “level playing field” with rich countries is almost opposite to what has happened in reality in most cases. Perhaps one of the most serious effects is that these external policies indirectly undermine democracy and democratic accountability, not only of the IMF and World Bank (after all, if their policies fail, who are they accountable to?) but also of the governments of the poor countries themselves, who see a reduction in their ability to make important decisions for their people. In some cases, the more corrupt governments can use structural adjustment as an excuse not to cater to all their people.
Oxfam International estimates that, in the Philippines alone, IMF-imposed cuts in preventative medicine will result in 29,000 deaths from malaria and an increase of 90,000 in the number of untreated tuberculosis cases. Tribunals investigating “crimes against humanity” take note!
—
Jeremy Brecher, Panic Rules: Everything you want to know about the Global Economy, by Robin Hahnel (South End Press, 1999). Because some of the poor nations are not as aggressive in privatization and other conditionalities as the IMF or World Bank would like, they face continual
. This model of development, whereby the North (or the developed Nations) impose their conditions on the South (the developing Nations) has come under
by many NGOs and other groups/individuals. Perhaps the model needs to be revised and approached from different angles, as this suggests. True, in some cases corrupt governments have borrowed money from these institutions and/or directly from various donor nations and ended up using that money to pursue conflicts, for arms deals, or to divert resources away from their people. However, in most cases that has been done knowingly, with the support of various rich nations due to their own “national interests”, especially during the Cold War. As Oxfam
, “it would be wrong to hold civilians to ransom by placing stringent conditions on humanitarian relief because of the way their government spends its money.” Furthermore, it has been argued that
Structural Adjustments encourage corruption and undermine democracy . As Ann Pettifor and Jospeh Hanlon note, top-down “conditionality has undermined democracy by making elected governments accountable to Washington-based institutions instead of to their own people.” The potential for unaccountability and corruption therefore increases as well. As the article from Africa Action above also mentions, “African countries require essential investments in health, education and infrastructure before they can compete internationally. The World Bank and IMF instead required countries to reduce state support and protection for social and economic sectors. They insisted on pushing weak African economies into markets where they were unable to compete with the might of the international private sector. These policies further undermined the economic development of African countries.”
»
What is also of note here is that African countries, before SAPs, were making some progress in things like health, though economic reform of some sort was needed. But SAPs have appeared to made the problem worse, as the following, quoted at length, summarizes:
Health status is influenced by socioeconomic factors as well as by the state of health care delivery systems. The policies prescribed by the World Bank and IMF have increased poverty in African countries and mandated cutbacks in the health sector. Combined, this has caused a massive deterioration in the continent’s health status.
The health care systems inherited by most African states after the colonial era were unevenly weighted toward privileged elites and urban centers. In the 1960s and 1970s, substantial progress was made in improving the reach of health care services in many African countries. Most African governments increased spending on the health sector during this period. They endeavored to extend primary health care and to emphasize the development of a public health system to redress the inequalities of the colonial era. The World Health Organization (WHO) emphasized the importance of primary healthcare at the historic Alma Ata Conference in 1978. The Declaration of Alma Ata focused on a community-based approach to health care and resolved that comprehensive health care was a basic right and a responsibility of government.
These efforts undertaken by African governments after independence were quite successful….
While the progress across the African continent was uneven, it was significant, not only because of its positive effects on the health of African populations. It also illustrated a commitment by African leaders to the principle of building and developing their health care systems.
With the economic crisis of the 1980s, much of Africa’s economic and social progress over the previous two decades began to come undone. As African governments became clients of the World Bank and IMF, they forfeited control over their domestic spending priorities. The loan conditions of these institutions forced contraction in government spending on health and other social services….
The relationship between poverty and ill-health is well established. The economic austerity policies attached to World Bank and IMF loans led to intensified poverty in many African countries in the 1980s and 1990s. This increased the vulnerability of African populations to the spread of diseases and to other health problems….
The deepening poverty across the continent has created fertile ground for the spread of infectious diseases. Declining living conditions and reduced access to basic services have led to decreased health status. In Africa today, almost half of the population lacks access to safe water and adequate sanitation services. As immune systems have become weakened, the susceptibility of Africa’s people to infectious diseases has greatly increased….
Even as government spending on health was cut back, the amounts being paid by African governments to foreign creditors continued to increase. By the 1990s, most African countries were spending more repaying foreign debts than on health or education for their people. Health care services in African countries disintegrated, while desperately needed resources were siphoned off by foreign creditors. It was estimated in 1997 that sub-Saharan African governments were transferring to Northern creditors four times what they were spending on the health of their people. In 1998, Senegal spent five times as much repaying foreign debts as on health. Across Africa, debt repayments compete directly with spending on Africa’s health care services.
The erosion of Africa’s health care infrastructure has left many countries unable to cope with the impact of HIV/AIDS and other diseases. Efforts to address the health crisis have been undermined by the lack of available resources and the breakdown in health care delivery systems. The privatization of basic health care has further impeded the response to the health crisis….
The World Bank has recommended several forms of privatization in the health sector…. Throughout Africa, the privatization of health care has reduced access to necessary services. The introduction of market principles into health care delivery has transformed health care from a public service to a private commodity. The outcome has been the denial of access to the poor, who cannot afford to pay for private care…. For example … user fees have actually succeeded in driving the poor away from health care [while] the promotion of insurance schemes as a means to defray the costs of private health care … is inherently flawed in the African context. Less than 10% of Africa’s labor force is employed in the formal job sector.
Beyond the issue of affordability, private health care is also inappropriate in responding to Africa’s particular health needs. When infectious diseases constitute the greatest challenge to health in Africa, public health services are essential. Private health care cannot make the necessary interventions at the community level. Private care is less effective at prevention, and is less able to cope with epidemic situations. Successfully responding to the spread of HIV/AIDS and other diseases in Africa requires strong public health care services.
The privatization of health care in Africa has created a two-tier system which reinforces economic and social inequalities. As health care has become an expensive privilege, the poor have been unable to pay for essential services. The result has been reduced access and increased rates of illness and mortality. Despite these devastating consequences, the World Bank and IMF have continued to push for the privatization of public health services.
—
Ann-Louise Colgan,
Hazardous to Health: The World Bank and IMF in Africa , Africa Action, April 18, 2002 With the other ills, corruption too has soared, so challenges in improving things like health care are even greater. The article also comments on recent increases in funds to tackle HIV/AIDS and other problems and concludes that because some underlying causes and issues are not addressed, these steps may not have much effective impact:
The World Bank has also increased its funding for health, and for HIV/AIDS programs in particular. While the shift in focus towards prioritizing social development and poverty eradication is welcome, fundamental problems remain. New lending for health and education can achieve little when the debt burden of most African countries is already unsustainable. Debt cancellation should be the first step in enabling African countries to tackle their social development challenges. Additional resources to support health and education programs should be conceived as public investment, not new loans. The new spin on the World Bank and IMF priorities fails to change the basic agenda and operations of these institutions. Indeed, it appears to be largely an exercise in public relations. The conditions attached to World Bank and IMF loans still reflect the same orientation prescribed over the past two decades. The recent moves towards promoting poverty reduction have actually permitted these institutions to increase the scope of their loan conditions to include social sector reforms and governance aspects. This allows an even greater intrusion into the domestic policies of African countries. It is highly inappropriate that external creditors should have such control over the priorities of African governments. And it is disingenuous for such creditors to proclaim concern with poverty reduction when they continue to drain desperately needed resources from the poorest countries….
The free market fundamentalism of the World Bank and IMF has had a disastrous impact on Africa’s health. The all-out pursuit of market-led growth has undermined health and health care in African countries. It has forced governments to sacrifice social needs to meet macroeconomic goals.
This approach to development is fundamentally flawed. The failure to prioritize public health denies its significance in promoting long-term economic growth. As the WHO Commission on Macroeconomics and Health recently concluded, health is more than an outcome of development, it is a crucial means to achieving development.
—
Ann-Louise Colgan,
Hazardous to Health: The World Bank and IMF in Africa , Africa Action, April 18, 2002
Furthermore, there is the phenomena of “
” whereby the poor countries educate some of their population to key jobs such as medical areas and other professions only to find that some rich countries try to attract them away. The prestigious journal,
(BMJ) sums this up in the title of an article: “Developed world is robbing African countries of health staff” (Rebecca Coombes,
, Volume 230, p.923, April 23, 2005.)
Some countries are left with just 500 doctors each with large areas without any health workers of any kind. A shocking
one third of practicing doctors in UK are from overseas
, for example, as the
reports.
And yet, this is not just a problem Africa faces, but many other poor countries, such as various Asian countries, Central and Latin America, Eastern Europe, the Caribbean, etc. Other industries also suffer this issue. Yet, at the same time, it is understandable that individuals would want to escape the misery of poverty and corruption in their own country. A lot of the poverty and corruption results from these same structural adjustment programs, which then contributes to this brain drain, thus twisting the knife in the back, so to speak, as some of what little is allowed to be spent on health is now lost to the already rich, and the poor have to bear the burden.
This inevitably means that the
, while the . Also note that the illegal drug trade has increased in countries that are in debt (because of the hard cash that is earned), as Jubilee 2000
. Growing such illegal crops also diverts land away from meeting local and immediate needs, which also leads to more hunger. Debt’s chain reactions and related effects are enormous. (For more information on debt in general, see this web site’s section on .) These policies may be described as “reforms”, “adjustments”, “restructuring” or some other benign-sounding term, but the effects on the poor are the same nonetheless. Some even describe this as leading to
.
- The U.S. uses its dominant role in the global economy and in the IFIs [International Financial Institutions] to impose SAPs on developing countries and open up their markets to competition from U.S. companies.
- SAPs are based on a narrow economic model that perpetuates poverty, inequality, and environmental degradation.
- The growing civil society critique of structural adjustment is forcing the IFIs and Washington to offer new mitigation measures regarding SAPs, including national debates on economic policy.
—
Carol Welch,
Structural Adjustment Programs & Poverty Reduction Strategy , Foreign Policy in Focus, Vol 5, Number 14, April 2000 In a more cynical or harsher description, structural adjustments and other trade related policies could also be seen as a “weapon of mass destruction” as Raj Patel hints, (commenting on the Doha WTO conference in November, 2001. Although this is a different context, the overall aspect remains the same):
A fertilizer bomb that kills hundreds in Oklahoma. Fuel-laden civil jets that kill 4000 in New York. A sanctions policy that kills one and a half million in Iraq. A trade policy that immiserates continents. You can make a bomb out of anything. The ones on paper hurt the most.
—
Raj Patel,
They also make bombs out of paper , ZNet, November 28, 2001 Indeed, consider the following:
According to UNICEF, over 500,000 children under the age of five died each year in Africa and Latin America in the late 1980s as a direct result of the debt crisis and its management under the International Monetary Fund’s structural adjustment programs. These programs required the abolition of price supports on essential food-stuffs, steep reductions in spending on health, education, and other social services, and increases in taxes. The debt crisis has never been resolved for much of sub-Saharan Africa. Extrapolating from the UNICEF data, as many as 5,000,000 children and vulnerable adults may have lost their lives in this blighted continent as a result of the debt crunch.
—
Ross P. Buckley,
The Rich Borrow and the Poor Repay: The Fatal Flaw in International Finance , World Policy Journal, Volume XIX, No 4, Winter 2002/03 (Emphasis Added)
The “Welfare” State has Helped Today’s Rich Countries to Develop
The era of globalization can be contrasted with the development path pursued in prior decades, which was generally more inward-looking. Prior to 1980, many countries quite deliberately adopted policies that were designed to insulate their economies from the world market in order to give their domestic industries an opportunity to advance to the point where they could be competitive. The policy of development via import substitution, for example, was often associated with protective tariffs and subsidies for key industries. Performance requirements on foreign investment were also common. These measures often required foreign investors to employ native workers in skilled positions, and to purchase inputs from domestic producers, as ways of ensuring technology transfers. It was also common for developing countries to sharply restrict capital flows. This was done for a number of purposes: to increase the stability of currencies, to encourage both foreign corporations and citizens holding large amounts of domestic currency to invest within the country, and to use the allocation and price of foreign exchange as part of an industrial or development policy.
—
Mark Weisbrot, Dean Baker, Egor Kraev and Judy Chen,
The Scorecard on Globalization 1980-2000: Twenty Years of Diminished Progress , Center for Economic Policy and Research, July 11, 2001 As J.W. Smith notes, every rich nation today has developed because in the past their
governments took major responsibility to promote economic growth . There was also a lot of protectionism and intervention in technology transfer. There was an attempt to provide some sort of equality, education, health, and other services to help enhance the nation. The industrialized nations have understood that some forms of protection allow capital to remain within the economy, and hence via a multiplier effect, help enhance the economy. Yet, as seen in the structural adjustment initiatives and other western-imposed policies, the developing nations are effectively being
to
these very same provisions that have helped the developed countries to prosper in the past. The extent of the devastation caused has led many to ask if development is really the objective of the IMF, World Bank, and their ideological backers. Focusing on Africa as an example:
The past two decades of World Bank and IMF structural adjustment in Africa have led to greater social and economic deprivation, and an increased dependence of African countries on external loans. The failure of structural adjustment has been so dramatic that some critics of the World Bank and IMF argue that the policies imposed on African countries were never intended to promote development. On the contrary, they claim that their intention was to keep these countries economically weak and dependent.
The most industrialized countries in the world have actually developed under conditions opposite to those imposed by the World Bank and IMF on African governments. The U.S. and the countries of Western Europe accorded a central role to the state in economic activity, and practiced strong protectionism, with subsidies for domestic industries. Under World Bank and IMF programs, African countries have been forced to cut back or abandon the very provisions which helped rich countries to grow and prosper in the past.
Even more significantly, the policies of the World Bank and IMF have impeded Africa’s development by undermining Africa’s health. Their free market perspective has failed to consider health an integral component of an economic growth and human development strategy. Instead, the policies of these institutions have caused a deterioration in health and in health care services across the African continent.
—
Ann-Louise Colgan,
Hazardous to Health: The World Bank and IMF in Africa , Africa Action, April 18, 2002 While the phrase “Welfare State” often conjures up negative images, with regards to globalization, most European countries feel that protecting their people when developing helps society as well as the economy. It may be that for real free trade to be effective countries with similar strength economies can reduce such protective measures when trading with one another. However, for developing countries to try to compete in the global market place at the same level as the more established and industrialized nations—and before their own foundations and institutions are stable enough—is almost economic suicide. An example of this can be seen with the global economic crisis of 1997/98/99 that affected Asia in particular. A UN report looking into this suggested that such nations should rely on domestic roots for growth, diversifying exports and deepening social safety nets. For more about this economic crisis and this UN report, go to this web site’s section on
debt and the economic crisis .
The
of trade is important. As the UN report also suggested, diversification is important. Just as
biodiversity is important
to ensure resilience to whatever nature can throw at a given ecosystem, diverse economies can help countries weather economic storms. Matthew Lockwood is worth quoting in regards to Africa:
What Africa needs is to shake off its dependence on primary commodity exports, a problem underlying not only its marginalization from world trade but also its chronic debt problems. Many countries rely today on as narrow a range of agricultural and mineral products as they did 30 years ago, and suffer the consequences of inexorably declining export earnings. Again, the campaigners’ remedy—to improve market access for African exports to Europe and America—is wide of the mark.
—
Matthew Lockwood,
We must breed tigers in Africa
, The Guardian, June 24, 2005
Asia too has seen development where policies counter to neoliberalism have been followed, as Lockwood also notes.
To see more about the relationship of protectionism with free trade, check out this site’s section on
, which also discusses protectionism and its pros and cons.
IMF and World Bank The IMF and World Bank’s policies are very different now from their original intent, as summarized here by the John F. Henning Center for International Labor Relations:
The International Monetary Fund and the World Bank were conceived by 44 nations at the Bretton Woods Conference in 1944 with the goal of creating a stable framework for post-war global economy. The IMF was originally envisioned to promote steady growth and full employment by offering unconditional loans to economies in crisis and establishing mechanisms to stabilize exchange rates and facilitate currency exchange. Much of that vision, however, was never born out. Instead, pressured by US representatives, the IMF took to offering loans based on strict conditions, later to be known as structural adjustment or austerity measures, dictated largely by the most powerful member nations. Critics charge that these policies have decimated social safety nets and worsened lax labor and environmental standards in developing countries. The World Bank (The International Bank for Reconstruction and Development) was created to fund the rebuilding of infrastructure in nations ravaged by World War Two. Its vision too, however, soon changed. In the mid 1950’s, the Bank turned its attention away from Europe to the Third World, and began funding massive industrial development projects in Latin American, Asia, and Africa. Many scholars and activists contend that the Bank’s aggressive dealings with developing nations, which were often ruled by dictatorial regimes, exacerbated the developing world’s growing debt crisis and devastated local ecologies and indigenous communities. Both IMF and World Bank policies remain a source of heated debate.
—
John F. Henning Center for International Labor Relations , Institute for Industrial Relations, University of California, Berkeley Although their goals are slightly different, the IMF and World Bank policies complement each other:
World Bank and IMF adjustment programs differ according to the role of each institution. In general, IMF loan conditions focus on monetary and fiscal issues. They emphasize programs to address inflation and balance of payments problems, often requiring specific levels of cutbacks in total government spending. The adjustment programs of the World Bank are wider in scope, with a more long-term development focus. They highlight market liberalization and public sector reforms, seen as promoting growth through expanding exports, particularly of cash crops.
Despite these differences, World Bank and IMF adjustment programs reinforce each other. One way is called “cross-conditionality.” This means that a government generally must first be approved by the IMF, before qualifying for an adjustment loan from the World Bank. Their agendas also overlap in the financial sector in particular. Both work to impose fiscal austerity and to eliminate subsidies for workers, for example. The market-oriented perspective of both institutions makes their policy prescriptions complementary.
—
Ann-Louise Colgan,
Hazardous to Health: The World Bank and IMF in Africa , Africa Action, April 18, 2002 But economics is often driven by politics. As a result of policies by the IMF, World Bank and various powerful nations, basic human rights have been severely undermined in many countries, as also noted sharply by Global Exchange:
By insisting that national leaders place the interests of international financial investors above the needs of their own citizens, the IMF and the World Bank have short circuited the accountability at the heart of self-governance, thereby corrupting the democratic process. The subordination of social needs to the concerns of financial markets has, in turn, made it more difficult for national governments to ensure that their people receive food, health care, and education—basic human rights as defined by the Universal Declaration of Human Rights. The Bank’s and the Fund’s erosion of basic human rights and their perversion of the democratic process have made the institutions a clear and present threat to the well being of hundreds of millions of people worldwide.
—
How the International Monetary Fund and the World Bank Undermine Democracy and Erode Human Rights , Global Exchange, September 2001 For decades, the IMF and World Bank have been largely controlled by the developed nations such as the USA, Germany, UK, Japan etc. (
The IMF web site has a breakdown of the quotas and voting powers .) The US, for example, controls 17% of the voting power at the IMF. Until November 2010, an 85% majority was required for a decision, so the US effectively had veto power at the IMF . In addition, the World Bank is 51% funded by the U.S. Treasury .
The
from 2008 onwards has resulted in some shifts in power, such that some
leading developing countries have finally managed to break some of the control at the IMF and get more seats and votes
. While some say that parts of Europe have resisted giving up some share which would be appropriate, the changes also mean the US no longer has veto power that it had for decades.
Journalist John Pilger also provides a political aspect to this:
Under a plan devised by President Reagan’s Secretary to the Treasury, James Baker, indebted countries were offered World Bank and IMF “servicing” loans in return for the “structural adjustment” of their economies. This meant that the economic direction of each country would be planned, monitored and controlled in Washington. “Liberal containment” was replaced by
capitalism known as the “free market”.
—
John Pilger, Hidden Agendas, (The New Press, 1998), p.63 The IMF and World Bank’s policies have indeed been heavily criticized for many years and are seen as
and sometimes, , as they have led to an increased dependency by the developing countries upon the richer nations, as also mentioned at the top of this page. At the same time, the different are not respected when it comes to prescribing structural adjustment principles, either. In Africa, the effects of policies such as SAPs have been felt sharply. As an example of how political interests affect these institutions, Africa Action describes the policies of the IMF and World Bank, but also hints at the influences behind them too:
Over the past two decades, the World Bank and International Monetary Fund (IMF) have undermined Africa’s health through the policies they have imposed. The dependence of poor and highly indebted African countries on World Bank and IMF loans has given these institutions leverage to control economic policy-making in these countries. The policies mandated by the World Bank and IMF have forced African governments to orient their economies towards greater integration in international markets at the expense of social services and long-term development priorities. They have reduced the role of the state and cut back government expenditure.
…
The World Bank and IMF were important instruments of Western powers during the Cold War in both economic and political terms. They performed a political function by subordinating development objectives to geostrategic interests. They also promoted an economic agenda that sought to preserve Western dominance in the global economy.
Not surprisingly, the World Bank and IMF are directed by the governments of the world’s richest countries. Combined, the “Group of 7” (U.S., Britain, Canada, France, Germany, Italy and Japan) hold more than 40% of the votes on the Boards of Directors of these institutions. The U.S. alone accounts for almost 20%. (The U.S. holds 16.45% of the votes at the World Bank, and over 17% of the votes at the International Monetary Fund.)
—
Ann-Louise Colgan,
Hazardous to Health: The World Bank and IMF in Africa , Africa Action, April 18, 2002
But it is not just health. Basic food security has also been undermined. An example in 2002 at least made it to mainstream media attention in UK. As Ann Petifor, head of debt campaign organization,
noted, the
IMF forced the Malawi government to sell its surplus grain in favor of foreign exchange just before a famine struck
. This was explicitly so that debts could be repaid. 7 million of the total 11 million population were severely short of food.
“But its [sic] worse than that,” said Petifor. “Because Malawi is indebted, her economic policies are effectively determined by her creditors—represented in Malawi by the IMF.” Malawi spent more than the budget the foreign creditors set. As a result the IMF withheld $47 million in aid. Other western donors, acting on advice from IMF staff, also withheld aid, “
of the national budget.” (Emphasis added).
“To add to the humiliation of the Malawian government, the IMF has also suspended the debt service relief for which she was only recently deemed eligible—because she is ‘off track.’”
That is not the end of the story unfortunately. As Petifor also mentioned, under the economic program imposed by her creditors, Malawi removed all farming and food subsidies allowing the market to determine demand and supply for food. This reduced support for farmers, leading many to go hungry as prices increased. As she also noted, the rich countries, on the other hand, do not follow their own policies; Europe and the US subsidize their agriculture with billions of dollars.
But the US, for example, sees this situation as exploitable. Petifor again:
US Secretary for Agriculture, Dan Glickman, illustrates well the US attitude to countries suffering famine and in need of food aid:
“Humanitarian and national self interest both can be served by well-designed foreign assistance programs. Food aid has not only met emergency food needs, but has also been a useful market development tool.” (OXFAM report: “Rigged Rules and Double Standards: Trade Globalization and the Fight Against Poverty” by Kevin Watkins and Penny Fowler)
—
Ann Petifor,
Debt is still the linchpin: the case of Malawi
, Jubilee Research, July 4, 2002
It is not just the US that uses aid in this way. Most rich countries do this. And it isn’t just food aid, but aid in general that is often used inappropriately. The
reported (August 29, 2005) how £700,000 (about $400,000) of £3 million in British aid to Malawi was mis-spent on US firms’ hotel and meal bills . Even notebooks and pens were flown in from Washington rather than purchased locally. See this site’s section on
for more details about the issue of foreign aid and its misuse. Throughout the period of structural adjustment from the 80s, various people have called for more accountability and reform of these institutions, to no avail. Following the IMF and World Bank protests in Washington, D.C on April 16, 2000, and coinciding with the Meltzer Report criticizing the IMF and World Bank, there has been more talk about IMF reforms. At first thought the reforms sound like the protests and other movements’ efforts are paying off. However, as Oxfam noted, some of the reform suggestions may not be the way to go and may do even more harm than good. In their own words:
While some of the reform proposals now being debated are sensible, the thrust of the reform agenda is a source of concern for the following reasons:
- It reflects a growing disenchantment with multilateralism
- It threatens to replace inappropriate IMF conditions with inappropriate conditions dictated by the G7 countries
- It fails to address the real policy issues at the heart of the IMF’s failure as a poverty reduction agency
- It does not address the politicization of IMF loans, especially with regard to the US Treasury’s influence
- It does not adequately consider the “democratic deficit” which prevents poor countries from having an effective voice in the IMF
—
, Oxfam International Policy Paper, April 2000 On the one hand it seems appropriate to demand an end to the IMF. However, such an abrupt course of action may itself lead to a gaping hole in international financial policies without an effective alternative. And that is another topic in itself!
Into 2008, and the
has been so severe that rich countries have been affected. Calls for reform have therefore increased, even from within some of these institutions themselves. These calls have included more transparency and accountability as well as specifics such as creating a more stable financial system, and cracking down on tax havens.
This time, however, developing countries are demanding more voice, and have more power that in past years to try and affect this. In April, the IMF conceded just 3% of rich country votes to the developing countries, but developing countries rightly want more.
Historically democracy and power have not gone well together, and as journalist John Vandaele has found,
The most powerful international institutions tend to have the worst democratic credentials: the power distribution among countries is more unequal, and the transparency, and hence democratic control, is worse.
—
John Vandaele,
Democracy Comes to World Institutions, Slowly
, Inter Press Service, October 27, 2008
If change is to be effective, these fundamental issues will need resolving. Powerful countries may try to reshape things only in so far as they can get themselves out of trouble and if they can avoid it, they will try to limit how much power they concede to others. And perhaps a sad reality of geopolitics will be that any emerging nations that become truly influential and powerful in this area will one day try to do the same. For now, however, developing countries generally have a common agenda of more voice and will therefore champion common principles of better democracy and accountability.
IMF and World Bank Admit Some of Their Policies Do Not Work Recently, we have heard members of the World Bank and IMF entertain the possibility that maybe their structural adjustment policies did have some negative effects. For example, the
revealed that in 2000, an “
internal World Bank report has concluded that the poor are better off without structural adjustment
”. The report itself is titled The Effect of IMF and World Bank Programs on Poverty . (Requires a .) The report doesn’t really look in detail at
the poor benefit less from adjustment. Instead it speculates that they “may be ill-placed to take advantage of new opportunities created by structural adjustment reforms” because, as the Bretton Woods Project insinuates, the report implies that the poor “have neither the skills or financial resources to benefit from high-technology jobs and cheaper imports.” Now, it may not have been the intent of the report to do so, but one can’t help but notice how it almost seems as though while they may admit that structural adjustment didn’t benefit the poor, it is almost as though the Bank tries to subtly absolve itself by sort of blaming the poor for not benefiting from this. When structural adjustments have required cut backs in health, education and so on, then what would one expect? In March 2003, the IMF itself admitted in a paper that
globalization may actually increase the risk of financial crisis in the developing world . “Globalization has heightened these risks since cross-country financial linkages amplify the effects of various shocks and transmit them more quickly across national borders” the IMF notes and adds that, “The evidence presented in this paper suggests that financial integration should be approached cautiously, with good institutions and macroeconomic frameworks viewed as important.” In addition, they admit that it is hard to provide a clear road-map on how this should be achieved, and instead it should be done on a case by case basis. This would sound like a move slightly away from a “one size fits all” style of prescription that the IMF has been long criticized for. As mentioned further above, and as many critics have said for a long time, opening up poorer countries in an aggressive manner can leave them vulnerable to large capital volatility and outflows.
, reporting on the IMF report also noted that the IMF “sounded more like its critics” when making this admission. In theory there may indeed be merit to various arguments supporting global integration and cooperation. But politics, corruption, geopolitics, as well as numerous other factors need to be added to economic models, which could prove very difficult. As suggested in various parts of this site, because economics is sometimes separated from politics and other major issues, theory can indeed be far from reality. Sitglitz, the former World Bank chief economist, is worth quoting a bit more to give an insight into the power that the IMF has, and why accusations of it and its policies being colonial-like are perhaps not too far off:
…The IMF is not particularly interested in hearing the thoughts of its “client countries” on such topics as development strategy or financial austerity. All too often, the Fund’s approach to the developing countries has had the feel of a colonial ruler. A picture can be worth a thousand words, and a single picture snapped in 1998, shown throughout the world, has engraved itself in the minds of millions, particularly those in the former colonies. The IMF’s managing director, Michel Camdessus (the head of the IMF is referred to as its “Managing Director”), a short, neatly dressed former French Treasury bureaucrat, who once claimed to be a Socialist, is standing with a stern fact and crossed arms over the seated and humiliated president of Indonesia. The hapless president was being forced, in effect, to turn over economic sovereignty of his country to the IMF in return for the aid his country needed. In the end, ironically, much of the money went not to help Indonesia, but to bail out the “colonial power’s” private sector creditors. (Officially, the “ceremony” was the signing of a letter of agreement, an agreement effectively dictated by the IMF, though it often still keeps up the pretense that the letter of intent comes from the country’s government!)
Defenders of Camdessus claim the photograph was unfair, that he did not realize that it was being taken and that it was viewed out of context. But that is the point—in day-to-day interactions, away from cameras and reporters, this is precisely the stance that the IMF bureaucrats take, from the leader of the organization on down. To those in the developing countries, the picture raised a very disturbing question: Had things really changed since the “official” ending of colonialism a half century ago? When I saw the pictures, images of other signings of “agreements” came to mind. I wondered how similar this scene was to those marking the “opening up of Japan” with Admiral Perry’s gunboat diplomacy or the end of the Opium Wars or the surrender of maharajas in India.
—
Joseph Stiglitz, Globalization and its Discontents, (Penguin Books, 2002), pp. 40–41 The above passage is from Stiglitz’s book,
Globalization and its Discontents . In it, he highlights many, many more issues, criticisms and aspects of IMF/Washington Consensus ideological fanaticism that have hindered development, and in many cases, as he points out, worsened situations. It is surprising and also quite illuminating to get the “insider” image of the workings of some large institutions in this way.
Into mid-2005, and though not as vocal as Stiglitz,
others at the IMF are also questioning the institution’s strict adherence to the free market doctrine
, as
reveals. One of the authors of a paper from the IMF “concedes the failure of
policies for the poorest countries” saying that “Much of sub-Saharan Africa has been under IMF and World Bank programmes during the last three decades, and while a modicum of macroeconomic stability has been achieved, progress has been spotty at best.” Another working paper from the IMF suggests that trade liberalization has crippled some governments of poorer countries, and that prospects for further trade liberalization in poor countries may be troubling.
PSRPs replace SAPs but still SAP the poor The IMF in 1999 replaced Structural Adjustments with Poverty Reduction Growth Facility (PRGP) and Policy Framework Papers with Poverty Reduction Strategy Papers (PSRP) as the new preconditions for loan and debt relief. However, the effect is
as the preceding disastrous structural adjustment policies, as the World Development Movement reported. Many civil society organizations are increasing their critique of the PSRPs.
[T]he PRSP process is simply delivering repackaged structural adjustment programmes (SAPs). It is not delivering poverty-focused development plans and it has failed to involve civil society and parliamentarians in economic policy discussions.
—
PRSPs just PR say civil society groups , Bretton Woods Project Update #23, June/July 2001 As Jubilee Research (formerly Jubilee 2000, the debt relief campaign organization) adds:
Joint World Bank/IMF papers (39) on the PRSP stress “poverty reduction” and that the paper must be “country-driven with the broad participation of civil society”. But the IMF in its own papers stresses that this is in addition to everything that was required in the past; none of the old “Washington consensus” policies have been removed. In a paper for a meeting of African finance ministers, 18-19 January 2000, to explain the new PRGF, (40) the IMF stresses that it will demand of all countries “a more rapid privatisation process” and “a faster pace of trade liberalization”—the conditions criticized by Joseph Stiglitz when he was chief economist of the World Bank.
… James Wolfensohn, president of the World Bank, commented that “it is also clear to all of us that ownership is essential. Countries must be in the driver’s seat”. The theory is fine, but the practice distorts the meaning of these words. Countries are in the driving seat only as the chauffeur of the Washington Consensus limousine. And as Angela Woods and Matthew Lockwood comment, all too often “ownership relates to persuading the public that reforms are necessary and good in order to minimize political opposition to them”.
… The implication is that governments wishing to take an alternative economic approach must expect to forgo aid and debt relief. But Wood and Lockwood note that “not only does the Bank define a ‘good’ policy environment very narrowly, the consensus on what defines ‘good’ policies is subject to change. What may have been regarded as a good policy yesterday may not be today.”
… It is impossible to ignore the sweeping critique, by the second most important man in the World Bank [Joseph Stiglitz], of policies still being imposed on poor countries as a condition of debt cancellation and aid. And it must be remembered that these are being imposed in the names of “good governance”, “sound policies” and “poverty reduction”.
Stiglitz notes that had the US followed IMF policy it would have not achieved its remarkable expansion.
—
Joseph Hanlon and Ann Pettifor,
Kicking the Habit; Finding a lasting solution to addictive lending and borrowing—and its corrupting side-effects , Jubilee Research, March 2000 Additionally, as
reports (see pages 37-38 of the PDF online version), “[A] senior [World] Bank official described the PRSP-PRGF as a ‘compulsory programme, so that those with the money can tell those without the money what they need in order to get the money.’” It would be worth additionally noting the cruel irony that nations that are “those with the money” today have largely accumulated it through plunder via imperialism and colonialism upon those very nations who today are “without the money.” Prescribing how to get “the money,” in that context, is dubious indeed. For additional information and critique, you can see the following links as well:
- Reports from the World Development Movement:
- One size for all: A study of IMF and World Bank Poverty Reduction Strategies
, September 2005
- Still Sapping the Poor: A critique of IMF poverty reduction strategies
, by Charles Abugre, June 2000
- Polices to Roll-back the State and Privatize?
from the World Development Movement, April 2001 provides additional studies and examples
- From the Bretton Woods Project, an IMF and World Bank monitoring organization:
- Structural Adjustment/PRSP
section of their web site
, an introduction to the new Bank and Fund Poverty Reduction Strategy Papers, by Angela Wood, April 2000
- From the Focus on the Global South:
- The World Bank and the PRSP: Flawed Thinking and Failing Experiences
The Asian Development Bank Like the IMF and World Bank, the Asian Development Bank (ADB) has also fallen under much criticism for its policies, which also require structural adjustments for loans. Through its policies it encourages export-driven, capital and resource-intensive development, just like the other international financial institutions. The largest financing and influence of the bank comes from Japan and the United States. As summarized from chapter 2 of
The Transfer of Wealth; Debt and the making of a Global South : The escalating dependence of developing countries in the [Asia] region on debt-financed development has a number of negative consequences. These include:
- the neglect of domestic savings as a source of development finance;
- cuts in government expenditure for basic social services and basic infrastructure in order to meet debt servicing requirements;
- an escalation of export-oriented resource extraction to generate hard currency receipts for debt servicing;
- a reorientation of agricultural production from meeting local needs to production for export in highly skewed regional and global markets;
- increased dependence on imported, capital intensive technologies as a consequence of tied procurement and project design processes led by foreign consulting companies;
- increased dependence on and influence of international financial institutions such as the ADB and the World Bank, particularly through the imposition of debt-induced structural adjustment programs and policy based lending.
Also, as with the IMF and World bank, and mentioned in the above link, “governments are using the rubric of poverty reduction to channel taxpayer funds to their private sector companies via the ADB. This is occurring with little or no pubic scrutiny although government representatives will, if necessary, appeal to commercial self-interest to justify continued contributions to the ADB and other multilateral development banks.” As with the IMF for example, loans by the IMF are guaranteed by the creditor country. In essence then, tax payers from the lending countries will bail out the IMF and ADB if there are problems in their policies. (For more details, statistics etc., the above link is a good starting place.) The ADB has mentioned its desires to promote “good governance.” However, Aziz Choudry is highly critical in terms of whom this governance would actually be good for:
It has nothing to do with democratization, humanitarianism or support for peoples’ rights. It is a euphemism for a limited state designed to service the market and undermine popular mandates. The term is explicitly linked to the kinds of structural adjustment measures promoted by the ADB—measures for which there is little popular support and which are rapidly increasing economic inequalities.
—
Aziz Choudry,
The Asian Development Bank—“Governing” the Pacific? , June 6, 2002
Structural adjustment policies have therefore had far-reaching consequences around the world. Yet, this is just one of the mechanisms whereby inequality and poverty has been structured into laws and institutions on a global scale. Where next? Related articles
- Structural Adjustment—a Major Cause of Poverty
- Today, over 22,000 children died around the world
- Foreign Aid for Development Assistance
- Causes of Hunger are related to Poverty
- United Nations World Summit 2005
- IMF & World Bank Protests, Washington D.C.
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Chapter 15: BANKING POLICY
DRAFT October 13, 1996
I. Basic Features of the Sector
A. The Banking System
B. Non-bank Financial Institutions
II. Policies of the Sector
III. Description of the Principal Issues and Constraints Facing the Sector
A. Lessening Quality of the Loan Portfolio
B. Oligopolistic Structure
C. Capital Adequacy
D. Inadequacy in the Legal System of Enforcement of Contracts
E. Weak Collateral Base in Agriculture, Aquaculture, and Timber
F. Inadequate Levels of Long-term Financing
IV. Sectoral Objectives
V. Policies for Achieving Stated Objectives
A. Improving Accounting and Disclosure Standards
B. Credit Concentration
C. Resolving Legal Uncertainties
D. Provisioning Requirements Relating to the Quality of Loans
E. Developing Long-term Financial Instruments
F. Deposit Insurance
G. Developing Greater Understanding of New Instruments and Activities
H. Supervision of Financial Institutions
I. Strengthening the Commercial Banking Sub-sector
J. Home Mortgage Institutions
K. Bank Collateral
L. The National Insurance Scheme
M. Equities Markets
N. The Autonomy of the Central Bank
VI. Recommended Legislative Changes |
[Back to Top]
I. Basic Features of the Sector
[Back to Top]
A. The Banking System
The financial system in Guyana has experienced significant changes over the last decade in both structure and financial regulation. Before October 1965 commercial banking in Guyana was conducted by two foreign-owned banks, namely the Royal Bank of Canada and the Barclays Bank, D.C.O. The Royal Bank of Canada started operations in Guyana in 1914 when it took over the activities of the British Guiana Bank. The latter had been incorporated on November 11, 1836, and began operations on February 16, 1837. Barclays Bank commenced business in 1925, following the merger of three banks --the Anglo Egyptian Bank Ltd., the National Bank of South Africa, and the Colonial Bank that was operating in the colony of British Guiana since 1837. In October 1965 the Chase Manhattan Bank of the United States established a branch in Guyana. This was shortly followed by the opening in March 1966 of the Bank of Baroda, with head offices in India.
By the end of 1966 the two dominant banks, the Royal Bank of Canada and the Barclays, were operating more than twenty-five branches, sub-branches, and agencies, a third of which were located in Georgetown. In the following years many rural branches and agencies were closed. These institutions essentially provided short-term trade and working capital finance. It was felt that the commercial banking sector did not adequately provide the type of financing required to develop the Guyanese economy. Because of the above, the authorities embarked on a strategy aimed at shaping a financial system that would mobilise deposits and provide loans to the rural areas, provide long-term finance for investment, and supply resources in support of local firms.
In response to the need to improve the role of the financial sector, the Government established the Guyana National Co-operative Bank (GNCB) in February 1970. The bank was thus given the task to provide for the commercial financing requirements of Guyanese business, to support investment in new business areas, and to extend financial services to rural communities where such services were nonexistent.
As part of its financial sector restructuring programme, in 1984 the Government started a process of nationalising foreign-owned commercial banks beginning with the Royal Bank of Canada, which changed its name to National Bank of Industry and Commerce (NBIC). The next bank to experience a change in ownership was the Chase Manhattan in 1985 (then renamed Republic Bank), followed by Barclays in 1987, when it was renamed the Guyana Bank for Trade and Industry. Government took control of it in 1988(1), and it was merged with Republic Bank in 1990. Thus the Government assumed ownership of a substantial part of the commercial banking system and by 1990 owned 95.3 percent of GNCB, 51.02 percent of NBIC and 30.0 percent of GBTI. In 1994 the Government sold most of its shares in GBTI, retaining only 1.3 percent. The ownership of Bank of Baroda and the Bank of Nova Scotia remained under the ownership of the Government of India and a private Canadian bank, respectively.
Table 15-1
Nominal Stock of Assets and Equity of the Banking Sector
|
1993 |
1994 |
June 1995 |
Assets |
Equity |
Assets |
Equity |
Assets |
Equity |
G$Mn. |
%share |
G$Mn. |
%share |
G$Mn. |
%share |
GNCB
NBIC
GBTI
SCOTIA
BARODA
DEMERARA1)
CITIZEN'S1)
|
11,545
9,510
18,422
2,726
1,302
-
-
43,506
|
27
22
42
6
3
-
-
100
|
115
846
1,028
147
54
-
-
2,190
|
10,930
10,662
18,834
3,818
1,412
694
585
46,935
|
23
23
40
8
3
1
1
100
|
137
1,045
1,372
204
50
450
229
3,487
|
15,776
12,205
19,841
4,101
1,346
1,746
1,016
56,030
|
28
22
35
7
2
3
2
100
|
137
1,045
1,372
204
50
441
226
3,475
|
1)operations commenced during the last quarter of 1994 |
Table 15-1 shows one of the most important developments in the financial sector in recent years, the embryonic emergence of a private banking sector. The share of total banking assets held by the three purely private banks rose from 6 percent in 1993 to 12 percent in 1995. Concomitantly, the share of those banks in total equity in the sector rose even more rapidly, from 7 percent to 25 percent. This latter figure is indicative of the relatively strong financial position of the private banks.
In recent years, commercial banks have been in a relatively sound position, as judged by the ratio of operating costs to assets, rates of return and quality of assets. However, most of their loans are for very short terms and their portfolios are heavily concentrated in treasury bills.
As for asset base, Table 15-1 shows that approximately 90 percent of the total assets of the banking system were concentrated in the hands of three banks during the period 1992-1995. However, within this subsector the growth in assets was mixed --the relative share of GNCB strengthened slightly while that of GBTI weakened. While, in general terms, for most of the banks there are indications of solvency and profitability, one of the larger banks (GNCB) has experienced some financial difficulties in the past thru political interference in the lending. Capital adequacy ratios for the overall banking system continue to be low, averaging approximately 6 percent, compared with the ratio of 8 percent prescribed under the new Financial Institutions Act 1995. Historically, "capital adequacy" has been an important concern of bank management and regulators. In the literature the role of bank capital has been examined from at least three different perspectives: (1) that of depositors and the monetary system, (2) that of the shareholders, and (3) that of the functioning of banks as financial intermediaries. In dealing with the issue of "capital adequacy," the authorities in Guyana have placed emphasis on depositor interest. Under the Financial Institutions Act 1995, the function of capital is viewed primarily from this standpoint. Support for this bias derives from the nonexistence of deposit insurance. This absence highlights the need for protecting depositors of individual banks against loss and to use high capital ratios to guarantee the banking system as a whole against general banking panic.
Table 15-2 shows the overall success of the banking system in reducing the share of non-performing assets out of total assets since 1992, as the economy has experienced sustained growth. However, there was a slight increase in that ratio again in 1995, and the ratio of past due loans to total assets has shown a persistent tendency to creep up from year to year.
Table 15-2
Selected Indicators of the Banking System1)
(Percent)
|
1992
December
|
1993
December
|
1994
December
|
1995
June
|
Commercial banks
Capital assets ratio2)
Past due loans/Total loans
Non performing/Total loans
Past due loans/Total assets
Non performing/Total assets
Provisions/Total assets
|
5.08
2.10
40.53
0.54
10.37
6.59
|
5.03
1.95
19.44
0.51
5.05
2.05
|
6.15
3.73
5.20
1.23
1.72
-1.09
|
5.06
4.30
6.62
1.77
2.73
-0.78
|
1) excludes the two new banks
2) capital refers to 'capital base' that under the FIA means the total paid up share capital, statutory reserve fund, share premium account, and retained earnings and any other capital account approved by the Bank of Guyana.
|
[Back to Top]
B. Non-bank Financial Institutions
Besides commercial banks, the financial sector comprises trust companies, mortgage finance institutions, insurance companies, pension schemes and a development bank. The non-bank financial institutions (NBFIs) continued to play a major role in the financial sector (see Table 15-3). The relative share of NBFIs' assets in total assets of financial intermediaries rose from 32 percent in 1992 to 34 percent in 1994. Trust companies, pension schemes and non-life insurance companies led the growth in NBFIs' assets that was particularly strong in recent times. Of the total change in assets (G$7,363 million) of financial intermediaries in 1994, the NBFIs accounted for a share of 54 percent and commercial banks, the remaining 46 percent. In contrast, during 1992 NBFIs accounted for a share of 23 percent and that of banks, 77 percent.
Table 15-3
Assets Held by Financial Intermediaries
(Percent of Total Financial Assets)
|
1992
December
|
1993
December
|
1994
December
|
Commercial banks
Non Bank Financial Institutions
Building Society
Trust companies
Insurance companies
Life
Non-life
Pension schemes
Development banks
GAIBANK
Mortgage banks
Total assets
|
67.6
32.4
4.6
2.7
10.7
9.2
1.5
3.9
10.4
10.3
0.1
G$57,430.4
|
68.7
31.3
5.6
3.4
8.9
7.4
1.5
4.5
8.9
8.8
0.1
G$63,365.6
|
66.3
33.7
6.6
4.5
8.6
6.5
2.1
5.4
8.5
8.4
0.1
G$70,728.1
|
The main source of funds of NBFIs originated from deposits (other than demand deposits) from the public. Before the introduction of the Financial Institutions Act (FIA) in 1995, these non-bank institutions were not subjected to the Banking Act and thus were unsupervised by the Bank of Guyana. Insurance companies still are not.
Over the past four years trust companies continue to be the closest competitors to commercial banks for interest earning (savings and time) deposits. The four major trust companies are the GNCB Trust, Trust Company Guyana Limited, Secure Trust International Limited, and the Globe Trust and Investment Company. GNCB Trust continues to be the dominant trust company, accounting for a market share of more than 85 percent. Despite a substantial drop over the years, the major source of funds of trust companies is private sector deposits. The share of these deposits in total sources of funds amounted to approximately 51 percent at the end of June 1995 compared with 82 percent in 1980. In broad terms, the overall assets portfolio of trust companies exhibited only a minor shift between 1980 and mid 1995. In 1980, of the resources mobilised, 2 percent were deposited in the commercial banking system, the remaining 98 percent was channeled to the private sector - with mortgage loans accounting for 79 percent of private sector credit from trusts. By end of June 1995, while trust companies' deposits in the banking system remained virtually unchanged (3 percent), there was evidence of a slight portfolio shift from credit to the private sector to holdings of government securities. Claims of the public sector rose to 9 percent while credit to the private sector fell to 88 percent. Unlike in 1980 the relative importance of mortgage loans in total trust company credit to the private sector fell sharply to 29 percent in 1995. As with other NBFIs, the trust companies in Guyana are not highly capitalised. At the end of June 1995 the capital assets ratio of trust companies was 1.7 percent compared with 1.5 percent in 1980.
The New Building Society and the Guyana Cooperative Mortgage Financial Bank (GCMFB) are two institutions established primarily to provide mortgage finance services. Although both institutions were designed to deal almost exclusively in mortgage loans, their individual shares of the mortgage market differ substantially. During 1994 the NBS accounted for a share of 50.8 percent while the GCMFB accounted for only 1.9 percent. The GCMFB was established essentially to provide low-income housing from Government funds. This state-owned institution lends a maximum of G$150,000 for home acquisition or improvements using a two-tier interest rate structure. For loans under G$75,000 the interest rate levied is 20 percent while on those between G$75,000 and G$150,000 the rate is 24 percent. These rates are highly uncompetitive and have remained unchanged since 1989. Most loans are for a maturity of twenty years.
To the extent that inflation has greatly eroded the real value of the maximum loan amount provided by GCMFB, most financing has been restricted to minor home improvements. In addition, borrowing has been severely restricted because the GCMFB will not lend unless it could secure a first mortgage. Inflation has significantly eroded the asset base of this institution. Total assets at the end of June 1995 amounted to G$51 million compared with G$67 million in 1992. In view of the size of its operations, support for the existing administrative infrastructure has been a strain to the GCMFB. Estimated employment costs and related benefits in 1994 (20 percent of total assets) absorbed approximately 71 percent of revenue, while operating expenses (8 percent of assets) absorbed 29 percent of revenue. Given the limited resource base, the low level of activity and the high cost of operation, the Government has indicated its intention to dissolve the GCMFB. In the light of Government's continued support for low-income housing, serious consideration should be given to the option of transferring the functions of the GCMFB to a suitable Government agency or channeling the support through private banks via a rediscount mechanism.
The NBS was created specifically as a nonprofit institution to encourage thrift and as a source of funding for home ownership through disbursement of mortgage loans mainly to individuals. The main components of the liabilities structure of the NBS are shares and deposits. During the period 1988-1994, shares and deposits represented an average of 89 percent of total liabilities compared with 95 percent during the period 1980-1987. Unlike the stability in the liability structure, the asset composition of this institution has shown significant changes over the years. In 1980, approximately 71 percent of its total assets were in mortgage loans compared with 4 percent in treasury bills. At the end of 1994, mortgage loans accounted for 23 percent of the asset portfolio of the NBS, while holdings of treasury bills rose to 66 percent. It should be noted that this shift is inconsistent with the intent and purpose of the Society.
The Guyana Agricultural and Industrial Development Bank (GAIBANK), the fourth largest financial institution in the country, was established as a state-owned development bank specialising in lending to the agricultural and industrial sectors. GAIBANK accounted for 24 percent of total assets of all reporting NBFIs in 1994. This institution is not allowed to accept deposits from the public and its main source of funds originates from development credits from donors and international agencies. This institution is the main one in Guyana that covers the non-urban sector. Reflecting government policies, GAIBANK's lending policy had been biased in favour of providing medium to long-term loans at subsidised interest rates. As in previous years its lending rates are currently below the Government's cost of funds - as at the end of June 1995 the rate charged on domestic currency loans was 17.50 percent and the charges for foreign currency-denominated loans, 15 percent compared with the bank rate of 19.75. These two rates were unchanged since June 1993.
Because of governmental directives, some loans were not based firmly on commercial profitability, thus the quality of loans deteriorated substantially. Moreover, because of weak enforcement and collection policy the institution accumulated a high level of arrears on loans. Another major source of loss arose from currency devaluation over the years. A significant portion of its liability was in foreign currency (averaging 57 percent during 1990-1994), while most of its assets were denominated in domestic currency. These developments resulted in losses that greatly exceeded its equity. To redress financial difficulties faced by GAIBANK and the state-owned GNCB the government initiated a process of merging the two institutions in 1995 and established a separate entity with the responsibility of recovery of their nonperforming loan portfolio.
Besides the financial institutions mentioned above the financial sector includes insurance companies and pension schemes. Of this sub-sector, insurance companies are the largest in terms of their control of assets. Insurance companies accounted for approximately 26 percent of the assets of NBFIs in 1994. The insurance industry in Guyana is dominated by large insurance companies operating throughout the Caribbean. Over the last seven years there has been a noticeable shift in the uses of funds of insurance companies. Of the total assets of insurance companies in 1988, 47 percent was invested in foreign assets, 13 percent in bank deposits, and 9 percent and 12 percent were used for lending to the public sector and the private sector, respectively. By the end of 1994 loans to the foreign sector rose to 61 percent of total assets while lending to both the public sector (5 percent) and private sector (11 percent) declined. This externally-biased pattern in the use of funds is in contravention to the Insurance Act of 1970 that require insurance companies to invest 90 percent of insurance funds locally. However, based on the evidence in 1994, the major source of funds originated externally, and the wisdom of that 1970 Act may be questioned if the policy goal for the insurance industry is to assure that it is financially sound. It is to be expected that as the Guyanese economy continues to grow and diversify, and inflation is definitively tame, then an increasing share of insurance companies' assets will be invested domestically. In any event, other institutions should be looked to as the principal sources of loanable funds.
A potential problem faced by the insurance industry as a whole arises from the fact that some companies are highly decapitalised. The Guyana Cooperative Insurance Services (GCIS) is a classic example. Lack of foreign reinsurance constrained the operations of the GCIS, particularly during late 1980s and early 1990s, occasioned by foreign exchange shortages, and by a weak capital base. Another area of concern in the insurance industry is the lack of adequate regulation and effective supervision. These companies are governed by the Insurance Act of 1970, considered archaic and deficient regarding the specification of meaningful prudential guidelines. It is not being enforced due in part to the absence of the institutional capacity to effect such enforcement and in any case should be amended throughout.
As a percent of total assets of NBFIs, the share of pension schemes rose from 12 percent in 1992 to 16 percent in 1994. An issue that is of some concern is the existence of restricted investment opportunities faced by the pension schemes. Whereas the bulk of the funds mobilised are long term in nature, they are invested in short-term instruments, predominantly treasury bills. In 1994 about 55 percent of the resources mobilised was invested in treasury bills, with 20 percent deposits at commercial banks and 11 percent channeled to the private sector. While these institutions are permitted to use limited opportunities for investing in new equity, they are not allowed to invest in outstanding equity. Arguments supporting the restrictions of investment in outstanding equity point to the difficulties in determining realistic asset price valuation due to the absence of a secondary market.(2)
The National Insurance Scheme (NIS), while not considered a part of the formal financial sector, also mobilises a substantial amount of financial savings. The funds mobilised provide long-term benefits (old-age pension, permanent disability benefits, survivors and funeral benefits), short-term (sickness, extended medical care and maternity), and industrial benefits (injury, disability, and death). The NIS obtains its funds from contributions from employees and employers. Currently, contributions to the NIS are 12 percent of insured income - of which employees paid 40 percent and the employers paid the remaining 60 percent. According to the National Insurance Act the maximum insurable earnings should amount to four times the minimum wage. During 1994 the insurable earnings ceiling was raised twice. The first increase from G$14,000 to G$20,000 came into effect on the first day of June 1994. In the second increase that came into effect from November 1, 1994, the ceiling was raised to G$25,500 - the equivalent of four times the minimum wage as prescribed by the NIS Act. Of the 12 percent contribution, more than two thirds are channeled to the long-term branch for pensions, with the remaining contribution split almost equally between the industrial benefit branch and the short-term branch.
The bulk of NIS' investments is in debentures (82 percent of assets in 1994) and deferred receivables (8 percent of assets). Both investments earn interest rates that are below market rates. Most of the debentures have a fixed rate of interest of 14 percent and carry a five-year moratorium on interest and capital payments (which begun in 1987). These low rates of interest earned on such large investments have affected negatively the capitalisation of the funds of the NIS. The large branch network, the reduced earnings resulting from existing investment portfolios and the slow pace in the flow of new investment, have all contributed to a high administrative cost relative to the volume of funds managed. Against this background of high costs and constrained earnings there is urgent need for continuous revisions to the contribution and benefit formulas and investment strategy to ensure NIS's solvency and an adequate level of benefits to contributors. Specifically, decisions on future investment should be based on market-determined rates. In an attempt to diversify its investment portfolio, the NIS has become very active in the treasury bill market. While this strategy is commendable, future investment policy of the NIS should be focused on investment in long-term assets given the term structure of its liabilities.
[Back to Top]
II. Policies of the Sector
As indicated by the discussion in the preceding section, Government policy towards the financial sector was characterised in the 1970s and 1980s by increasingly direct intervention starting with the establishment of a state-owned bank in 1970 and moving on to nationalisations of foreign private banks in the 1980s. It also entailed controls on interest rates.
The latter half of the 1980s and first three years of the 1990s were as difficult for the banking sector as for the rest of the economy and saw a decline in the ratio of financial assets to GDP. From 1986 to 1992, the ratio of broad money to GDP declined almost by half. Real lending and deposit rates became negative, sometimes strongly so, from 1987 to 1992. The real prime rate for commercial bank lending was -54 percent in 1989 and -72 percent in 1991. Real deposit rates were even more negative. Not surprisingly, the real volume of time and savings deposits contracted by half from 1986 to 1991.
During this period the Government moved to loosen restrictions on interest rates. However, GAIBANK continued to lend at substantially negative interest rates. The CIDA portfolio, for example, was lent at 7 percent per annum even when inflation was several times as high. This practice contributed to decapitalising the institution and did not necessarily promote the most productive use of those funds. Both GAIBANK and GNCB suffered from lack of sufficiently rigorous criteria for loan allocations, overstaffing and inadequate supervision. Since 1992 these conditions have improved somewhat but GAIBANK's situation remained untenable, with losses in one recent year amounting to ten times its equity, and accordingly in 1995 the Government decided upon the above mentioned merger of the two institutions.
To ensure stability, soundness, and efficiency of the financial sector, the Government has recently given priority to overhauling the regulatory environment. Before the introduction of the Financial Institutions Act (FIA) of 1995 two main Acts regulated the financial sector, namely the Banking Act of 1965 and the Cooperative Financial Institutions Act (COFA) of 1976. The GNCB was subject to both the COFA and the Banking Act, and the activities of commercial banks were regulated under the Banking Act. This Act stipulated the prudential requirements, including minimum capital and capital adequacy levels and lending concentration limits. The Act also determined licensing and financial requirements and requirements of management.
The New Building Society is subject to the New Building Society Act of 1973, while credit unions and financial cooperatives are regulated by the Cooperative Societies Act and the Friendly Societies Acts, respectively. The non-government, non-bank deposit-taking institutions were unregulated. Due to significant limitations of both the Banking Act and the COFA, the Financial Institutions Act was passed in Parliament in May 1995. This legislation is intended to strengthen and modernise the regulatory and supervisory framework for the financial system, aligning it with regional and international standards. Major developments embodied in the FIA include:
- extension of coverage of the legislation to all deposit-taking institutions;
- centralisation and strengthening of financial sector regulation at the Bank of Guyana;
- introduction of a new minimum capital adequacy requirement and new limits on loan concentration;
- the adoption of enhanced licensing criteria;
- new summary procedures for intervention and winding-up of financial institutions.
Amendments to the Bank of Guyana Act, Dealers in Foreign Currency (Licensing) Act, and the Cooperative Financial Institutions Act (COFA), required for their conformity with the new FIA, were also passed during the first half of 1995.
[Back to Top]
III. Description of the Principal Issues and Constraints Facing the Sector
In relation to the promotion of short to medium-term financial intermediation based on the criteria of stability, soundness, and efficiency the following are the major issues and constraints identified:
[Back to Top]
A. Lessening Quality of the Loan Portfolio
The financial indicators in Table 15-2 reflect the very recent trend toward less satisfactory quality of the commercial banks' loan portfolio in spite of the large improvements made in that regard after 1992. The banks' past due loans increased from G$564 million at the end of December 1994 to G$945 million by the end of June 1995. That is, from 1.2 percent to 1.8 percent of total loans for all banks. An alternative indicator of the quality of the loan portfolio is the ratio of nonperforming loans to total credit, which increased from 1.7 percent (G$786 million) at the end of December 1994 to 2.7 percent (G$1.5 billion) at the end of June 1995. Although there was a general deterioration in the quality of the loan portfolio of the banks, the extent of the deterioration varied substantially among individual banks. Concerning the ratio of past due loans, one bank recorded an unchanged ratio of zero, while another recorded a change in the ratio from 0.83 percent to 27.1 percent in the periods mentioned above. The records on nonperforming loans for the same two banks were similar. For the former one the ratio of nonperforming loans to total loans remained at zero, while for the latter one that ratio rose from 2.2 percent to 3.2 percent. Overall, these indicators cannot yet be said to be alarming but they bear watching.
[Back to Top]
B. Oligopolistic Structure
Before October 1994, the banking system consisted of only five commercial banks. Even with the entry of two new commercial banks by the end of 1994, there is not much evidence of strong competitive pressure. The absence of competitiveness generally leads to inefficient financial intermediation that invariably shows in the widening in interest rate spreads. A widening in spreads between lending and deposit rates is likely to dampen loan demand or discourage financial savings or both, thus contributing toward the retardation of the objective of higher economic growth. During the period 1991-1994, the annual average spread between a small savings rate and the weighted average lending rate of commercial banks rose to 10.15 percentage points from 5.51 percentage points during the period 1988-1990. On the other hand, drawing clear conclusions from a comparison of these two periods is hampered by the fact that it was a period of structural change. A more relevant indicator of the lack of competitiveness may be the observed behaviour by some banks to hold their foreign exchange in reserve to meet the possible needs of preferred clients, rather than selling it on a spot basis to any purchaser.
[Back to Top]
C. Capital Adequacy
Commercial banks in Guyana are generally undercapitalised, except the two new banks recently established, which represent only a small portion of the stock of banking system's assets, loans, deposits, and capital. When disaggregated by banks, the capital adequacy ratios of the two new banks and one of the three largest banks were above the 8 percent level prescribed under the FIA. That of the state-owned GNCB was less than one percent but has improved dramatically after its restructuring and portfolio-cleaning operation.
[Back to Top]
D. Inadequacy in the Legal System of Enforcement of Contracts
Experience with the judicial system suggests that the enforcement of contracts can be time consuming and its outcome uncertain. This is a major impediment to more development-oriented lending on the part of commercial banks.
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E. Weak Collateral Base in Agriculture, Aquaculture, and Timber
About half the agricultural sector's land is operated based on relatively short-term, nontradeable leases that by their nature fail to serve as adequate collateral. The same condition affects the aquaculture subsector, which has considerable unrealised potential for expansion, and the short duration and nontradeable character of timber leases similarly inhibits lending to that sector.
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F. Inadequate Levels of Long-term Financing
In relation to the issue of the providing an adequate level of long term financing, it was observed that the commercial banks' portfolios are concentrated in short-term loans. Most of them in fact are overdrafts or roll-overs. There is urgent need for the development of financial structure and policies to encourage the financial sector to provide long-term financing. The private sector's concerns, namely access to finance, hindrances, and the cost of financing are very important issues for Guyana's economic development. While the problem of access to financing per se is critical, it is not as pressing as the problem of access to the type of financing (long term) required to support private sector development. Much of the hindrances tends essentially to be regulatory or legal in dimension and the relatively high cost of financing derives in part from tight monetary policy and in part from inefficiencies in financial intermediation.
A major issue is the apparent mismatch between the type of funds required by the private sector and those provided by the financial system. Thus the issue is more one of the "types" of funds rather than the "lack" of funds. The financial sector is currently geared to providing short- to medium-term funding rather than long-term funding. There is evidence of a surplus of short to medium-term loan capacity, particularly among commercial banks. Table 15-4 shows that the financial sector finds long-term lending less attractive than other forms. During the period 1989-1994 total lending to the private sector averaged 26 percent of total assets of financial intermediaries. Of this amount, less than 3 percent was in long-term (mortgage) lending. At the same time, holdings of treasury bills averaged more than 20 percent annually during the same period. A closer examination of the various financial intermediaries reveals that only the trust company group invested more than a third of their assets in mortgage loans. Although the NBS was specifically designed to deal in mortgage loans, only 17 percent of its assets were invested on mortgages compared with 68 percent in treasury bills during the six-year period ending 1994. The largest investors in Guyana, the insurance companies, invested only 2 percent in long-term (mortgage) loans. Commercial banks, the largest group of financial intermediaries, invested only a minor share of their assets in long-term lending. During the six-year period mentioned above, banks invested only a fourth of 1 percent of their assets in mortgage lending compared with 24 percent in treasury bills.
It should be noted that the prevailing spread of eight percentage points between the average treasury bill rate and the highest deposit interest offered by commercial banks contribute greatly to this concentration of portfolio in T-bills, as does the Government's policy of issuing those instruments in volume to sterilise excess liquidity. Equally, the Bank of Guyana would have to play a major role in overcoming the lack of long-term finance by offering long-term instruments to financial institutions.
Table 15-4
Financial Intermediaries:
Private Sector Lending and Holding of Treasury Bills
(G$ million)
End of
Period
|
Total Assets |
Loans to Private Sector |
Treasury
Bills
Holdings
|
Percent of Total Assets |
Total |
Mortgage |
Private loans |
Mortgage |
T/Bills |
1989 |
13,836 |
3,406 |
580 |
2,816 |
24.6 |
4.2 |
20.3 |
1990 |
22,282 |
5,686 |
541 |
4,652 |
25.5 |
2.4 |
20.9 |
1991 |
39,083 |
9,397 |
650 |
4,073 |
24.0 |
1.7 |
10.4 |
1992 |
57,430 |
113,442 |
1,025 |
9,951 |
23.4 |
1.8 |
17.3 |
1993 |
63,366 |
16,007 |
1,672 |
18,806 |
25.3 |
2.6 |
29.7 |
1994 |
70,728 |
22,741 |
2,330 |
15,741 |
32.2 |
3.2 |
22.3 |
19951) |
83,175 |
28,592 |
175 |
17,511 |
34.4 |
0.2 |
21.1 |
1) To September 1995
While there is potential scope for the financial sector to get involved in mortgage financing in an extensive way, it is urgent that the necessary groundwork be done concerning property rights. Many bonafide borrowers are unable to obtain a mortgage because of the absence of title to land. The Government has large holdings of land and, while some of them must be protected (especially in areas like watersheds), continuing with the land divestment programme is important, granting full property rights to squatters who satisfy the "critical conditions" to be specified and publicised by the Government. The lessees, like the squatters, have no official title to land, making them ineligible for loans from the financial sector.
To promote the acceleration of long-term lending in Guyana, continued efforts should be focused on the development of capital markets. These institutions are specifically designed to provide the financing required to foster the sustainability of the growth trajectory over time. Currently, no formal stock exchange exists in Guyana. Stocks are traded over-the-counter through an informal market. Apart from the Companies Act, no legislation is in place to regulate stock trading. The raising of share capital through public offering has not attracted many investors. As part of the strategy in developing an equities market, in January 1994 the Government established the Call exchange. Activities of the Call exchange have been slow during 1994 and 1995.
The following are some major factors constraining the development of a stock market in Guyana:
1. A culture of family ownership of many small firms in Guyana.
2. An unwillingness to finance through markets that require public disclosure of corporate financial statements.
3. Scarcity of or limited availability of information on existing trades and the performance of companies.
4. Absence of a Securities Act or a regulatory authority.
5. Thinness of the potential market, and hence potential volatility.
These factors suggest that a stock market would not be an important source of finance in the short or medium run.
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IV. Sectoral Objectives
As for the commercial banking sector, the major objective is to promote the viability of the banking system while preserving competitiveness and sound financial environment. The seminal work of Gurley and Shaw (1956) shows that financial intermediaries in general, and commercial banks in particular, have an important economic role to play simply because financial markets are imperfect. Among the imperfections that produce a need for financial intermediaries are the varied nature and terms of financial claims, the corresponding transaction costs of search, acquisition, and the diversified nature of lenders and borrowers. Financial intermediaries exhibit economies of scale with respect to such costs. By exploiting market imperfections financial intermediaries do alter the yield relationship between lenders and borrowers, thus providing higher returns to the former (at a given level of risk) and lower costs to the latter than would be possible with direct finance.
As mentioned above, a major goal is to enhance the mobilisation of financial savings in a way consistent with the stability of the financial system. Stability in this context refers to the ability of the financial system to withstand disturbances, including those that may arise internally. Economic problems in a financial enterprise have been frequently cited as potential sources of disturbances. In view of this, banks and other financial institutions need regulation and supervision aimed at limiting their exposure to risk, while ensuring that they maintain an adequate margin to deal with economic strain. Regarding the criterion of "soundness," the thrust of policy will be the establishment of financial legislation with the purpose of protecting consumers (borrowers) and suppliers of resources (depositors). This implies that legislation should be put in place to ensure that suppliers of resources have access to their money on the terms agreed upon and that they are knowledgeable about these terms and that deposits are adequately insured. Soundness in this context will therefore afford consumers the opportunity of making intelligent portfolio decisions based on their assessment of the level of services, interest rates, risk, maturity of investment, and so on.
Like soundness, the criterion of "efficiency" is sometimes difficult to define or interpret. In a general sense, efficiency indicates that the financial intermediation process is carried out in a way that contributes to an optimal distribution and use of savings and other resources. In other words, the idea of "efficiency" would ensure that economic agents cannot earn abnormal profits by trading in the market at prevailing prices. In practice, competition is viewed as the best instrument for promoting efficiency. This is so because it encourages the development of new and better techniques, institutional solutions, and management strategies.
Another aspect of the efficiency of the financial system is its ability to meet the term structure of demand for financial instruments, and in this area Guyana's financial system is notably deficient to date. The mobilisation of the level of long-term financing required to sustain the long-term growth path in Guyana, would require the establishment of securities and capital markets. These markets are essential to development since they provide long-term debt and equity finance for the corporate sector and the Government. By making long-term investment liquid, securities and capital markets mediate between different maturities and maturity preferences of lenders and borrowers. Moreover, these markets facilitate the spread of ownership and the reallocation of financial resources between corporations and industries. They also permit financial institutions to hedge against risk over term structures.
Among the prerequisites for the establishment of such markets are: (1) a demand by businesses for long-term funds; (2) an adequate level of savings of both individuals and institutional investors; (3) a good regulatory structure; (4) a strong judicial system; (5) leadership by the Government in establishing long-term instruments; and (6) a monetary policy environment in which the issuance of short-term debt instruments by the Government does not play such a dominant role. Prerequisites (1) and (2) appear to be satisfied, but policy makers need to work on (3) through (6).
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V. Policies for Achieving Stated Objectives
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A. Improving Accounting and Disclosure Standards
Reporting and accounting standards and practices vary across banks in Guyana. An improvement and some harmonisation of accounting and disclosure practice are highly recommended since it would enhance transparency in financial markets. Although some measures have been taken to address this issue, much more need to be done. Under section 22, subsection (1) of the FIA, every licensed financial institution will appoint annually an auditor. The duties of an auditor appointed under this Act will include the following:
"to make a full review of the licensed financial institution's records and accounts, and to make to the shareholders of the licensed financial institution a report on the annual balance sheet, profit and loss statements and accounts, and state in that report whether, in the auditor's opinion, such balance sheet, profit and loss statements and accounts are full and fair and properly drawn up, whether they exhibit a true and fair statement of the affairs of the institution in accordance with auditing and accounting standards, and requirements as to format and content, specified by the Bank and in any case in which the auditor has called for information or explanation from the directors, officers or agents of the institution, whether a satisfactory response was received" [Section 23, subsection (1)(a)].
The FIA also specifies the timing of delivery of the auditor's report. Accordingly, section 23, subsection (4) makes it quite explicit that:
"the report . . . shall be delivered to the licensed financial institution and the Bank not later than one hundred and twenty days after the close of the financial institution's financial year and thereafter the report required under subsection (1)(a) shall be delivered to shareholders within thirty days of its delivery to such institutions . . . "
While the enhancement of disclosure as required under the FIA would increase transparency, assessment of financial institutions can still be made difficult because of lack of uniformity in auditing and accounting standards. Section 33 subsection (1)(a) indicates that the auditors must present reports that are in accordance with auditing and accounting standards. To the extent that standards though acceptable can vary substantially among financial institutions, there is urgent need for the Bank of Guyana, in collaboration with financial institutions in Guyana, to develop and agree on a common set of auditing and accounting standards. Uniformity in report format and content is also an important goal to be pursued. Such uniformity would enable market participants to assess better the performance of financial institutions.
At present, the local operation of a foreign-based bank does not publish independent accounts, but rather these are amalgamated in a consolidated statement. A statutory requirement needs to be issued to the effect that separate financial statements for local operations should be published, to permit the necessary supervisory scrutiny and to guarantee transparency and facilitate assessment of these local operations.
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B. Credit Concentration
Legal amendments to reduce credit risks are essential to maintain the stability of the financial system. Of the various risks faced by banks, credit risk appears to be the one of greatest concern. Three main factors have influenced the heightened concern over credit risk in Guyana:
1. The recent trend towards deterioration of the loan portfolio of some banks.
2. Enhanced awareness of credit risk following the introduction of the capital accord.
3. Difficulty in assessing credit standing of borrowers as well as credit exposure in view of a changing financial environment and the paucity of relevant statistical data.
In dealing with this issue, the regulatory authorities have placed limits on loan concentration. The provisions under Section 14(1) of the FIA seek to limit the exposure of a licensee to a single person/borrower group in the case the person/group fails to repay the credit. The relevant provisions state:
"A licensed financial institution shall not grant to any person, or borrower group, any loan, advance, financial guarantee, or other extension of credit, or incur any other liability on behalf of such person or borrower group, so that the total value of the loans, advances, financial guarantees or other extensions of credit, and other liabilities is at any time, in respect to such person, more than twenty-five percent of its capital base, or in respect of such borrower group, more than forty percent of its capital base, and where any portion of the total value of loans, advances, financial guarantees or other extensions of credit or other liabilities is unsecured, that portion shall not exceed ten percent of its capital base in the case of a person or twenty percent of its capital base in case of a borrower group."
While the limits imposed on credit concentration are commendable, additional measures are required. The imposition of limits on an individual borrower or borrower group is necessary but not sufficient. A bank lending four individual borrowers an equal amount equivalent to 24 percent of its capital base would be acting in conformity with the letter of the law. However, in such over-concentration of credit a bank would evidently be excessively exposed. Thus, while the single borrower's limit is useful, supplementary regulations are needed to prevent excessive credit concentration among a few borrowers and within a specific sector.
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C. Resolving Legal Uncertainties
Informal discussions with financial market participants in Guyana reveal that there is both a great deal of ignorance of and uncertainties about the various financial laws. A recommended measure to deal with this issue is the establishment of a Legal Review Committee formed by legal practitioners. Such a committee should be charged with the responsibility of identifying areas of obscurity and uncertainty in the laws affecting financial markets. The Committee should also be responsible for proposing possible solutions to promote greater legal certainty. More important, the Committee should formulate recommendations for improvements in the judicial system that would promote tighter enforcement of contracts.
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D. Provisioning Requirements Relating to the Quality of Loans
As stipulated under the FIA, supplementary regulations dealing with provisioning for bad debts have been drafted. According to the proposed regulations, all depository institutions will conduct, at least, annual reviews of their credit portfolio and submit the results to the Bank of Guyana. The proposed regulations provided a common minimum standard to be applied in the classification and provisioning of credit assets. This minimum criteria and standards are intended to provide a yardstick against which one can assess the quality of loan portfolios and the adequacy of reserves. The provisioning in the supplementary regulations to the FIA is likely to erode the capital base of some deposit-taking institutions but nonetheless is essential to guarantee the stability of the financial system.
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E. Developing Long-term Financial Instruments
The Central Bank will take the lead in developing rediscount instruments for both mortgages and medium to long-term production loans, to encourage commercial banks to diversify their portfolios in the direction of providing greater volumes of long-term finance. It will also, as a priority matter, conduct study on the issuance of long-term real return bonds, a form of indexed instruments, as well as direct U.S. dollar-denominated instruments. Widening the country's scope of financial intermediation in these ways is urgent.
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F. Deposit Insurance
It must be recognised that deposit insurance is a two-edged sword, raising as it does the question of moral hazard in respect of the behaviour of financial institutions. There are several cases, including Argentina and Chile in this continent, in which the existence of implicit or explicit deposit insurance has induced high-risk strategies on the part of banks, leading to the need for massive infusions of financial resources to rescue them during crises. On the other hand, uninformed depositors, especially those with lower incomes, need protection from risks they cannot properly evaluate. Therefore the policy will be to establish insurance coverage for deposits of up to G$500,000, with that limit revised annually to keep in step with changes in the consumer price index. This policy will achieve both the goals of reducing incentives for risk-taking by financial institutions and encouraging the continuing mobilisation of resources.
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G. Developing Greater Understanding of New Instruments and Activities
Evidently, market participants, including the central bank and other supervisory and regulatory bodies, must have a full understanding of what is involved in the financial deepening process and the risk faced individually and collectively by various participants in the financial markets. Cooperation between market participants and the Central Bank is needed to achieve such an understanding. It is essential that the Central Bank further develop its existing expertise with respect to market instruments and mechanisms. There is also great need for all market participants to have more comprehensive and meaningful statistical coverage of financial operations of financial intermediaries.
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H. Supervision of Financial Institutions
The various reforms taking place in the financial sector in Guyana have highlighted the importance of supervision and regulation. It is widely agreed that the supervisory authority must have sufficient legal powers if it is to fulfill the purpose for which it was created. Adequate legislation to support an effective supervisory activity is required. Without it, there is potential risk that the supervisory authority will be regarded as a "toothless animal" by the entities it supervises.
Under the Financial Institutions Act of 1995 the Bank of Guyana is responsible for the supervision of licensed financial institutions. A set of supplementary regulations has been drafted and distributed to commercial banks to solicit their reactions. The proposed legislation should have three characteristics: flexibility, transparency, and fairness. The legal system should permit sufficient flexibility to give supervisors the ability to respond quickly and flexibly to changing markets and conditions. More attention should be given to the need to provide adequate transparency to enable financial market participants to understand what is required of them. Section 5 of the FIA highlights the requirements for granting a licence to conduct banking or other financial business in Guyana. However, despite satisfying all the requirements of the Act, a licence may only be issued after consultation with the Minister, raising serious concerns about the transparency of the procedure. The criterion of fairness would require the laws and regulations to be perceived as being "even-handed" thus ensuring that a subset of financial players are not placed at a competitive disadvantage. Therefore, this requirement of consultation needs to be eliminated.
The question of the autonomy of the supervisory body continues to be a source of debate. There is no conclusive agreement whether the supervision of the financial institutions should be conducted by an independent body or by the Central Bank. An independent body would certainly require funding, but direct funding from the State may not be appropriate since the supervisor may be subjected to political control. On the other hand, obtaining funding from the industry they regulate is also not considered the ideal solution. As for this, the notion of conflict of interest is likely to arise. In view of the situation, there is strong support for the supervisory body to remain part of the Bank of Guyana, and that is the policy adopted in this National Development Strategy.
The development of an effective supervision system would require a continuous focus on the following areas:
Prudential regulations. These regulations cover licensing provisions, operating guidelines and bank rating criteria.
Creation of an early warning system. An early warning system is an important aspect of bank supervision through off-site surveillance. Computerisation and the development of telecommunication systems are highly supportive of the effectiveness of an early warning system.
Examination methods. To valuate the financial condition and management capability of a financial intermediary objectively, a proper examination is very important for supervision.
Discussions to improve the soundness of banks. The periodic discussions currently held by the authorities with financial institutions should be formalised. These discussions can prove useful in emphasising to the bank owner and bank management the importance of protecting the interest of depositors and other aspects of sound banking.
Enforcement of sanctions. Sanctions imposed on banks should be both formal and non-formal. Formal sanctions may be in the form of a fine or a cease and desist order.
Supporting the efficiency of the banking business. The banking system would require supporting facilities such as a clearing house, a credit information system, the money market, foreign exchange market, and a code of conduct among bankers. The recently established Bankers' Association can play an important role in this regard.
Closure of institutions. The regulations must permit decisive action by financial authorities to close financial institutions that experience severe liquidity crises, and to put them into receivership as necessary.
[Back to Top]
I. Strengthening the Commercial Banking Sub-sector
The data cited in Table 15-1 show clearly that the commercial banks are the country's most dynamic financial institutions and they have the strongest equity base in relative terms. Furthermore, despite a slightly adverse trend recently, the quality of their asset portfolio is generally superior to that of the State-owned banks. Therefore, successful economic development will clearly require that the commercial bank sub-sector be given precedence in the evolution of the country's financial system, subject to all the checks and balances implied in the foregoing discussions of the system of regulation and supervision.
Therefore it is a fundamental policy of this National Development Strategy to concentrate the State's role in one development bank, GNCB, while continuing to deepen the reforms in the management of that institution, now having resolved the problem of its nonperforming portfolio. Part of those reforms will involve setting interest rates at market levels for domestic on-lending of funds received from international institutions.
Continuing the policy that was initiated in 1994 with the sale of Government shares in GBTI, the State's partial holdings in GBTI and NBIC will be disposed of in stages, as follows:
In 1997, half the State's shares in NBIC will be divested via public action.
In 1998, the remaining State shares in NBIC and GBTI will be divested, also through public auction.
These steps will permit Guyana's financial sector to enter the coming century on as solid a basis as possible, fully prepared to serve the needs of an economy that is growing rapidly and undergoing profound changes in its structural composition.
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J. Home Mortgage Institutions
The discussion in Section I of this Chapter revealed that the New Building Society (NBS) has changed the composition of its asset portfolio over time and now the value of its T-bill holdings is approximately three times that of its mortgages. Clearly this pattern is not consistent with its mission as originally envisaged. While respecting the institution's need to have a measure of portfolio diversification, steps will be taken to reduce its T-bill holdings to no more than one-third of the total portfolio.
In the one exception to the rule of on-lending of external funds at market interest rates, in ternational funding sources will be sought for mortgage finance, at concessional rates.
An orderly closure of GCMFB will be arranged, and its remaining liabilities and performing assets will be transferred to the NBS.
Government also will explore the possibility of establishing a rediscount line in the Central Bank for mortgage finance.
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K. Bank Collateral
The main concern in the area of collateral has been related to agricultural land tenure and urban land titling. The land tenure reforms proposed in Chapter 29 of this Strategy, of making leases tradeable and longer in term and accelerating the process of conversion of leasehold to freehold, will help immeasurably to reduce lending constraints related to the quality of collateral. In the same sense, it is urgent to accelerate the process of titling urban land, including for squatters who have recognised occupancy, in order to enable an expansion of mortgage lending to take place.
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L. The National Insurance Scheme
There are important concerns about the long-run actuarial soundness of the National Insurance Scheme, as well as about its high administrative costs and operational problems in meeting its health insurance obligations. As mentioned in Chapter 17 of this Strategy, these issues will be addressed in a thorough going review of the NIS, its role, functions and financing. Cabinet-level recommendations will be formulated on the basis of such a review.
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M. Equities Markets
The limited scope of the present call exchange and the obstacles to the launching of a stock exchange have been described in previous sections of this Chapter. Because of those considerations, the most appropriate course of action would be for Guyana to join forces with other countries of the region in an initiative to create a Regional Stock Exchange for the Eastern Caribbean. A request will be presented to CARICOM to sponsor an initial study of the concept, its prospects and the issues it raises. The paper will be circulated to governments of the region for review and comment, and if there is sufficient consensus a feasibility study will be undertaken. An interesting precedent in this regard is Central America, where steps are underway to create a regional stock exchange.
[Back to Top]
N. The Autonomy of the Central Bank
As a necessary step in improving the degree of independence of the Bank of Guyana, its net worth will gradually be restored to positive levels, thereby compensating it for the losses on foreign exchange transactions that it incurred on behalf of the Government (see Chapters 12 and 14).
[Back to Top]
VI. Recommended Legislative Changes
A strong legal framework is necessary for long-term development of a sound banking system and effective banking supervision. Financial intermediation in Guyana is debilitated by the existence of an unsatisfactory legal foundation and infrastructure regarding property rights, collateral, bankruptcy, liquidation, contract enforcement, and loan recovery. While the authorities have taken some measures to aid the effective functioning of the financial system, the legal and regulatory environment is still not fully responsive to the need of the banking system requirements.
Besides the introduction of the new Financial Institutions Act and the conforming amendments to the related Acts, additional reforms and their implementation are required, for example, in the civil and commercial codes and collateral laws. In Guyana, conflicts over disputed claims to property sometimes arise due to incomplete or disorganised property registers. This contributes to the backlog of cases that often take years to adjudicate, affecting contract enforcement and bank loan recovery. It is also recommended that out-of-court approaches, such as arbitrage, be developed to accelerate dispute resolution.
The following legislation urgently needs modification or repeal:
- Insurance Act of 1970
- Rate of Interest Act
- Exchange Control Act
- Companies Act
- Alien Landholding Act
- Mining Act
The Mining Act provides an exception to the general rule of free entry for foreign investors. It provides that "small and medium mining" are reserved for Guyanese nationals. However, local mining companies are unable to raise all the capital required with local banks, either because of the inability of the latter to provide the magnitude of funds required or their reluctance to lend since the only collateral is usually movable equipment located in Guyana's interior. Considering the above, the prohibition of foreign participation in the small and medium mining sector effectively cuts off the local mining sector from the benefit of foreign technology and urgently needed capital. Therefore, it is recommended that the Mining Act be revised to permit foreign participation in those areas. Such revisions, however, should ensure that the interests of local miners are not compromised.
Legislation and/or regulations also are needed for the deposit insurance scheme proposed for small savers, to facilitate the issuance of debt instruments denominated in U.S. dollars to control a potential concentration of credit, and to require separate publication of the accounts of local operations of foreign banks, as noted earlier in this Chapter.
1. In technical terms, the Barclays Bank and the Royal Bank of Canada were not nationalised. They were sold to the Government of Guyana for G$1.00 each.
2. 0Secondary trading in treasury bills was approved by the Bank of Guyana in December, 1995.
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November 28, 2010 |
Tiny update to note that the IMF voting structure has changed so US no longer holds veto power that it had for so long |
February 20, 2010 |
Small update to add another example of why commodity exporting is not always good compared to exports of industrial goods |
October 29, 2008 |
A small update to mention more recent thoughts of reforming the World Bank and IMF due to the global financial crisis. |
July 2, 2007 |
Some video clips were added; one is an award-winning animation looking at nuts, global trade and structural adjustment, the other two are from the Third World Network’s Martin Khor about impacts to poor countries. |
November 20, 2005 |
Small update noting how commodity diversity is still lacking for poor countries |
November 13, 2005 |
Small update adding more about how the IMF is beginning to admit that its policies may have done some harm |
October 2, 2005 |
Very small note on how some aid to Malawi was mis-spent |
July 10, 2005 |
Small note adding to the need for a multiplier effect in poor countries |
June 24, 2005 |
Small addition on IMF telling Malawi to sell surplus grain stock for foreign exchange to repay debt—3 months before a famine struck. Also added a note on the brain drain phenomenon affecting poor countries. (Remainder of text remains untouched since July 16, 2003.) |
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The main link is
- Mario Osava, 'Trade-Brazil: Commodities Rule in Exports to China', Inter Press Service, February 19, 2010http://www.ipsnews.net/news.asp?idnews=50401
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- http://www.globalissues.org/news/2010/02/19/4596
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The main link is
- http://thenewrepublic.com/041700/stiglitz041700.html
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- A Google search reveals many sites that have reposted this articlehttp://www.google.com/search?q=What+I+learned+at+the+world+...
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The main link is
- Greg Palast, 'IMF’s four steps to damnation', Observer, April 29, 2001http://www.guardian.co.uk/Archive/Article/0,4273,4177445,00...
If the above link has expired, please try the following alternatives
- This next version is posted on Greg Palast’s own site. The Observer version seems slightly edited, so citations used come from both. Palast’s article is titled “The Globalizer Who Came In From the Cold.”http://www.gregpalast.com/the-globalizer-who-came-in-from-t...
- A repost of the Observer article by Jubilee Researchhttp://www.jubileeresearch.org/analysis/articles/IMF_Four_s...
- A repost of the Observer article by ZMaghttp://www.zmag.org/ParEcon/palastimf.htm
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The main link is
- 'Africa’s forgotten crises: people in peril; Angola, Ethiopia, Eritrea, Sierra Leone, Congo', Oxfam Policy Dialogue, September 1999http://www.oxfam.org.uk/what_we_do/issues/conflict_disaster...
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- This original link no longer seems to work but was the original paper in full. The main link given is to a press release which has a link to the paper, but the link does not work any more.http://www.oxfam.org.uk/policy/papers/africa_forgotten_cris...
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The main link is
- Matthew O. Berger, 'IMF Criticised For ‘fancy Footwork’ Over Real Reforms', Inter Press Service, November 8, 2010http://www.ipsnews.net/news.asp?idnews=53493
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- http://www.globalissues.org/news/2010/11/08/7578
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The main link is
- Ann Petifor, 'Debt is still the lynchpin: the case of Malawi', Jubilee Research, July 4, 2002http://www.jubileeresearch.org/opinion/debt040702.htm
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- http://www.jubileeresearch.org/worldnews/africa/malawi04070...
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The main link is
- Eswar Prasad, Kenneth Rogoff, Shang-Jin Wei and M. Ayhan Kose, 'Effects of Financial Globalization on Developing Countries', International Monetary Fund, March 17, 2003http://www.imf.org/external/np/res/docs/2003/031703.pdf
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- http://www.brettonwoodsproject.org/article.shtml?cmd[126]=x...
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The main link is
- 'Little evidence that globalisation helps poor nations: IMF', Reuters, March 19, 2003 [link is to reposted version by Business Times, Singapore, a major business daily there]http://business-times.asiaone.com.sg/news/story/0,4567,7570...
If the above link has expired, please try the following alternatives
- A repost of the same Reuters article. A Google search on the internet can reveal a number of other web sites that have reposted the same article.http://www.yearzero.org/communique/e0106110654bfa8517462e40...
- The BBC also reported on this, March 19, 2003. This is an alternative link to the Reuters article.http://news.bbc.co.uk/2/hi/business/2863153.stm
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