The Deadly Ideas Of Neoliberalism: How The Imf Has Undermined Public Health And The Fight Against AIDS 9781350223042, 9781848132849

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Ac k n o w l e d g e m e nt s

I would like to offer a special word of thanks to my colleagues in the HIV/AIDS and public health activist community who gave me important insights and a deeper understanding of the issues addressed in this book, including Brook Baker, Eric Friedman, Gorik Ooms, Rob Yates, Aditi Sharma, Wendy Johnson and Paul Zeitz. Despite their helpful inputs, any errors or omissions are entirely my own. I also owe a debt of gratitude to my former colleagues at the development NGO ActionAid, including Atila Roque, Rose Wanjiru, Tennyson Williams, Thomas Johnny, Julie Juma, Collins Magalasi, Akanksha A. Marphatia, Amy Gray and David Archer, among many others, whose support in working on IMF issues was immense. A special thanks is due to Nancy Alexander and Jo Marie Griesgraber, whose patience and generosity were invaluable. I am particularly grateful for the assistance and guidance of several of today’s most thoughtful and incisive economists with alternative perspectives, in­ cluding Fernando Cardim de Carvalho, Ilene Grabel, Gerald Epstein, James Heintz, Pamela Sparr, Elissa Braunstein, Thomas Palley, Mark Weisbrot and Terry McKinley, among others. I have also taken great inspiration from the tireless efforts and unrelenting determination of my colleagues in the IMF Working Group in Washington, DC.

This book is dedicated to HIV/AIDS activists and public health advocates everywhere, who lobby the corridors of power and take to the streets to demand more …

Int r o d u ct i o n

This book tells the story of two remarkable phenomena that have unfolded over the last thirty years which are today heading towards a profound clash. One is the story of the success of health activists who forged global connections and gained the political clout to demand – and get – historic levels of public financing to treat a global health pandemic; the other is of the rise from obscurity to dominance of a set of economic ideas that have come to reshape the world we know today. During the 1980s, the world first took notice of a new virus and disease that attacked the human immune system and would come to be known as HIV/AIDS; the decade also witnessed a radical rethinking of the ways in which government plays a role in national economies with the introduction of ‘free market’ and ‘free trade’ reforms by the Reagan and Thatcher governments. Part One provides an overview of the historic global response to HIV/AIDS and other infectious diseases over the last few decades. It explores the unprecedented political mobilization of HIV/AIDS activists and the international advocacy networks they forged to mobilize political pressure on leading foreign aid donors in the rich countries to provide the necessary financing to address the crisis in developing countries. The crucial discovery of life-prolonging drugs meant that HIV was no longer necessarily a death sentence, and that if this could be true for those in wealthy countries, it ought to be true for those everywhere who suffer from HIV. The political push to get such medicines to everyone who needs them led to major new global commitments by governments and global institutions to achieve universal access to HIV treatment. In a series of historic political achievements, AIDS activists raised tens of billions of dollars, got lower prices for medicines, created visionary new institutions, and, most notably, were led by some of the most marginalized segments of society – sex workers, gay men, drug users, etc. Their familiarity with suffering both rights violations and various forms of discrimination informed their successful efforts to insist that the world’s major foreign aid agencies and global institutions adopt a rights-based approach to fighting HIV/AIDS and use scientific, evidencebased solutions to fight the disease.

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But after building successful momentum over thirty years, today this global political juggernaut has hit a wall. This section explains how major health donors such as the Global Fund to Fight AIDS, TB and Malaria (GFATM), the World Health Organization (WHO) and others have been increasingly realizing that they cannot fight HIV/AIDS or other diseases without adequately financed and staffed public health systems in developing countries. This was an inevitable conclusion they were forced to confront as all of their initiatives began bumping up against the limitations of weak health systems, with often limited capacity for scaling up. And as the medical relief organization Médecins sans Frontières (MSF) concluded, efforts to further increase access to HIV treatment and maintain and improve the quality of care are ‘coming up against a wall’ owing to the severe shortage of healthcare workers in many low-income countries. Related to this growing concern about the healthcare workforce shortage is a re-emerging consensus about the efficacy of public finan­ cing for health systems after a thirty-year hiatus away from an earlier international consensus in support of public financing for health. After a long road of trial and error, much of the global health community is today returning to an earlier recognition of the importance of public financing of national health systems. As global AIDS activists and international public health advocates seek to increase the levels of public financing for health systems, however, they are being confronted with the reality that they cannot succeed because of the dominant ‘development model’ of the last thirty years, which has been based on free markets and less government intervention and has been aggressively promoted by foreign aid donors and pushed on poor countries through specific economic policy reforms upon which access to foreign aid has been conditioned. Part Two of this book explains how these free market policy reforms introduced by Reagan and Thatcher in the 1980s are based on free trade ideas associated with the nineteenth-century school of classical economics, or liberal economics, and were repopularized and came to be known as ‘neoliberal’ economic policies. This section documents how neoliberal economic theories and policies were translated into a ‘development model’ that militates against public expenditure increases, and came to be rigidly reinforced through the global foreign aid, finance and trade systems. Such policies are also commonly known as the ‘Washington Consensus’ policies because they are most forcefully promoted by the US Treasury Department, the International Monetary Fund (IMF) and the World Bank located in Washington, DC. Although many of the

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development model’s precepts and foundations have lost legitimacy and are coming under greater scrutiny, particularly as the global financial and economic crises begun in 2008 deepen and spread, much of this dominant development model still goes unchallenged generally. Part Two attempts to offer some insights into the underlying microfoundations of neoliberal economic theories, upon which many of the axioms of neoliberal policy reforms are based. It shows the profound change in mainstream economic thinking that accompanied the Reagan and Thatcher governments and how the rise of neoliberalism in the 1980s has come to dominate most contemporary thinking in development economics and the foreign aid industry. This section also underscores how the actual consequences of such policy reforms have been unsuccessful economic development in many developing countries. Much of the progress made in the 1960s and 1970s has been rolled back and undermined during the last thirty years. Today countries under neoliberal policies continue to suffer declining agricultural sectors, rural-to-urban migration in the context of worsening unemployment and underemployment, chronic underfunding of public investment as a percentage of GDP necessary for long-term economic development, collapsing domestic industries that cannot withstand high interest rates for credit and floods of cheaper imports, and an inability to invest in research and development or to acquire the technology that will be necessary for dynamic transformations and industrial development. These neoliberal policies have translated into smaller national budgets and insufficient levels of long-term public investment over many years. In turn, this has translated directly into smaller health budgets and less money for doctors, nurses and healthcare workers. The cumulative impact of such policies over thirty years has been unnecessarily worsened health for many of the world’s poorest countries. Because the neoliberal policies have reduced the levels of national public expenditure, and consequently reduced the levels of spending available for health budgets, Part Three reviews the deadly consequences neoliberal policies have had for health outcomes. It begins with an overview of the demise of the 1978 Alma Ata international consensus in favour of public health that had been emerging just as neoliberal ideas came into ascendancy in the early 1980s, and it documents the World Bank’s shift towards the promotion of user fees, private sector provision of health services, deregulation, liberalization and decentralization of public health systems. It reviews the harmful consequences of the IMF’s restrictive fiscal and monetary policies on national budgets and wages, and how these policies have led to the subsequent chronic underfunding

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of health sector budgets, wages and long-term public investment in the underlying health system infrastructure in many countries. Part Three documents the failure of neoliberal reforms to improve health outcomes, and catalogues the slow transition of the international health community back towards a re-emerging consensus reminiscent of the Alma Ata principles of thirty years earlier, with renewed support for strengthening public health systems and enabling the provision of universal access for primary healthcare. Importantly, it explains the ways in which this new support for strengthening public health systems and health workforces is being blocked by the IMF’s fiscal and monetary policies and their associated budget restrictions and wage bill ­ceilings. This section documents the last ten years of numerous published ­studies and reports, conference declarations, parliamentary statements and official reports from international agencies which have increasingly identified the obstructionist role of the unnecessarily restrictive IMF policies as blocking efforts to advance the new public health agenda. Lastly, it reviews the mounting international concern about and the advocacy work being done on this problem recently by HIV/AIDS activists and public health advocates, but makes the case that much more needs to be done. It is reasonable to ask why health advocates ought to be concerned with abstractions such as the field of development economics. Many advocates of increased foreign aid for poor countries simply want to help get resources to those in need and do not often engage with broader debates about ‘development’. But one basic feature of successful development ought to be that countries are able to increasingly pay for meeting their own needs by themselves, i.e. that their national budgets are getting larger over time. This book will show, however, that most of the neoliberal policies have in fact led in one way or another to smaller national budgets each year, and insufficient levels of long-term public investment. And that has translated directly into smaller health budgets and less money for doctors, nurses and healthcare workers every year, making the issues of development economics something that the global health community can no longer neglect. One of the key intentions of this book is to inform HIV/AIDS activists and public health advocates, as well as all who are concerned with foreign aid and development issues, that much greater potential financing for public health – and economic development generally – is being held hostage, unnecessarily, by a certain set of economic policies which are informed by a certain set of ideas, many of which have been proved incorrect. The policy outcomes have had quite deadly

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consequences, and arguably will continue to do so until the policies are changed through political pressure. There are, however, alternative macroeconomic policies that could increase public spending and investment, and health advocates should be aware of this. In order to undo this ideological policy straitjacket on public financing, and truly enable the significant scaling-up of public health spending required to achieve universal treatment access for HIV/AIDS, other major diseases of poverty and primary healthcare, advocates will have no choice but to work with economists and other allies to engage with this set of ideas, challenge its core precepts, question its axiomatic reasoning and demand that alternative macroeconomic policy options be made available for developing countries. In the coming years, it will be essential for the HIV/AIDS treatment access movement to break through this ‘wall’ of insufficient health workforces and inadequate public health financing, and in order to do so the movement will have no choice but to undo the dominance of this flawed development model if it hopes to win.

one  |  Emerge nce

of HIV/ AID S a nd t h e Glo bal Res ponse

i nt r o d u ct i o n ‘HIV and AIDS constitutes a global emergency and one of the most formidable challenges to human life and dignity; [it] undermines social and economic development throughout the world and affects all levels of society.’ – ‘Declaration of Commitment on HIV/AIDS’, United Nations General Assembly Special Session on HIV/AIDS (UNGASS), 25–27 June 2001 ‘HIV/AIDS advocates are by definition health systems advocates.’ – International Treatment Preparedness Coalition ‘Efforts to further increase access to HIV treatment and maintain and improve the quality of care are coming up against a wall due to the severe shortage of health care workers.’ – Médecins sans Frontières (MSF)

Since AIDS was first recognized in 1981, it has claimed the lives of more than 25 million people and infected more than 65 million. It is a disease that disproportionately affects the poor and destitute, and 95 per cent of the estimated 33 million people living with HIV reside in developing countries, further perpetuating the cycle of poverty in these areas. According to the World Health Organization and UNAIDS (2008), the number of people currently living with HIV has climbed to 33 million, with 2.7 million new infections and 2 million deaths in 2007. The most worrying statistic is that for every two people put on treatment, five others are newly infected. The epicentre of HIV cases continues to be found in sub-Saharan Africa: half of new HIV cases are young people, and more than half are women; most new cases are in sub-Saharan Africa, and two-thirds of all people living with HIV are African. Three-quarters of the deaths in 2007 were in Africa. And if 100 random adults in sub-Saharan Africa were tested, the average number of those found to be HIV positive would be five (ibid.). The epidemic is continuing to expand, however, in the Caribbean and Latin American countries, South-East Asia and eastern Europe. Treatment programmes have continued to expand and meet new challenges over time. Three million people have access to life-saving HIV treatment, and many clinics are now seeing patients responding well to antiretroviral treatment (ART). Still, in 2007, 55 countries reported that fewer than 25 per cent of adults and children in

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need of ART therapies received them. And while new steps have been taken to slow the rate of mother-to-child transmissions, 88 out of 113 developing countries reported that fewer than half of mothers received services to prevent the transmission of HIV to their children during birth, and only 34 per cent of pregnant women in need of services to prevent mother-to-child HIV transmission have access (ibid.). In 2007, global foreign aid from rich countries for HIV/AIDS assistance to developing countries reached its highest level ever: commitments totalled US$6.6 billion, of which US$5.4 billion was through bilateral channels (including earmarked multilateral commitments) and US$1.2 billion to the Global Fund (adjusted to represent the AIDS share). For every ten dollars committed in 2007, more than seven were disbursed (including disbursements against both current and past commitments), totalling US$4.9 billion in disbursements, or resources made available for AIDS in low- and middle-income countries by donor governments (ibid.). There are more financial resources available for AIDS than ever before. In just over a decade, international and domestic funding for AIDS has grown from millions to billions. By the end of 2007, AIDS funding was expected to stand at just under $10 billion – an almost forty-fold increase since 1996, when the figure was $260 million. The increase has been largely due to political pressure and successful mobilization of AIDS activists and advocacy networks, which have successfully lobbied for the creation of a series of new funding initiatives and mechanisms, notably the Global Fund to fight AIDS, Tuberculosis and Malaria (GFATM), the World Bank’s Multi-Country AIDS Programme (MAP), and the US President’s Emergency Plan for AIDS Relief (PEPFAR). Related to the pressure to create such institutions has been the push to create other multi-stakeholder funding mechanisms to address other diseases and broader public health systems, including the Global AIDS Vaccine Initiative (GAVI), the UK-led International Financing Facility (IFF), the French-led UNITAID, and the International Health Partnership (IHP+). Foreign aid for HIV/AIDS from donor governments has risen significantly over the past several years: between 2002 and 2007, commitments and disbursements each increased by at least fourfold, although commitments rose at a faster rate than disbursements. Increases in international HIV/AIDS assistance from donor governments have been led by the USA, the UK, the Netherlands, Sweden and Ireland: in 2007, the United States was the largest donor in the world, accounting for more than 40 per cent of disbursements by governments. Among resources available

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in 2007 for the fight against AIDS in low- and middle-income countries from all sources (domestic and international), the USA accounted for 20 per cent, the largest share. The United Kingdom accounted for the second-largest share of disbursements from all donor governments, followed by the Netherlands. Sweden and Ireland each accounted for larger shares than some G8 members. UNAIDS estimated that US$18.1 billion was needed to address the epidemic in low- and middle-income countries in 2007. Of this, an estimated US$10.0 billion was available from all sources (public and private), with bilateral international assistance accounting for almost 40 per cent ($3.7 billion in disbursements). Still, there was a gap of $8.1 billion between resources available from all sources and resources needed in 2007, as estimated by UNAIDS (ibid.). Tuberculosis is the world’s leading infectious killer of adults after HIV/ AIDS, claiming 1.7 million lives each year. TB typically affects people in their most economically productive years, straining economies at both the macro and micro levels. The immense global burden notwithstanding, TB can be successfully treated with a course of drugs costing as little as $20 per patient, but there is insufficient access for all those who need these life-saving therapies. The rising tide of drug-resistant TB is entirely human-made, emerging in response to inadequate treatment for regular TB. Far more deadly and exponentially more costly to treat, extensively drug-resistant strains of TB have yielded mortality rates approaching 85 per cent, thus spotlighting the urgent need to research and develop new TB tools and expedite the global distribution of new technologies. While a pandemic in its own right, TB is also undermining the global response to HIV/AIDS. Because HIV/AIDS weakens the immune systems of its victims and makes them susceptible to contracting other diseases, TB has become the leading cause of death for people living with HIV in the developing world, yet WHO data suggest a mere 1 per cent of people living with HIV/AIDS are screened for TB. Despite the growing awareness of the interrelated nature of the two diseases, there is still a lack of a coordinated response to both. Some donors have been making attempts to better coordinate TB–HIV efforts, but programmatic scaling-up has lagged and progress still falls far short of the need. This is ironic, as TB control is among the world’s most proven cost-effective health interventions. According to the 2008 World Health Organization (WHO) World Malaria Report, malaria continues to cause nearly one million deaths worldwide, the majority in children yet to reach the age of five. The delivery of relatively inexpensive prevention and treatment interventions

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in malaria-endemic regions (long-lasting insecticidal nets, artemisininbased combination therapy and indoor residual spraying of insecticide) fell far below the 80 per cent World Health Assembly target in 2006. For the first time in recent history, the global community seems mobilized to spend enormous resources to combat the diseases of the poor, and addressing the developing world’s diseases has become a key feature of many rich nations’ foreign policies over the last five years for several reasons. In addition to the unprecedented activism of HIV/AIDS advocates around the world, other factors include a growing perception of diseases as a national security threat, given that viruses can move globally today. Others see promoting public health abroad as strategic for public diplomacy efforts. Governments have been joined by a long list of private donors, topped by the Bill and Melinda Gates Foundation, which had given away $6.6 billion for global health programmes in its first six years, nearly $2 billion for programmes aimed at TB and HIV/ AIDS and other sexually transmitted diseases. Others include the Bill Clinton Foundation and personal contributions by billionaire Warren Buffett, among others. Between 1995 and 2005, total giving by all US charitable foundations tripled, and the portion of money dedicated to international projects soared 80 per cent, with global health representing more than a third of that sum. Because of these initiatives, billions of dollars are being made available for global health spending and thousands of non-governmental organizations (NGOs) and humanitarian groups are stepping up with proposals and programmes to spend it. The following chapters in Part One of this book describe the global response to the HIV/AIDS pandemic and efforts to combat other major diseases of poverty. Chapters 1 and 2 document the history of stepped-up efforts to fight HIV/AIDS and to spend the billions of dollars that have been raised, and the unintended impacts this has had on public health systems over the years in developing countries. Chapter 3 describes the difficulties such efforts have been confronted with as they have been stymied by a severe shortage of healthcare workers and underfinanced, poorly supplied and dilapidated public health systems on the ground in many countries. Chapter 4 explores the conflicting ways in which foreign aid donors and others have attempted to respond to this problem of weak health systems, while Chapter 5 offers an overview of the different types of healthcare financing approaches that can be used in developing countries. But in the final analysis, it is becoming increasingly apparent that developing countries simply cannot significantly increase their health budgets or public investment in their health systems under the current macroeconomic policy model based on neoliberal ideas.

1  |  T h e H i s to ry o f G lo ba l F u nd i n g to F i g h t HI V / AI D S

The Central Intelligence Agency had notice of the impending African AIDS pandemic as early as 1987 and began studying it in earnest in 1990. In Interagency Intelligence Memorandum 91-10005 entitled ‘The global AIDS disaster’, the authors projected 45 million HIV infections by 2000 – inexorably fatal, the great majority in southern Africa (Gellman 2000). This prediction, though surprisingly close, was actually an underestimate – 53 million people had contracted HIV by the year 2000, 19 million of whom have died. When the CIA report was first released, it was either ignored or trivialized. Similarly, the WHO foretold tens of millions of deaths by 2000. Despite this prediction, most of the 1990s was characterized by indifference, petty infighting and procrastination at the WHO and in other UN structures. It was not until 1996 that the UN finally established its UNAIDS programme. The moment UNAIDS was established, however, its partners, the World Bank, the WHO and UNICEF, dropped their funding for AIDS from $225 million to $40 million (ibid.). The most telling measure of neglect by the rich countries is financial. The first US budget submitted after the 1991 CIA report appropriated only $124.5 million for all overseas AIDS control, only a portion of which went to Africa. Harvard’s Center for International Development found that between 1996 and 1998, financial aid from all rich countries to sub-Saharan Africa for AIDS control projects was between $69 million and $140 million annually. One reason for the initially low funding for HIV/AIDS was a longstanding notion among public health experts about the profound dis­ parities in care that separated the industrialized countries from the developing ones. There had been a historical tendency to accept this separation as a fact of life, complicated by the fact that health concerns were seen as a subset within larger issues of poverty and ­development. A key moment, however, occurred at the 1996 International AIDS Conference (IAC) in Vancouver, Canada, at which scientists presented startling evidence that a combination of anti-HIV drugs (known as

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antiretrovirals, or ARVs) could dramatically reduce the spread of the virus inside the bodies of infected people and make it possible for them to live long lives. Suddenly HIV was no longer an immediate death sentence for tens of thousands of infected men and women in wealthy countries. By mid-1997, the dramatic fear provoked by the dreaded disease had greatly subsided as people with HIV living in the industrialized countries sought treatment. But the drugs, then priced at about $14,000 per year and requiring an additional $5,000 a year for tests and medical visits, were unaffordable for most of the world’s HIV-positive population (Garrett 2007). While HIV was no longer an immediate death sentence for those in the rich countries, it remained so for millions in Africa and other lowincome countries. This appalling injustice incited an already growing international AIDS activist movement, but the new reality of ARVs mobilized these networks into putting political pressure on leading drug companies to lower their prices for ARVs or waive their patents (intellectual property rights or IPRs) and allow the production of cheaper generic copies of these new medicines. The activists demanded that the Clinton administration and its counterparts in other major industrialized countries increase their foreign aid specifically for the purchase of ARVs and donate them to poor countries. The success of this political effort was demonstrable by 1999, when total donations for health-related programmes (including HIV/AIDS treatment) in sub-Saharan Africa hit $865 million, up more than tenfold in just three years (ibid.). Social activism in South Africa played a crucial role in the development of the international HIV/AIDS movement, and in connecting activists from both rich and poor countries. Under the apartheid government in South Africa, little had been done during the early years of the epidemic (Fourie 2006), when the initial characterization of HIV/AIDS as only affecting a few vulnerable groups stigmatized the disease and obstructed the development of any coherent policy. No policy-makers anticipated the effect that the structural drivers of the virus – poverty, gender inequality and violence – would have in catalysing the spread of HIV. Although South Africa’s 1994 liberation from apartheid began a new era of great hope, it was also paradoxically the catalyst for the rapid spread of HIV infection. Racial segregation, entrenched gender inequality and the disparity in the provision of education and health were a few of the factors that left South African society unprepared for the onslaught of HIV/AIDS (Fassin 2007). The first ANC government of Nelson Mandela did little to seriously address the HIV/AIDS crisis and in 1998 refused to provide zidovudine

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to pregnant women because it ‘simply was not cost effective to purchase expensive drugs’ (ibid.). Cost would be used again and again as a rationale for blocking access to ARVs. Nattrass (2007) documents the extraordinary influence that the antiscience denialist movement (the belief that HIV is not real or does not cause AIDS) had on the thinking and policies of President Thabo Mbeki and former minister of health Mantombazana Tshabalala-Msimang and the creation of the Treatment Action Campaign (TAC) led by Zackie Achmat. The battle of scientific reason against Mbeki’s theories initially peaked in 2000, at the International AIDS Conference in Durban, when TAC mounted a Global March for Treatment Access to defend a science-based approach to government policy. The structure and function of the TAC advocacy network represent an important model. TAC’s partnership with the AIDS Law Project mounted innovative lawsuits that activated the South African justice system and focused public attention on critical issues of public policy. Although TAC’s major battles were waged against their own president, health minister and government, TAC was also key in linking with international networks and forging a successful global campaign to pressure pharmaceutical companies to lower their drug prices. Underlying TAC’s experience is the critical role that civil society has in working in solidarity with a global network of partners to create a global advocacy movement to ensure that sound evidence-based policies are promulgated by governments and other external funders. In 2000, activists, scientists, doctors and patients gathered in Durban, South Africa, for another international AIDS conference at which South Africa’s former president, Nelson Mandela, defined the issue of supplying ARVs in moral terms, saying it would be immoral to allow ‘the poor of Harare, Lagos, or Hanoi to die for lack of treatments that were keeping the rich of London, New York, and Paris alive’ (Garrett 2007). A Harvard University team led by Jeffrey Sachs estimated that fewer than 40,000 sub-Saharan Africans were then receiving ARVs, even though some 25 million in the region were infected with HIV and perhaps 600,000 of them needed the drugs immediately. Advocates increased political pressure on donors for the scaling-up of ARV supplies to lowincome countries but the World Bank and USAID and other donors were dismissive of the idea. The World Bank issued a report in 1997, Confronting AIDS, in which it stated it would only support efforts on the prevention side, and that treatment was not ‘cost-effective’ (World Bank 2007a). Andrew Natsios, then USAID director, outraged activists when he suggested that Africans would not be able to take the proper

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combinations of drugs in the right sequences because they did not have clocks or watches and lacked a proper concept of time. But the Harvard team insisted that any obstacles to the rolling out of widespread HIV/AIDS treatment in poor countries could be overcome. The political momentum that had been gathered by the global advocacy movement reached a turning point at the IAC in Durban in 2000, when a consensus was shifted against a prevention-only approach and in favour of stepping up efforts to provide HIV treatment to all who need it. In 2000, global leaders embraced a series of eight United Nations-led Millennium Development Goals (MDGs) and targets for donor aid that reflected a new-found resolve to increase foreign aid generally and for HIV/AIDS in particular, and to make the world safer, healthier and more equitable by 2015 (discussed below). MDG Goal 6 provides that, by 2015, the world will have halted and begun to reverse the global HIV epidemic, and implicit in the commitment was the need for ambitious programmes to roll out ARVs. In the United States, the Reagan administration originally did little to address the HIV/AIDS epidemic at home in the 1980s (Shilts 1987), and during the 1990s, when there was an increased awareness of the epidemic’s spread in Africa, the Clinton administration did little to address the HIV/AIDS crisis globally (Behrman 2004). In The Invisible People, Behrman documents several factors for the lacklustre response by the USA to the global crisis, including how the end of the cold war diminished Africa’s strategic importance, leading the USA to scale back its foreign aid to the continent, and how all the news from Africa seemed to be about famine and civil war, making the AIDS crisis just another ‘part of one long, uninterrupted narrative of death and suffering in a faraway land’ (ibid.). Behrman describes former president Bill Clinton as ‘responsive, engaged, and in agreement’ that the USA should do all it could to help fight AIDS in Africa, but unwilling ‘to expend one dime of political capital to move US policy’ until after he left the White House. By the time the Bush administration had come to power in 2001, however, US AIDS activists had built considerable momentum to get something done. Clinton’s second AIDS tsar, Sandra Thurman, had used her office to raise the issue and politicize it, the US-based group Health GAP successfully pressured the Al Gore presidential campaign to pledge it would provide scaled-up assistance on HIV/AIDS, the global Jubilee 2000 advocacy network for debt cancellation for poor countries  had scored astounding political victories, and the global AIDS activists had  started meeting every two years at IACs, as had

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governments with the periodic UN General Assembly Special Sessions (UNGASS). It was the culmination of such momentum which greeted the then-incoming Bush administration, which eventually responded by considerably increasing US foreign aid from $11.4 billion in 2001 to $27.5 billion in 2005, with support for HIV/AIDS and other health programmes representing the lion’s share of all aid unrelated to large increases in US aid to Iraq or Afghanistan. After almost two years in office, the Bush administration launched a $15 billion, five-year programme to tackle HIV/AIDS, TB and malaria, the President’s Emergency Plan for AIDS Relief (PEPFAR), in February 2003. The programme targeted assistance to sixteen nations and was aimed primarily at providing ARVs for people infected with HIV. PEPFAR has been one of the largest single sources of money available for AIDS treatment in the world, providing US$15 billion over five years (PEPFAR 2004). PEPFAR money was, however, overtly influenced by the ideology of the US administration of George Bush and its conservative approach to HIV prevention, rather than based on evidence of what works to address the real prevention needs of people (GAO 2006). Des­ pite numerous and uncontested government-funded studies discrediting PEPFAR’s ‘abstinence only’ programmes as an exclusive HIV prevention strategy, the US Congress during the Bush administration still required that at least 33 per cent of all HIV prevention money under PEPFAR be spent on ‘abstinence-until-marriage’ approaches. PEPFAR’s guidelines and spending requirements have constrained or blocked organizations receiving US funding from supporting programmes targeting commercial sex workers (the Prostitution Oath) or those that promote sexual and reproductive health choices (including the Mexico City Policy/Global Gag Rule), and such PEPFAR guidelines had an equally damaging impact on AIDS responses targeting key at-risk populations and on the promotion of human rights, especially of women (CHANGE 2005). In June 2001, the international community finally officially acknow­ ledged HIV and AIDS as a major threat to development during the UN General Assembly Special Session on HIV and AIDS (UNGASS), when 189 nations committed to jointly responding to the pandemic and meeting a clear set of targets to be reached by 2005 and 2010. The declaration, ‘Global crisis – global action’, contains time-bound HIV commitments for a comprehensive response; from increased leadership and resources, to targets on prevention, treatment and care. It is notable that the declaration stresses the central importance of promoting human rights, particularly of women, people living with HIV and AIDS and marginalized communities.

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Soon after the UNGASS declaration, persistent campaigning by advocates led to a high-profile victory on access to generic drugs for poor countries at the October 2001 summit of the World Trade Organ­ ization (WTO). At the trade summit, activists successfully beat back the worst aspects of a proposed deal on intellectual property rights (IPRs) for patent holders and drug manufacturers under the WTO negoti­ations on Trade-Related Aspects of Intellectual Property Rights (TRIPs). ­Although still imperfect (discussed below), the final summit declaration acknowledged that the right to health should prevail over intellectual property rights. A major advance in the international effort to fight HIV/AIDS was the launching of the Global Fund to fight AIDS, Tuberculosis and Malaria (GFATM or Global Fund) in 2002 at the UN General Assembly Special Session on AIDS in New York. The explicit purpose of the Global Fund is to dramatically and rapidly increase the level of donor aid resources to fight the three most devastating diseases in the world. The idea for such a fund had been promoted by advocates for several years and received the endorsement of then UN secretary-general Kofi Annan in 2001, when he declared the need for a global fund to fight AIDS. The UNGASS summit in New York City was met outside by thousands of AIDS activists living with HIV from New York City, Philadelphia and around the world marching in pouring rain to demand a worldwide commitment to funding the fight against AIDS, adding to the pressure on officials to take action. Today, the Global Fund is one of the most important aid instruments, channelling resources to effectively combat diseases of the poor. It is a unique global public–private partnership dedicated to attracting and disbursing additional resources to prevent and treat HIV/AIDS, tuberculosis and malaria. This partnership between governments, civil society, the private sector and affected communities represents a new approach to international health financing. The Global Fund works in close collaboration with other bilateral and multilateral organizations to supplement existing efforts dealing with the three diseases. Uniquely among international institutions, it reserves a seat on its governing board for civil society representatives from both the global North and South. The Global Fund’s performance-based funding model provides an effective vehicle for scarce resources, ensuring value for money. By channelling funds through the Global Fund, donors ensure that funds are spent effectively. The Global Fund’s financing model emphasizes accountability for grant targets and transparent use of funds (ICASO

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2006). The fact that civil society has seats on the board is an important recognition of the political power asserted by advocacy and other civic organizations over the last few decades. In important ways, the Global Fund represents a new type of governance structure emblematic of how the growth of civil society organizations and telecommunications technology has altered contemporary norms and expectations about how public institutions ought to be governed. Today, citizens expect opportunities for civic participation, and demand greater degrees of accountability and transparency at public institutions. Since its creation, the Global Fund has approved funding of $11.4 billion for more than 550 programmes in 136 countries. It is responsible for nearly a quarter of all international funding to fight AIDS around the world. It also provides two-thirds of the funding for tuberculosis and three-quarters of the funding for malaria. In 2003, the WHO and UNAIDS put forward an ambitious initi­ ative called ‘3 by 5’, aimed at providing antiretroviral therapy (ART) to 3 ­million people living with HIV/AIDS in low- and middle-income countries by the end of 2005. Although this target was not achieved, the number of people receiving ART in developing countries significantly increased – and continues to increase – tripling from 400,000 in ­December 2003 to approximately 1.3 million by the end of 2005 (WHO/ UNAIDS 2006). Such impressive scaling-up further mobilized activists about what could be possible. Within many countries, the 2001 UNGASS Declaration of Commitment fostered the creation of national multisectoral AIDS strategies and mechanisms. By 2006, 90 per cent of countries reporting to UNAIDS had a national AIDS strategy. In forty developing countries, heads of state lead the national AIDS response in order to ensure a multi­sectoral approach (UNAIDS 2006a). Regarding financing for the national strat­ egies, the secretary-general’s report to the 2006 UN High-Level Meeting on AIDS noted that if the international community is to scale up the response, ‘no credible, costed, evidence-informed, inclusive and sustainable national AIDS plan should go unfunded’ (UN 2006). The July 2005 annual summit meeting of the Group of Eight (G8) in Gleneagles, UK, was another historic moment in the global response to HIV/AIDS. At the G8 summit, rich countries made a commitment to scale up HIV prevention, treatment and care and to reach ‘universal access’ to treatment by 2010. The summit declaration stated, ‘We commit to develop and implement a package of HIV prevention, treatment and care, with the aim of coming as close as possible to universal access to treatment for all those who need it by 2010’ (G8 2005). Later, in

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September 2005, at the UN’s World Summit, all world leaders adopted the commitment to develop and implement a package for HIV prevention, treatment and care, with the aim of coming as close as possible to the goal of universal access to treatment by 2010 for all those who need it, ‘including through increased resources, and working towards the elimination of stigma and discrimination, enhanced access to affordable medicines and the reduction of vulnerability of persons affected by HIV and AIDS and other health issues’ (UN 2005). After the summit, UNAIDS and its co-sponsors were tasked with facilitating inclusive, country-driven processes for scaling up HIV prevention, treatment and care, as well as analysing and recommending ways to address the common obstacles to scaling up. At the 2006 UN High-Level Meeting on AIDS, countries reported back on the progress they had made on the targets set in the 2001 Declaration of Commitment and further committed to set ‘ambitious national targets … that reflect the urgent need to scale up significantly towards the goal of universal access to comprehensive prevention programmes, treatment, care and support by 2010’ (UNGASS 2006). There is much debate about what ‘universal access’ means; however, people and communities directly affected by HIV and AIDS understand it as access to prevention, treatment, care and support for everyone who needs it (ActionAid 2007a). According to UNAIDS, this commitment would include accommodating: at least 80 per cent of people in need ­accessing antiretroviral treatment; at least 80 per cent of pregnant women accessing antenatal care having information, counselling and other HIV prevention services available to them; and at least 95 per cent of young women and men having information, education, services and life skills that enable them to reduce their vulnerability to HIV infection (­UNAIDS 2006b). Because the setting of explicit targets enables advocates to monitor disbursements and later hold donor governments accountable for their aid commitments, the 2010 universal access goal has served as a powerful weapon in the armoury of global HIV/AIDS advocates. Despite the impressive increases in global HIV/AIDS funding, however, there is still a disturbing gap between how much is being given and what is projected to be needed to fight HIV/AIDS effectively. According to UNAIDS, there is an AIDS funding gap of at least US$8.1 billion in 2007 and US$10 billion per year thereafter for what is needed for a comprehensive response to HIV and AIDS in low- and middle-income countries. These are conservative figures and real resource needs may be higher. For example, UNAIDS narrowly defined universal access to

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treatment as 80 per cent coverage of people who would die within a year without treatment, but if we used a wider definition like the one used in the ‘3 by 5’ initiative as all those who have begun to develop AIDS-related symptoms, then estimates would be higher (ActionAid 2006a). By May 2006, the Global Fund had signed grant agreements worth US$4 billion for over 300 grants to 127 countries. As of June 2006, HIV and AIDS programmes supported by the Global Fund had a reported 544,000 people on ARV treatment, 5.7 million people reached with HIV counselling and testing, 560,000 orphans receiving basic care and support and 1.5 million additional service deliverers trained to fight HIV, TB and malaria (Global Fund 2006). Set up as the exceptional response from the world to address diseases that overwhelmingly affect the poor, the Global Fund has delivered measurable successes in a very short time. Each cycle to get more funding from donors is always tenuous, however, and rich countries have yet to back it with total conviction and full and predictable funding. Calls for proposals have been delayed and some proposals have been rejected. The scope of the Global Fund has been defined by the voluntary and ad hoc donors’ pledges rather than to meet the real needs in developing countries. By 2007, the Global Fund provided about 21 per cent of total funds for HIV and AIDS and two-thirds of total funds for TB and malaria. Assuming that the Global Fund’s share in funding the three diseases is maintained, the Global Fund estimates its own resource needs at US$6.7 billion to US$7.7 billion annually from 2008 to 2010. At the G8 summit in Germany in June 2007, the leaders of the world’s wealthiest nations agreed that the Global Fund’s grant-making should be expanded about sixfold by 2010, but the necessary funding has not yet materialized. Ensuring the sustainability of the Global Fund is crucial as it is the one vehicle that has rapidly delivered a scale-up of the world’s response to the three neglected diseases. In 2008, US-based HIV/AIDS and health advocates successfully persuaded the US government to increase its investment in fighting HIV/AIDS, tuberculosis and malaria overseas by increasing the funding level for the PEPFAR programme to $48 billion over the next five years. Both Democratic and Republican candidates in the 2008 presidential campaign offered ambitious plans, and it remains to be seen how much the global economic recession of 2009 will affect US contributions to financing the global fight against HIV/AIDS, TB and malaria. USbased advocates are expected to seek and win changes to PEPFAR’s problematic guidelines under the Obama administration.

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Global AIDS activists meeting in Dakar, Senegal, in December 2008 for the 15th International Conference on AIDS and STIs in Africa (ICASA) spoke out strongly against the broken AIDS promises of donor countries and African country governments to reach universal access to AIDS treatment and comprehensive prevention for all by 2010. Despite progress in some countries, massive gaps persist between those who have access to quality HIV care, treatment and effective prevention, and those who do not. The advocates argued that emergency funding for the Global Fund and other effective funding mechanisms is needed, as well as a renewed commitment, led by African countries, to reach universal access and the Millennium Development Goals (MDGs). Advocates were alarmed by an earlier 2008 decision by the Global Fund board to cut and cap funding for quality, successful programmes owing to a lack of donor resources. At its meeting in November, the Global Fund board decided to cut one quarter off proposed future funding and cap the expansion of the highest-performing grants at half the current rate of expansion. These cuts and caps – which would undermine countries’ abilities to reach targets and save lives – can only be reversed if donors fulfil their pledges to the Global Fund. From the December 2008 summit in Dakar, Olayide Akanni, director of Journalists against AIDS in Africa and African Civil Society Coalition on HIV/ AIDS, said, ‘Two years away from 2010, and the spirit and momentum to reach universal access is missing from this conference. Donors and African country governments are breaking their promises.’ Back before the Global Fund was created in 2002, the cost of ensuring access to life-saving treatment and prevention was too often used by countries to excuse their own decisions not to increase AIDS spending, and it was considered by many country governments unwise to agree to invest billions in the response to AIDS in the developing world. But in just seven years, a powerful global civil society movement of people with HIV and their allies has forced governments to retreat from that position, and as a result to significantly scale up AIDS spending. Although progress on treatment access has been modest, the steps taken have been profound. For example, just seven years ago treatment access was considered by many as inappropriate or unsustainable for millions in low- and middle-income countries. Yet currently there are 3 million people on ARV treatment, in defiance of that earlier notion, and advocates have secured political commitments at the highest levels to reach the additional 7 million people deemed to be in urgent need of treatment by 2010. PEPFAR, GFATM and the World Bank’s Multi-Country AIDS Pro-

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gramme for sub-Saharan Africa (MAP) are among the largest funders of the AIDS response. By 2005, these three funders were disbursing more than $3 billion per year, with over 70 per cent of this total coming from PEPFAR. In spite of the challenges posed by poor alignment, harmonization, coordination and weak public sector capacity, PEPFAR, GFATM and MAP have demonstrated remarkable results in terms of disbursing funds, and there is now a strong evidence base to suggest that diseasespecific funding to developing countries has yielded significant results in terms of helping to strengthen broader health systems, improving access to services and improving health and HIV outcomes. As a result of HIV-specific funding providing life-sustaining ART in low- and middleincome countries, it was estimated that GFATM-supported programmes had saved 1.25 million lives by 2006. The WHO reports that the GAVI Alliance, which aims to make available the newest and most effective vaccines against deadly childhood diseases, had saved 2.9 million lives between 2000 and 2007. Clearly, disease-specific interventions in AIDS, TB and malaria are preventing the loss of human capital and helping to support the social fabric of developing countries. Additionally, a groundbreaking 2008 study in South Africa provided the first hard evidence that treating HIV-positive babies with ARV medicines from as early as six weeks dramatically improves their chances of survival. The study found that infants started on ARV therapy immediately after diagnosis were 76 per cent less likely to die than those who began treatment only after displaying clinical symptoms. Early treatment also greatly reduced the progression of disease (Violari et al. 2008). The HIV/AIDS epidemic has heightened global consciousness of health disparities, and catalysed unprecedented action to confront some of the world’s most serious development challenges. No disease in history has prompted a comparable mobilization of political, financial and human resources, and no development challenge has led to such a strong level of leadership and ownership by the communities and countries most heavily affected. Owing in large part to the impact of HIV, people throughout the world have become less willing to tolerate inequities in global health and economic status that have long gone unaddressed. Importantly, and perhaps unwittingly, the high-income donor countries have approached the fight against HIV/AIDS in a way that has acknowledged a globally shared responsibility for the health of all people. Such an acknowledgement is unprecedented, and marks a break with the assumptions about the ‘temporary’ nature of aid in previous donor

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aid flows to low-income countries. Traditionally, donor aid was given to countries on the assumption that it would be temporary and that eventually recipient countries would develop and ‘graduate’ from needing additional donor support and would transition into self-reliance. But in dealing with HIV/AIDS, it was evident, from the beginning, that some of the highly affected countries would not be able to finance AIDS treatment themselves any time within the foreseeable future. Thus, if AIDS treatment were to become available in low-income highly affected countries, then sustainability (in the sense of self-reliance) had to be abandoned and replaced with the concept of globally shared responsibility for the health of all people. This unprecedented break with past assumptions suggests the early stages of a different approach to donor aid in the twenty-first century (Ooms 2009). Current UNAIDS estimates project that, globally, the cost of reaching universal access to prevention, treatment and care by 2010 is approximately $40 billion per year; today developing and developed countries together spend approximately $10 billion per year – this is a figure that includes the out-of-pocket expenditures for services by HIV-positive people in low- and middle-income countries who in any reasonable costing model cannot actually afford to pay. Despite the important successes in this global effort so far, the funding gaps remain massive.

2  |  The Impact of the AIDS Response on Public Health Systems

The Stop AIDS Campaign issued a December 2008 report that explored both the impacts of HIV/AIDS on public health systems as well as the impact on health systems of HIV/AIDS programmes. It found that there is a strong body of evidence to suggest that in countries that have demonstrated significant progress towards achieving universal access for HIV services (for example, Cambodia, Kenya, Namibia), investments in health systems strengthening – laboratory and supply chain strengthening, expansion of and training for the health workforce, task shifting and involvement of civil society, including people living with HIV (PLHIV) – were key enabling factors. Conversely, in countries where health system strengthening investments are not being made, the fragile and fragmented state of the health system is acting as a major impediment to the effective scale-up of HIV services. Some of the most commonly reported health system constraints in scaling up HIV programmes include skilled staff shortages, weak supply management systems and laboratories, low stocks of commodities, lack of access to and inappropriate services for marginalized and vulnerable groups, poor/ inaccessible health infrastructure, weak national planning and monitoring processes and systems (Stop AIDS Campaign 2008). As regards how HIV/AIDS programmes impact on public health systems, the Stop AIDS Campaign report explained that there are many examples of how donor AIDS programmes have strengthened health systems. A study undertaken across six countries with very different HIV epidemics (Argentina, Brazil, the Dominican Republic, Uganda, Zambia and Zimbabwe) describes the following positive effects of HIV service scale-up: promoted integration of HIV, TB and other health services; relieved demand for hospital beds, emergency-room services and antibiotics that the AIDS crisis had created; motivating and expanding the capacity of healthcare workers; increased access by marginalized populations and the poor to health services; raised community awareness about health, sexuality and human rights issues; and making AIDS clinics, laboratories and equipment available for other

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health services and improving commodity procurement and negotiation skills with suppliers. It also cited evidence, however, that HIV programmes placed addi­ tional burdens on public health systems, and that the claim that HIV services are drawing precious human resources from the public sector is one of the major criticisms levelled at AIDS programmes (ibid.). Other research by ITPC (2008) described ways in which HIV programmes placed strains and burdens on public health systems: increased demand for services, sometimes leading to drug shortages; raised new concerns about corruption and lack of transparency as increasing resources came from outside sources; increased the workload on healthcare personnel; imposed new budget pressures on governments; took government focus away from other aspects of health services as it strove to meet the demands of donors and a growing HIV/AIDS service system; attracted high-quality healthcare personnel away from other health services; and created an unequal system wherein some AIDS drugs are free while other treatments are available only at substantial cost (ibid.). There is a growing recognition that achieving universal access for HIV/AIDS treatment will remain impossible without well-functioning, well-resourced and comprehensive primary healthcare services that reach the poor. A successful AIDS response will require a much larger, well-trained and motivated healthcare workforce being made available. The AIDS pandemic and the donor response to it are, however, putting tremendous additional strains on the already weak health infrastructure in many developing countries at a time when even stronger and better healthcare systems and workforces are required for providing primary care services and treating opportunistic infections like TB and malaria, as well as testing for HIV, distributing information, condoms and providing AIDS treatment. Asking poor countries to spend more on HIV/AIDS emergencies is one thing, but spending enough extra to also strengthen their entire public health systems is simply not possible for many low-income countries. Ironically, many of the countries most in need of strengthened health systems can least afford them. For example, in sub-Saharan Africa, the region most affected by the pandemic, many countries still do not spend the minimum US$35 per person that WHO estimates is required to ensure a basic health service package in low-income countries (UNDP 2006). As a result, already inadequate health systems are failing millions of HIV-infected people at a time when they are most needed. In many countries, women’s ­access to healthcare is much lower as they face additional barriers, both economic and social.

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While some countries do meet the US$35 per person minimum spending target in their annual health budgets, a significant disparity in health expenditure remains, both within countries and within regions. The southern Africa region, where HIV prevalence rates are the highest, has the biggest differences within the continent. There, spending per capita ranges from US$669 spent in South Africa, US$375 in Botswana or US$324 in Swaziland, to the mere US$46 and US$45 spent in Malawi and in Mozambique, respectively. Big differences can be found as well within the Caribbean region, the second-hardest hit with HIV/AIDS, with a spending of US$1,050 in Barbados, compared to the US$251 and the US$84 spent in Cuba and in Haiti, respectively. In Asia, Malaysia spends US$374, double the spending in Cambodia of US$188 and seven times the spending in Pakistan of US$48. Differences are also evident between the two highly populated countries: China spends US$278, triple the amount of India’s spending on health per capita of US$82. Latin America illustrates big disparities among middle-income countries, with Argentina spending US$1,067 per person on health, against the US$597 and US$582 spent by Brazil and Mexico, respectively (ibid.). In terms of increasing domestic spending on public health, member states of the African Union committed themselves to spending 15 per cent of their public budgets on health at a summit in Abuja, Nigeria, in 2001 (AU 2001). By 2005, however, most countries were a long way from meeting this pledged target (ActionAid 2005a). Concern about this continued underfunding of public health budgets was reiterated by the Assembly of the African Union in its January 2005 Framework on Action to accelerate health improvement in Africa. According to the Assembly, the current health expenditure in most African countries was still below the US$35–40 minimum required to achieve basic functionality. African countries were spending only an average of 2.5 per cent of GDP on their health budgets against a world average of 5.4 per cent. While there was evidence that some countries had indeed increased their health expenditure, most countries in Africa remain well short of the 15 per cent of public budget for health committed to in the Abuja Declaration (AU 2005a). As of the end of 2005, only Botswana had achieved this target (AU 2005b). In May 2006, the African heads of state met to review progress made since the Abuja Declaration in 2001 and recommitted to raising the health expenditure to a minimum of 15 per cent of the national budget. There they were met by civil society advocates campaigning to hold African governments accountable to this promise. But if even many countries fully intended to increase health spending

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to the WHO’s recommended level, many of the world’s poorest countries would not be able to do so. Such countries will require significantly scaled-up foreign aid levels and for that aid to become much longerterm. The Commission on Macroeconomics and Health projected that an additional US$27 billion per annum in aid (on top of the current estimated $50 billion per year in donor aid from rich countries), as well as greater domestic spending, is needed to sufficiently build the capacity of health systems (CMH 2001). The HIV/AIDS crisis and the massive global donor response to it have raised a host of difficult issues on the ground in countries, including the impact of donor AIDS money on recipient governments and their health systems, the impact on health workforce issues, and the impact of AIDS priorities on other health priorities, including basic healthcare services.

3  |  T h e S h o rta g e o f H e a lt h C a r e W o r k e r s a nd t h e ‘ B r a i n D r a i n ’ Problem

One of the most immediate difficulties of accommodating the massive inflows of HIV/AIDS money to developing countries has been the lack of sufficient numbers of skilled and trained healthcare workers available in countries to administer and roll out HIV/AIDS programmes. This is particularly the case for the many countries that had already faced a striking shortage of needed healthcare workers even before the global response to HIV/AIDS. The enormous flow of AIDS money has aggravated the problem of insufficient numbers of healthcare workers, but has also raised its profile and stimulated a greater awareness and efforts to address the health worker shortage. Most countries suffer from major problems with the availability – and the equitable distribution – of qualified clinical and technical health workers and managers. Shortages exist at all levels, including doctors, nurses, managers and administrators, with the crisis at its worst in rural areas. More technical staff are needed for procurement, for financial management and for monitoring and evaluation. An estimated fifty-seven countries, including India and Bangladesh, face crippling shortages of health workers. Sub-Saharan Africa is particularly affected because it has 11 per cent of the world’s population yet is also home to almost 64 per cent of all people living with HIV in the region and only 3 per cent of the world’s health workers. According to WHO (2006), at least 4 million additional health workers will be needed for an effective AIDS response. WHO has proposed a target of 2.3 doctors, nurses and trained midwives and 1.8 health auxiliaries (including community health workers) per 1,000 residents. The existing global health workforce of 59 million people includes an invisible backbone of managers and support workers that total almost a third of the entire workforce. The managers and support workers help the health system to function but do not provide health services directly to the population and are often forgotten in discussions about the health workforce. These individuals perform a variety of jobs, such as

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distributing medicines, maintaining essential buildings and equipment, and planning and setting directions for the system as a whole. Health management and support workers provide an invisible backbone for health systems; if they are not present in sufficient numbers and with appropriate skills, the system cannot function – for example, salaries are not paid and medicines are not delivered. The existing global health workforce of about 59 million people is spread unevenly around the world and spread unevenly within many countries (ibid.; Speybroeck et al. 2006). Unfortunately, countries with the lowest relative need have the highest numbers of health workers, while those with the greatest burden of disease must make do with a much smaller health workforce. The Americas region, which includes Canada and the United States, shoulders only 10 per cent of the global burden of disease, yet almost 37 per cent of the world’s health workers live in this region and spend more than 50 per cent of the world’s financial resources for health. In contrast, the African region suffers more than 24 per cent of the global burden of disease but has access to only 3 per cent of health workers and less than 1 per cent of the world’s financial resources – even with loans and grants from abroad (WHO 2006). Health workers are also spread unevenly within regions and countries, and access to health workers is also unequal. For example, Vietnam averages just over one health service provider per 1,000 people, but this figure hides considerable variation. In fact, thirty-seven of Vietnam’s sixty-one provinces fall below this national average, while at the other extreme one province counts almost four health service providers per 1,000. Similar variations exist in other countries. Many factors influence the geographical variation that is observed in health worker density. Areas with teaching hospitals and a population that can afford to pay for health services invariably attract more health workers than regions without such facilities or financial support. As a result, health worker density is generally highest in urban areas, where teaching hospitals and high incomes are most common. Although the extent of urbanization increases across countries with increasing income, in countries of all income levels the proportion of health professionals living in urban areas exceeds the proportion of the general population found there. This is particularly the case for doctors. According to the WHO (ibid.), while under 55 per cent of all people live in urban areas, more than 75 per cent of doctors, over 60 per cent of nurses and 58 per cent of other health workers live in such areas. Not only is there a shortage of healthcare workers in many countries

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to help deal with HIV/AIDS, but many trained healthcare workers are themselves sick with the disease. As they die, the health workforces are further eroded. According to the WHO, the AIDS epidemic has placed unprecedented burdens, including high rates of HIV-related illness and death among health workers, on these already stressed health systems. For example, Mozambique’s health minister says that AIDS is killing the country’s healthcare workers faster than new ones can be recruited and trained: by 2010, the country will have lost 6,000 lab technicians to the pandemic (Garrett 2007). A study by the International Labour Organization estimates that 18–41 per cent of the healthcare labour force in Africa is infected with HIV. If they do not receive ARV therapy, these doctors, nurses and technicians will die, exacerbating the collapse of the very health systems on which HIV/AIDS programmes depend. Various estimates of the availability of health workers required to achieve a package of essential health interventions and the MDGs by 2015 (including the scaling up of interventions for HIV/AIDS) have resulted in the identification of workforce shortfalls within and across mostly low-income countries. In the HIV/AIDS literature, scaling up treatment with ARVs was estimated to require between 20 and 50 per cent of the available health workforce in four African countries, though less than 10 per cent in the other ten countries surveyed (Smith 2004). Many health advocates and practitioners were long aware of the worker shortage. Dr Paul Zeitz, now executive director of Global AIDS Alliance, spent six years in Zambia conducting health training programmes and technical assistance projects for USAID. Zeitz was frustrated by the seeming unwillingness of donors to address the problem. ‘We would do all of these pre-service and in-service trainings for healthcare workers, but then whenever we’d go out to a clinic there would be no health workers, or whenever we found some, they were very badly paid. Nobody was addressing this.’ To achieve a global assessment of the depth of the shortfall, the WHOled Joint Learning Initiative ( JLI), a network of global health leaders, launched by the Rockefeller Foundation, suggested that, on average, countries with fewer than 2.5 healthcare professionals (counting only doctors, nurses and midwives) per 1,000 population failed to achieve an 80 per cent coverage rate for deliveries by skilled birth attendants or for measles immunization (Chen et al. 2004). This method of defining a shortage, whether global or by country, is driven partly by the decision to set the minimum desired level of coverage at 80 per cent and partly by the empirical identification of health worker density associated with that level of coverage.

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The JLI report provoked interest in the health workforce shortages issue, which led UNDP to focus on the issue in its 2006 World Health Report, ‘Working together for health’. Using a similar ‘threshold’ method and updated information on the size of the health workforce obtained for the WHO report, the JLI analysis was repeated for skilled birth attendants. A remarkably similar threshold is found at 2.28 healthcare professionals per 1,000 population, ranging from 2.02 to 2.54 allowing for uncertainty (WHO 2006). The fifty-seven countries that fall below this threshold, and which fail to attain the 80 per cent coverage level, are defined by WHO as having a critical shortage. Thirty-six of them are in sub-Saharan Africa. The WHO estimates that at least 2.4 million health professionals and 1.9 million health workers, or a total of 4.3 million healthcare workers, are needed to fill the gap. Without prompt action, the shortage will worsen. This global workforce shortage is made even worse by imbalances within countries, with the greatest deficits in peri-urban and rural areas. In absolute terms, the greatest shortage occurs in South-East Asia, dominated by the needs of large populations in Bangladesh, India and Indonesia. The largest relative need exists in sub-Saharan Africa, where an increase in health workers of almost 140 per cent is necessary to meet the threshold (ibid.). These estimates highlight the critical need for more health workers in order to achieve even modest coverage for essential health interventions in the countries most in need. The medical relief group Médecins sans Frontières (MSF) began providing antiretroviral therapy (ART) in 2000 and has today reached over 80,000 people in more than thirty countries. Efforts to further increase access to treatment and maintain and improve quality of care, however, are ‘coming up against a wall’ owing to the severe shortage of health workers. This is contributing to unnecessary illness and death. MSF’s 2007 report ‘Help wanted: confronting the health care worker crisis to expand access to HIV treatment’ examined the impact of human resource shortages witnessed by MSF teams in four southern African countries: Lesotho, Malawi, Mozambique and South Africa. MSF teams witnessed the impact of the human resource crisis in this region, which represents the epicentre of the AIDS pandemic. While the report focused largely on nurses in rural areas, it found that health staff is lacking across the spectrum from doctors to laboratory technicians to pharmacists – at all levels of care. According to the MSF report, health workers are overwhelmed, overworked and exhausted. In Thyolo district in Malawi, a single

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medical assistant can see up to two hundred patients per day. In Mavalane district in Mozambique, patients are forced to wait for up to two months to start treatment because of the lack of doctors and nurse clinicians; many have died during the wait. In Lusikisiki, South Africa, utilization of clinic services almost doubled in two years while the number of professional nurses remained constant. In Scott Hos­ pital Health Service Area in Lesotho, over half of professional nursing posts at health centres are vacant while the HIV-associated workload is increasing sharply. In all these cases the need for access to ART, as well as other health needs, is outstripping human resource capacity (MSF 2007). MSF identified certain national and international barriers faced by healthcare workers in the countries studied: inadequate salaries and poor working conditions, which lead to ‘brain drain’, attrition and an inability to attract new health workers; national policy barriers that block the possibility of shifting tasks to lower-level health staff; a lack of adequate national and international resources committed to addressing the healthcare worker crisis; and a lack of donor funding for recurrent human resource costs, particularly salaries, owing to concerns about ‘sustainability’ and other constraints. International pressure was effective in bringing down antiretroviral (ARV) drug prices dramatically and jump-starting HIV/AIDS treatment programmes when many still believed it would not be feasible to provide ART in resource-limited settings. This pressure is still needed to make sure that people with HIV/AIDS in developing countries will have access to both newer, improved first-line ARVs and second-line ARVs. Access to drugs is a necessary condition, but will not be enough to save millions of lives at risk unless priority is also given to ensuring the presence of the necessary personnel to provide treatment. According to MSF, ‘Without fundamental change, the perspectives for expanding access to ART and improving quality of care are bleak. And the cost of inaction is clear: hundreds of thousands of people with HIV/AIDS will die unnecessarily because there will not be the necessary personnel to provide the life-saving care and treatment they need’ (ibid.). The ‘brain drain’ problem

Not only do many low-income countries face a shortage of healthcare workers, but to make matters worse many of the current healthcare workers are leaving. A worldwide shortage of healthcare workers, coupled with a disproportionate concentration of health workers in wealthier countries and urban areas, stands in the way of achieving such key public health

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priorities as reducing child and maternal mortality, increasing vaccine coverage, and battling HIV/AIDS. The problem of a ‘brain drain’ occurs through shifts in employment among healthcare workers and manifests itself in three main arenas: 1) globally when healthcare workers move from poor countries to rich countries; 2) nationally when workers switch from working in the public health system to the NGO or private health sectors; and 3) nationally when healthcare workers migrate from rural to urban areas. Regarding the global brain drain problem, in which health professionals are leaving poor countries to work in the rich countries, data from international migration-tracking organizations show that health professionals from poor countries are leaving to work abroad, usually in wealthy countries. Mullen (2005) found that of all the practising physicians in the USA, over 60 per cent were persons who had migrated from lower-income countries; of all practising physicians in the UK, over 75 per cent were from lower-income countries; for Canada and Australia, the figures are over 43 per cent and 40 per cent, respectively. In May 2003, approximately one in five doctors registered in the UK qualified in developing countries (DfID 2004a). It is difficult to establish exactly how many healthcare workers are leaving developing countries to work abroad. Many do not necessarily work in the medical profession in their new countries. Various groups, including the WHO, professional organizations and others, are working to address both the global shortage and the circumstances and practices that encourage the disproportionate migration of health workers from developing nations to wealthier countries. A variety of phenomena have contributed to the existing global shortage of clinicians. The WHO’s 2006 World Health Report outlined many of the causes of disproportionate health worker migration. For example, in developed countries, predominantly in the northern hemisphere, a growing ageing population and increasingly high-tech healthcare are exacerbating the demand for healthcare workers. In addition, poor planning and underinvestment in health worker education have left developed nations with too few domestic health workers to meet the demand, according to the WHO report (2006). Some of the so-called ‘push factors’ that drive workers out of the public health systems in developing countries are related to the low pay and working conditions. In many less developed countries economic policies limit investment in public sector healthcare and reduce funds for health worker education (discussed below). Faced with poor working conditions and limited economic prospects in their home countries,

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many health workers choose to migrate to fill the demand in wealthier nations. Friedman (2004) identified six major ‘push factors’: 1) poor salaries and benefits; 2) health worker safety and well-being (fear of occupational infection); 3) physical health infrastructure and health systems management (insufficient equipment, supplies and drugs to help their patients); 4) pre-service training curricula tend to be more appropriate for industrialized countries than actual developing-country contexts; 5) reluctance to return to less-well-equipped conditions at home after experiencing more advanced working conditions abroad when undertaking overseas research and graduate training opportun­ ities; and 6) a medical school culture that does not discourage overseas migration of graduates. Friedman (ibid.) also identified two major ‘pull factors’: 1) shortage of health professionals in developed countries; and 2) recruitment of health professionals from Africa. Similarly, Mullen (2005) identified five major ‘push factors’ (lack of postgraduate training opportunities; insufficient practice opportunities; poor remuneration; personal security concerns; and HIV/AIDS illnesses) and five major ‘pull factors’ on the part of rich countries (better training opportunities; better practice opportunities; better remuneration; better access to technology; improved family opportunities). For poor countries, the costs of the outflow of health workers can be considerable. When developing nations pay to educate their healthcare workers only to have them leave for developed nations, they are, in ­effect, subsidizing wealthier nations, noted the International Organization for Migration (IOM 2007). The organization estimates that developing nations spend $500 million each year to educate health workers who leave to work in North America, western Europe and South Asia. Additionally, health systems that are already weakened by epidemics or a shortage of health workers may further falter or collapse. For the past three years, the African ministers of health have attempted to raise their concerns about this growing crisis by repeatedly bringing resolutions to the annual meetings of the World Health Assembly (the policy-making body for the WHO), stating that migration of health workers from their countries is crippling their health systems. For some of these nations, the migration of one or two specialists in a given field may strip the country of half or all of its skill base in that field, explained Dr Francis Omaswa, executive director of the new Global Health Workforce Alliance (GHWA) (Kuehn 2007). The GHWA was formed in 2007 in response to the growing awareness of this problem. As both Mullen (2005) and Friedman (2004) have found, the overt recruiting activities by governments, hospitals and NGOs in the rich

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countries to lure healthcare workers away from public health systems and ‘poach’ the best talent in developing countries have compounded the health workforce crises. Distortions are also happening within developing countries as well. To help comply with the growing burdens of financial and reporting requirements imposed by multiple sets of individual government and NGO donors, aid projects and programmes have not only lured healthcare providers but also the few local economists, accountants and translators from the public health system into vertical donor HIV/ AIDS programmes. This trend has often created an internal domestic brain drain phenomenon from public to private or NGO sectors. This is especially evident with differences in offered salaries. PEPFAR-funded programmes, UN agencies, other rich-country government agencies and NGOs routinely augment the base salaries of local staff with benefits such as housing and education subsidies, frequently bringing their employees’ effective wages to a hundred times what they could earn at government-run clinics (Garrett 2007). A similar paradox can be seen in countries such as Guinea-Bissau, which has been given large supplies of donated ARVs, but the drugs are cooking in a hot dockside warehouse because the country lacks doctors to distribute them. In Zambia, only 50 of the 600 doctors trained over the last 40 years remain today. According to Erik Schouten, HIV coordinator for the Malawi Ministry of Health, between 2002 and 2007 Malawi’s public health system lost 53 per cent of its health administrators, 64 per cent of its nurses and 85 per cent of its physicians – mostly to foreign NGOs, largely funded by the US or the UK governments or the Gates Foundation, which can easily outbid the ministry for the services of local health talent (ibid.). The consequences of these brain drain phenomena are that countries like Malawi have been left with approximately one doctor per 100,000 people (MMOH 2003). In Ghana, about 70 per cent of young doctors leave the country within three years of qualifying, resulting in just 1,500 doctors serving a population of 20 million (Dean 2005). Even as HIV/AIDS money has poured into Ghana for various projects and programmes, the country has moved backwards on other health markers. Prenatal care, maternal health programmes, the treatment of guinea worm, measles vaccination efforts – all have declined as the country has shifted its healthcare workers to the better-funded projects and lost physicians to jobs in the wealthy world. A survey of Ghana’s healthcare facilities in 2002 found that 72 per cent of all clinics and hospitals were unable to provide the full range of expected services

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owing to a lack of sufficient personnel. Forty-three per cent were unable to provide full child immunizations; 77 per cent were unable to provide twenty-four-hour emergency services and round-the-clock safe deliveries for women in childbirth. According to Dr Ken Sagoe, of the Ghana Health Service, these statistics represent a severe deterioration in Ghana’s health capacity. Sagoe also points out that 604 out of 871 medical officers trained in the country between 1993 and 2002 now practise overseas (Garrett 2007).

4  |  T h e D e bat e Ov e r ‘ V e rt i c a l’ v e r s u s ‘ H o r i z o nta l’ D o n o r A i d

As the donor community is confronted with the health worker shortage and underfunded public health systems, many donors find themselves at an impasse. Most donors have traditionally preferred to give aid for specific projects and programmes through direct, top-down ‘vertical’ channels, usually independent of the government. Until a recent trend among primarily Europeans, most donors traditionally have been reluctant to give aid as general public expenditure or health sector budgets, or through ‘horizontal’ channels. In analysing how the global response to HIV/AIDS has impacted on public health systems, the ongoing debate over which approach works better rages on. Rannan-Eliya (2008) describes three major problems with vertical aid programmes. First, the selective, external financing of such programmes often leads to distortions within health systems, as better-funded vertical programmes compete for and deprive other parts of the health system of critical inputs, such as staffing. Second, it often makes it more difficult for countries to effectively plan the development of an integrated health service delivery system, which must remain at the core of any sustainable expansion in overall health services coverage. Third, such programmes may fail to benefit from the synergies of integrated services. These problems are not new. The original Alma Ata declaration of 1978, with its commitment to integrated health service delivery, encapsulated in the WHO concept of primary healthcare, was a reaction to the perception that investments in selective primary healthcare and other vertical interventions had undermined development of developing country health sectors. In the 1990s, the pendulum swung back, as growing frustration with actual progress in developing primary healthcare led to growing investments in vertical programmes. Leading aid donors have been on both sides of this debate, committing to ‘horizontal’ support for strengthening overall health systems, but also investing heavily in vertical programmes through such channels as the Global Fund and PEPFAR. It is now readily apparent, however, that greater focus is needed to help countries strengthen their overall health systems and

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integrated delivery, as the Global Fund and other initiatives ‘run up against the limitations of weak health systems, with often limited capacity for scaling-up’ (ibid.). This realization was a significant motivation for the WHO’s recent efforts to renew the focus on primary healthcare in its World Health Report 2008. The potentially destructive polarization between vertical donor aid programmes for disease-specific results and horizontal aid programmes for generally improved health services in developing countries has neglected consideration of a ‘diagonal’ financing approach in which disease-specific results are targeted through improvements to health systems (Ooms et al. 2008). In April 2007, the board of the Global Fund agreed to consider proposals for more comprehensive country health programmes for financing. The International Health Partnership Plus, a consortium of bilateral and multilateral donors and foundations launched in September 2007, proposes to also assist low-income countries to develop such programmes for their health systems. The diagonal approach, as described by Ooms et al. (ibid.), could lead the Global Fund to a much broader financing scope. The International Treatment Preparedness Coalition stated, ‘The dichotomy between vertical and horizontal financing and programming is a false one – outdated and largely theoretical. We can and must do both: strengthen health systems while fighting HIV/AIDS. HIV/AIDS advocates are by definition health systems advocates’ (ITPC 2008). Indeed, several agencies have responded to this problem by increasingly utilization of the diagonal approach. For example, new PEPFAR funding legislation is calling for financing for an additional 140,000 healthcare workers in its next round, and the WHO announced at the IAC in 2008 in Mexico City that it was initiating a campaign to align HIV programmes with healthcare system strengthening. In May 2008, the GAVI Alliance increased funding for healthcare system strengthening to US$800 million, and the Global Fund began encouraging applicants to integrate requests with system-strengthening interventions. ‘Weak health systems are a major bottleneck in the effort to fight AIDS, tuberculosis, and malaria in resource-poor countries,’ noted Nicolas Demey, Global Fund communications officer. ‘There is a major gap in funding for health systems and the human resources needed to scale up the response to the three diseases, let alone many other health challenges facing developing countries’ (Harris 2008). And even though the June 2007 Group of Eight (G8) summit declaration dedicates seven pages to ‘Improving health systems and fighting HIV/AIDS, TB and malaria’, serious questions remain about how to finance the needed investments.

5  |  D i f f e r e nt T y p e s o f H e a lt h S ys t e m s , D i f f e r e nt T y p e s o f F i n a nc i n g

Rannan-Eliya (2008) provides an overview of the main methods for financing health systems, and notes that money is essential for delivering healthcare, but it alone does not translate into better health or effective risk protection. In developing countries and wealthy industrialized countries alike, there is little, if any, relationship between the amount that countries spend and health outcomes, or indeed between total spending and risk protection (WHO 2008b). In the coming years, the fiscal pressures facing all countries will be severe. It will require significant efforts to increase expenditures for health, but there will be constraints on how much further spending can be increased, given that revenue collection capacity depends on a country’s economic and institutional development, and this is least in the poorest countries. Some techniques that will be key are various forms of risk pooling, which will be critical for financial protection, but depend on being able to prepay and share across the population the expenses involved in medical treatment. Both tax and insurance financing can serve this function, but as with revenue collection, country capacity for this increases with income, and the capacity is weakest in the poorest countries. How resources are allocated and purchased and how providers are paid will remain fundamental questions. When provision is directly organized through government-operated services, it can be difficult to ensure effi­cient allocation, but when provision is indirect through purchasing it requires a minimum degree of government capacity to be effective, but again, such capacity is more likely to be lacking in the poorest countries (Rannan-Eliya 2008). Strengthening policies for health financing is critical for developing countries. Failure to do so continues to be the main constraint preventing realization of better outcomes from current investments. Where developing countries have put in place effective policies, they have been able to achieve universal coverage, effective risk protection and sustained

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improvement in health outcomes, and often do so at below-average levels of expenditure (Gottret and Schieber 2006). Rannan-Eliya (2008) and Gottret and Schieber (2006) describe four major different financing methods available to countries, other than out-of-pocket financing by individuals and foreign aid: 1) tax-financed, national health services; 2) social health insurance; 3) community health insurance; and 4) private or voluntary insurance. Of these, two are the predominant forms in the wealthy industrialized countries – tax-funded, national health services, and social health insurance (with the exception of the USA, where private health insurance plays a major role). The problem for developing countries is to know which methods to use, and how to effectively implement them in order to expand risk pooling, and ensure access for the poor and efficiency in use of resources. Tax-financed, national health services (NHS) are the most common strategy that developing countries have adopted. In this, public revenue collection is through general revenue taxation, with the funds directly financing government-operated healthcare services, which are made available to the whole population on a universal basis at zero or minimal price. The approach integrates public financing and provision, which has many advantages. First, tax financing achieves the highest degree of risk pooling possible and has proved the most equitable in terms of being able to distribute costs most fairly across the whole population. Comparative analyses of who pays taxes in Europe and in other developing regions consistently find that taxation is the mechanism that places the least burden on the poor and mobilizes the most from the better off (van Doorslaer et al. 1993). Although there has been concern that indirect taxation, which predominates in many developing countries, is regressive, largely based on this being the situation in Europe, actual studies have demonstrated that in most developing countries even indirect taxation is progressive in its incidence (O’Donnell et al. 2008). Second, national taxation offers a broader revenue base than smaller pools for various types of social insurance schemes. In poor countries, most people cannot make significant insurance contributions, but almost all governments can raise taxes. Third, a key selling point is that it makes services available free, thus eliminating financial ­barriers to access. Unfortunately, most developing countries that rely on this approach fail to achieve equitable access to health services and adequate risk protection. Despite the promise of universality, in many countries the rich, mostly in urban areas, capture available public services, leaving the poor without access.

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In many countries, such tax-financed NHS can often operate with great inefficiency, resulting in low-quality and inadequate, unresponsive provision (Gottret and Schieber 2006; World Bank 2003), although, as in industrialized countries, there is no empirical evidence that public sector provision is any more inefficient than the alternative private provision (Rannan-Eliya 2008). Nevertheless, several countries and regions at all income levels have successfully used the tax-financed, NHS approach to achieve access by the poor to services and effective risk protection. Examples include Sri Lanka, Kerala in India, Malaysia, Botswana and many Caribbean and Pacific island states. Most have done so at low cost, with government health spending being less than average, and less than 2–3 per cent of GDP. Most are also exceptional health performers, on track to achieve their health-related MDGs by 2015. Their ability to manage their public–private mix in financing and delivery may be critical. All of them have substantial privately financed private health sectors, which distinguishes their situations from most industrialized nations with NHS systems, but unlike other poor countries they manage to both use the public system to reach the poor and persuade the rich to self-pay for private services. Crucially, the only low-income countries that have been able to ensure universal and pro-poor access to health services (O’Donnell et al. 2007; Gilson et al. 2007), and which are able to ensure effective risk protection (Ke Xu et al. 2007), all employ this tax-financed, government delivery approach. Unfortunately, there is only limited understanding of what these best-practice countries do differently to be so successful, and what lessons they can give others. Abolition of ‘user fees’ (discussed below) might be one element, but it is not fully understood how they are able to efficiently deliver services so as to meet the resulting increases in patient demand, which have challenged African countries that have recently abolished fees. Similarly, most do not means-test access to services, but it is not fully understood how they are able to ensure that public services serve mostly the poor. Regarding the social health insurance (SHI) model, these systems are the main financing method in many developing countries, particularly middle-income ones. SHI involves the mandatory collection of contributions from designated segments of the population (typically through payroll taxes), and pooling of these contributions into independent funds that pay for services on behalf of the insured. In the classic SHI model, which originated in Germany, there is an explicit link between making contributions and the right to benefits. SHI can achieve significant risk

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pooling and equitably distribute the burden of payments between rich and poor, but not as much as general revenue taxation. Many middleincome countries have successfully used SHI to achieve universal access and effective risk protection. Although often seen as a solution to failed tax-financed NHS systems, however, SHI schemes have proved much more difficult to implement in the context of low-income countries. To date, no country that is low-income or whose income is below US$1,000 per capita has been able to achieve universal access to healthcare services through SHI (ibid.). The central problem for SHI systems in low-income countries is that such countries have economies with very small formal sectors (those businesses which are registered and pay income taxes and payroll taxes), and SHI premiums are much harder to collect than through general revenue taxes. Effective premium collection also requires a high degree of state capacity (government technical and administrative capability), which tends to be very limited in low-income countries. Consequently, most developing countries have not been able to extend SHI coverage to the large numbers of workers in the informal sector and rural populations (Hsiao and Shaw 2007). Despite these difficulties, some poorer countries have had significant success in extending social insurance coverage, even with large informal sectors. None of these cases follows the classic SHI model, where insurance coverage is linked to insurance payments. All of them deviate from the classic SHI system by employing substantial amounts of tax monies to fund their social health insurance schemes, and by extending insurance coverage mostly on a non-contributory basis. For example, both Mongolia (Nymadawa and Tungalag 2005) and Thailand (Tangcharoensathien et al. 2005) extended coverage with social health insurance to 90–100 per cent of their population, but financed the coverage for most people, who were outside the formal sector, by financing 60 per cent or more of the insurance fund from general revenue taxes. In both cases, increases in taxation were necessary. In Mongolia, these could not be sustained and coverage fell, illustrating how difficult it is for the poorest countries to use SHI when their tax bases are small. Currently, some low-income countries, such as Ghana and Rwanda, are attempting to use SHI to achieve universal coverage. None, however, has been able to raise coverage levels to over 75 per cent. Not enough is known about the limitations they are facing, and how well their coverage actually benefits the poor. Much more information on how other best-practice countries with small formal sectors succeeded in achieving universal SHI coverage is required (Rannan-Eliya 2008).

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Regarding community-based health insurance (CBHI) systems, these differ from social health insurance in that they involve voluntary membership, and control is by community organizations and not by state agencies. Although CBHI was once important in some wealthy countries (Germany, Japan), where it preceded the establishment of SHI, it is not used today by any developed country, and is found only in the poorest countries. CBHI takes diverse forms, but it typically operates where those in the informal sector pay direct out-of-pocket costs in order to access healthcare, and lack access to other insurance. Evaluations by the World Bank, the ILO and others conclude that in low-income settings CBHI schemes make only modest contributions to overall coverage, and only as a complement to other formal schemes (Gottret and Schieber 2006; ILO 2002; Ekman 2004; Jakab and Krishnan 2004). With the exception of China, and a few schemes in India, CBHI has not proved able to cover large numbers of people (coverage rarely exceeds 10 per cent of the population), or reach the very poor (Ranson et al. 2007). The key constraint is that CBHI depends on the voluntary contributions of poor people, which are usually insufficient to fund adequate levels of coverage, and prevent the provision of adequate risk pooling and possibilities for scaling up. While CBHI systems continue to be promoted as a potential stopgap solution, the evidence clearly indicates that CBHI approaches are not able to scale up to achieve universal coverage, or provide high levels of effective risk protection (Rannan-Eliya 2008). Regarding private or ‘voluntary’ health insurance schemes, these provide some element of risk pooling, which can be substantial if coverage is arranged through organized employee groups. Well-known problems in insurance markets of adverse selection and ‘cream-skimming’ of the wealthiest consumers, however, severely limit its ability to cover people outside organized employee groups (Gottret and Schieber 2006; Hsiao 2007). Private insurance schemes tend to be highly cost inefficient, as they incur significant administrative costs, and provide few pressures for cost control. Thus, even within the wealthiest countries, private health insurance has never been able to extend health coverage to most people, and its main purpose in Europe is only to provide complementary coverage to other public systems. Even in the USA, where private health financing is the most developed, and is a significant factor behind the high overall health expenditures (Anderson et al. 2003), private health insurance leaves more than 45 million people uncovered (DeNavas-Walt et al. 2008). In developing countries, the much smaller formal sector

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and weaker financial markets generally limit coverage of private health insurance to less than 2–5 per cent of the population, and to less than 5 per cent of overall healthcare financing (WHO 2008a; Gottret and Schieber 2006). There have been frequent claims that private insurance initiatives might provide a way to scale up healthcare coverage in low-income countries, for example in Africa in the 1990s, but experience has shown that none has been able to surmount the basic problems that prevent private insurance from scaling up or being cost-effective in the wealthiest countries (Chawla and Rannan-Eliya 1997). Currently, there are several initiatives to support private health insurance schemes in African countries, but none has demonstrated the ability to scale up coverage in the poorest African countries. Indeed, one project in Namibia proposes to spend more than US$30 per capita to extend subsidized private health insurance schemes for upper-middle-income workers, but it does not appear to provide a cost-effective, sustainable or equitable way to use scarce donor funds for extending coverage to the poor, especially in a region where per capita spending on the poor is typically less than US$10 (Rannan-Eliya 2008). In summing up what has been learned during the past three decades, Rannan-Eliya (ibid.) notes that considerable knowledge has been gained about what works in healthcare financing in developing countries and what does not, to supplement what has been learned in industrialized countries themselves. There is now broad consensus amongst experts and the leading development agencies that the key to increasing coverage of health services in the poorest countries, and improving equity and risk protection, is to expand and rely on public financing (EU 2008; WHO 2008b; Gottret and Schieber 2006). From this emerging consensus there are seven general principles by which developing countries and their donor partners should improve health financing: 1) to improve coverage of the poor and improve financial risk protection, countries must shift financing from out-of-pocket payments to reliance on public financing, involving national tax financing (NHS) and/or social health insurance (SHI) systems; 2)  although the ability to mobilize tax financing in the poorest countries is inherently limited, many countries have room to increase current levels, and should do more to increase such funding for health (Gottret and Schieber 2006); 3) increased foreign aid from external donors can help, but its effectiveness depends on better pooling and integration with domestic sources of financing, and better design; 4) if social health insurance (SHI) is relied on to expand public spending in poor countries, it must

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be partly financed by taxation to enable coverage extension to the poor, but given the constraints on increasing taxation in the poorest countries, this makes SHI less feasible in these countries; 5) where tax-financed national health services are the main channel for public spending, countries may need to share the burden of financing with the private sector, but then they must be able to manage the public–private mix effectively so that public spending preferentially reaches the poor; 6) ‘user fees’ for health interventions whose coverage needs to increase should be reduced or eliminated where possible so as to improve access by the poor; 7) developing countries should not rely on private health insurance or CBHI to expand coverage of services to the poor, since experience so far in both wealthy and developing countries has repeatedly shown that this is not effective. It is important to note that while the broad principles are clear, there is still a lack of knowledge on the details of how to achieve such improvements in actual and diverse country settings. There are many reasons for this, often because health financing has tended to suffer from conflicts over ideology and analytic approaches. As this book ­attempts to show, the broader debates between market and non-market perspectives in particular have long hindered the forming of a consensus on what the evidence shows. Despite these delays, there is today an emerging consensus that in the area of healthcare financing, a strong role for the state and national public health systems (NHS) is universally needed to address inherent shortcomings and ‘market failures’ in private ­financing approaches, although there is growing acceptance that market approaches may sometimes benefit the delivery side. Hitting a wall: why can’t public health finance be increased?

Part One has attempted to provide an overview of the historic ­global response to HIV/AIDS and other infectious diseases over the last couple of decades. It explored the unprecedented political mobilization of HIV/ AIDS activists and the international advocacy networks they forged to mobilize political pressure on leading aid donors to provide the necessary financing to address the crisis. The crucial discovery of life-prolonging ARVs meant that HIV was no longer necessarily a death sentence, and that if this could be true for those in wealthy countries, it ought to be true for those everywhere who suffer from HIV. The political push to get ARVs to everyone who needs them led to major new global commitments by governments and global institutions to achieve universal access for HIV treatment. In a stunning series of historic political

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achievements, AIDS activists raised tens of billions of dollars, obtained lower prices for medicines, created visionary new institutions and, most astonishingly, were led by some of the most marginalized segments of society – sex workers, gay men, drug users, etc. Their familiarity with suffering both rights violations and various forms of discrimination informed their successful efforts to insist that global institutions adopt a rights-based approach to fighting HIV/AIDS and use scientific evidence-based solutions. But now this global political juggernaut has hit a wall. Rannan-Eliya (2008) underscored an important trend in recent years among major health donors such as the Global Fund, the WHO and others, which have been increasingly acknowledging the need to assist countries in strengthening their public health systems. This was an inevitable conclusion they were forced to confront as all of their initiatives had ‘run up against the limitations of weak health systems, with often limited capacity for scaling-up’. And as MSF concluded, efforts to further increase access to HIV treatment and maintain and improve the quality of care are ‘coming up against a wall’ owing to the severe shortage of healthcare workers. In addition to growing concern about the healthcare workforce shortage, there is also a new consensus emerging about the efficacy of public financing for health systems. After a thirty-year hiatus away from an earlier international consensus in support for public financing for health, and a long road of trial and error, the global community is returning to a recognition of the importance of public financing of national health systems. But as this book will describe, AIDS activists and public health advocates are bumping up against a reality long understood by those in low-income countries: they cannot meaningfully increase their public financing for additional healthcare workers or public health systems because of the dominant ‘development model’ promoted by foreign aid donors and implemented through conditions on aid and technical advice. This model, discussed in the coming chapters, militates against public expenditure increases, and is reinforced through the global foreign aid, finance and trade systems. Although many of the development model’s precepts and foundations have lost legitimacy and are coming under greater scrutiny, particularly as the global financial and economic crises began in 2008, much of this dominant development model still goes unchallenged generally, and among global HIV/AIDS and public health advocates. In the coming years, it will be essential for the HIV/AIDS treatment

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access movement to break through this ‘wall’ of insufficient health workforces that has been hit, and in order to do so, the movement will have no choice but to undo the dominance of this flawed development model if they hope to win.

t wo  |  T h e

Neo liberal De v e lo pment Mo del

Int r o d u ct i o n

The global efforts to address HIV/AIDS and other health crises in the developing countries described in Part One are today bumping up against a dominant development model that militates against the very increases for public health spending they are striving to achieve. This section will explore the history of such policies as they have been applied in developing countries, their impacts, and their consequences for development generally. Chapter 6 offers a brief overview of development economics as it was understood in the years following the Second World War and through the decolonization process of the 1960s and 1970s, and how the thinking changed dramatically in the 1980s with the so-called Reagan Revolution. The chapter explains how during this time neoliberal economic policy reforms were introduced through structural adjustment programmes as mandated by loan conditions of the World Bank and the International Monetary Fund (IMF), and how such policies came to be widely accepted as the unquestioned dogma and enshrined in the so-called Washington Consensus policies. Chapter 7 offers a deeper theoretical background with some insights into the underlying microfoundations of neoliberal economic ideas, upon which many of the axioms of neoliberal policy reforms are based. It shows how many of these ideas have been subsequently challenged and called into question in recent years. Chapter 8 then documents the disastrous consequences of adopting such policy reforms in terms of the unsuccessful economic development that has since transpired in many developing countries, and how, tragically, the progress made in the 1960s and 1970s has been slowed or even rolled back in many cases. It reviews how countries under neoliberal policies continue to suffer declining agricultural sectors, rural-to-urban migration in the context of worsening unemployment and underemployment, chronic underfunding of public investment as a percentage of GDP necessary for long-term economic development, collapsing domestic industries that cannot withstand high interest rates and floods of cheaper imports, and an inability to invest in research and

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development (R&D) or to acquire the technology that will be necessary for dynamic transformations and industrial development. It is reasonable to ask why health advocates ought to be concerned with abstractions such as the field of development economics. Many advocates of increased foreign aid for poor countries simply want to help get resources to those in need and do not often engage with broader debates about ‘development’. But one basic feature of successful development ought to be that countries are able to increasingly pay for meeting their own needs by themselves, i.e. that their national budgets are getting larger over time. The following few chapters will show, however, that most of the neoliberal policies lead in one way or another to smaller national budgets each year, and insufficient levels of long-term public investment. And that has translated directly into smaller health budgets and less money for doctors, nurses and healthcare workers every year, making the issues of development economics something that the global health community can longer neglect.

6  |  T h e R e a g a n R e vo lu t i o n , St r u ct u r a l Ad j u s tm e nt a nd T h e Wa s h i n g to n C o n s e n s u s

Origins of the IMF and the World Bank: the Bretton Woods conference of 1944

In 1944, as the Second World War was coming to an end, the Allied countries met for a conference in Bretton Woods, New Hampshire, to address the international economy and discuss proposals for building new institutions to finance the rebuilding of Europe and better coordin­ ate rules for international trade and finance and avoid future financial crises. One of the reasons for periodic financial crises is the imbalance of trade between nations. Countries accumulate debt partly as a result of sustaining a trade deficit (importing more than they export). They can easily become trapped in a vicious spiral: the bigger their debt, the harder it is to ever generate a trade surplus. The build-up of such debts threatens the global system with periodic crises. The Bretton Woods conference debated various proposals for new institutions that would better manage or prevent such crises. One leading proposal was put forward by the UK economist John Maynard Keynes. Many people mistakenly credit Keynes with the idea for the World Bank and the IMF. As Monbiot (2008) points out, however, Keynes actually had very different ideas in mind (and some that could guide us today). Keynes recognized an essential point about trade imbalances among countries: there is not much the debtor nations can do; only the countries that maintain a trade surplus have any real agency to do something, so it is they who must be obliged to change their policies. His solution was an ingenious system for persuading the creditor nations (those which had achieved traded surpluses) to not hold on to their surpluses but instead to siphon their surplus money back into the economies of the debtor nations (those running trade deficits). Maintaining trade balances internationally in such a way would help prevent future economic crises. This idea was profoundly different to the system that emerged from the conference, the system we all know today, in which countries all strive to build and then maintain trade surpluses.

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Keynes’s original idea – which was never adopted – was for a global bank, which he called the International Clearing Union. The bank would issue its own currency, the bancor, which would be exchangeable with national currencies at fixed rates of exchange. The bancor would become the main unit of account between all trading nations, and could also be used to measure a country’s trade deficit or trade surplus. Every country would have an overdraft facility in its bancor account at the International Clearing Union, equivalent to half the average value of its trade over a five-year period. To make the system work, the members of the union would need a powerful incentive to clear their bancor accounts by the end of the year: to end up with neither a trade deficit nor a trade surplus (ibid.). In order to compel reluctant trade surplus countries to go along with such a system, Keynes suggested a set of inverted incentives built in for both creditor and debtor countries. He proposed that any trade deficit countries racking up a trade deficit equal to more than half of their bancor overdraft allowance would be charged interest on their account. They would also be obliged to devalue their currency and to prevent the export of capital. Much of this was adopted at the conference. But, and this was the key to his system, Keynes also insisted that the trade surplus countries would be subject to similar pressures. Any country with a bancor credit balance that was more than half the size of its overdraft facility would be charged interest, at a rate of 10 per cent. It would also be obliged to increase the value of its currency and to permit the export of capital. If, by the end of the year, its credit balance still exceeded the total value of its permitted overdraft, the surplus would be confiscated. Therefore, countries with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations’ deficits, helping to create a more balanced international trading system less prone to economic crises (ibid.). When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that ‘it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government … nothing so imaginative and so ambitious had ever been discussed’. Economists all over the world saw that Keynes had cracked the code and provided the answer they had all been searching for. As the Allied countries during the Second World War prepared for the 1944 Bretton Woods conference, the UK adopted Keynes’s solution as its official negotiating position. Some trade surplus countries were unhappy with what Keynes had

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in mind, however, and the biggest creditor country, the United States, formally opposed his proposal. The head of the US delegation at Bretton Woods, Harry Dexter White, backed by the financial clout of the US Treasury, responded to Keynes’s idea by saying: ‘We have been perfectly adamant on that point. We have taken the position of absolutely no’ (ibid.). Instead of Keynes’s plan to impose penalties on both debtors and creditors, the USA proposed an International Stabilization Fund (which would become the IMF), which would be based on an alternative system in which the entire burden of maintaining the balance of trade is placed only on the deficit nations (Griesgraber 2008). The US proposal prevailed, and the system that emerged from the Bretton Woods conference – and which has characterized the last sixty-five years – places no limits or obligations on the trade surpluses that successful exporters accumulate. The USA also succeeded in gaining support for the establishment of an International Bank for Reconstruction and Development (which would become the World Bank), to provide the needed finance capital for Europe’s economic reconstruction after the war. At the conference the USA designed a governance structure for votes on the executive board that would ensure that the USA maintained a built-in veto over key decisions. Of additional importance, the IMF would be tasked with insisting that the foreign exchange reserves maintained by other nations be held in the form of US dollars (US Treasury bonds). This is one of the reasons why the US economy does not collapse, no matter how much debt it accumulates (Monbiot 2008). The IMF’s main role between 1944 and 1971 was the management of a fixed exchange rate system that had the US dollar pegged to gold and other countries of the world pegging their currencies either directly to the US dollar or to the gold standard set by the dollar. This system ensured that countries made their currencies convertible to the US dollar. Countries were therefore expected to establish a fixed value for their currencies. Each state was to ensure that its currency did not fluctuate in value by more than 1 per cent (later changed to 2.5 per cent) above or below the par value (Bradlow 1996). This system collapsed later in 1971 and was replaced by the market-oriented exchange rate system, which allows currency fluctuation. Floating exchange rates allow a country to correct balance of payments problems by making adjustments either in the value of its currency or in the domestic economy. The end of the fixed exchange rate system was a turning point for the IMF because its core mandate had come to an end. To remain relevant the IMF sought to engage in other roles that were not originally assigned to it, such as increased lending to ­developing countries that experienced balance

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of payments crises during the 1973/74 the Organization of Petroleum Exporting Countries (OPEC) oil price shocks. Although Keynes’s idea for a International Clearing Union was rejected, he nevertheless had a profound effect on the shaping of macro­economic policy and the development of modern economies in the twentieth century, particularly from 1945 until 1980. During this era, the dominant theory about how governments could use fiscal, monetary and other policies to stimulate economic growth and gen­ erate employment was Keynesianism, which maintains that the level of economic activity is determined by the level of aggregate demand among consumers. Additionally, Keynesians maintain that capitalist economies are subject to periodic weakness in the process of generating enough consumer demand, resulting in intermittent crises, recessions and higher unemployment. Occasionally, this weakness can be severe and produce economic depressions, as exemplified by the Great Depression of the 1930s. Keynesianism proposed that governments could lessen the frequency and severity of such periodic recessions by using monetary and fiscal policy to either speed up or slow down the generation of consumer demand (Palley 2004). With regard to income distribution, Keynesians have always been divided. American Keynesians tend to accept the neoliberal ‘paid what you are worth’ theory of income distribution, while European Keynesians take the focus away from individuals and consider structural issues by arguing that income distribution depends significantly on institutional factors. Therefore, workers’ relative scarcity and productivity matter, but so too does their bargaining power, which is affected by institutional arrangements. This explains the difference between the USA and Europe regarding the importance of trade unions, laws governing minimum wages, employee rights at work, and systems of social protection such as unemployment insurance (ibid.). 1950 to 1980: decolonization

While most of the Latin American colonies achieved nominal political independence from the European colonial powers in the early nineteenth century, the bulk of developing countries achieved such independence in the aftermath of the Second World War during the 1940s, 1950s and 1960s. This period, known as decolonization, occurred because the Japanese and European colonial powers had been greatly weakened by the war and could not maintain control of their colonies in the face of the growing movements of national liberation that swept across Africa and Asia in these years.

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As more colonies became politically independent, Gerschenkron’s Economic Backwardness in Historical Perspective (1962) and Rostow’s The Stages of Economic Growth (1960) led a school of thought called ‘modernization theory’, which held that all countries are moving forward in a progressive fashion, passing through various stages of economic development while ever advancing in their levels of wealth and technological industrialization. By the late 1960s, however, lingering poverty and distortions in patterns of the development process began to call into question the progressive vision of modernization theory, and a more critical perspective originating among scholars in the former colonies focused on the continuing economic ties to the former colonial powers and the political dependencies these created. Called ‘dependency theory’, its first proponents emerged with The New Economic Development of Latin America (1950) by Raul Prebish, who headed the United Nations Economic Commission on Latin America (UNECLAC) in the 1960s. Major works such as Capitalism and Under­development in Latin America (Frank 1967) and Dependency and Development in Latin America (Cardoso and Faletto 1971) contributed to the theoretical base. The ideas of dependency and particularly ‘underdevelopment’ were articulated by Paul Baran in The Political Economy of Growth (1957), Walter Rodney in How Europe Underdeveloped Africa (1973) and Immanuel Wallerstein, who identified the ‘center–periphery dynamics’ of world-system theory (1974). They looked critically at global capitalism’s exploitation of peripheral regions outside of Europe and North America and attempted to account for the troubling South-toNorth global capital flows. These theories and perspectives accounted for the continuing unequal distribution of power in North–South relations with the concept of neocolonialism, or the continuation of control by the colonial powers over their former colonies through the trade and finance systems. They cautioned developing countries to break out of a post-colonial system of trade and finance in which poor countries would remain locked in as primary commodity producers and sources of cheap labour, and consequently would not be able to move towards industrialization, but would remain dependent upon manufactured goods produced by the industrialized countries. A major policy approach championed by UNECLAC and the depen­ dency theorists was import-substitution industrialization (ISI), which sought to reduce the dependency on imports from the rich countries by promoting domestic production of goods, often through state-run or state-subsidized policies influenced by Keynesianism. Because colonial patterns of resource extraction had retarded the

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otherwise independent economic development that might have occurred, many newly independent countries found their economies overly geared towards primary agricultural exports. Consequently many governments embarked on ambitious investments in manufacturing. Despite some successes, these industrialization efforts were plagued by common problems: a misplaced heavy reliance on first-stage import substitution, particularly of luxury goods; high levels of imported technology that was typically capital intensive in nature and offered little employment generation; manufacturing capacity remaining dependent on imports for both raw materials and spare parts, reinforcing the perceived dependencies; the goods produced frequently were not of as high a quality as cheaper imported varieties; most of the new manufacturing capacity was put in place through loans with variable interest taken by governments and thereafter run under state ownership and management. The result of this system was that many developing countries became increasingly reliant on a handful of largely stagnant natural resource exports to generate the foreign exchange to support the operation of these industries. This left economies susceptible to the oil shocks, political instability, global economic recessions, exploding debt crisis and sudden declines in terms of trade that would characterize the 1970s. Those interested today in rebuilding public health systems ought to be aware of an exceptionally important indicator in development economics: public investment as a percentage of GDP, for long-term investments in infrastructure and human capital. It remains one of the most robust determinants of economic growth, and trends in the share of public investment reveal much about developing countries and explain much of the relative decline in the last thirty years. Between 1965 and 1980, levels of investment in Africa had increased and compared favourably to those of other developing regions. It is important to note that, up until 1975, much of the investment was financed with domestic savings. This domestic capacity to accumulate capital and generate finance for relatively high levels of investments, at least when seen from today’s levels, should be remembered as African countries consider the possibilities for mobilization of resources for future development. Much of the early ISI in Latin America and India occurred under the ‘natural protection’ that resulted from the decline in international trade during the Great Depression and the Second World War. But for nearly all the newly independent countries of sub-Saharan Africa and elsewhere, the 1960s and 1970s marked their first attempts at industrial­ ization. Mkandawire (1988) discusses how Africa’s industrialization has been out of phase with global trends during much of this century, and

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it is, of course, the least industrialized part of the world. It is, perhaps, therefore not surprising that the nationalists placed so much emphasis on promoting industrialization, which was perceived as an integral part of the development agenda and was expected to facilitate the transformation of predominantly agricultural economies into modern industrial economies. The share of industry in the economy was expected to rise, generate opportunities for employment, raise levels of productivity, and raise the incomes and standards of living of the majority of the population. The dominant view then was that such an industrialization would be premised on industrial policy deliberately designed to diversify the production base, encourage investment, and facilitate the acquisition of new technologies (Mkandawire and Soludo 1999). Under colonialism, much of the private investment in many developing countries had been dominated by foreigners. The domestic capitalist class was virtually absent in all but a handful of African countries. At the eve of independence, countries saw capital flight and deinvestment, due perhaps to fear of the incoming nationalist governments. After independence, despite the array of incentives offered by African governments (co-financing, protection, tax holidays, repressive labour laws, and so forth), private FDI inflows were still restrained. According to Mkandawire and Soludo (ibid.), ‘It was partly the response to this restraint and the weakness and nascence of indigenous capitalists that pushed most African governments toward the much bemoaned “statist” option.’ Most African governments moved into production simply to fill in the investment gap. Few nationalizations in Africa occurred outside the mining sector, and many of the state-owned industries were set up by the new governments themselves. It is, therefore, not surprising that public investment played a major role in the growth of aggregate investment in Africa. Such public sector investment grew quickly to meet the post-independence goals of socio-economic transformation and diversification. Investment in public schools, roads, hospitals and industries grew rapidly. After the major external shocks of the mid-1970s, such levels of investment were no longer sustainable. In some countries, investment collapsed altogether, whereas others managed to sustain the trend through massive borrowing from abroad; these countries accumulated external debt rapidly as a consequence (ibid.). The role of capital flight, tax evasion and offshore financial centres has also been problematic for policies aimed at capital formation and public investment. Mkandawire and Soludo (ibid.) suggest that one of the factors contributing to the poor response of domestic capital is the traditional hostility of African governments to domestic capital, even as

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they courted foreign capital. African governments seemed to work on the assumption that although foreign capital has no political claims, domestic capital would be expected to assert such claims and, therefore, threaten the political positions of the ruling elite vis-à-vis other groups. And so, even in countries where official ideology was favourable to capitalism, indigenous capital remained suspect in the eyes of the political elite. Consequently, the potential African investors (many of whom had made their money through ‘rents’ from, and corrupt practices in, government) chose to keep most of their wealth abroad in what could be described as a ‘flight to safety’. Difficulties with achieving successful industrialization and delinking from the former colonial powers, along with frustrations with the lingering dependency on manufactured imports from the North and on the need to get their exports into Northern markets, fuelled a sense of lack of control over their own economic destinies, and provided a popular base for the dependency theories of the era. Dependency theory provided, along with others, the intellectual and theoretical foundations for the Third World nationalism that was unleashed during the 1960s and 1970s, as increasing numbers of former colonies gained independence. This period was also characterized by raging civil wars and leftist guerrilla insurgencies throughout Africa, Asia, Latin America and the Middle East, countered by military counterinsurgencies supported and supplied by both the USSR and the former colonial powers during the cold war decades. These civil wars and conflicts often involved massive dislocations and caused great setbacks in economic development. Decolonization and the popularity of dependency theory were occurring during the height of the cold war between the USA and the USSR, and there was a great deal of pressure for newly independent countries to politically and militarily align with one or the other ‘superpower’. Yet many developing countries expressed a desire for neutrality. Dependency theories were extremely popular throughout the 1960s and 1970s because they coincided with several unprecedented historic developments in North–South relations which collectively unsettled the foundations of the traditional structures of power in the world system. The decolonization process itself had immense political and psychological implications, as did other subsequent major developments, such as the ability of large blocs of newly independent countries to work together within the UN General Assembly. At the first major conference of African and Asian countries held in Bandung, Indonesia, in 1955, countries underscored the need to loosen their economic dependence on the leading industrialized nations by

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providing technical assistance to one another, as well as the exchange of technological know-how and the establishment of regional training and research institutes. The Bandung Conference expressed an opposition against colonialism from either the West or the East and delegates declared their desire not to become involved in the cold war, adopting a declaration on the promotion of world peace and cooperation, which included Indian Prime Minister Jawaharlal Nehru’s five principles about cooperation among developing countries. Six years after Bandung, an initiative of Yugoslav president Tito led to the first official Non-Aligned Movement Summit, which was held in September 1961 in Belgrade, followed by the establishment of the Non-Aligned Movement (NAM). At the NAM Conference in September 1970, the member nations added peaceful resolution of disputes and abstention from the big power military alliances and pacts to the aims of the movement. Opposition to the stationing of military bases in foreign countries was also added as an aim. The founding fathers of the NAM, apart from Nehru of India, Sukarno of Indonesia and Tito of Yugoslavia, were Gamal Abdul Nasser of Egypt and Kwame Nkrumah of Ghana. Similar to the political concerns of NAM were the global economic concerns of the Group of 77 (G77), which formed among seventy-seven developing countries at a conference in Algiers in 1967 for the purpose of using their new strength in numbers within the UN General Assembly more strategically, and to better coordinate joint actions on behalf of developing countries when negotiating with the industrialized countries. With strength in numbers, the bloc of G77 countries (130 countries today) was able to use the UN system and the United Nations Conferences on Trade and Development (UNCTAD) forum as a space in which to collectively negotiate with the rich countries on a broad-based scale for development aid, loans and trade preferences through a series of regular major UNCTAD conferences in the 1960s and 1970s. In 1974, the G77 used the UNCTAD forum to begin pressing the industrialized countries to adopt a New International Economic Order (NIEO), suggesting that the rich countries raise taxes for the Third World’s development (Gilpin 1987; Krasner 1985; Rothstein 1993, 1980). The proposal called for a diminished role for the IMF and the World Bank and new arrangements that would give improved terms of trade to developing countries, allow more access to markets in industrialized countries, and offer much higher levels of foreign aid, among other affir­ mative actions on behalf of developing countries. Cold war tensions and geostrategic rivalries, including conflicts to control the flow of Middle East oil, coloured the backdrop context within which newly independ-

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ent countries were attempting to develop. In 1960 the oil-producing countries forged OPEC, and by the 1970s had significantly challenged for the first time the concept of control over local resources by the colonial powers. The 1980s: the Reagan Revolution and neoliberalism

Although it provided a powerful intellectual basis for anti-colonialism, Third World nationalism and statist import-substitution development models, dependency theories ultimately came under attack as two major global recessions of the 1970s and the turbulence from oil price shocks raised growing doubts about the role of the state in the economy. By the late 1970s, critics of state intervention had gained political momentum, laying the ground for the Reagan Revolution of the 1980s and heralding the beginning of the end for trade protectionism, full employment goals, social welfare protection and macroeconomic policies of the Keynesian variety, which had long been popular since Roosevelt’s New Deal in the 1930s. Supporters of Ronald Reagan in the USA and Prime Minister Margaret Thatcher in the UK were proponents of a conservative economic philosophy known as neoliberalism. The reference to ‘liberalism’ reflects an intellectual lineage that connects with nineteenth-century economic liberalism associated with Manchester, England. The Manchester system was predicated upon laissez-faire economics, and was closely associated with free trade and the repeal of England’s Corn Laws, which restricted importation of wheat. These ideas on liberal trade regimes lie within a broader traditional school of thought in economics called classical economics, tied to the theories laid out by Adam Smith and David Ricardo in the eighteenth and nineteenth centuries, which emphasized the power of the ‘invisible hand’ of the market in promoting the division of labour and economic growth. A hundred years after Smith, a group of ‘neoclassical’ economists came along and added a few key features to his account, which continue to ground the field to this day – that all humans, regardless of their context, are rational, utility-maximizing agents with fixed preferences, that they make decisions ‘at the margins’ and that the mechanisms of supply and demand (operating free of government interference) will automatically lead to a general equilibrium whereby resources are allocated efficiently (Hayes 2007). This contemporary version of neoliberalism, made popular by the Reagan and Thatcher administrations, is principally associated with the University of Chicago’s School of Economics, which emphasizes certain microfoundations of traditional

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neoclassical economics, such as the efficiency of market competition, the role of individual consumers in determining economic outcomes, and criticisms of distortions associated with government intervention and regulation of markets (Saad-Filho and Johnston 2005). The Chicago School made popular again these very old ideas that the governments of the world should get out of the way of large, effi­ cient enterprises in their efforts to prevail in the world market. The first policy implication was that governments, all governments, should permit these corporations to freely cross every frontier with their goods and their cap­ital. The second policy implication was that governments, all governments, should renounce any role as owners themselves of these productive enterprises, privatizing whatever they owned. And the third policy implication was that governments, all governments, should minimize, if not eliminate, any and all kinds of social welfare transfer payments to their populations (Wallerstein 2008). These old ideas had always been cyclically in and out of fashion (Jomo and Reinert 2005; Reinert 2008). Starting from a tiny embryo at the University of Chicago, with the philosopher-economist Friedrich von Hayek and his students, such as Milton Friedman, at its nucleus, the modern incarnation of neoclassical economists – the neoliberals – have achieved astonishing success in prom­ ul­gating their ideas over the last thirty years. In just a few decades they went from relative obscurity to creating a huge international network of foundations, university departments, institutes, research centres, publications, scholars, writers and public relations firms to develop, package and push their ideas and doctrine relentlessly (Harvey 2007; Klein 2007). The political accomplishments of the neoliberal movement are all the more notable given that neoliberals had been marginalized during the heyday of widespread support for Keynesianism, the New Deal and the welfare state of 1945–80. Taking a page from Gramsci, however, neoliberals understood that to transform the economic, political and social landscape they first had to change the dominant intellectual and psychological one, and that for their ideas to become part of daily life and society, they must be propagated through books, magazines, journals, conferences, universities, research institutes, professional associ­ ations, etc. George (1997) documents how neoliberals successfully implemented a strategy of recruiting and rewarding thinkers and writers, raising funds to found and to sustain a broad range of institutions at the forefront of the ‘conservative revolution’. Important players in this effort included the American Enterprise Institute (AEI), founded in 1943 by an anti-

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New Deal businessmen. With an average budget of $14 million in the 1980s, it produced a steady stream of books, pamphlets and legislative recommendations, and its pundits were frequently heard in the mass media. Another neoliberal think tank closely associated with the Reagan Revolution is the Heritage Foundation, most of whose policy recommendations were supported by the Reagan administration. By the mid-1990s, Heritage was spending a third of its $18 million annual budget on marketing, and it produces some two hundred documents a year. President Reagan himself launched a major Heritage fund-raising drive, telling the audience, ‘Ideas do have consequences: rhetoric is politics and words are action’ (ibid.). Other think tanks in the revolution include the Hoover Institution at Stanford University in California, the libertarian Cato Institute in Washington, which promotes privatization, and the Manhattan Institute for Policy Research, which critiques government income-redistribution programmes. Outside the United States, UK think tanks include the Centre for Policy Studies, the Institute of Economic Affairs and the Adam Smith Institute, which has advised the World Bank extensively on privatization programmes in developing countries. Neoliberal thinkers and their champions in industry and government have also advanced their policies through membership in exclusive clubs. One of the original clubs was the Mount Pèlerin Society, founded in 1947 by Friedrich von Hayek, which first brought American and European conservatives together. George (ibid.) also documents the bankrolling of the neoliberal ideological campaign, the hundreds of millions of dollars that have been spent over the past fifty years to support these think tanks and many other neoliberal institutions. She cites the William Volker Fund, which subsidized neoliberal magazines, financed books published at the University of Chicago, paid the bills for the influential Foundation for Economic Education and meetings at US universities. Other backers included the Ford Foundation, which gave the AEI a major grant in 1972, and the Bradley Foundation, which gave major grants to Heritage, the AEI and conservative magazines and journals. According to the Foundation’s literature, the Bradley brothers believed that ‘over time, the consequences of ideas [are] more decisive than the force of political or economic movements’ (ibid. 1997). Foundations like Coors (brewery), Scaife or Mellon (steel) and especially Olin (chemicals, munitions) financed chairs in some of America’s most prestigious universities. In the war of ideas, any movement is in trouble if it cannot renew its ranks of professional researchers, thinkers and writers. George noted,

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‘Neoliberals don’t mind financing white men if white men happen to be best at delivering the intellectual goods. But they are also funding a great many women, African-Americans, and other minority thinkers and writers; as well as dozens of college newspapers, thousands of graduate students, and a small armada of journals,’ involving literally hundreds of millions of dollars spent every year on purchasing present and future neoliberal intellectual clout (ibid.). The Reagan–Thatcher revolution began in the UK and the USA, but has spread across the world. The doctrines of the IMF, the World Bank and the World Trade Organization (WTO) are indistinguishable from those of neoliberalism (Rowden 2001; Peet 2003). Palley (2004) suggests that the demise of the Keynesians and the meteoric rise of the neoliberals, partly due to the split between American and Europeans about individual-focused or institutional-focused solutions to labour and employment, weakened the left and prevented it from having a cohesive ideological agenda to pursue. George (1997) suggests the rise of neoliberalism says more about the inability of the left to promote its ideas with as much vigour as have the neoliberals. ‘Progressives can’t seem to tell a hegemonic project from a hedgehog. Not only do progressive institutions appear complacent as to their side’s intellectual superiority, but they’ve been cruising along as if there were no need to justify their positions, nor even to worry about the nearly hegemonic intellectual hold of the right’ (ibid.). The debt crisis, structural adjustment programmes and the Washington Consensus policies

During the 1970s, many developing countries found that they were unable to finance the debt service on earlier loans borrowed to deal with the 1973/74 oil price shocks. Debt service as a proportion of exports of goods and services for developing countries rose from less than 9 per cent in 1975 to around 11–12 per cent after 1980. By the beginning of the 1980s creditors and debtors alike were forced to acknowledge that these sovereign debts were unsustainable. In 1982, Mexico alarmed the system when it announced that it would stop servicing its debt. Argentina overhauled its exchange rate and Brazil was also facing exchange rate problems owing to devaluation of its currency. Private lenders panicked and withdrew credit from many of the developing countries. The USA and the IMF made clear that any debt restructuring bailouts for develop­ing countries would have to be accompanied by adjustments, and forced through conditions on IMF lending. Not only were the immediate debt bailouts conditioned, but in

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future all multilateral and bilateral donor agencies would be required to first check with the IMF and get ‘green light’ IMF approval before aid could flow. Increasingly, these multilateral institutions and bilateral donors, such as USAID and DfID in the UK, as well as private banks, insisted that borrowing countries in economic crises adopt policies of stabilization and liberalization as conditions for new loans and debt rescheduling. The global bailout arrangement designed by the largest creditor countries, the so-called Baker Plan, emphasized that those countries that were unwilling to undertake basic adjustments to implement stabilization policies could expect to not get access to debt restructuring or new foreign aid. In this way, the IMF assumed leadership of a de facto aid cartel. The creditors and the IMF warned that any countries that tried ‘to go it alone’ would suffer a cut-off in aid flows and likely seriously damage their prospects for future economic growth. Critics have complained that this debt rescheduling mechanism, agreed by the main donors and the international financial system, ‘led to the almost total loss of autonomy of developing countries in the definition of their development policy priorities’ (Lapeyre 2004). The power to choose macroeconomic and financial policies was transferred to the IMF and the World Bank, which made compliance with a set of policy change conditions part of structural adjustment programmes (SAPs) and the precondition for accessing subsequent loans and foreign aid. By the end of the 1980s, most developing countries had initiated programmes of economic liberalization and adjustment under the close administration of the IMF and the World Bank (ibid.). Initially, the original stabilization programmes and structural adjustment programmes in the 1980s were mainly macroeconomic stabilization policies, such as targets by which to reduce public expenditure, increase tax revenue, devalue the currency, and remove price controls. The IMF expanded the scope of its various loan conditions in 1988 to include trade liberalizations and privatization of state-owned companies as the IMF and World Bank structural adjustment policies began to overlap. Later, in the 1990s, they evolved into a broader package of policies, involving trade liberalization and foreign exchange restrictions, deregulation of the economy, privatization, and the other elements of what came to be called the ‘Washington Consensus’, largely because they were championed most vigorously by the US Treasury Department (Klein 2007). The 10 Steps of ‘The Washington Consensus’ were: 1 Fiscal Discipline: budget deficits of no more than 2 per cent of GDP

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2 Public Expenditure Priorities: redirect what is left of reduced public expenditures away from domestic industry 3 Tax Reform: broaden the tax base, cut marginal tax rates, improve tax administration 4 Financial Liberalization: capital account liberalization reforms towards market-determined interest rates, abolition of preferential interest rates for domestic industry and achievement of a moderately positive real interest rate 5 Exchange Rates: a unified exchange rate (for trading) set at a level sufficiently competitive to induce a rapid growth in non-traditional exports, and managed so as to assure exporters that competitiveness will be maintained in the future 6 Trade Liberalization: changing quantitative trade restrictions with tariffs, and then progressively lowering these tariffs until a uniform low tariff in the range of 10 per cent (or at most around 20 per cent) is achieved 7 Foreign Direct Investment: abolish restrictions on entry of foreign firms; establish ‘national treatment’ for foreign investors, i.e. no beneficial subsidies or taxes or other support for domestic firms 8 Privatization: state-owned enterprises should be privatized 9 Deregulation: abolish regulations on entry of new firms or competition laws that favour domestic firms 10 Property Rights: legal reforms to secure property rights. Regardless of what national development objectives might be desired by democratically elected governments, the IMF and the World Bank have long insisted upon Washington Consensus objectives being met first, and have conditioned aid access on agreements to implement neoliberal policies. Over the last thirty years, the IMF and the World Bank have wrung hundreds of concessions and promises out of governments with secret loan documents in exchange for access to donor aid and debt-cancellation deals, negotiated with finance ministries outside of public view, while excluding other line ministries, parliaments and civil society organizations. The IMF has come to assume a role as the ultimate arbiter of the supposedly ‘sound macroeconomic policies’ of developing countries. As mentioned above, the IMF exercises its power in the form of the ‘signal effect’ or ‘green light’ it sends each year to all other bilateral and multilateral donor agencies and creditors about the alleged ‘soundness’ of a recipient country’s policies. A ‘green light’ can open the floodgates to all of the other flows of aid from other donors and creditors, but a ‘yellow’

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or ‘red’ light can get aid-dependent countries cut off. The other donors are complicit in legitimizing this role for the IMF when they first look to its signal every year before giving aid or loans to countries. In so doing they forfeit their agency to undertake their own analyses of countries’ policies or to solicit the opinions of others beyond the IMF. This massively unequal leverage which the IMF can bring to bear on aid-dependent, low-income countries stands as the central linchpin in the current foreign aid system to this day. It enables the IMF to act as enforcer of the implementation of Washington Consensus policies in borrowing countries. The influence of the Washington Consensus policies, however, also spreads far beyond the strict conditions attached to IMF and World Bank loans. Many countries have adopted some of the reforms even without being compelled through loan agreements, because of a desire to achieve membership of the World Trade Organization or in the belief that these policies will attract foreign investment. Many also simply believe in the policies. Arguably, the majority of current staff in the world’s donor aid agencies, finance ministries and central banks, who have studied economics or finance at major universities in the last couple of decades, are also true ­believers in the Washington Consensus policies. Like Thatcher, many have come to believe ‘there is no alternative’. As George (1997) suggests, the dominance of the neoliberal ideology has become widely accepted and today pervades society. While much of the attention in the West was focused on Reagan’s ‘getting tough’ with the Soviet Union in the arena of cold war politics, a larger conflict had been unfolding between the rich and poor countries. When Reagan and Thatcher took their respective helms in the early 1980s, vast new sets of rules were introduced regarding the format for official discourse in North–South relations. Of primary importance was the breaking up of the global North–South aid and trade talks that had been unfolding in the UNCTAD negotiations. In 1981, the USA, the UK and others decided that developing countries would no longer be allowed to participate as a cohesive bloc with strength in numbers capable of dominating the General Assembly and UN bodies, such as UNCTAD. Instead, the substantive North–South talks regarding development loans were transferred to the IMF and the World Bank, where the rich countries would make separate arrangements with one aid-dependent borrowing country at a time. With such a change, the leverage changed dramatically. Not only would future loans be considerably smaller than in the 1960s and 1970s, but the IMF and the World Bank would give further loans only if the individual recipient countries

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first agreed to implement an array of neoliberal economic reforms and structural adjustments in their economies. The slogan for the new context was coined by UK Prime Minister Margaret Thatcher: TINA, or There Is No Alternative. The slogan was intended to convey to all governments that they had to fall in line with the IMF’s policy recommendations, or they would be punished by a cutoff in new flows of desperately needed foreign aid or debt restructuring (Wallerstein 2008). President Reagan’s first encounter with developing countries occurred at a 1981 UNCTAD summit meeting in Cancún, Mexico, attended by twenty-two industrialized and developing countries. But rather than ­address the G77’s demands for an NIEO, Reagan repeated the message that he had delivered to the IMF a month before: development would occur only when the Third World was opened to the ‘magic of the marketplace’ and the American economy was fully recovered from its recession. The implications were clear: that the state of the American economy would, of course, come first, and that, in the meantime, develop­ing countries could get ready by adopting IMF structural ­adjustment programmes, including cutting their public sectors, selling off state-owned assets, and opening up to more foreign investors. Although the UNCTAD summit had been set to discuss further North–South global negotiations for the NIEO proposal, upon returning from Cancún, Reagan explained, ‘We did not waste time on unrealistic rhetoric or unattainable objectives’; the far more important goal achieved was dictating what IMF policy would be (Nathan and Oliver 1985). The Reagan Revolution got an additional boost in 1989, when the failure of communist command economies and political movements for independence led to democratic revolutions across eastern Europe, followed by the break-up of the USSR in 1991. In eastern Europe and elsewhere, government after government – in the global South, in the socialist bloc, in China, and even in the strong Western countries – were adopting neoliberal approaches and privatizing industries, opening their frontiers to trade and financial transactions, and cutting back on the welfare state. Socialist ideas, even Keynesian ideas, were largely discredited in public opinion and renounced by political elites. The triumphalism in the United States was well displayed by Francis Fukuyama’s best-selling book The End of History (1992), which equated the victory of Western political and economic systems in the cold war with the ‘end of history’ for ideological struggles. Thatcher’s dictum that There Is No Alternative to neoliberalism seemed to be widely accepted. By the 1990s, no one was talking about the NIEO any more. The

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anti-colonial and independence momentum generated by the NAM, the G77 and the global North–South talks in the UNCTAD forum in the 1960s and 1970s was completely rolled back under the debt crises and structural adjustment programmes of the 1980s (Bello et al. 1999). That more traditional colonial relations with the developing world remained essentially intact after hundreds of years was well exemplified by a 1992 Financial Times article entitled ‘Rip van Winkle’s New World Order: the fall of the Soviet Bloc has left the IMF and G7 to rule the world and create a new imperial age’ (Morgan 1992). The article imagines the mythical figure Rip van Winkle sleeping for eighty years and awakening to find that the same powers which were running the world before the First World War were still running the world today. Developing countries everywhere were told that in order to develop and prosper, let alone get access to foreign aid, they needed to ­privatize state-owned companies and public services, deregulate the sectors of their economy (especially for foreign investors), cut back on state subsidies to domestic industries, lower their trade barriers to allow cheaper foreign goods to enter their markets, water down their labour rights and minimum wages, open their capital accounts so money and investors could flow in and out of their economies, devalue exchange rates in order to make exports more attractive, and adopt tight fiscal and monetary policies that greatly reduced public spending and increased interest rates as a way to lower inflation. In theory, these Washington Consensus policies were supposed to reduce the inefficiencies of government intervention in their economies, strengthen their private sector companies, stabilize prices and increase the freedom of choice for consumers, and all of these would provide the necessary context for sustainable economic growth and development. The following chapters in Part Two will explore the neoliberal policies of the Washington Consensus that have informed the contemporary development model, their underlying theories – and their disastrous consequences for economic development.

7  |  N e o l i b e r a l T h e o ry a nd i t s Policies

The underpinnings of IMF and World Bank structural adjustment programmes, upon which donor aid has been conditioned over the last thirty years, are derived from the theoretical foundations inherited from the stabilization policies of the IMF from the time of the Bretton Woods era of fixed exchange rates (1944–73). Two key economic theories formed the basis for these policies: the Polak model and the Swan-Salter model. The Polak model (1957) had formalized the IMF’s financial programming model, which was a monetarist approach to dealing with stabilizing countries with balance of payments problems (importing more than they were exporting). It relies on a monetarist formulation to tie credit growth to the balance of payments, and assumes full employment. Crucially, the Polak model was intended for use in the context of the fixed exchange rate system, yet the IMF has continued to use the model even after that system was replaced in 1973 with the current system of floating exchange rates on global currency markets. The Swan-Salter model focuses on the impact of currency devaluations and argues that such devaluations will help boost a country’s exports as their goods become more competitive (cheaper) on global markets relative to other exporters (Swan 1960; Salter 1959). This approach, however, has serious drawbacks, particularly as developing countries are usually heavily dependent on imports and devaluations will make such needed imports more expensive and raise the domestic costs of production and thus limit the capacity to produce exports. Additionally, this approach neglects the fallacy of composition; as other ‘adjusting’ countries also devalue their currencies world markets could become flooded with the same goods, driving their global prices down and leading to a decline in export revenues. Also underpinning adjustment programmes is the Heckscher-Ohlin model, which is a general equilibrium mathematical model of international trade that builds on David Ricardo’s theory of comparative advantage, and which is the basis of adjustment programmes pushing

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borrowing countries to liberalize their trade regimes and lower their trade barriers to cheaper foreign imports. The model, based on a simple two-country, two-goods world, suggests developing countries should focus on producing those goods for export which they produce with less comparative disadvantage relative to other countries. In other words, because most developing countries cannot hope to produce something better than the industrialized countries could, it is best for developing countries to try to produce the goods that they are least bad at producing, while rich countries should specialize in the products they can produce with greater comparative advantages relative to other countries. A corollary to this thinking is a gradual movement towards a ‘global factor price equalization’ in which the differences in costs for goods and labour in different countries would lessen and eventually come closer together as countries increased trade with one another. This idea formed the powerful foundation for the claim that free trade would enhance development and welfare. In practice, however, comparative advantage theory not only increases the risk of and vulnerability to price swings in global markets faced by economies dependent on one or two key exports (i.e. ‘putting all of one’s eggs in one basket’), but also presumes developing countries will always produce only one or two low-value primary commodities, and thus will forever be locked into a ‘plantation’ mode in which they never advance or diversify their economies in the course of transformational industrialization and development. The static neoclassical model assumes no economies of scale,  per­ fect certainty based on perfect information, pure competition, no  ex­ ternalities, no capital or labour movement, costless and equally available access to technology, and no unemployment. Each of these neoclassical assumptions, hoewver, as Stein (2008) points out, have no correspondence with the reality in developing countries. Another key problem with the model is that it does not recognize any economic difference between a country that produces unprocessed cocoa and a country that produces sophisticated computers, positing only that both countries should gain equally, when the reality is that such differences are fundamental (ibid.). In trying to further understand the underlying logic of structural adjustment programmes, Stein and Nissanke (1999) explore the major theories of adjustment and identify a common set of five neoclassical economic components of the theories, and a series of intermediate propositions on which the theories are based. The five components are the notion of Homo economicus, rational deductivity, methodological

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individualism, axiomatic reasoning and the belief in equilibrium as a natural state. According to Stein and Nissanke (ibid.), the notion of Homo economicus, which lies at the heart of all the theories, is a conception of a world filled with people who act as rationally calculating individuals and who are always out to maximize their individual welfare, and this notion incorporates a mode of rationality that is instrumental, in which actors always make choices that best satisfy their individual objectives. This model relies entirely on methodological individualism, which begins with choices at the individual level and ends with the maximization of the welfare of the individual; markets are exchanges where goods and services are transferred from producers to consumers, and such exchanges arise spontaneously from the atomistic interaction of selfseeking individuals. The thinking is also rational-deductive and axiomatic in that the behaviour of agents is predetermined by a set of rules that are deductively posited. Economists working within this framework begin with a series of axioms and then try to generate policy initiatives that are applied to very different kinds of complex real-world contexts. Policy variations are possible within narrow limits, but because the basic body of theory is derived from a set of axioms, the core propositions are not altered. In essence, ‘the theoretical level is cut off from the concrete historical experiences’ and specific country contexts (ibid.). The belief in equilibrium as a natural state is based on the assumptions that markets will clear and the most optimal choices will be made by all actors. In this ideal world, unfettered markets (especially prices) will lead to indicators that reflect scarcity and choice, and decisions based on such market signals will lead to the most efficient choices regarding what and how to produce, to the extent possible given a country’s natural endowments and comparative advantages. The outcome is therefore consistent with the underlying conditions, and the resulting equilibrium is a natural state. According to Stein and Nissanke (ibid.), these microfoundations of neoclassical theory generate six further intermediate propositions upon which IMF and World Bank structural adjustment programmes are based: a focus on static efficiency; state neutrality/minimalism; removing distortions; marginality; a view that changes in relative prices lead to predictable outcomes; and development as a static equilibrium state (not a dynamic transformative process). Each of these intermediate propositions profoundly informs different aspects of the IMF and World Bank structural adjustment programmes. For example, the assumption

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of private actor optimization leads neoclassical theory to focus on other explanations for why economies are working at optimal levels. The search for blame leads neoclassical theorists to identify other actors who may be influencing markets from outside the realm of private exchanges, namely the role of the government and how it affects the economy. In its purest form, neoclassical theory recognizes no role for the state, yet conventional neoclassical economists acknowledge some limited roles for the government to play in a market economy: to act as guarantor of property rights issues; to print money for use in exchanges; and to provide a central bank that tightly controls credit creation. Carrying out these functions effectively requires governments to exercise both official neutrality among various private actors in markets, and minimalism in limiting its role in the economy to these functions (ibid.). Such aspects of neoclassical theory have been important in informing those policies within structural adjustment programmes which are aimed at rolling back the role of the state: privatization of state-owned industries, lowering of trade barriers, diminished taxes collected from tariffs, deregulation and liberalization of various sectors, particularly the financial sector, stringent budget-cutting, and steep lay-offs of public employees. Consequently, the neoliberal policies of the last thirty years have focused on reducing the role of the state in production, services provision and industrial policies (trade protection, subsidies to industry, directing subsidized credit to targeted industries). For example, between 1981 and 1990 twenty sub-Saharan countries had already undertaken World Bank-sponsored government retrenchment reforms (Das 1998). While the IMF has more traditionally adopted neoclassical perspectives, the transformation at the World Bank towards neoliberal policies was more dramatic. The appointment of Ernest Stern in July 1978 as the vice-president in charge of operations and as chair of the Loan Committee was a key turning point in the World Bank’s development of its structural adjustment loans (SALs). A former USAID economist ­focused on macrostabilization, Stern championed the idea that in order to benefit fully from an improved trade environment, developing countries would need to carry out ‘structural adjustments’ favouring their export sectors. He promoted the idea that would be adopted by the World Bank to condition future donor aid to borrowers on the undertaking of ‘the needed structural adjustments for export promotion in line with their long-term comparative advantage’ (Kapur et al. 1997: 506–7). These developments coincided with the second global oil shock to the world economy (after the 1973/74 episode), which created an urgent need for developing countries to receive emergency balance of payments

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loans. In July 1981, the new Reagan administration put forward Bank of America president A. W. Clausen, a staunch supporter of free markets, as the new head of the World Bank. In addition, the ardent neoliberal economist Anne Krueger was appointed chief economist, and much of the new senior staff had close ties to the Reagan administration. In 1981, the World Bank published a study laying out its new agenda in Africa entitled ‘Accelerated development in sub-Saharan Africa’, also known as the ‘Berg Report’ after its lead author. It blamed Africa’s poor performance directly on poor government policies (World Bank 1981). According to the report, for African economies to grow would require ‘governments individually coming to grips with the distortion of prices and resource allocation and the operational responsibility assigned to the public sector and making necessary changes’. In the same memo Stern also blamed donor policies ‘which have supported domestic strategies which were inappropriate’. In response, he called for much closer donor coordination, whereby the Bank should be prepared ‘to take a lead in assisting governments to undertake the changes indicated on the one hand and to raise the resources and strengthen donor coordination on the other’ (Kapur et al. 1997: 716–17). Thus, the idea of the donor cartel pushing the structural adjustment agenda in Africa was born (Stein 2004). The World Bank’s 1983 World Development Report (WDR), ‘Management in development’, expanded on the concern about low inflation and ‘getting the prices right’ to also add neoliberal reasoning for why the state must no longer use industrial policies like trade protection, monet­ ary policies, and subsidized or directed credit for domestic industries. Accord­ing to Stein (2008), a key component was a rather flawed study of the relations between distortions and growth by Ram Agarwala, who asked, ‘Are market failures more damaging than government failures?’ This approach was rather counter-intuitive and contrary to development economics up to that point, since markets would seem to be more poorly formed in poorer countries and be replete with greater levels of market failure, which is one of the reasons why these economies have not developed. For example, Gunnar Myrdal gives a standard explanation for why state intervention is particularly necessary in an underdeveloped economy pursuing rapid economic development: ‘the relative lack of entrepreneurial talent and training in the private sector; the disinclination of most of those who are wealthy to risk their funds in productive investment and their preferences for speculation, quick profit and conspicuous consumption and investment; and finally the tendency in underdeveloped countries for any large-scale enterprises

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to acquire an extraordinary degree of monopoly or oligopoly’ (Myrdal 1968). Nevertheless, Anne Krueger jumped on Agarwala’s logic and made it the centrepiece of the WDR 1983, which, with its associated background papers, put in place the rationale for transforming the state largely in line with the neoclassical image, including the dismantling of industrial policy tools. It explained the new orthodoxy: ‘On average those countries where adjustment led to low price distortions have managed a significantly better growth performance … than have those with high distortions … The elements of these programmes usually include a lower exchange rate, more export incentives, less industrial protection, tighter monetary policy, higher real interest rates, less direction of credit, higher energy prices, and smaller consumer subsidies’ (World Bank 1983). Later, the Washington Consensus mantra would become: ‘In promoting exports, governments should not try to pick “winners” … Governments can best help entrepreneurs discover and develop competitive exports by getting out of the way’ (World Bank 1994). After the arrival of Anne Krueger, a cleansing of remaining Keynes­ ians and others with lingering ‘statist’ views unfolded at the World Bank. Former research staff economists with such perspectives were seen as deficient in appropriate technical skills. Three years after her arrival, 80 per cent of the staff of the Development Research Department had left, replaced by people with the ‘appropriate skills’. Between 1983 and 1986, the Economics Department set up an ‘intelligence system’ to identify staff with positions diverging from the established views and to reward loyal followers (Kapur et al. 1997). By 1991, 80 per cent of all the senior staff of the Policy, Research and External Affairs Departments were trained in economics or finance in UK or US institutions that tended to focus on a very narrow neoclassical economic curriculum (Woods 2000). Following the first World Bank structural adjustment loans (SALs) in the early 1980s was the introduction of sectoral adjustment loans (SECALs). Because many countries were having difficulty implementing economy-wide adjustment programmes, the World Bank introduced SECAL loans in 1982; these were conditioned on reform packages more narrowly focused on single sectors of the economy. While six African countries received SALs and SECALs between 1980 and 1983, an addi­tional twenty-one countries were added to the list between 1984 and 1989 (Kapur et al. 1997). At the IMF, its traditional Compensatory Financing Facility (CFF) used by developing countries during the 1960s and 1970s was radically

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overhauled with development of the Structural Adjustment Facility (SAF) loans in the 1908s. The SAFs were transformed into Enhanced Structural Adjustment Facilities (ESAFs) in 1986 in order to broaden the traditional scope of IMF stabilization reforms to begin to include broader Washington Consensus policies such as trade liberalizations and privatizations. By the 1990s, the World Bank and IMF structural adjustment loans had taken on features of one another and were increasingly being coordinated to shape the dominant neoliberal development model that we all know today.

8  |  T h e C o n s e q u e nc e s f o r D e v e lo pm e nt

As early as 1984, evidence of the negative impact of stabilization and adjustment policies on growth, income distribution, incidence of poverty and on the well-being of children in a large number of countries was published in the State of the World’s Children Report issued by the United Nations Children’s Fund (UNICEF), which built upon an earlier study, ‘The impact of world recession on children’ (UNICEF 1984; Cornia et al. 1987). The policies of privatization, liberalization, deregulation, restrictive budget-cutting and tightening of monetary policy shared a large part of the responsibility for the ‘lost decade’ of the 1980s. They led to stagnation or decline in GDP growth, an increase in unemployment, a drop in wages, reductions in public expenditure on social services, and an aggravation of poverty (Cornia et al. 1987). Moreover, for several consecutive years, the heavily indebted middle-income countries experienced negative resource flows. For example, in Latin America and the Caribbean, GDP and per capita income fell by 6.6 and 16 per cent between 1980 and 1988. The transfer of resources shifted from an inflow of nearly US$16 billion in 1978/79 to an outflow of about US$23 billion in 1987/88, equivalent to nearly 21 per cent of exports of goods and services (Ghai and Hewitt de Alcantara 1991). By 2000, some forty-five developing countries had per capita incomes below those of ten to twenty-five years earlier, as did more than twenty transition countries (UNDP 2002a). The 1980s and 1990s for developing countries were characterized by declining economic growth rates as compared to previous eras (CEPR 2005). It eventually became apparent that many of the costs of the structural adjustment reforms, which often led to massive job lay-offs, price increases and increases in urban poverty, were borne largely by the poor. Adjustment programmes were extremely unpopular and their impacts were often accompanied by labour strikes, protests, civil unrest and other civil disturbances that had become so predictable, numerous and frequent across so many developing countries in the 1980s and 1990s that they came to be

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commonly known as ‘IMF riots’ (Walton and Seddon 1994; Bello et al. 1999; Caffentzis and Federici 2001; WDM 2002). When considering the impacts of structural adjustment on developing countries, Van der Hoeven (2000) reminds us that nuance is in order. The devaluation of the national currency changes the prices of exports and imported goods relative to domestically produced goods, and this can affect different groups in different ways. Exporters may benefit, but importers will have to pay more for goods (Jamal and Weeks 1993; Stewart 1995). Stewart argues that initial conditions determine whether changes in the exchange rate policies lead to more employment and poverty reduction or not. The effect of other adjustment policies on poverty is more difficult to judge. For example, the effect of privatization on poverty or of a shrinking in the public sector employment depends very much on whether, for example, dismissed civil servants belong to poor groups or not, whether they can find other jobs, and whether the privatization process will result in a decline in the tax burden for the poor. Also, the effect of deregulation cannot be predicted in advance, with different outcomes for different groups, depending on the initial social economic setting in the country undergoing adjustment and on the type and intensity of adjustment policies applied (van der Hoeven 2000). That said, there are some generalized observations that can be made. Liberalization and adjustment programmes in developing countries put social expenditure under strong pressure. In some countries, however, downward pressure on expenditure on education, health and social welfare had already started during the economic crisis of the late 1970s before adjustment programmes were applied. Adjustment programmes are therefore not necessarily the principal cause of decline in social expenditure, although they failed in most cases to reverse the decline. A 1996 evaluation of adjustment programmes by the World Bank has pointed out that, especially in Latin America and Africa, adjustment programmes were accompanied by a decline in the percentage of social expenditure in total government expenditures (World Bank 1996). Given the fact that total government expenditure often declined in absolute terms, this resulted in declining per capita expenditure figures. According to Stein (2004), sub-Saharan Africa’s GNP growth per capita has fallen dramatically since 1980. Its share of global merchandise exports has also declined from around 4.5 per cent in 1980 to around 1.4 per cent in 2001. In 1998, merchandise trade was actually 13 per cent below the 1980 level in nominal not real dollar terms. There has been virtually no structural transformation of trade. In 2000 8.3 per cent of sub-Saharan African exports (excluding South Africa) were in

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manufactured goods, around the same as the 1983 level as most countries continued to rely on a handful of cash crop exports. The result has been a disastrous decline in the terms of trade, which fell by 50 per cent between 1980 and 1998. The relative decline in the terms of trade in Africa is directly related to the shifts in global production. The emphasis on static comparative advantage in adjustment strategies with a focus on raw material and primary product exports is very problematic in an era in which knowledge constitutes a larger proportion of the value-added of commodities. The share of developing country FDI going to Africa has also fallen from 7.6 per cent in the 1982–87 period to a mere 2.7 per cent in 2000. Even this overstates FDI flows to most of sub-Saharan Africa. The story of most FDI in the adjustment era is one of inflows to support oil production. During the 1982–87 period 49 per cent of the total excluding South Africa went to the two major oil producers Angola and Nigeria. By 1999 the figure had risen to 54 per cent and was still greater than 50 per cent in 2000 (Stein 2003). In 1997, the World Bank agreed to undertake a multi-year review of structural adjustment programmes in seven countries as part of a joint research study conducted with a broad global network of some 250 non-governmental organizations (NGOs) and other civil society groups known as the Structural Adjustment Participatory Review Initiative Network (SAPRIN). The project had been developed in a participatory fashion through consultations between a World Bank team and an NGO/civil society network steering committee, and aimed to improve understanding of the impacts of adjustment policies as well as of how the participation of local, broad-based civil society can improve economic policy-making. But as the World Bank grew unhappy with where the documentation was leading, it officially withdrew before the report was completed and would not comment on SAPRIN’s final report in April 2002, which documented the negative impacts of structural adjustment policies on all levels of society, including urban workers, farmers, small-business people, indigenous groups, women and the young. Country by country, the report exposed the disparity between stated neoliberal policy objectives to generate savings and foreign exchange by opening markets and reducing the state’s role in the economy, and the actual impact the policies had on ordinary citizens. It recorded the migration of undocumented workers, the professional brain drain, the reappearance of diseases once thought to have been eradicated and the destruction of the environment (SAPRIN 2002).

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The SAPRIN (2002) report found that a number of major problems were either caused or exacerbated by adjustment programmes. For example, it found that indiscriminate trade liberalization, financial sector liberalization and the weakening of state support and demand for local goods and services devastated local industries, particularly small and medium-sized enterprises that provide the bulk of national employment; domestic businesses cannot compete with the flood of often subsidized foreign imports nor afford credit at high interest rates that redirect capital from productive to speculative activities; neoliberal structural and sectoral policy reforms in the agricultural and mining sectors undermined the viability of small farms, weakened food security and damaged the natural environment; cheap food imports, the removal of subsidies from farm inputs, the withdrawal of the state from the provision of technical, financial and marketing assistance, and the emphasis placed on export production further marginalized small farmers and forced them to overexploit natural resources; the liberalization, deregulation and privatization of the mining sector have further eroded the environment and the viability of the land of small farmers and indigenous people; labour-market reforms, lay-offs resulting from privatizations and civil service reform, and the shrinking of labour-intensive productive sectors severely undermined the position of workers. Employment levels dropped, jobs became more precarious, real wages deteriorated, income inequality worsened and workers’ rights and unions were weakened by reforms designed to give employers greater flexibility in establishing employment terms and conditions as public enterprises were privatized unaccompanied by adequate regulation; structural adjustment had a disproportionately more harmful impact on women, as small-scale business people and food producers – they were undermined by import liberalization, high interest rates on credit and the withdrawal of the state from the provision of assistance; their frequent employment in low-skill jobs made women particularly vulnerable to large numbers of lay-offs resulting from bankruptcies and privatizations; and labour ‘flexibilization’ measures have often stripped women of their right to maternity leave and other special protections (ibid.). The SAPRIN report concluded, Many of the anticipated gains in efficiency, competitiveness, savings and revenues from the privatization of public enterprises, labourmarket ‘flexibilization’ and large-scale mining operations did not materialize. Trade liberalization has tended to increase rather than decrease current-account deficits and external debt due in part to

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the high import content of the exports promoted under adjustment regimes. The growing presence and power of transnational com­ panies, often the greatest beneficiaries of adjustment programmes, have severely diminished the economic sovereignty of many countries and their governments’ capacity to respond first and foremost to the economic and social needs of their own people. And the freedom of these corporations and both foreign and domestic speculative capital to move from country to country creates constant instability on top of the destabilizing effects of the destruction of national economic activity. (ibid.)

In 2003, the United Nations Development Programme’s annual Human Development Report found that during the 1990s, fifty-four developing countries suffered ‘negative growth’, while another seventyone experienced only 0–3 per cent growth (UNDP 2003). From 1980 to 2000, growth in most countries implementing neoliberal policies declined significantly compared to the preceding twenty years (CEPR 2005). As the UNDP’s Jan Vandemoortele concludes, ‘If the 1980s were the “lost decade for development,” the 1990s was the “decade of broken promises”’ (UNDP 2002b). The 2003 UNDP Human Development Report admonished the IMF and World Bank by calling for a broader policy view of how best to lift the least developed nations out of extreme poverty with options other than the Washington Consensus policies (UNDP 2003). The report said the current policy approach of the IMF and the World Bank, which is based on a total reliance on market forces and increased trade to achieve development, will not succeed. Mark Malloch-Brown, then administrator of the UNDP, said many countries in Africa and Latin America that had been previously held up as examples of how to kick-start development were today among the stragglers in the global economy: ‘The poster children of the 1990s are among those who didn’t do terribly well.’ Malloch-Brown called for a ‘guerrilla assault’ on the neoliberal policies and for a reaffirmation of the role of the state in development policy: ‘Market reforms are not enough. You can’t just liberalize; you need an interventionist strategy’ (Elliot 2003). By 2003, there was an increasing acknowledgement that insufficient national health budgets and education budgets have been the consequences of strict IMF budget austerity. ‘The IMF and the World Bank should no longer set these kind of ceilings’ on public expenditure, Malloch-Brown said (Leopold 2003). In a direct rebuke to the neoliberal policy approach that insists high economic growth rates must come first, and only then can increases for

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public health and education budgets be afforded, Jeffrey Sachs, former IMF adviser and special adviser on the UN Millennium Development Goals (MDGs), said, ‘Poor countries cannot afford to wait until they are wealthy before they invest in their people’ (ibid.). Also in 2003, a report from the UN human settlements programme, UN-habitat, found that 940 million people – almost one-sixth of the world’s population – already live in squalid, unhealthy areas, mostly without water, sanitation, public services or legal security, that urban slums were growing faster than expected, and that the balance of global poverty was shifting rapidly from the countryside to cities. The report documented that Africa had 20 per cent of the world’s slum dwellers and Latin America 14 per cent, but the worst urban conditions were in Asia, where more than 550 million people were living in what the UN called unacceptable conditions. The world’s thirty richest countries are home to just 2 per cent of slum dwellers; in contrast, 80 per cent of the urban population of the world’s thirty least developed countries live in slums. Although the report emphasized that not all slum dwellers are poor, the UN warned that unplanned, unsanitary settlements threaten political stability and are creating the climate for an explosion of social problems. The report projected that one in every three people in the world will live in slums within thirty years unless governments control unprecedented urban growth, according to a UN report (­UN-habitat 2003). The report roundly blamed laissez-faire globalization and neo­ liberal economic policies imposed on poor countries by global institutions such as the IMF and the World Trade Organization (WTO) for much of the damage caused to cities over the past twenty years. The authors say people are encouraged to move to the cities by factors including the privatization of public services, job losses and the removal of subsidies and tax breaks from key industries. Such effects, the report said, increase inequality, and make sure that those who move to the cities remain in deep poverty (Vidal 2003). Also by 2003, it was becoming apparent that the conventional expectations that rich countries are sending capital to poor countries through foreign aid and foreign direct investment (FDI) flows were not being fulfilled in practice. The prevailing neoliberal development model presumes that the direction of world capital flows should be from the developed nations, where capital is plentiful, to the developing nations, where capital is scarce. In principle, capital flows from rich to poor countries should lead to gains for both sides. Developing nations benefit from obtaining the financing needed to build up their capital stock as well as their physical and social infrastructure, allowing them

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to be more productive in the future. The developed nations benefit by receiving a higher return on their capital, since the scarcity of capital in poor countries should lead to a higher return on investments in poor countries than could be obtained in rich nations. As a study by the Center for Economic Policy and Research shows, however, in fact most developing nations receive, net, little or no capital from rich nations, and many are actually large exporters of capital to the rich nations. The report uses World Bank data and the standard measure of capital flows – the current account – to determine the extent to which developing countries are net borrowers or lenders to the rest of the world. Several developing countries, especially those in East Asia, are currently lending large amounts of capital to the rest of the world, often because of debt repayments of previous loans, through the purchase of treasury bonds to build foreign currency reserves, or in payments for intellectual property claims, such as licensing fees and royalties on patents and copyrights. While these payments are still relatively small, research from the World Bank indicates that they are likely to grow considerably in the future as a result of the Trade-Related Intellectual Property Rights (TRIPs) agreement at the WTO. In 2000, the developing countries as a group began running a current account surplus for the first time in almost a quarter-century (CEPR 2003). In 2006, a UNDP study warned about the dangers to development posed by the trend in South-to-North global capital flows, as this deprives developing countries of needed investment capital (McKinley 2006). By 2008, the UN’s ‘World situation and economic prospects’ report found that developing countries continued to make significant outward transfers of financial resources to developed economies, and total net financial transfers from developing countries, that is to say net capital flows less net interest and other investment income payments, increased from $728 billion in 2006 to $760 billion in 2007 (UN 2008). In 2004, the World Bank’s own annual ‘World Development Indicators 2004’ report found that global poverty had declined over the past twenty years, but it was noteworthy that the successes were not in countries that had closely followed the neoliberal policies of the World Bank and the IMF. The study showed that the proportion of people living on less than one dollar a day in all developing countries dropped by almost half between 1981 and 2001, from 1.5 billion in 1981 to 1.1 billion in 2001, or a reduction from 40 to 21 per cent of the world’s population. Importantly, however, the report reveals that most of the success in fighting poverty occurred in Asian countries, particularly India and China, which, together, were responsible for lifting 500 million

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people out of poverty, but neither China nor India has ever adopted IMF and World Bank structural adjustment programmes (largely because they are too big and can get private financing on international markets without being dependent on foreign aid). The report found that the track record in regions with large World Bank and IMF programmes, such as Africa, Latin America, eastern Europe and Central Asia, has been poor (World Bank 2004). In marked contrast to East and South Asia, poverty actually rose in sub-Saharan Africa, where many countries closely follow IMF and World Bank lending plans. Since 1981, a 13 per cent contraction in GDP per capita in sub-Saharan Africa resulted in a near-doubling of the number of people living on less than a dollar a day, from 164 million to 314 million, or from 42 to 47 per cent of the region’s population. In eastern Europe and Central Asia, too, high unemployment and declining output in many of the formerly centrally planned economies drove extreme poverty rates up from near zero in 1981 to 6 per cent by 1999. The number of people living on less than two dollars a day in eastern Europe and Central Asia rose from 8 million (2 per cent) in 1981 to over 100 million (24 per cent) in 1999, dropping back to slightly more than 90 million (20 per cent) in 2001. In the Middle East, where countries such as Egypt and Jordan have also adopted the policies of the international financial institutions (IFIs), the number of people living on less than two dollars a day rose from 52 million to 70 million. In Latin America the number of people living on less than a dollar a day rose from 36 million to 50 million during the same period, but remained constant as a percentage of the total population, at around 9.7 per cent. The number of people in the region living on less than two dollars rose from 99 million to 128 million, a slight decline from 26.9 per cent of the population in 1981 to 24.5 per cent in 2001, despite decades of their governments adhering to IMF and World Bank-backed policies (ibid.). While India and China have implemented to some degree the liberalization and privatization agenda, particularly in recent years, they introduced reforms at a very gradual level and only after many years of state protection and state support for industries first, in contrast to other low-income countries, which were under pressure to adopt structural adjustment programmes to obtain aid. ‘It’s absolutely not the case that either China or India have followed the typical reform package recommended by the IMF and the World Bank,’ said Kevin Watkins, then head of research at Oxfam International. ‘Neither of them had liberalized their capital account, which is what the IMF was going

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around the world recommending a couple of years ago. Both of them have liberalized relatively slowly. In the case of China, the liberalization didn’t start until after the economy had already gone on to a higher growth path,’ he added (Mekay 2004). ‘If you look at the parts of the world that have been most affected by the conventional IMF, World Bank prescriptions of rapid liberalization on trade and capital accounts, you’d have to point to Africa and Latin America, both of which have performed disastrously in terms of growth, and in terms of poverty reduction and in terms of income distribution,’ Watkins said (ibid.). By 2005, the problem of growing global inequality was addressed for the first time by the World Bank in its annual World Development Report for 2005, marking the first time that the World Bank has explicitly acknowledged that redistribution – as well as economic growth – is needed to end world poverty. The report is in tune with other recent UN reports, such as the UNDP Human Development Report, which warned that MDGs would not be met without tackling inequality, and acknowledged that inequality between countries has grown sharply since globalization and the expansion of world trade in the nineteenth century, and that the trend continued between 1950 and 1990. The World Bank estimates that global inequality doubled between 1820 and 1990, and, measured in absolute terms, the gap between rich and poor has been steadily increasing, both between citizens of rich and poor countries, and within countries (Schifferes 2005). By 2008, the Social Watch network was reporting that eighty countries – home to half the world’s population – fare badly when three criteria are examined: the number of children who die before their fifth birthday, the proportion of children who complete primary education, and the proportion of births that are attended by trained midwives or other medical professionals. Social Watch, which has devised a measure known as the Basic Capabilities Index (BCI) to assess the level of hardship throughout the world, examined the progress or regression made by 176 countries since 2000. In its latest report, it found that progress in basic social indicators slowed down in 2008 all over the world, and the present rate does not allow for the internationally agreed poverty reduction goals, the MDGs, to be met by 2015, unless substantial changes occur. Of the 176 countries for which a BCI figure can be computed, only twenty-one register noticeable progress in relation to how they were in 2000. Another fifty-five countries show some progress, but at a slow rate, while seventy-seven countries are stagnated or worse. ‘Contrary to frequent claims that poverty is diminishing fast in the world, the index computed by Social Watch shows that the deficient coverage of the basic

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needs required to escape poverty persists; even more, it is increasing, in spite of impressive economic growth in most developing countries’ (Social Watch 2008). In 2008, the World Bank made important revisions to assessments of the global poverty rate based on a new poverty line of $1.25 per day. The new measure indicates that 1.4 billion people live beneath this threshold, which is substantially more than its earlier estimate of 985 million people living in poverty in 2004. The World Bank has also revised upwards the number it said were poor in 1981, from 1.5 billion to 1.9 billion. The new estimates suggest that poverty is both more persistent, and has fallen less sharply, than previously thought. The new figures confirm that Africa has been the least successful region of the world in reducing poverty, as the number of poor people in Africa doubled between 1981 and 2005 from 200 million to 380 million, and the depth of poverty is greater as well, with the average poor person living on just 70 cents per day. The poverty rate has been unchanged at 50 per cent since 1981 (Schifferes 2008). The UNCTAD 2008 annual report on the least developed countries (LDCs) noted that until the global economic recession struck in 2008, many LDCs had been experiencing relative high annual GDP growth in the previous several years, at about 6–7 per cent. The report noted, however, that the type of growth occurring in most LDCs was strongly affected by trends in international markets and, in particular, com­modity prices. Additionally, LDCs continue to depend heavily on external sources of finance, particularly foreign aid, rather than domestically generated resources. Despite the recent high rates of economic growth, the rate of progress in terms of poverty reduction and human development remains very low. The incidence of poverty and deprivation remains very high, and most LDCs are off track to meet the MDGs on indicators for which data are available (UNCTAD 2008). Of tremendous importance to those concerned with development, the UNCTAD report noted that despite their rapid economic growth rates (until 2008), the LDCs were not experiencing positive progress towards diversification and structural change. As a result, they remain very vulnerable to trade shocks due to the volatility of global commodity prices, affecting both exports and imports. And importantly, aid inflows, which provide their major source of external finance, are mainly directed towards improving social services and social infrastructure, including governance mechanisms – but are not increasing their productive capacities and promoting structural change and diversification (ibid.). Regarding neoliberal policies, the report noted that

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the expectation implicit in the prevailing development policy paradigm was that investment in productive sectors would be taken care of by the international private sector, through access to international capital markets or inflows of foreign direct investment (FDI). But this has proved to be an illusion in the former case, as LDCs remain almost entirely marginalized from this source of finance. As for FDI, inflows have concentrated on a few LDCs and have often been weakly linked with the rest of the economy. Workers’ remittances are growing and – while playing a role in directly alleviating poverty for those who receive them – their contribution to development by financing investment remains to be proven. They should not be seen as a substitute for long-term capital inflows, and deliberate policies are required to enhance their developmental impact. (ibid.)

The weak correlation between growth and improvements in ­human well-being arises because of the type of economic growth that is ­occurring. This cannot generally be equated with an inclusive process of development. The UNCTAD report notes that in most LDCs the majority of the population is employed in agriculture, but agricultural labour productivity is very low and growing very slowly. As it is difficult to make a living in agriculture, more and more people are seeking work in other sectors of the economy. Remunerative employment oppor­ tunities are not being generated quickly enough, however, to meet this growing demand for non-agricultural work. The report identifies an accelerating process of ‘de-agrarianization’, in which poverty in LDCs now has two faces: one face is low-productivity, small-scale agriculture; the other is low-productivity, urban, informal-sector activities in petty trade and services. Again, regarding the neoliberal development model, UNCTAD noted that the trends which are occurring are related to policy choices, in particular the development model which has been pursued in most LDCs. This model has sought to deepen the integration of the LDCs into the world economy and increase the efficiency of resource allocation and free markets. Global integration is vital for development and poverty reduction in LDCs. However, without the development of productive capacities and associated employment, external integration does not lead to inclusive development. Export-led growth without associated expansion of sectors serving domestic markets often leads to an exclusive pattern of economic growth. (ibid.)

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This wholesale neglect of policies to advance the domestic productive sectors of developing countries ought to be of considerable concern. According to Ocampo (2005b), successful economic development is intrinsically tied to the dynamics of production structures and to the specific policies and institutions created to support it. These policies and institutions include, in particular, those that facilitate the diffusion of technological innovations generated in the industrialized world (including new technologies and the development of new production sectors), encourage the creation of linkages among domestic firms and sectors, and seek to reduce the dualism that characterizes production sector structures in most developing countries – i.e. the coexistence of a high-productivity (modern) and a low-productivity (informal) sector (ibid.). While Ocampo (ibid.) notes that policies and institutions that guarantee stability in the basic social contract, the protection of business contracts and an efficient state bureaucracy, as well as successful public investments for the formation of human capital and the development of infrastructure, are certainly important to economic growth, these merely play the role of ‘framework conditions’ which, by themselves, are unlikely to affect the growth momentum. According to Ocampo, the key to rapid growth in the developing world is a combination of strategies aimed at the dynamic transformation of domestic production structures while closing the gap between the formal and informal production structures and building a domestic capital accumulation strategy to kick-start growth. Yet most structural adjustment programmes and free trade arrangements of the last thirty years have prohibited developing countries from adopting the policies they would need for enabling such dynamic transformations of their domestic productive sectors. This keeps many locked into ‘plantation mode’ of exporting only a few primary commodities. This disastrous track record of lingering poverty, underdevelopment and regression in many parts of the world that adopted neoliberal policies should call for a major rethink of the dominant development model. The neoliberal policy approach ignores the significant and systematic differences between industrialized and developing countries, and the  differences among developing countries. Nayyar (2007) notes that the nature of relationships and the direction of causation in macro­ economics, which shape analysis, diagnosis and prescriptions, depend upon the institutional setting, which differs greatly across countries. Although the differences vary among countries and features are changing over time, Nayyar (ibid.) identifies several key differences between the

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macroeconomic features of industrialized and developing countries that neoliberal policies fail to take into consideration: • Many industrialized countries operate at near full employment, most economic activity occurs within large formal sectors (registered companies that pay taxes), and they have populations that are heavily urbanized, whereas most developing countries operate with high unemployment and underemployment, much economic activity occurs in the informal sector (not taxed) and half or more of the population is in rural areas. • Rich countries are often troubled by a limited supply of labour (most are already working) along with an unlimited supply of investment capital, as compared with developing countries, which often have an unlimited supply of labour but a very limited supply of investment capital. • Sources of GDP growth are also very different, as growth in industrialized economies is driven by productivity increases, which, in turn, are a function of the level of investment and the pace of technical progress, whereas in developing economies growth is (or at least should be) driven by labour absorption through employment creation in the non-agricultural sector and, in part, through a shifting of labour from low-productivity employment to higher-productivity employment in the manufacturing sector or the services sector. • In the industrialized countries, financial markets, institutions and instruments are far more developed than in the developing countries. Developing-country firms rely more on self-financing than their counterparts in industrialized economies, in part because equity markets are underdeveloped as a source of finance for new investments. Because industrialized countries have deeper financial markets with supporting institutions, companies have been moving away from bank lending and increasingly using securitization offered in financial markets to transfer and absorb risk, which enables them to better withstand economic shocks. Developing countries lack deep financial markets, however, and are less able to absorb shocks. • Governments in industrialized countries have little trouble in finan­ cing their deficits, whereas governments in developing countries typically face greater financial constraints. Because of the perception of higher risk, governments often have to sell bonds or borrow at high rates of interest to finance deficit spending, which can quickly lead to unsustainable debt burdens. • Developing countries have much smaller but more open economies

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than do industrialized nations. Although this is a broad generalization, most developing countries are more open in so far as exports constitute a larger proportion of their GDP growth and foreign capital inflows finance a larger proportion of domestic investment. This combination of greater openness and smaller size means that the economies of developing countries are not only more prone but also more vulnerable to external shocks. • In developing countries, tax revenues are based less on direct taxes and more on indirect taxes as compared with industrialized econ­ omies. Most developing countries have much smaller tax bases and the tax compliance is significantly lower (attributable to easier tax avoidance and tax evasion). Therefore, many governments find it very difficult to increase their income through tax revenues. Consequently, tax–GDP ratios in developing countries are much lower than in industrialized economies. In terms of the composition of government expenditure, developing countries tend to devote much higher proportions of total public expenditure to investment than do industrialized economies, because private investment in infrastructure is not always forthcoming. In difficult times, it is investment expenditure which is cut first because governments find it very difficult to cut consumption expenditure. This means that excessive fiscal stringency imposes a higher cost in terms of lost growth than it does when budgets are cut in industrialized countries (i.e. when education budgets are cut in rich countries it may result in more crowded classrooms and a decrease in quality, but when education budgets are cut in poorer countries, it may result in some children not getting educated at all, with implications for lower long-term productivity growth rates). Despite these types of fundamental differences between industrialized and developing countries, neoliberal theory, and its microfoundations, intermediate propositions and the axioms upon which they are based, does not acknowledge such differences. It makes an assumption about the universality: that economic policies should work the same everywhere in all times and places. Another fundamental flaw in the structural adjustment approach has been the inherent contradiction in the IMF’s claim that its ‘stabilizationplus-adjustment’ programmes would first achieve macroeconomic stability and also then enable future higher growth because the policies used to achieve the macroeconomic stability actually undermine or prevent countries from embarking on higher economic growth. ­Slowing domestic

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demand to correct trade imbalances by adopting budget cuts and raising interest rates also has the effect of slowing economic growth,  and this has led to declines in investment necessary for future growth (Nissanke and Aryeetey 1998). It seems that the IMF has been better at achieving its goal of stabilization than at enabling higher future growth and development. In a way, the neoliberal policies are like a radical experiment with developing countries being used as guinea pigs. The neoliberal policy conditions attached to IMF and World Bank loans are nothing like the policies used by the industrialized economies over the past 150 years. Europe, the United States, East Asia and other industrialized areas have all always relied on an extensive partnership between industry and the state. Their industrialization process involved several decades or more of government providing protective trade barriers, large sub­ sidies and directed credit to domestic industry, support for public utilities and state-owned industries, tax breaks and other incentives for research and development and investment in technological innovation to diversify the economy, and controls on currency and capital. In contrast, the IMF and World Bank structural adjustment programmes call for developing economies to reduce the states’ role in their economic development process by lowering or eliminating trade barriers and tariffs, ending subsidies to their businesses, privatizing public utilities and state-owned businesses, limiting production to only one or two major exports, and eliminating their controls on currency and capital. Yet all of these policies weaken the ability of the state to assist domestic industry or provide needed public services. Since no country in history has ever before successfully industrialized under such a process, the structural adjustment programmes are essentially a massive, radical experiment foisted on much of the developing world over the last thirty years. The point is worth further consideration. Most contemporary ­students of development economics will not have read Ha-Joon Chang’s Kicking Away the Ladder (2002), which offers the forgotten history of the policies used by all of the rich, industrialized countries as they were developing so successfully over the last few centuries. The history of the actual trade and industrial policies used by the United States, Europe and East Asia (Singapore, Hong Kong, South Korea and Taiwan) has been largely stripped from the standard university curriculum and the field of development economics over the last twenty-five years because it inconveniently contradicts the dominant free trade and free market theories of neoliberal economists. The record shows that these countries developed on the back of many decades of high levels of trade protec-

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tion and with considerable state support for subsidies for supporting and diversifying domestic industry, and large-scale public investment in infrastructure, public health and public education. Countries began to liberalize some of these protections and supports once they were competitive in world markets, but only after decades of state support (ibid.; Amsden 2001; Reinert 2008). Chang’s book is so refreshingly unusual because it takes a historical, inductive approach to development economics (i.e. by asking how all the developed countries developed and what policies worked for them), whereas most neoliberal university departments teaching economics or development today do not ask such questions. Instead, they often take only an ahistorical and deductive approach to development economics, one that starts with theory and ends with deduced policy prescriptions. Yet these theories have nothing to do with the historical facts about the policies that were actually used by the countries that industrialized successfully. As Nobel laureate Joseph Stiglitz noted, ‘As someone who was intimately involved in economic policy making in the US, I have always been struck by the divergence between the policies that America pushes on developing countries and those practiced in the US itself. Many aspects of US economic policy contribute significantly to the country’s success, but are hardly mentioned in discussions of development strategies’ (Stiglitz 2003). Referring to the long history of activist industrial policies used by rich countries, including support for new technologies, public pension systems and strong anti-trust laws which broke up private monopolies in many areas, Stiglitz suggested that ‘Those in Mexico, Brazil, India and other emerging markets should be told a different message: do not strive for a mythical free-market economy, which has never existed. Do not follow the encomiums of US special interests because, although they preach free markets, back home they rely on the government to advance their aims.’ Instead, Stiglitz believes developing economies ‘should look carefully, not at what the US says, but at what it did in the years when it emerged as an industrial power, and what it does today. There is a remarkable similarity between those policies and the activist measures pursued by the highly successful East Asian economies over the past two decades’ (ibid.). Health advocates who want developing countries to build a tax revenue base capable of financing adequate public health systems ought to take note. Similarly, in exploring what policies enabled successes in the East Asian economies, Amsden (2001) and Reinert (2008) noted that, as in the USA and Europe, businesses and governments worked closely

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together to strengthen domestic industry. Foreign enterprises were discouraged, by deliberate red tape, from entering certain industries, so that national companies could get a head start. State-owned banks lent money at subsidized rates to help local firms acquire the technologies and capital equipment they needed. Where corruption existed, it tended to be confined to raw-materials industries. In much of manufacturing, subsidies were allocated by professional bureaucracies according to relatively transparent procedures. State support for business was often tied to strict performance standards and closely monitored (Amsden 2001). Amsden also points to the difficult position developing countries are faced with today, when the neoliberal policies would have them adopt the opposite of the policies used successfully by the industrialized countries. The types of promotional measures used successfully by countries like Taiwan and Thailand no longer have the support of international organizations. These measures are now identified as protectionist and unfair. To join the international trading system, nations must now agree to the radical notion of a level playing field and, toward that end, must disallow government intervention in the economy beyond establishing certain minimal norms, like standard accounting procedures and contract law. (Amsden 2002)

Regarding the Investment Agreement being advocated within World Trade Organization (WTO) negotiations, such policies could well ‘void members’ rights to regulate multinationals and promote domestic businesses’. For the large aspiring group of middle-income developing nations – countries like Tunisia, Nigeria and Vietnam – ‘the advantage of accepting the doctrine and rules of a level playing field is access to world markets. The disadvantage is a loss of the freedom to subsidize company formation and the necessary learning process. That freedom has been critical to most economic modernizations that have had any lasting success. A level playing field may thus entail a false equality’ (ibid.). Epstein (2006) points out the same story regarding central bank policy. Throughout the early and recent history of central banking in the USA, the UK, Europe and elsewhere, central banks played important activist roles in financing governments, managing exchange rates and supporting economic sectors by using ‘direct methods’ of intervention that have been among the most important tasks of central banking and, indeed, in many cases, were among the reasons for their existence. Central banks were traditionally used by industrialized countries

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to promote the financial sectors of their economies, and especially to support the international role of their financial services industries. They did this by using subsidized interest rates, legal restrictions, directed credit and moral suasion to promote particular markets and institutions. Moreover, at times they have even oriented their overall monetary policy towards promoting the development of particular economic sectors. These mechanisms of industrial policy were an attempt by central banks to build up a ‘targeted’ sector of the economy and virtually all central banks have engaged in such industrial policies or ‘selective targeting’. According to Epstein, ‘The neoliberal central bank policy package, then, is drastically out of step with the history and dominant practice of central banking throughout most of its history’ (ibid.). This concern is also underscored by Nayyar (2007), who notes that the more expansionary fiscal and monetary policies and the use of large government deficits to stimulate aggregate demand or low interest rates to encourage domestic investment ‘can no longer be used, as easily as in the past, because of an overwhelming fear that such measures could lead to speculative capital flight and a run on the national currency. The problem exists everywhere. But it is far more acute in developing countries’ (ibid.). Chang (2005) reviews the long history of so-called ‘policy space’, or the freedom of manoeuvre of countries to adopt interventionist policies such as various techniques of trade protection and industrial policies used successfully by industrialized countries. He notes that the degree of policy space available to countries is a matter of vital importance because the long-range historical records suggest that it has an enormous influence on a country’s ability to achieve economic development. When today’s developing countries were colonies or subject to unequal treaties, they experienced extremely slow economic growth (and we are not even taking into account the issues of political legitimacy, cultural/racial domination and social inequity associated with colonialism and imperialism). During the brief period following decolonization of many African and Asian countries, they were allowed quite large policy space, and between the 1950s and the 1970s their growth accelerated beyond expectation. Once the policy space started shrinking from the 1980s until today with the rise of neoliberalism and the adoption of IMF and World Bank structural adjustment programmes, their average growth rate fell to half of what it was in the 1950s–1970s period (ibid.). Historical comparison shows that the policy space available for today’s developing countries is in fact not the smallest by historical standards (it was less under colonialism). However, ‘policy space for developing countries has been constantly shrinking over the last quarter of a century and it is at the risk of shrinking even further,

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to the point of making the use of any meaningful policy for economic development impossible’ (ibid.). Monetarism and its consequences

While all economists agree that macroeconomic stability is essential for sustainable economic growth and successful development, there are disagreements about what actually constitutes ‘stability’. The school of monetarism within contemporary economics believes that stability requires extremely low inflation and that containing inflation ought to be a key priority of macroeconomic policy, and that other goals such as higher economic growth rates, higher employment levels or higher public investment ought to be subordinated to first keeping inflation at extremely low levels. Because it is believed that high budget deficits can lead to inflation, fiscal policy monetarists believe that budget deficits should be tightly restricted. Because of the focus on keeping inflation low, monetarism focuses on the macroeconomic effects of the supply of money circulating in the economy and the best central bank policies for modulating the money supply. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that therefore central banks should focus solely on controlling the rate of growth of the money supply in order to keep inflation as low as possible (Friedman and Schwartz 1963). While Keynes was focused on how best to maintain the stability of the value of currencies, in contrast Friedman was focused on how best to maintain the stability of prices. Thus, ‘price stability’ or low inflation has been a key fixation of the monetarists. The Reagan and Thatcher governments were strong supporters of Friedman’s ideas, which had important influences on the policies that became attached to IMF structural adjustment policies from the 1980s until today. A fundamental part of the IMF’s economic orthodoxy has been that low inflation (near to zero, certainly under 5 per cent) is an absolute prerequisite for sustainable growth and macroeconomic stability. The IMF sees a distinction between the dangers of spurts of high growth as opposed to the safety of lower but steady growth over a longer run. The main way the IMF advises countries to reduce inflation is to raise interest rates. There is a very steep cost to raising interest rates, however, as it slows the level of demand, and consequently economic growth; raising interest rates is deliberately designed to have a dampening effect on economic growth rates. When governments raise interest rates, the idea is to deliberately reduce the amount of buying, spending and hiring going on in the economy, and basically bring on an economic recession,

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with the resulting lower public spending, employment, tax revenue generation and economic growth; this is how inflation is brought down and kept down. The IMF believes that it is better for a country to suffer through slower growth or even an economic recession for a few years as the price to pay for getting inflation down and the macroeconomy stabilized, even if this means paying a cost of lower GDP growth, higher unemployment and less tax revenue generation. A related policy to allow interest rates to be very high and set by the market, not the state, is based on the neoliberal assumptions popularized by McKinnon (1973) and Shaw (1973), which were critical of the central bank’s interventionist uses of subsidized credit and other industrial policy activities. Neoliberal theory is opposed to central banks setting interest rates at what they consider to be artificially lower levels than the market would demand, and instead believes interest rates should be determined by market forces. Such central bank manipulation, and denying investors the possibilities of higher returns, they believe, constitutes ‘financial repression’. McKinnon and Shaw analysed the benefits of market-based interest rates and ways to reduce the central bank’s impact on the domestic financial system within developing countries. The McKinnon–Shaw analysis suggests that alleviating financial restrictions in such countries – and allowing market forces to determine real interest rates – can exert a positive effect on growth rates as interest rates rise towards their natural ‘competitive market equilibrium’, even if this means interest rates go higher. According to this tradition, artificial ceilings on  interest rates reduce savings and capital accumulation, and discourage the efficient allocation of resources (McKinnon 1973; Shaw 1973). These monetarist ideas have informed the IMF’s approach to inflation reduction. The original structural adjustment programmes of the 1980s were designed to address the massive Third World debt crisis at the time, to reschedule debt payments, correct trade imbalances and to reduce the high rates of inflation, some of which were situations of runaway hyperinflation. Even after inflation rates were stabilized, however, IMF loans over the last twenty years have continued to maintain the tight monetary policy of targeting low rates of inflation by raising interest rates or allowing markets to keep interest rates high. A 2003 EURODAD survey of twelve IMF programmes found that the majority of countries had inflation programmed to decline and then level off at a rate under 5 per cent per year. The average level of inflation among all twelve programmes over the medium term was 4.1 per cent (EURODAD 2003). A 2003 Oxfam study of twenty programmes found that although most countries had already sustained low inflation

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over a number of years, the IMF was still pushing them towards even further inflation rate reductions and that sixteen had inflation targets of less than 5 per cent (Oxfam 2003). Similarly, a 2005 ActionAid study of sixty-three IMF loan programmes or arrangements with developing countries found that in forty-five cases countries had either already achieved or were targeting inflation rates at 5 per cent per year or below (ActionAid 2005b). And most recently, a 2008 ActionAid survey of new or augmented IMF loans given to developing countries in response to the 2008 price increase of food and fuel imports found that twelve of the fourteen programmes target inflation levels to be brought down to 7 per cent or lower over the next couple of years between 2008 and 2010 (Muchhala and Rowden 2008). Since the 1970s, the IMF’s approach to designing its lending programmes and policy advice has been based on the ‘financial programming’ model. This model was based on earlier IMF loan programmes and is still used in current lending arrangements and debt relief processes without much alteration (GAO 2001). It is used by the IMF to derive monetary and fiscal programmes to achieve desired macroeconomic targets in borrowing poor countries. The typical IMF programme connects balance of payments constraints, the government fiscal deficit and central bank policy in order to attempt to reduce indebtedness to a sustainable level, primarily by keeping economic growth in line with likely available foreign resources from export taxes, donor aid and foreign investment inflows. Increasingly, reducing inflation to ‘the low single digits’ became a central focus. Therefore, two key central assumptions of these programmes are that: a)  inflation rates above 10 per cent per year are bad for economic  growth and reducing inflation below that level will not reduce economic growth;  and b)  reducing government spending is good for the economy, because higher government spending ‘crowds out’ private investment. Under the standard financial programming methods implemented by the IMF to contain government spending, targets are set for the central bank to place a limit or ceiling on available credit and a minimum requirement or floor to maintain a certain level of net international currency reserves. These two main targets are called net domestic assets (NDA) ceilings – sometimes called domestic credit ceilings – which directly limit the amount of credit that the central bank can create, and net international reserve (NIR) floors, which require monetary and fiscal policy to operate so as to preserve a minimum level of international currency reserves. By tweaking these two targets, IMF programmes can

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constrain the available credit for domestic deficit financing. If either target is threatened – that is, if international currency reserves are too low or if net domestic assets are too high – then the IMF criteria call for tightening monetary policy, usually by raising interest rates or reducing monetary expansion (Epstein and Heintz 2006; Blejer et al. 2002). It is important to note that even if both targets are met and the currency reserves are high enough and the credit ceiling has not been breached, IMF programming still does not ever call or allow for an alternative expansionary monetary policy option. There is a built-in neoliberal bias against expansionary policy approaches (having the central bank lower interest rates) and, unlike with the US or EU central bank mandates, there is no other policy target or central bank objective beyond low inflation, such as for targeting higher economic growth, employment creation or poverty reduction, which would require the availability of more expansionary monetary policy options. The bias of the IMF’s financial programming model is always on the side of achieving the contractionary constraints. The motivation for these restrictions is to ensure the ability of countries to crank out exports and earn foreign exchange with which to repay creditors. The IMF has reserved a special place as the foremost preferred creditor, meaning that it is repaid ahead of all other creditors and aid lenders. The IMF’s financial programming model is inherently preoccupied only with short-term stabilization and debt repayments and is monitoring macroeconomic fundamentals on a rolling short-term basis of about eighteen months at a time – those interested in actual development should understand that it is not mandated to consider longer-term time horizons or what it would take to increase public investment, employment or social expenditure for a successful long-term national development trajectory. According to an analysis of the financial programming model by former World Bank economist William Easterly, the IMF’s financial programming uses a set of ‘identities’ and extremely simple models (a set of assumptions about the structure of the economy) to establish a set of targets that the IMF will monitor and the borrowing government will have to meet in order to receive the next instalments of IMF loans, or get the ‘green light’ signal that opens the doors to other aid donors or debt cancellation programmes. Easterly’s analysis found that all of the identities contain large statistical discrepancies, which weakens the case for them as a ‘consistency check’ (Easterly 2004). In at least the literal applications of the framework, financial programming does not do well in forecasting or explaining the target variables, even when some

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c­ omponents of the identity are known with certainty. ‘These results suggest that IMF staff have to rely on macroeconomic theory and empirics that come from outside the financial programming framework in designing stabilization packages’ (ibid.). In particular, financial programming is based on a neoliberal freemarket approach to macroeconomic policy that assumes that GDP growth (as well as employment rate and higher public spending) is not affected by monetary policy. Therefore, financial programming assumes that restrictive monetary policies will reduce inflation, without any long-run negative impacts on economic growth. Important evidence and reasonable theory suggest, however, that excessive restrictions on monetary policies and credit and pushing high interest rates do have negative impacts on economic growth (Epstein and Heintz 2006), with a disproportionately negative effect on the poor and women (Braunstein and Heintz 2006). Easterly (2002) explains the four major problems with financial programming that economists have highlighted: 1) it is based on identities that, in practice, often have large and variable measurement errors (‘errors and omissions’), thereby rendering precise targets problematic; 2) their policy prescriptions are based on the assumption of constant or even one-for-one economic relationships – for example, a stable velocity of money or a constant relationship between domestic credit and the money supply – relationships which in reality turn out to be highly un­ stable and often not one-for-one; 3) they often leave out other important channels of monetary policy besides changes in the money supply, channels such as credit and asset prices; and 4) there are important variables that are assumed to be exogenous to monetary variables, which are, to the contrary, often affected by monetary policy (ibid.). Because the IMF macroeconomic model is based on the notion that restrictive monetary policies will reduce inflation without any long-run negative impacts on economic growth, IMF loan programmes over the years have sought to subordinate the use of fiscal policy (strategic budgeting) as a main tool for economic policy-making in favour of using monetary policy at the central bank to achieve macroeconomic stability and drive national economic policy. This shift from using fiscal policies (in which parliaments can interfere in setting budget policies) to using monetary policies (set at more detached and less accountable central banks) weakens democratic processes and parliamentary and civil society input on crucial decisions affecting the shape of countries’ political economies. By limiting fiscal policy, governments forfeit many of their tools for budget control to the interests of the financial sector.

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It is important for readers to know that the IMF has very little empirical evidence in the economics literature to justify pushing inflation down to the 5–7 per cent level, with the consequences of lower growth, lower taxes and lower spending that result. This is often considered surprising, given the widespread belief that the IMF is the expert on such matters. While everyone agrees that high inflation is bad and must be brought down, a more relevant question is how low must inflation be  brought  down and at what level must it be maintained. On this point, the IMF’s position that inflation must be brought down to and maintained at the 5–7 per cent range is not backed up by the empirical literature or historical record. At least nine major studies have examined this question and have tried to find the ‘kink’ in the inflation–growth relationship, or at what level inflation begins to hurt a country’s longterm GDP growth rates: 1) Fischer (1993) found the point to be between 15 and 30 per cent; 2)  Bruno (1995) cites a major unpublished World Bank study of the link between inflation and economic growth in 127 countries from 1960 to 1992 which found that inflation rates below 20 per cent had no obvious negative impacts on long-term economic growth rates; 3) Barro (1996) found that an increase by 10 percentage points in the annual inflation rate is associated on impact with a decline by only 0.24 percentage points in the annual growth rate of GDP (but this does justify the IMF’s disinflation policy targets); 4) Sarel (1996) found the danger point at 8 per cent; 5) Bruno and Easterly (1998) found the danger  point to be as high as 40 per cent; 6) Ghosh and Phillips (1998) found that the inflation–growth relationship is convex, so that the decline in growth associated with an increase from 10 to 20 per cent inflation is much larger than that associated with moving from 40 to 50 per cent inflation (but this does justify the IMF’s disinflation policy targets); 7) Khan and Senhadji (2001) found the danger point for inflation at between 11 and 12 per cent for developing countries and 1–3 per cent for industrialized countries; 8) Gylfason and Herbertsson (2001) found the danger point for inflation at between 10 and 20 per cent; and 9) Pollin and Zhu (2005) found the danger point to be between 14 and 16 per cent (for middle- and low-income countries). Health advocates should know that what these nine major studies show is that not only are the estimates all over the place and further research is still needed, but, as Pollin and Zhu note, ‘There is no justification for inflation-targeting policies as they are currently being practiced throughout the middle- and low-income countries’ (ibid.). The same literature was reviewed by a 2007 study from the Washington-based

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Center for Global Development which found: ‘Empirical evidence does not justify pushing inflation to these levels in low-income countries’ (CGD 2007) and by the House Financial Services Committee of the US Congress, which wrote to the IMF in 2007, ‘We are concerned by the IMF’s adherence to overly-rigid macroeconomic targets’ and ‘It is particularly troubling to us that the IMF’s policy positions do not reflect any consensus view among economists on appropriate inflation targets’ (Financial Services Committee 2007). The added significance of the research by Bruno and Easterly (1998) and Fischer (1993) is that Bruno had once been the World Bank chief economist, and Fischer became the head of the IMF, so their research was coming from inside the heart of the establishment, so to speak. The very existence of papers like those of Easterly and Bruno and Fischer suggests that even within the centre of the IMF and the World Bank the opinion on this issue is divided. Less ideological economists will acknowledge that the research is inconclusive. Health advocates and those concerned with development ought to be deeply alarmed by this discrepancy between what the IMF says is necessary for inflation and what is in the current body of empirical research, as there are steep consequences for keeping economic growth, employment, taxation and future expenditure unnecessarily lower than they otherwise could be. Such concern was pointed out by a 2001 US Government Accountability Office (GAO) report on IMF loans when it explained: ‘Policies that are overly concerned with macroeconomic stability may turn out to be too austere, lowering economic growth from its optimal level and impeding progress on poverty reduction’ (GAO 2001). According to IMF and World Bank documents shared with the GAO, there is a ‘substantial gray area’ between those policies that may be considered too austere and those that cause macroeconomic instability. This point about the IMF policies was reiterated as a concern in the major retrospective undertaken in 2005 by the World Bank: … the search for macro stability, narrowly defined, may in some cases have actually been inimical to growth. Preoccupation with reducing inflation quickly induced some countries to adopt exchange rate regimes that ultimately conflicted with the goal of outcomes-based stability. Others pursued macro stability at the expense of growth enhancing policies such as adequate provision of public goods, as well as social investments that might have both increased the growth payoff and made stability more durable. (World Bank 2005a)

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The 2008 Spence Commission on Growth and Development report also pointed to this specific concern: ‘… Very high inflation is clearly damaging to investment and growth. Bringing inflation down is also very costly in terms of lost output and employment. But how high is very high? Some countries have grown for long periods with persistent inflation of 15–30 percent’ (Spence 2008). The report also quoted commission member Montek Singh Ahluwalia as noting, ‘The international financial institutions, the IMF in particular, have tended to see public investment as a short-term stabilization issue, and failed to grasp its long-term growth consequences. If low-income countries are stuck in a low-level equilibrium, then putting constraints on their infrastructure spending may ensure they never take off.’ The key point to bear in mind is that, while the IMF and monetarists within neoliberal theory believe strongly that inflation must be driven so low, there are actually very real consequences and very important trade-offs being made behind closed doors when the finance ministries regularly agree to such low inflation targets in their loan agreements with the IMF. Regarding the disinflation policies and the raising of interest rates to get inflation down, economists refer to the trade-off as the ‘sacrifice ratio’ – or the amount of GDP growth (output) that is forgone or sacrificed in order to get inflation rates down to lower levels. Health advocates should look closely at what is being ‘sacrificed’: the lower growth means fewer taxes are collected and less public expenditure is available in future budgets. This carries huge social costs, and yet the costs of this approach, and the possibility of other policy options, are not subject to public debate, analysis or consideration by any wider groups of stakeholders in developing countries. There are competing formulae in the economics literature regarding how to best calculate the exact sacrifice ratio, including ‘Okun’s Law’ and ‘Howitt’s Rule’ (Thornton 1996; Ball 1994; Cecchetti 1994). But whatever the formula, the IMF won’t talk about it, ever. Despite repeated requests to IMF staff, the IMF will not say how or even whether they calculate the sacrifice ratio or costs to forgone higher employment and spending. Monetarism presumes it is always better to have low inflation, even if higher public spending and employment must be sacrificed. The reality is that the IMF simply decides on its own, behind closed doors, that it is worth having less growth, less employment, less tax collection, less expenditure available than otherwise could be the case simply in order to get inflation down from, say, 12  to 7 per cent, regardless of the consequences for insufficient public investment needed to spur long-term development.

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Few economists outside the IMF opt for a level as low even as 10 per cent in defining a healthy rate of inflation for a growing economy in a developing country. Terry McKinley, former UNDP economist and now a professor at the School of Oriental and African Studies (SOAS), University of London, explained, ‘As long as current revenue covers current expenditures, governments can usefully borrow to finance [social] investment. […] Fiscal deficits should remain sustainable as ensuing growth boosts revenue collection. The resultant growth of productive capacities will keep inflation moderate – namely, within a 15 per cent rate per year’ (McKinley 2005b). Moderate inflation can, in fact, be compatible with growth. But low inflation can be as harmful as high inflation. ‘When low-inflation policies keep the economy mired in stagnation or drive it into recession, the poor lose out, often for years thereafter, as their meager stocks of wealth are wiped out or their human capabilities seriously impaired … Without jobs and income, people cannot benefit from price stability’ (ibid.). Chang and Grabel (2004) note that Latin American countries in the 1950s and 1960s and East Asian economies in the 1960s and 1970s grew rapidly despite average inflation rates of around 20 per cent, but that was before the IMF moved into the stabilization business in the 1980s and rewrote the rules – without any definitive evidence to support their claim that doing so was advantageous to growth. An interesting way of considering the trade-off inherent in the sacrifice ratio is offered by a multi-country opinion survey that asked people which was more of a concern to them, inflation or unemployment. The answers were strongly class dependent across all countries, meaning that poorer respondents said they were more concerned with facing unemployment and wealthier respondents – with assets whose value could be eaten away by even moderate inflation – said they were more concerned with inflation (Jayadev 2006). Regarding Margaret Thatcher’s TINA dictum that there is no alternative, health advocates should be aware that in fact there are important alternative choices to be made in macroeconomics, particularly in the sphere of macroeconomic policies. The significance of such choices, however, depends on the context. The relationship between inflation and unemployment is much more important in the industrialized econ­ omies than it is in the developing countries. For developing countries, however, the key trade-off to be concerned with is between short-term macroeconomic management and long-term objectives, whereas this is less the case in the already developed industrialized countries. The IMF programme reforms in developing countries are preoccupied with

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macroeconomic management in the short term and restructuring of economies along neoliberal lines in the medium term. The former is driven by a quest for stabilization. The latter is prompted by the quest for (supposed) efficiency. This is in conformity with the orthodoxy embodied in the Washington Consensus. Nayyar (2007) points out, however, that there are some long-term negative consequences of the IMF’s constant short-termism, and that macroeconomic policies always implemented with a short-term objective may have adverse consequences for the performance of the economy in the long term, through hysteresis, if the effects of short-term policies persist over time to influence outcomes in the long term. The current IMF framework based on monetarism has failed to deliver on the two major reasons used to justify its application: that it would increase economic growth and reduce poverty. The best conventional indicator that economists have to measure national economic development is per capita economic growth rates, and over twenty-five years of neoliberal reforms, per capita economic growth rates have been markedly lower than during the previous twenty years (CEPR 2005). This is well known among economists, and was well documented in several early analyses of the effects of monetarist stabilization policies, which pointed to an adverse effect on the poor that was at least equal to the deflationary push and often larger (Cornia et al. 1987; van der Hoeven 1987; PREALC 1985). The contractions in the economies have also frequently led to a decline in the wage share in national incomes (Pastor 1987). In general it is accepted that the deflationary component of stabilization policies results in increased poverty, although the intensity depends both on the relative weight and intensity of the policies adopted as well as on the initial conditions (Khan 1993). Periods of adjustment policies dominated by stabilization were often characterized by a contraction in the economy, which led to a fall in GDP per capita (van der Hoeven 2000). Such a contraction is accompanied by lower rates of capacity utilization (how much of the available skilled workforce is being employed). Several economists have therefore argued that a priority of macroeconomic policies in a stabilization phase should be to increase capacity utilization, as this will contribute to non-inflationary growth, but the IMF has been more concerned with getting countries stabilized than with generating higher employment in post-stablization periods. Taylor (1988, 1993) has criticized the financial accounting in most stabilization packages for failing to take account of the importance of increases in capacity utilization. The much slower rates of economic growth and progress in poverty

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reduction during the last few decades under neoliberal policies were well documented in a 2005 study by the Washington, DC-based Center for Economic and Policy Research (CEPR), which found that the recent twenty-five-year era of globalization has brought substantially less progress on growth rates and poverty reduction than had been achieved in the earlier twenty-year period. The study examines the available data on economic growth and various social indicators – including health outcomes and education – and compares the recent twenty-five years (1980–2005) with the prior two decades before structural adjustment programmes were adopted (1960–80). It found that, contrary to popular belief, the past twenty-five years (1980–2005) have seen a sharply slower rate of economic growth and reduced progress on social indicators for the vast majority of low- and middle-income countries (CEPR 2005). According to the United Nations Economic Commission for Latin America and the Caribbean, the percentage of households in poverty in Latin America – with poverty defined as insufficient income to meet basic needs – grew from 34.7 per cent to 35.3 per cent during the last twenty years, meaning that, despite the population growth, roughly the same proportion of people are impoverished today as twenty years ago, only now there are more of them. The economist Paul Krugman summed up the general situation in his New York Times column, reporting that the Latin American countries that had made the biggest commitment to implementing the macroeconomic and other structural reforms favoured by the IMF and the World Bank end up as failures ranging from ‘disappointing’ in Mexico to ‘catastrophic’ in Argentina (Krugman 2003). Krugman contrasted this track record with the evident successful economic development of East Asian economies and parts of India and China, but neglected to spell out the reasons for the difference in the outcomes. In fact, while East Asia traditionally had higher domestic savings rates and lower levels of economic inequality, parts of East Asia may well have developed so successfully because of the fact that these countries mostly resisted and never fully adopted the neoliberal structural adjustment policy reforms to the same degree as Latin American and African nations. Instead, several East Asian economies largely maintained high levels of trade protection and state-directed subsidy support for key domestic industries, engaged in deficit spending and maintained relatively lower interest rates for domestic commercial loans, fully supported public infrastructure and public health and education services, maintained price controls for basic commodities, and heavily regulated foreign investment to make sure it provided positive spin-offs for domestic industries. In many ways, these economies in East Asia

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mimicked what the industrialized countries of Japan, Europe and the USA had themselves done during the last couple of hundred years of their own successful industrialization (Chang 2002). Financial liberalization and its consequences

Neoliberal economic policies have favoured unleashing the ‘magic of the marketplace’ generally and, in particular, deregulating the financial sector. The policies seek to give increased power and autonomy to the financial sector globally and nationally, and advise policy-makers in developing countries to use open financial markets as a way of attracting international capital flows. As discussed above, neoliberal theory maintains that the government regulation of domestic finance, such as at central banks, which was the norm from the 1940s until the 1970s, was counterproductive, and considers such constraints as ‘financial repression’. Such systems tend to be dominated by banks whose decisions are influenced by governments, rather than by capital (i.e. stock and bond) markets. Neoliberal theory is concerned that low interest rates (particularly in the context of high inflation) encourage domestic savers to hold funds abroad, and make current consumption more attractive than saving in domestic financial institutions. High levels of consumer spending can put upward pressure on prices, and thereby aggravate inflationary pressures. Low savings rates also mean that domestic banks have an insufficient pool of savings from which to extend loans. Thus, the level of domestic investment is compromised by active financial regulation, and employment and economic growth suffer accordingly. The neoliberal critique of government-subsidized and directed credit is that it fragments domestic financial markets, with only a small segment of politically connected borrowers gaining access to scarce low-cost credit. Other borrowers must resort to the informal market, which charges exorbitant interest rates. In view of the above, neoliberal economists argue that developing countries must liberalize their domestic financial systems. A liberalized financial system with a competitive capital market is seen as central to the promotion of high levels of savings, investment, employment, productivity, foreign capital inflows and growth. From this perspective, liberalized systems serve the interests of the poor and the disenfranchised (as well as other groups) by increasing access to capital with attendant benefits for employment, investment and growth. Neoliberal economists also say that financial deregulation allows greater ‘financial innovation’ or the creation of new financial instruments

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(e.g. derivatives) and markets in which to trade them. It is also argued that capital markets offer greater flexibility than bank loans and are better able to disperse risk. Regarding capital account liberalization (CAL), neoliberal theories suggest there are numerous benefits associated with unfettered international private capital flows: they offer new sources of technology and financing not available domestically; international private capital flows increase efficiency and policy discipline in government policy-makers, who will want to attract and fear losing capital flows; and a greater proportion of total financial flows being allocated by capital markets or foreign banks is not influenced by developing country governments and, it is believed, will be directed towards more efficient private investments. Based on these neoliberal assumptions, the IMF strongly pushed developing countries towards liberalizing their capital accounts under structural adjustment programmes. Indeed, had the East Asian financial crisis of 1997/98 not occurred (showcasing the dangers of CAL), the IMF was going to amend Article 6 of its Articles of Agreement to make the liberalization of international private capital flows a central new purpose of the IMF and extend its jurisdiction to capital movements. Financial liberalization has become the norm in developing countries over the last twenty-five years, and according to Epstein and Grabel (2007), the policy has had a few successes and numerous unambiguous failures. Some of the benefits have been enabling large firms to get more affordable financing; middle-class consumers may also have benefited from access to international credit markets, and from the opportunity to diversify their portfolios, and the higher interest rates associated with financial liberalization was effective at lowering inflation. The growth of large firms, however (and the contraction of small firms that cannot afford to borrow at high interest rates), has increased business concentration. The lower-cost capital now available to some large firms after financial liberalization has fuelled speculative bubbles in many countries. There is no evidence that the growth of capital markets increases access to or lowers the cost of finance for those entrepreneurs that have long confronted severe capital constraints. Indeed, as McKinley (2005a) notes, following financial liberalization, commercial banks have concentrated their activities in major urban areas of developing countries. He goes on to explain that ‘although financial deepening might have improved following financial liberalization, access to credit has become, if anything, more unequal. The rural population remains deprived of credit in most countries, and is likely worse off compared to the access

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to credit that state-owned agricultural banks had previously provided’ (ibid.), and in Africa’s case, the private sector has even less access to credit after financial liberalization than before. Financial liberalization has allowed large, foreign-owned banks to enter developing countries and play a greater role in the domestic financial system, but they are generally not responsive to the needs of small- and medium-sized enterprises (SMEs) (Epstein and Grabel 2007; Weller 2001). There is a large body of empirical evidence demonstrating that domestic financial liberalization has clearly failed to deliver most of the rewards claimed by its proponents (Epstein and Grabel 2007; Stiglitz et al. 2006; Arestis and Demetriades 1997; Williamson and Mahar 1998; Zhu et al. 2004; Ang and McKibbin 2005; Demirgüc-Kunt and Detragiache 1998; Weller 2001). Domestic savings have not responded positively to liberalization. Financial liberalization has not promoted long-term investment in the types of projects or sectors that are central to development. Financial liberalization has created the climate, oppor­tunity and incentives for investment in speculative activities and a focus on short-term financial as opposed to long-term developmental returns. While speculative bubbles may temporarily result in an increase in investment and overall economic activity, they create an unsustainable and financially fragile environment, or what Grabel (1995) terms ‘speculation-led development’, which is hardly in the long-term interest of developing countries (Epstein and Grabel 2007). Financial liberalization can also worsen income and wealth inequality by aggravating existing disparities in political and economic power, as only a very small proportion of the population is situated to exploit the opportunities for speculative gain available in a liberalized financial environment. Speculation-led development often creates a small class of financiers who maintain greater ties to financial markets abroad than to those in their own country, and it is also associated with a shift in political and economic power from non-financial to financial actors (Grabel 2002; Harvey 2007; Panitch and Gidgin 2004). In such an environment, the financial community becomes the anointed arbiter of the ‘national interest’ (Grabel 2003). The neoliberal assumptions are that exposure to international cap­ ital investments compel governments to adopt best practices, improve effi­ciency and lessen corruption, but according to Epstein and Grabel (2007), liberalization frequently changes the form, but not the level, of corruption or inefficiency. Research has documented the many forms and levels of corruption that often flourish after financial liberalization

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(Kotz 1997; Burkett and Dutt 1991; Chang 1998; Crotty and Lee 2004; Lewis and Stein 1997). Epstein and Grabel (2007) reviewed the literature on numerous recent cross-country and historical studies which demonstrate conclusively that there is no reliable empirical relationship between the liberalization of capital flows and performance in terms of inflation, economic growth or investment in developing countries (i.e. Eichengreen 2001; Rodrik 1998; Lee and Jayadev 2006). Increased short-term international financial flows (especially portfolio flows) are often associated with a greater chance of financial crisis (Kaminsky and Reinhart 1999; Weller 2001), especially in more liberalized environments (Demirgüc-Kunt and Detragiache 1998); financial crises have disproportionately negative consequences for a country’s poor (Baldacci et al. 2002; Frankenberg et al. 2002); low-income earners are more likely to be affected by declining demand as unemployment rises following a financial crisis (Eichengreen et al. 1996); and the poor are the first to lose under the fiscal contractions and the last to gain when crises subside and fiscal spending expands (Ravallion 2002). Cornia (2003) also finds a good deal of suggestive evidence that financial liberalization has a negative impact on the poor. CAL has increased the vulnerability of many developing countries to large, sudden inflows of capital, which can put pressure on the domestic currency to appreciate, which in turn can hurt the country’s trade balance. Sudden inflows or equally sudden outflows can culminate in a financial crisis, an event that seriously compromises economic performance and living standards (particularly for the poor) and often provides a channel for increased foreign influence over domestic decision-making (Stiglitz et al. 2006). International private capital flows consist of four main types – foreign bank lending, portfolio investment (PI), foreign direct investment (FDI) and remittances. PI refers to the purchase of stocks, bonds, derivatives and other financial instruments; FDI refers to the purchase of a ‘controlling interest’ (defined as at least 10 per cent of the assets) in a business, and can take two forms: ‘greenfield’ investment, which involves the creation of a new facility, i.e. the construction of a factory by a foreign investor; or ‘brownfield’ investment, namely mergers and acquisitions that involve the purchase of assets of existing domestic firms. Private remittances involve foreign workers sending funds to a family member in the home country. Epstein and Grabel (2007) analysed the data on international private capital flows and found that despite the growth of PI and FDI flows

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to developing countries during the 1990s, their share of global private capital flows is still rather small and remains highly concentrated in a few large countries. In other words, most developing countries are not benefiting in terms of increased PI or FDI flows, despite having liberalized their capital accounts. With regard to concentration of FDI, Brazil, China, India, Mexico and the Russian Federation received just over 60 per cent of net FDI inflows to all developing countries in 2004, and China accounted for one-third of the net FDI inflows that went to all developing countries. Low-income countries in 2003/04 received about 11 per cent of the net FDI and the same percentage of the portfolio equity flows that went to all developing countries. China, India and South Africa together accounted for 82 per cent of all portfolio equity flows that went to developing countries in 2004, and China alone ­accounted for almost 40 per cent of the net PI that went to all developing countries. Inflows of private remittances are becoming an increasingly important part of the financial landscape in some developing countries and regions. As is the case with PI and FDI, remittance inflows are also highly concentrated in a group of developing countries. This concentration means that the potential of many developing countries to harness remittances in the service of development financing is rather limited. Therefore, international private capital flows cannot perform the tasks assumed by neoliberal theory (Epstein and Grabel 2007; Stiglitz et al. 2006). In addition to suffering increased vulnerability to instability and frequency of financial crises, developing countries that have undertaken capital account liberalization (CAL) have to a large extent also lost autonomy over their exchange rate and monetary policies, which in turn has severely limited their capacity to implement Keynesian countercyclical macroeconomic policies to protect their citizens during external shocks or economic recessions (Ocampo 2002). The flow of capital into a country following liberalization tends to lead to real exchange rate appreciation, which is often linked to higher real interest rates. Higher interest rates, in turn, often attract additional capital flows. The resulting credit expansion can trigger a consumption and import boom or a speculative asset price bubble. While the IMF is hyper-vigilant on goods price inflation, elsewhere it promotes such policies, which facilitate asset price inflation (asset bubbles, such as in real estate booms). The IMF’s general approach of encouraging financial liberalization has ended up placing many low- and middle-income countries in positions of constantly reacting to short-term fluctuations in foreign investors’ confidence in their national economic policies. This situation

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has made long-term national economic planning, and public expenditure investments in long-term productive assets extremely difficult. Emergingmarket economies with open capital and current accounts are always subject to sudden reassessments of risks and prospective gains that may lead to reversals of capital flows and balance of payments crises. To follow the IMF’s strategy, these countries have to be prepared to react in such a way as to regain the investors’ goodwill, by raising interest rates (their profits on bonds, lending, etc.) to the extent necessary in order to assuage their concerns. It is important to note that this is not a temporary shortcoming of this kind of strategy. Vulnerability to sudden capital outflows is an intrinsic element of a financially integrated world as devised by the IMF. This is a permanent situation and so are the risks associated with it. As former deputy managing director of the IMF Michel Camdessus clearly explained, ‘Further, countries that successfully attract large capital inflows must also bear in mind that their continued access to international capital is far from automatic, and the conditions attached to that access [are] not guaranteed. The decisive factor here is market perception: whether the country’s policies are deemed basically sound and its economic future, promising’ (Camdessus 1995). The IMF’s Camdessus readily admitted that open capital accounts lead to a striking loss of domestic policy space: ‘The globalization of the world’s financial markets has sharply reduced the scope for governments to depart from traditional policy discipline.’ Any policy that can be construed as too interventionist, be it industrial policy or commercial policy, or whatever, will be branded as populist and will generate suspicion in the financial community. Again, in the absence of any capital controls and restrictions, financial investors will be able to veto these policies by withdrawing their capital from the country, causing a balance of payments crisis and forcing a retreat by the deviating government back into line. This is precisely what the IMF means by being ‘disciplined by the market’, one of the hallmarks of financial globalization. By 2003, the increased volatility and vulnerability faced by developing countries had become undeniable. The IMF issued a mea culpa, conceding that its early assumptions that liberalized capital accounts would lead to higher economic growth were not borne out by the evidence, yet greater vulnerability to external shocks was increased (IMF 2003). A May 2005 report by the IMF’s own Independent Evaluation Office (IEO) concluded that the institution’s cheerleading on CAL in the early 1990s was unbalanced and inconsistent. While IMF management, staff and the executive board were ‘aware of the risks of premature capital

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account liberalization’, such awareness ‘remained at the conceptual level’ and did not lead to operational advice on preconditions, pace and sequencing of parallel reforms ‘until later in the 1990s’. In addition to the increased vulnerability now faced by developing countries that have liberalized their financial sectors, CAL has created other new problems, including facilitating tax evasion and capital flight, both of which drain public expenditure even further. Central bank independence (CBI)

In recent years, new reforms have been added to the IMF’s standard economic policy reforms in the Washington Consensus, including central bank independence (CBI) and having central banks adopt inflationtargeting (IT) regimes. Regarding CBI, the idea is to detach the central bank from the rest of national government so that its monetary policy choices can remain free from the pressures of domestic politics and limit the role of the finance ministry and parliamentary control over monetary policy decisions – particularly public pressure to increase deficit spending. Ideally, CBI enables central banks to be left alone to set and enforce low-inflation and anti-deficit monetary targets even in times when there is a periodic strong political demand for increased deficit spending, such as during a recession or after a drop in export prices or other external shocks, etc. CBI allows unelected central bank officials to remain insulated from such pressures and maintain the strict budget discipline necessary for achieving monetary policy goals and maintaining central bank ‘policy credibility’ among foreign investors and bond holders. Critics, however, argue that this undermines democratic accountability and surrenders the use of long-term fiscal policy tools in order to achieve short-term monetary policy goals. In some cases, the IMF has gone even farther than pushing CBI, and in the 1990s also began encouraging countries to adopt formal inflation-targeting (IT) regimes at their central banks. A formal IT regime publicly commits central banks to a formal target to reduce inflation rates by a certain degree or maintain them at a certain low level over a set period of time. If such targets are achieved, it is believed this gives governments additional ‘policy credibility’ among bond holders and investors. Many countries have now adopted inflation-targeting as their chief macroeconomic policy, setting both monetary and fiscal policies to ensure price inflation rates stay within a target range often as low as 3–5 per cent per year. IT regimes involve a range of supporting institutions and an elaborate institutional framework dedicated to achieving

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the central bank’s main policy objective. The IMF loan programmes generally nudge many borrowers in this direction. Zambia, for example, offers an excellent case of what the IMF calls ‘IT-lite’ (Stone 2003). Even when central banks do not exclusively adopt a formal IT regime, most still prioritize getting inflation down or keeping it low to the neglect of higher economic output and employment. This happens because global investors evaluate central banks primarily on their ability to control inflation, not on their ability to maintain output stability or stimulate economic growth (Arestis and Sawyer 2003). Neoliberal central banks attempt to enable four goals: to keep inflation at a very low level; to reduce central bank support for government fiscal deficits; to help manage the country’s integration into world trade and financial markets; and to dramatically reduce the influence of democratic social and political forces on central bank policy. The major claims made by advocates of IT regimes are that they will enhance the credibility of monetary policy, reduce the pain of recessions from contractionary monetary policy, and will help to attract foreign investment. The evidence on these claims is mainly in the negative. While countries that adopt formal IT regimes often achieve lower inflation rates, they do not do so at any lower cost than other countries, in terms of forgone output. That is, inflation-targeting does not appear to increase the credibility of central bank policy and therefore does not appear to reduce the sacrifice ratio (Bernanke et al. 1999; Epstein 2000). Central banks that reduce inflation do so the old-fashioned way: by raising interest rates, causing recessions or slower growth, and by throwing people out of work. Moreover, there is no evidence that countries adopting IT manage to attract more usable foreign investment. In an analysis of Zambia’s macroeconomic policies, Saad-Filho (2006) described a situation common to many developing countries, namely the financial sector’s ‘disproportionate leverage over economic policies and outcomes’ and its socially harmful actions in ‘draining public funds and social resources, but failing to channel them into priority and welfareenhancing economic sectors’ (Saad-Filho 2006). Anti-deficit radicalism and its consequences

Regarding fiscal policy, Amartya Sen defined the IMF’s obsession with deficit reduction in IMF loan programmes by calling their approach ‘anti-deficit radicalism’. He distinguished between the more traditional notions of fiscal conservatism and the more recent anti-deficit radicalism of the last couple of decades under neoliberalism. While fiscal conservatism tends to demand that deficit reduction take place eventually, this

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is not to be confused with the IMF’s perceived ‘necessity of eliminating budget deficits altogether within a few years no matter what the social cost of this might be’ (Sen 1998). Whereas Keynesians would adopt counter-cyclical fiscal policies by increasing government spending during economic slowdowns, the IMF loan programmes call for pro-cyclical policies that cut back on public spending and investment. So both when times are good and during economic downturns, the IMF always advises countries to keep low fiscal deficits. Regarding the IMF’s deficit-reduction targets, the major concern with excessive deficit-reduction policies is that countries could be allocating much more to public expenditure if they were not using scarce revenues to pay down the level of the deficit. Oxfam International attempted to express the seriousness of these sacrifices by conducting a survey of twenty IMF programmes and showing what could have happened differently had countries channelled deficit-reduction monies into more health or education spending instead. In some cases the projections would have doubled or tripled those budgets (Oxfam 2003). The IMF’s demands for deficit reductions have long been blamed for consequent reductions in social spending, particularly during the early IMF stabilization loans in the 1980s, when public expenditures on social services were reduced dramatically. This bias persists twenty-five years on, despite rising poverty in several regions, notably sub-Saharan Africa. The conventional measure of the ‘fiscal deficit’ is the difference between total government expenditure and current government revenue, usually measured as a percentage of GDP. While being clear as an accounting concept, it is not above controversy as an economic entity. A major argument of the IMF has long been that high budget deficits cause higher inflation rates. There are, however, many studies in the economics literature on this point that challenge the IMF claim (de Haan and Zelhorst 1990). The IMF worries that if countries run up budget deficits that are too high, servicing the interest on this debt over future years will comprise a larger and larger portion of available expenditure, and that debt servicing on previous years of deficits could become unsustainable. Therefore, it claims its approach to deficit spending is cautious. According to Cardim de Carvalho (2005a), however, there are two fundamentally different ways of looking at the world of economic policy as regards increasing government spending – the IMF’s view, as articulated by Heller (2005) in an IMF policy paper directed at civil society entitled ‘Understanding fiscal space’, and the traditional Keynesian view promoted in the successfully industrialized countries. The IMF note

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is from an accountant’s point of view and offers some commonsense observations, such as reminders about how recurring expenditures will have to be financed every time the expenditure is made, or about how expenditures financed by foreign aid may demand some corresponding internal expenditure, with the resultant worry as to how this domestic part will be financed, and so on. These points are just the obvious, however, and not very enlightening about how to get public expenditure levels from where we are today to the much higher levels on HIV/AIDS, health and education needed to achieve the MDGs. The important questions about ‘fiscal space’ are, of course, what is it and how large is it? There are two ways to understand the expression. The first is the public accountant’s perspective, which asks whether the expenditure generates future revenues or, if this is not the case, whether it will be possible to find other sources of finance, by raising taxes, cutting other expenditures or finding other revenue streams (such as charging fees for the use of public goods), etc. This is a microeconomic view. It takes the government as an entity whose expenditures are constrained by its current sources of revenue so that to spend more money on something (building schools, for instance) requires either cutting a corresponding amount of spending on something else or raising the additional revenue by increasing taxes. Of course, if other revenues have to be found, and everything else remains the same, others elsewhere in the economy will have to cut their own expenditures to accommodate any increase in government spending. This is called the ‘crowding out’ effect in economics. In contrast to this view there is the Keynesian view, still promulgated widely in the industrialized countries but not permitted by the IMF, which relies on the existence of an ‘income multiplier’ that changes the adjustment process profoundly, as all of the rich countries have long understood. Instead of seeing government expenditure as crowding out private spending, it suggests the opposite: some types of government spending can create new income by inducing increased production, so that in fact they do not cause private spending to fall but actually to rise. The people who sell goods to the government spend their income on other goods, in a second round of spending, creating income for other sectors of the economy, and so on. This is the ‘crowding in’ effect, suggested by Nicholas Kaldor, a British Keynesian economist who was an adviser to Labour governments (Cardim de Carvalho 2005a). Thus, a true measure of ‘fiscal space’ is not merely a budgetary question, but a macroeconomic question: can the increase in government demand lead to an increase in output and thus in real incomes? The

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answer to this question may be different for industrialized and developing countries. It is the economic ‘output gap’ which matters (the difference between the current and the potential level of economic growth). If there is idle capacity and unemployment of skilled workers in the economy, government spending can stimulate an increase in economic output. Out of these newly created incomes, new taxes will be collected without the need to raise tax rates, so that fiscal deficits may be avoided. Industrial economies and even middle-income economies usually have a potential output that is routinely greater than actual output, so that fiscal spending may increase without creating macroeconomic problems (see the US experience since the 1990s). The macroeconomic fiscal space in the USA is obvious. Whether there will be a budget deficit or not depends, in the case of a sophisticated economy such as the USA’s, on many factors, but the ‘real’ impact on the economy is positive without a doubt. Cardim de Carvalho (2005a) explains that in very poor economies, the degree of the output gap will vary, but if output could be raised significantly, fiscal space would actually be endogenous. If potential output is too low, domestic policies may not do much in the short term, although if governments spend on the creation of human and physical capital now (increasing future productive capacity), they may help to increase potential economic output in the future (multiplier effect). But seeing the wisdom of making such upfront investments requires a more dynamic understanding of investments and a longer-term time horizon. That is a world away from the IMF’s zero-sum and short-term notion of government spending ‘crowding out’ private investment – with IMF demands that any increase in spending in one area must be offset by budget cuts elsewhere in order to keep what it considers a sustainable budget deficit level. The IMF’s ‘Understanding fiscal space’ does not even begin to address the important questions about such major alternatives. Most development policy of the last twenty-five years has been confined within the IMF’s narrow logic of ‘availability of resources’, in which a country has to spend only whatever it can raise in tax revenues and from foreign aid. This perspective, however, is not shared by industrialized countries, which regularly engage in strategic deficit spending during economic slowdowns and recessions. The IMF’s position on deficit spending tends to neglect any distinction between wasteful or productive spending and the possibilities for Keynesian multiplier effects that could pay off down the road, as pointed out by Cardim de Carvalho (2005a). For example, charging up one’s credit card on lavish parties and expensive vacations is one kind of

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debt, but taking out student loans for a university education or buying a home with a thirty-year mortgage is quite a different kind because of the multiplier effects: the former is debt for short-term consumption and will indeed be a burden to pay over time with no further benefits, while the latter type of debt is actually a long-term productive investment that will not only pay for itself but will provide exponential economic benefits over the long run. The same thing holds for different types of deficit spending in developing countries. For example, an excess of expenditure on expanding infrastructure can create productive capacity in the future and will likely have a different impact to a one-off excess of expenditure on consumption subsidies (Raghbendra 2001; Tanzi 1993; Hermes and Lensink 2000; Gemmell 2000). The IMF’s unwillingness to acknowledge this is just one example of how the Fund’s logic has trapped poor countries into a destructive cycle of unnecessarily low spending over the last twenty-five years. EURODAD undertook an examination of twelve IMF loan programmes in 2003 and found that overall deficits were scheduled (permitted) to increase in only three countries over the next three years (EURODAD 2003). Other studies of IMF programmes denote a similar trend. For example, ‘staff appear to have behaved rather passively under this [fiscal policy] heading’, failing in most cases to come up with alternative fiscal scenarios to be discussed with national authorities (Robb 2003). A 2007 examination of deficit-reduction targets by the Washington-based Center for Global Development found that ‘The evidence suggests that IMF-supported fiscal programmes have often been too conservative or risk-averse. In particular, the IMF has not done enough to explore more expansionary, but still feasible, options for higher public spending’ (CGD 2007, emphasis added). A 2008 ActionAid survey of fourteen new or augmented IMF loans given to developing countries in response to the 2008 price increase for food and fuel imports found that eleven of the fourteen loans require that fiscal deficits be brought below 3 per cent of GDP within a year or two (Muchhala and Rowden 2008). Lost in the unnecessarily lower budget deficits are forgone public investments as a percentage of GDP (Elbadawi 1992; Faini and de Melo 1990; Corbo and Rojas 1991). These are public investments that could have laid the foundation for higher economic growth in the future, but were not allowed to be invested. Roy et al. (2006) found that public investment spending has been declining since the 1980s (as a share of GDP) and the declines are even more striking in the specific case of public investment in infrastructure.

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Several, related, reasons are identified in the policy literature to explain these trends in public investment spending. These include the fiscal consolidation that was part of the implementation of structural adjustment programmes, controversies about infrastructure project aid, and misplaced theoretical assumptions about compensating private investment, and about ‘crowding-out’ (ibid.). There is indeed widespread evidence that fiscal accounts are highly pro-cyclical in the developing world (Kaminsky et al. 2004). In Latin America, for example, the evidence provided by Martner and Tromben (2003) indicates that out of forty-five episodes of cyclical swings in 1990–2001, twelve were neutral (in the sense that the structural fiscal deficit remained unchanged), twenty-five were pro-cyclical and only eight counter-cyclical. The costs of pro-cyclical fiscal policies are high. During upswings, abundant financing may lead authorities to initiate some projects that have low social returns. During downswings, cuts in spending may mean that investment projects are left unfinished or take much longer to execute than planned, thereby raising their effective cost. In turn, extended cuts in public sector investment may have long-term effects on growth (Easterly and Servén 2003; IMF 2004a). To the extent that current spending is reduced during downswings, some valuable social programmes may be cut, the existing structure for the provision of public and social services may become disjointed, and reductions in real wages may lead to the loss of valuable staff. Thus, in general, ‘stop-go’ cycles significantly reduce the efficiency of public sector spending (Ocampo 2005a). According to Roy et al. (2006), the neoliberal model driving the IMF’s fiscal policy prescriptions inadequately recognizes the role of public investment in poverty reduction and economic growth. Its ­approach implicitly considers public investment as an endogenous variable bound by strict fiscal deficit targets rather than as a catalytic force for economic and human development. This is incompatible with an enabling medium-term development framework such as that required to achieve the MDGs. As the Millennium Project argues, ‘without public-led investment in infrastructure and human capital, the private sector simply stays away [because] many of the preconditions for growth … are public goods, meaning in shorthand that the social returns to providing them are much higher than the private returns’ (ibid.). United Nations Development Programme (UNDP) empirical research (Roy and Weeks 2004) shows that the countries whose macro­ economic frameworks included strong public investment strategies

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enjoyed substantial and stable levels of economic growth with high poverty elasticities. On the other hand, governments that sought to achieve deficit targets without reference to growth and poverty objectives suffered from economic stagnation. This demonstrates that the need to maintain sound fiscal policy to maintain macroeconomic stability goes beyond managing the fiscal deficit and public debt. The economic function of government is not merely to maintain a stable macroeconomic environment; its primary responsibility to its citizens is to foster the general welfare (Roy et al. 2006). In 2005, the UNDP stepped up its challenge to the IMF’s neoliberal position of enforcing strict fiscal restraint as a means to achieving macroeconomic stability, claiming such policies were not pro-poor. The UNDP is advocating the opposite approach – increased public spending and investments as a way forward to boosting confidence for the private sector to participate in the economic processes of growth and development. The UNDP suggests that large public sector investment is the most appropriate way of ensuring a pro-poor growth scenario that benefits a broader section of society in developing countries, but this thinking runs directly counter to the IMF’s long-held view that large public sector spending ‘crowds out’ the private sector, which it sees as the engine driving growth. Though the UNDP agrees that macroeconomic instability harms the poor, it insists that policy frameworks that aim exclusively at securing stability do not necessarily benefit the poor. It also agrees that while fiscal expansion has the tendency to generate government deficits and inflationary pressures, the long-term pay-offs, in terms of capital accu­ mulation and technological innovation, deliver lasting gains to the poor. The UNDP’s support for judicious public spending was the result of case studies it conducted in some developing countries, including Vietnam, Mongolia and Indonesia, among others, that are saddled with poverty as a result of reduced public spending under structural adjustment (Adabre 2005). The policy implication for this rising inequality, says the UNDP, is that expansionary fiscal measures are necessary to generate growth, which is pro-poor, and will lay the foundation for economic development. Trade liberalization and its consequences

Trade liberalization is the driving force of economic globalization, pursued relentlessly by rich nations and international financial institutions at the expense of industrialization in many developing countries.

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When a country liberalizes its trade protection too much or too quickly, foreign imports often flood into domestic markets and local producers are priced out by cheaper, better-marketed goods. Exports also tend to grow, but by less, restricted by relatively low demand for typical developing-country exports – such as raw materials. As a result, local producers sell less than before trade was liberalized and short-term gains to consumers are wiped out in the long term as incomes fall and unemployment rises. This has been the story of sub-Saharan Africa and other regions over the past twenty years. The IMF officially claims that it seeks to facilitate the expansion and balanced growth of international trade. A 2007 internal staff review of the ‘Fund work on trade’ concludes that the IMF has consistently advocated open trade regimes as a means to improve economic efficiency, combat rent-seeking and corruption, and promote income growth. While providing a broad overview of the IMF’s work on trade policy, including loan conditions, the internal review neglected to address farreaching questions relating to the appropriateness and effectiveness of the IMF’s advice on trade reforms. The IMF’s approach to trade has always drawn substantial criticism. According to critics, the IMF loan programmes calling for trade liberalization have been too fast-acting; its programmes have not included appropriate social safety nets for affected vulnerable parts of the population, and have ignored market imperfections in domestic and world markets; the IMF has failed to take into account the impact of tariff reductions on the revenue base and fiscal sustainability; trade liberalization conditions have been driven by the agenda of developed countries, which dominate decision-making on the IMF executive board; IMF requirements for individual countries to liberalize unilaterally have decreased their bargaining power in the multilateral trade liberalization negotiations, such as at the WTO; the IMF has been too soft on tariffs and non-tariff barriers in industrial countries as well as on other policies of industrial countries that amplified global trade imbalances. The rich countries that dominate the IMF and World Bank executive boards and negotiations at the WTO continue to argue that rapid trade liberalization policies will improve the plight of the poor in developing countries (Rowden 2001; Peet 2003). They claim, for example, that lowering developing countries’ barriers to trade in manufactured goods, as proposed in the WTO’s ongoing non-agricultural market access (NAMA) negotiations on lowering industrial tariffs, would translate into poverty reduction by boosting economic growth, prices and employment opportunities. In fact, there is now substantial evidence to back up

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NGOs’ long-standing claims that rapid liberalization policies actually cause a net loss for low- and middle-income countries (Shafaeddin 2005; Stein 1992). UNCTAD concluded from a study of the relationship between trade liberalization and poverty in the world’s poorest countries that: ‘the incidence of poverty increased unambiguously in those economies that adopted the most open trade regimes’ (UNCTAD 2004). According to neoliberal trade theory, the most frequently cited propoor effect of the liberalization of imports is to bring benefits to poor people in developing countries by reducing the price of the imported goods they consume. But such benefits must be weighed against the reality that a high percentage of poor people, particularly women, produce goods for the domestic market. Sudden exposure to competition from floods of cheaper imports can prove disastrous for their jobs and incomes. Another supposed benefit of trade liberalization is its impact on employment opportunities; overall, it is supposed to create more jobs than it destroys. Employment opportunities in any given country, however, depend on the strength and performance of its economy, and many developing countries have seen their domestic manufacturing capacity simply wither away when faced with the enormous market power of multinational companies. Millions of workers have lost their livelihoods as a result. In Chile, for example, net employment in manufacturing fell by about 8 per cent following trade liberalization, while Senegal lost one-third of all manufacturing jobs. Other examples of devastating ‘deindustrialization’ following trade liberalization include: Zambia, where employment in formal sector manufacturing fell by 40 per cent in just five years following trade liberalization (IDS 2000; Christian Aid 2005); Ghana, where employment in manufacturing fell from 78,700 in 1987 to 28,000 in 1993 following trade liberalization (Lall 1997; Christian Aid 2005); and Malawi, where textile production fell by more than half between 1990 and 1996. Many firms manufacturing consumer goods like soap and cooking oils went out of business, and the poultry industry collapsed in the face of cheap imports (UNCTAD 2004). According to Pieper (1998), neoliberal macroeconomic stabilization and the adjustment experience of the 1980s and 1990s have been characterized by stagnating productivity and per capita income growth and low capacity utilization (particularly of labour) accompanied by increasing inequality. Since the early 1980s, there has been an appreciable slowdown of industrial development in many developing countries, in particular in Latin America and sub-Saharan Africa. By the late 1990s, many African

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countries had suffered sustained ‘deindustrialization’ of their manufacturing capacity, and as a consequence African economies remain the least industrialized in the world. Similarly in Latin America, reduced economic growth has, not surprisingly, been accompanied by underutilization of industrial capacity and deindustrialization. This, on the other hand, stands in stark contrast to the recent experience of successful industrialization and the rapid growth rate of many Asian countries, many of which did not adopt, or did not fully adopt, neoliberal policy reforms. Trade liberalization does create new jobs, but job losses have typic­ally occurred at a faster rate than job creation. In addition, the new jobs are rarely similar to the ones lost, making it difficult for many citizens to regain formal employment. The evidence suggests that in many developing countries trade liberalization has favoured skilled labour over unskilled. This is a significant problem in the battle against poverty. The sale of unskilled labour is the single most important source of income for poor people, but without new jobs for the unskilled, trade liberalization can hardly claim to be pro-poor. Moreover, many of the new jobs created after trade liberalization are located in so-called Export Processing Zones (EPZs) – special port areas detached from the rest of the domestic economy in which there are no trade barriers or labour laws. Owing to their disconnected nature, these zones do not produce the traditional beneficial backward and forward linkages and spin-off effects of foreign investment, such as paying taxes to the host government, transfers of technology to local firms, or requirements to purchase needed goods and services from domestic companies. While all of the rich countries traditionally insisted upon such benefits from foreign investors in their economies, under neoliberalism the IMF tells poor countries they may not do so (Chang 2002). There has also been considerable damage done by rapid trade liberal­ ization because it has often resulted in a major loss of essential tax ­revenues needed for social programmes or public investment. Inter­ national trade taxes still make up a large proportion of public revenue in many developing countries – 27 per cent of total government revenue across sub-Saharan Africa, for example, and 37 per cent in South Asia, the region most dependent on tariff revenues (Cordoba et al. 2004). This compares with a mere 0.8 per cent for high-income OECD countries. In 2005, Christian Aid commissioned economic modelling which concluded that trade liberalization had cost twenty-two African countries more than US$170 billion in lost GDP since the 1980s (Kraev 2005). Their findings also confirmed that imports tend to rise faster than exports following trade liberalization, and that this results in quantifiable losses

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in income for some of the poorest countries in the world (Christian Aid 2005). The UNCTAD Least Developed Countries ­Report for 2004 noted, equally damningly, that: ‘even where LDCs have increased their overall export growth rate, as many did in the 1990s, better export performance rarely translated into sustained or substantial poverty reduction’. Similarly, a 2006 report by the World Bank’s own Internal Evaluation Group (IEG) examined trade liberalization programmes during 1987–2004 and found that while the programmes had opened markets over the last two decades, they have not done enough to tackle poverty and boost growth in developing countries’ exports (IEG 2006). A recent IMF staff research paper acknowledged the scale of this problem, observing: ‘With the public finances of many developing and emerging market countries still heavily dependent on trade tax revenues, further trade liberalization may be stymied unless they are able to develop alternative sources of revenue.’ The report went on to investigate to what degree 125 countries had been able to make up revenue lost through trade liberalization from other sources between 1975 and 1990, and found ‘troubling’ answers. While high-income countries had recovered revenues with ease, middle-income countries had recovered only about 35–55 cents for each dollar of trade tax revenue lost, and low-income countries had recovered essentially none (Baunsgaard and Keen 2004). Neoliberal theory and IMF officials have long promised that the newly unemployed rural small farmers will be ‘freed up’ by trade liberalization to look for new opportunities on more efficient and higher-value agricultural exports farms or in urban manufacturing sectors. The 2005 Christian Aid study concluded, however, that among thirty-two countries studied, while exports generally did increase, most countries simply exported more of the same goods. Worse, the 2004 UNCTAD annual report on LDCs found that many lost market share following trade liberalization, as their exports failed to compete in international markets (Christian Aid 2005). UNCTAD (2008) found that farmers in LDCs have been particularly hurt by trade liberalization as a high number of LDC producers have found it difficult to compete in their own markets for many key foodstuffs following trade liberalization. It is clear that rapid or premature trade liberalization is not achieving the dynamic, diversified or pro-poor pattern of development that the IMF has long promised. On the contrary, such trade liberalization has locked Africa and other countries into greater dependence on a few agricultural products whose prices have been declining on world markets for decades. Even where export prices have increased, the higher GDP growth has not translated into diversification or development. In such a

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context, national economic plans for industrial development will remain severely hampered. Neoliberal theory sidesteps the inconvenient fact that developing countries are rivals with each other as they each try to get more of their exports into Northern markets, and when one country manages to increase its exports it often does so by crowding out the exports of another developing country. This is the ‘fallacy of composition’ as it applies to the developing world. Export-led development may work when adopted by one or even a few countries, but it takes on a zero-sum dimension when adopted by all (Palley 2002). Labour flexibility and its consequences

Another major area of structural adjustment reforms over the years has been promoting ‘labour flexibility’ – meaning making it easier for workers to be fired, making it harder for them to form unions and collectively bargain for better wages or working conditions, and a watering down of government commitments to minimum wage laws. The IMF has advised regulatory changes throughout the developing world to remove restrictions on government and private employers firing or laying off workers. The IMF has actively promoted government downsizing, even though in many countries the government is the major employer and there are few prospects for alternative employment. The IMF has also viewed many worker benefits as too costly (if they are provided by the government) or too inefficient (if legally required of private employers). It has urged major scaling back of government pension programmes throughout the world while promoting privatization of public health insurance and pension systems. And the IMF has even called for the rollback of minimum wages in countries like Haiti. In 2000, a study by the International Labour Office (ILO) on the impacts of structural adjustment on labour and employment found that in Africa since the introduction of adjustment programmes, the percentage of the labour force working in formal sector jobs declined (van der Hoeven 2000). This was mainly due to a declining number of workers in state enterprises and the inability of the economic and social system to generate sufficient jobs in other sectors to accommodate the retrenched workers from the public sector. Industrial and formal service employment have hardly increased (van der Geest and van der Hoeven 1999). By 2000, exchange rates had been adjusted, currencies had become (almost) fully convertible and budget deficits were decreased, and in most countries per capita growth had become positive. Despite these signs that countries have complied with the

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IMF’s demands for macroeconomic stability, however, the economic recovery in Africa had not yet yielded a massive creation of new jobs (van der Hoeven 2000). By the term ‘labour flexibility’ the IMF and the World Bank have meant removing legal protections that inhibit employers from firing workers; revamping public pension systems to generate ‘new savings’ by cutting back on benefits for retired workers; slashing government workers’ salaries; privatizing the financial and energy operations of the government. Lloyd and Weissman (2001) reviewed hundreds of loan documents between the IMF and the World Bank and twenty-six countries which included policy reforms for ‘labour flexibility’, including: civil service downsizing; privatization of government-owned enterprises, with lay-offs required in advance of privatization and frequently following privatization; promotion of labour flexibility – regulatory changes to remove restrictions on the ability of government and private employers to fire or lay off workers; mandated wage rate reductions, minimum wage reductions or containment, and spreading the wage gap between government employees and managers; and pension reforms, including privatization, that cut social security benefits for workers. The IMF and the Bank say these policies may inflict some short-term pain, but are necessary to create the conditions for long-term growth and job creation. Critics respond that the measures inflict needless suffering, worsen poverty and actually undermine prospects for economic growth. Lloyd and Weissman (ibid.) found that the most consistent theme in the IMF/World Bank structural adjustment loans was that the size of government should be reduced. Typically, this means that the government should spin off certain functions to the private sector (by privatizing operations), and that it should cut back on spending and staffing in the areas of responsibility it does maintain. The IMF/Bank support for government downsizing is premised, first, on the notion that the private sector generally performs more efficiently than government. In this view, government duties should be limited to a narrow band of activities that the private sector cannot undertake. In its 2001 draft ‘Private Sector Development Strategy’, the World Bank argued that the private sector does a better job even of delivering services to the very poor than the public sector, and that the poor prefer the private sector to government provision of services. A second rationale for shrinking government is the IMF and World Bank’s priority concern with eliminating government deficits. The institutions seek to cut government spending as a way to close and eventually eliminate the

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shortfall between revenues and expenditures. Because the government is often the largest employer in both rich and poor countries, such policies can be devastating, but this is especially so in poor countries, which generally have weakly developed private sectors. Sudden and massive cuts in government spending can throw tens or hundreds of thousands out of work, and contribute to a surge in unemployment, and to a consequent reduction in the bargaining power of all workers. According to Lloyd and Weissman (ibid.), many countries were mandated to cut their public sector payrolls under IMF and World Bank loan programmes. The civil service downsizing included in IMF and World Bank conditions is frequently bound up with broader privatization plans: under IMF and Bank instruction, governments agree to lay off thousands of workers to prepare public enterprises for privatization. But privatization itself is then frequently associated with additional rounds of downsizing, as well as private employer assaults on unions and demands for wage reductions. Privatization is a core element of the structural adjustment policy package. Blanket support for privatization has long been a cornerstone of the neoliberal policy reforms in structural adjustment. The range of IMF and Bank-supported or -mandated privatizations is staggering. The institutions have overseen wholesale privatizations  in economies that were previously state-sector-dominated – including former communist countries in central and eastern Europe, as well as many developing countries that had heavy government involvement in the economy – and also privatization of public services that are regularly maintained in the public sector in rich countries, such as water provision and sanitation, healthcare, roads, airports and postal services. Another core tenet of IMF and Bank lending programmes is the promotion of ‘labour flexibility’ or ‘labour mobility’, the notion that firms should be able to hire and fire workers, or change terms and conditions of work, with minimal regulatory restrictions. The theory behind labour flexibility is that, if labour is treated as a commodity like any other, with companies able to hire and fire workers just as they might a piece of machinery, then markets will function efficiently. Efficient functioning markets will then facilitate economic growth. Critics say the theory does not hold up. Former World Bank chief economist Joseph Stiglitz explained, ‘As part of the doctrine of liberalization, the Washington Consensus said, “make labour markets more flexible.” That greater flexibility was supposed to lead to lower un­ employment. A side effect that people didn’t want to talk about was that it would lead to lower wages. But the lower wages would generate more investment, more demand for labour. So there would be two beneficial

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effects: the unemployment rate would go down and job creation would go up because wages were lower.’ But ‘The evidence in Latin America is not supportive of those conclusions. Wage flexibility has not been associated with lower unemployment. Nor has there been more job creation in general’ (ibid.). Few things more clearly run contrary to workers’ interests than wage reductions. Wage freezes, wage cuts and wage rollbacks are all commonplace in IMF and World Bank lending programmes, as is ‘wage decompression’ – increasing the ratio of highest- to lowest-paid worker. These initiatives usually occur in the public sector, where the government has authority to set wages and salaries, and where the rationale is to reduce government expenditures. The institutions have elabourate justifications for opposing wage supports, claiming that a minimum wage law will prevent some employers from hiring, thus preventing a reduction in unemployment. Pension and social security reform, including liberalization reforms and privatized social security systems, has been a major thrust of the World Bank and IMF’s proposals in this area. By 1991, the ICFTU was reporting that the World Bank had been involved in pension reform efforts, increasingly towards privatization, in over sixty countries. Dean Baker, co-director of the Center for Economic and Policy Research, says the Bank’s support for social security privatization is not based on the evidence of what works efficiently for pension systems. ‘The single-mindedness of the World Bank in promoting privatized systems is peculiar,’ he says, ‘since the evidence – including data in World Bank publications – indicates that well-run public sector systems, like the Social Security system in the United States, are far more efficient than privatized systems. The administrative costs in privatized systems, such as the ones in England and Chile, are more than 1500 per cent higher than those of the U.S. system.’ Baker adds that ‘the extra administrative expenses of privatized systems come directly out of the money that retirees would otherwise receive, lowering their retirement benefits by as much as one-third, compared with a well-run public social security system. The administrative expenses that are drained out of workers’ savings in a privatized system are the fees and commissions of the financial industry, which explains its interest in promoting privatization in the United States and elsewhere’ (ibid.). Despite the examination of hundreds of IMF and World Bank documents, Lloyd and Weissman (ibid.) found a striking, near-perfect consistency in the institutions’ recommendations on matters of key concern to labour interests. None of the documents supported government takeover

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of services or enterprises formerly in the private sector; they virtually never made the case for raising workers’ wages (except for top management); nor do they propose greater legal protections for workers. Cavanagh et al. (2001) describe how several neoliberal policies promoted by the IMF and the World Bank overlap and reinforce a downward spiral for employment rates. While the IMF claims its ‘labour flexibility’ reforms are intended to make countries more competitive and attractive to foreign investment, a 1995 UNCTAD report found employers were changing labour laws to make it easier to fire workers and undermine the ability of unions to defend themselves, rather than to add to productive capacity and create new jobs. This weakened bargaining power for workers translates into increased worker insecurity, lower pay and worse working conditions. Employment then becomes compromised further by a host of interconnected neoliberal policy reforms, starting with the IMF requirement that countries privatize public companies and services and fire public sector workers. As compliant government agencies downsize, the ranks of the unemployed grow faster than the private sector can absorb them. Additionally, as other IMF liberalization conditions have countries removing barriers to foreign investment and trade, the flood of cheaper imports often makes it much harder for private domestic producers to compete, often leading to the closure of businesses and lay-offs. Further, because many developing countries export similar, often identical, primary agricultural products and mineral resources to the industrialized nations, when the IMF and the World Bank encourage multiple countries to increase their exports at the same time a predictable glut on world markets results, and the prices for such goods then collapse, adding yet further losses of livelihoods. An additional difficulty results from the IMF policy of devaluing national currencies to promote exports, which makes needed imports (which usually include energy resources and machinery) more expensive for many developing countries, squeezing import-reliant domestic industries, which are then forced to lay off even more workers. Lastly, the IMF monetary policy of raising interest rates prevents small businesses from getting the business loans and capital needed to expand production and employment or stay afloat, often leading them to shut down, leaving even more workers unemployed (ibid.). Such policies have contributed to the fact that over one billion adults – more than 30 per cent of the global workforce – are unemployed or seriously underemployed today. Since 2004, the World Bank and the IMF have been pushing for the weakening of labour protections with the publication of the World Bank’s

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annual ‘Doing business’ report – the institution’s highest-circulation publication – which purportedly grades countries on the friendliness of the investment climate for foreign and private investors. It actually gives lower grades to countries with basic worker protections. The World Bank has not, however, provided any evidence from developing countries to support its assertions that developing and transition countries that adopt specific labour market deregulation measures will obtain more investment and employment (Bakvis 2006). Although IMF staff usually acknowledge that they have no expertise on labour issues, the IMF also invokes the ‘Doing business’ hiring and firing indicators in its labour deregulation recommendations, as with Ecuador, for example (ibid.). Country-level staff of the World Bank and the IMF are using the ‘­Doing business’ indicators to drive a one-sided approach to labour market reform in developing and transition countries. They have used ‘Doing business’ to push countries to bypass tripartite consultation mechanisms for reforming labour laws, or other incomes policies negotiated between labour, industry and governments. Despite the publication’s implicit endorsement of the internationally endorsed core labour standards, World Bank and IMF staff have used annual ‘Doing business’ reports to encourage countries to eliminate the very measures that had been put in place to implement core labour standards, such as programmes to end discriminatory practices. The basic core labour standards are internationally agreed fundamental human rights for all workers, irrespective of countries’ level of development, defined by the ILO Conventions that cover: the freedom of association and the right to collective bargaining; the elimination of discrimination in respect of employment and occupation; the elimination of all forms of forced or compulsory labour; and the effective abolition of child labour, including its worst forms. Lee et al. (2008) found that since the ‘Doing business’ reports were launched in 2004, the World Bank’s assessment of existing regulations in developing countries has been predominantly negative. Rigid labour market policies are blamed for poor labour market performance, such as low productivity, high unemployment and informal employment, while a more flexible regulatory framework is perceived to be associated with increased growth and employment creation. Not only do trade unions, academics and lawyers question the neoliberal presumption that unregulated labour markets produce better employment, but the ‘Doing business’ reports are also criticized for their failure to recognize and measure any ways in which labour laws can

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generate positive economic outcomes. A June 2008 report of the World Bank’s Independent Evaluation Group (IEG) confirmed that the ‘Doing business’ reports ‘measure costs but not benefits of regulation or other dimensions of labour market flexibility’. Despite such criticisms, the World Bank continues to use the ‘Doing business’ indicators to inform its policy advice on labour flexibility reforms in places such as Turkey, Mali, South Africa, Serbia, Ukraine and Panama. Not until as recently as 2006 did the World Bank finally commit to ensuring that the basic International Labour Organization (ILO) core labour standards (CLS) would be adequately recognized and protected in its operations. But the official commitments to CLS mean little when the World Bank lauds countries such as Belarus in its 2008 ‘Doing business’ report at the same time as the ILO condemned Belarus for curtailing of workers’ rights as a violation of the core labour standards, leading to the European Union’s withdrawal of trade preferences under the Generalized System of Preferences in 2007. As Lee et al. (ibid.) noted, one wonders how helpful World Bank advice is when it endorses unacceptable labour standards that result in reduced access for Belarus exports to the world’s largest market. Even before the global financial crisis had spilled over into the real economy in late 2008, the ILO estimates had already forecast the loss of 20 million jobs globally by the end of 2009, and a 40 million increase in the number of people living on less than $1 per day. Trade unions fear that with the deepening of the recession the problem will be compounded by the IMF’s continuing monetarism and ‘labour flexibility’ policies will only make the final impacts significantly worse. In January 2009, an eighty-strong high-level delegation of trade union representatives from around the world met with the IMF and the World Bank and their executive boards to push for further immediate anti-recession measures and effective global regulation to ensure future global economic stability. The delegation noted that While the IMF has been encouraging industrialized countries to adopt vigorous fiscal stimulus polices, which we believe it is correct in doing, it has been putting forward a much more traditional ‘fiscal discipline’ approach in its advice to most developing countries. Developing and transition economies are now rapidly beginning to suffer from the global economic crisis and the IMF and the World Bank should jettison failed policies of the past and focus their efforts on maintaining and creating employment, both to deal with the present crisis and to lay the foundations for economic recovery. (ITUC 2009)

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Regarding several large IMF emergency loans to countries particularly affected by the economic crisis of late 2008, ITUC affiliates expressed concern at some of the conditions or required ‘prior actions’ that feature in many of these, such as interest rate and utility price hikes, restrictions and even reductions in wages, particularly in the public sector, and reductions in pension payments and other public spending cuts. ITUC noted, ‘All of these will dampen the level of activity of economies already in recession and lead to a reduction in workers’ living standards, and are inconsistent with the fiscal stimulus polices the IMF is encouraging rich countries to adopt’ (ibid.). According to UNCTAD’s annual report on least developed countries (LDCs), working-age population of the LDCs has been increasing at an annual pace of 2.6 per cent since the 1980s, a rhythm that is projected to continue unabated until 2020. In order to bring about a significant dent in poverty, it is necessary to strongly increase employment opportunities and labour productivity. Yet in almost all LDCs there continues to be an imbalance between the rate of growth of the labour force, which is very rapid, and the rate of capital accumulation and technological progress, which is generally slow. As a result, most workers have to earn their living using their raw labour, with rudimentary tools and equipment, little education and training, and poor infrastructure. Labour productivity is low and underemployment is widespread (UNCTAD 2006: 167–92). The bene­ ficial impact of economic growth on poverty reduction in LDCs has been seriously reduced because of the failure to generate sufficient employment opportunities (particularly in the formal sector) and to raise labour productivity, especially that of people working in informal sector activities both inside and outside agriculture. The neoliberal export-led growth strategy implemented by most LDCs over the last few decades has contributed to an overall export expansion and overall economic expansion until the global recession of 2008. This export-led growth, however, has not led to successful economic development, often because the export sectors often have few beneficial forward or backward linkages with domestic firms in the rest of the economy and therefore there are limited multiplier and job-creating effects. In many cases, special export processing zones (EPZs) have developed as enclaves for foreign investors and therefore have little positive impact on other segments of the population. Beyond manufacturing in EPZs, this is also true of countries that offer natural resource extraction and tourism enclaves. As Meyer (2004) explains, if a developing country does not have a

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critical mass of linkages that provide spin-off benefits to its local industrial firms because of insufficient domestic production of intermediate inputs or insufficient domestic demand from either other industrial firms or final consumers, the developing country will have to import a large proportion of production inputs and export the bulk of output without offering much domestic value-added. As a result, the volume of the country’s manufactured exports will rise strongly, while manufacturing value-added will go up only a little. By contrast, successful developing countries have used policies that actively establish domestic linkages, which are then able to provide a large share of the intermediate inputs from domestic production; consequently a larger share of output will go into further domestic production or consumption, and a large share of its exports is comprised of domestic value-added (ibid.; Kaya 2006). The essential problem with the dominant neoliberal model is that it prohibits governments from using such policies to develop such linkages. The failure of the neoliberal export-led economic growth model to translate into economic development is particularly evident in those LDCs where growth has been propelled by investment in the capitalintensive mining and oil industries (UNCTAD 2008). In contrast, UNCTAD’s LDC Reports for 2004 and 2006 argued that it is possible to see a more inclusive pattern of economic growth in countries where macroeconomic policies work to promote both the domestic demandside sources of economic growth and export expansion. This does not mean that exports cannot play an important role in a successful development strategy, only that the neoliberal model of the last few decades has effectively outlawed most of the macroeconomic policies that are necessary to promote expansion of domestic demand. Stein (2004) reports that sub-Saharan Africa’s GNP per capita has fallen dramatically since 1980. Its share of global merchandise exports has also declined from around 4.5 per cent in 1980 to around 1.4 per cent in 2001. In 1998, merchandise trade was actually 13 per cent below the 1980 level in nominal not real dollar terms. There has been virtually no structural transformation of trade. In 2000 8.3 per cent of sub-Saharan African exports (excluding South Africa) were in manufactured goods, around the same as the 1983 level, as most countries continued to rely on a handful of resource and cash crop exports. The result has been a disastrous decline in the terms of trade, which fell by 50 per cent between 1980 and 1998. The relative decline in the terms of trade in Africa is directly related to the shifts in global production. The emphasis on static comparative advantage in adjustment strategies with a focus on raw material and primary product exports is very problematic in an era

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in which knowledge constitutes a larger proportion of the value-added of commodities (ibid.; Reinert 2008). Consequences for agriculture and food security

Over the past thirty years, aid has been used to dismantle state involvement in agriculture, including states’ ability to regulate markets effectively. In the 1960s and 1970s, in most developing countries, the state had a primary role in agriculture, buying and selling farm produce at fixed market prices; providing training, extension support and subsidized inputs such as fertilizer and credit to farmers; and used protective trade tariffs on agricultural imports. Neoliberal policy reforms under structural adjustment programmes in the 1980s, however, began requiring that borrowing countries withdraw the state from these functions and allow agriculture to be driven by market forces. Much of the donor aid for agriculture was shifted from supporting such functions towards neoliberal policy and administrative reforms, while funding was drastically reduced for crop production and agricultural inputs such as seeds, fertilizer and machinery and diverted to support for agricultural financial services. UNCTAD (2008) has documented how public expenditure on agri­ culture has been neglected. Fan et al. (2008) estimate that public spending on agriculture as a share of agricultural GDP was just 4.2 per cent in LDCs in 2004, less than half the level in other developing countries (10.7 per cent). Public expenditure on agricultural research and development (R&D) was also very low in most LDCs (UNCTAD 2007: 174–7). Falling donor aid for agriculture has been a critical ­elem­ent in the low levels of public expenditure on agriculture in LDCs in recent years. This trend runs counter to the findings of case studies, which show that better welfare indicators are prevalent in areas where farmers have higher adoption rates for improved technology (Minten and Barrett 2008). The IMF and the World Bank have been strongly pushing for liberalization of agriculture in the developing countries for the past thirty years, but there have been shifts in the degree of intensity. In the 1980s, conditions attached to loans required removing subsidies and liberalizing prices within a rigid framework to roll back the state to a minor role. In the first phase, these states transformed their agricultural sectors, in effect by privatizing them by abolishing or reducing the dominant role of the state and allowing free markets and private companies to ­operate. This position was somewhat revised towards the end of the 1980s and until the mid-1990s, when the World Bank accepted the need

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for targeted subsidies in order to raise agricultural productivity. But then in the mid-1990s the World Bank reverted to a dogmatic belief in markets, opposition to government fertilizer subsidies and a push for a complete government withdrawal from agricultural markets. In the last few years, however, the World Bank has begun to soften its position again. While still strongly pushing trade liberalization and market reforms, the Bank now concedes that ‘market reforms have sometimes been implemented before the private sector gained the cap­ acity to step in when public companies were closed’, and it accepts the need for ‘appropriate transitional arrangements that may require some involvement of the public sector, but aiming for a medium- to long-term strategy that creates an enabling environment for private investment’ (Curtis 2007). The change in policy was evident in a 2006 World Bank report which conceded that private sector growth is not a panacea for the poor and that state intervention is needed, for policies must be targeted directly at addressing growing inequality. It even uses the ‘R’ word: ‘Converting the state into an agent that promotes equality of opportunities and practices efficient redistribution is, perhaps, the most critical challenge Latin America faces in implementing better policies that simultaneously stimulate growth and reduce inequality and poverty’ (World Bank 2006).The new flexibility can be seen in an increased role for government intervention in agriculture in certain areas in some countries that are pursuing a mix of state intervention and liberalization policies in agriculture. Zambia and Malawi, for example, have reintroduced new fertilizer subsidy programmes after abolishing them in the 1990s, while in Ethiopia government-backed companies dominate the fertilizer supply markets and continue to intervene to set grain prices (Curtis 2007). In an examination of recent agriculture reform policies in Zambia, Ethiopia and Malawi, Curtis (ibid.) found that not only has deep liberalization increased hunger for the poorest people, but also that the more recent steps towards ‘partial liberalization’ in some countries are barely an improvement. The faults lie as much with national governments as with the World Bank – both essentially undemocratic, elitist actors, who are ignoring the needs of poor farmers. The price for the current non-strategic mix of (government and liberalization) policies is being paid by some of the poorest people in the world (ibid.). The UN noted in 2005, ‘Far from improving food security for the most vulnerable populations, these agricultural liberalization reforms have often resulted in a deterioration of food security among the poorest’ (Ziegler 2006). According to ActionAid (2008b), policy reforms in

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agriculture have been particularly detrimental to food security because of the failure to recognize that food systems in rural areas depend on both income earned from selling crops and subsistence farming, whereby food is grown for household consumption. Women are mainly responsible for subsistence crop farming, but this has been viewed as household work, which does not receive investment, rather than an economic activity. Additionally, market-based reforms have focused on export-oriented agriculture to the detriment of food self-sufficiency. The emphasis on cash crops for export rather than for domestic consumption has also meant changes in land use and land ownership patterns, and changes in who controls agricultural markets (ibid.). In addition to years of IMF and World Bank loan conditions, market-based reforms in agriculture have also been particularly supported by aggressive trade liberalization negotiations, particularly the WTO’s Agreement on Agriculture. These policies have increased the con­centration of agricultural markets in the hands of multinationals, undermined local and national economies, eroded the environment and damaged local food systems. The latest manifestation of this is the EU’s Economic Partnership Agreements (EPAs), which could eliminate what little protection remains for local agriculture and agri-processing sectors. Structural adjustment has been accompanied by high levels of support from donors for agribusiness (ActionAid 2005c). While most farmers are smallholders, the global food system is controlled by a handful of giant corporations. The top ten seed companies control almost half the US$21 billion global commercial market, while the ten leading retailers control around a quarter of the US$3.5 trillion world food market. This means that smallholders are unable to capture a fair share for high-value agricultural products such as fruit, vegetables and meat (Cohen 2007). As the ability to subsist on small-scale agriculture has been under­ mined by market-based reforms, there has been accelerating trend towards urbanization as people shift from agricultural labour. Although the share of the economically active population in agriculture is still high, it is declining sharply in a number of LDCs. The LDC Report 2006 documented that it is increasingly difficult to make a living in agriculture, as average farm sizes are getting smaller and poor people cannot get access to the inputs that they need to increase productivity. Many children finish primary school, then seek work outside agriculture (UNCTAD 2006). Some observers have described what is happening as ‘de-agrarian-

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ization’ (Bryceson 1996). In this process, people living in rural areas increasingly survive through multiple activities, not simply farming, and more and more people also seek work outside agriculture. As with urbanization, this is occurring at an accelerating rate. Thus, even though agriculture is still the major employer in most LDCs, the annual increase in the number of people seeking work outside agriculture is starting to exceed the annual increase in the number of people seeking work within agriculture, marking a major change from the 1980s and 1990s. The LDC Report 2006 estimates that this employment transition will affect more than half the LDCs in the present decade and the rest during the next decade (ibid.). Such a transformation in the structure of employment could be seen as positive if people are pushed out of agriculture by rising productivity and pulled into other sectors by new employment opportunities being created outside agriculture. Yet only some Asian LDCs, which have managed to combine productivity increases in agriculture with expansion of manufacturing exports, show signs of this kind of structural transformation. For most LDCs, however, de-agrarianization is a negative process in which people are pushed out because they cannot make a living in agriculture or find remunerative work elsewhere. This is leading to the other face of poverty in LDCs – unemployed youth in the cities – which now coexists alongside the poverty associated with long-standing agricultural neglect. The consequences for development

In summary, this section has provided a broad overview of the neoliberal policies of privatization, liberalization and deregulation which have informed the dominant neoliberal economic development model and the terms for accessing foreign aid over the last thirty years. These policy reforms for developing countries, known as the ‘Washington Consensus’, have been pushed most prominently by the World Bank, the IMF and the US Treasury Department in Washington, DC, but also by other aid donors and multilateral lending agencies. After languishing on the sidelines for much of the twentieth century, neoliberal policies have since the 1980s gone from relative obscurity to overwhelmingly broad-based acceptance in academia, the corporate media and in major international institutions. Yet, despite these stunning political advances for neoliberalism in the last thirty years, this chapter has shown that many of the promises, assumptions and claims of neoliberal theory have not been substantiated, and efforts to adopt neoliberal policies have met with deadly consequences for the poorest people in the world.

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The claim that neoliberal policies would promote better economic growth rates was debunked by the actual outcomes, which showed much higher economic growth and per capita economic growth rates in the earlier twenty-year period (1960–80), before neoliberal policies were adopted. Where some developing countries have experienced higher growth rates in recent years, this was often due to price increases in international commodity markets but did not translate into any develop­ mental transformation. This kind of growth has been characterized by growing income inequality within countries and an inability to provide any beneficial forward or backward linkages to domestic firms. The claim that neoliberal policies would get the state out of the way and enable the private sector to flourish in agriculture has been debunked by the actual outcomes, showing a dearth of domestic private companies that have been able to fill the void. This has led to a crisis in public underinvestment in agriculture in many developing countries, where agriculture is the major source of employment. Consequently, agricultural productivity is very low and rising only slowly amid accelerating trends of urbanization and de-agrarianization, in which more and more people are seeking work outside agriculture, while few countries have been able to generate sufficient productive employment opportun­ ities for the growing numbers of young job-seekers. The claim that neoliberal policy reforms that limit or do away with state industrial policies would lead to a more efficient private sector, driving higher economic growth rates and leading to economic development, has been debunked by the actual outcomes – the deindustrialization of domestic industries. Severe and sustained cutbacks in trade protection, subsidized credit directed at key sectors, research and development for technological innovation and other forms of state support for industries have wiped out domestic firms, which were unable to afford the higher interest rates on commercial loans and compete with floods of cheaper imports. The claim that neoliberal policy reforms would make a more attractive investment climate for foreign investors (by weakening labour laws, cutting back on public spending to keep inflation and deficits low, and doing away with taxation or other regulations on foreign investors), and would attract greater FDI inflows, has been debunked by the actual outcomes, which have shown that most FDI goes to countries that have well-paid, healthy, literate and highly skilled workforces, and which have  made large investments in public infrastructure. Those countries that have adopted neoliberal policies have been much less able to make such large and sustained public investments in the health, literacy and

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skills of their workers or in public infrastructure. Consequently, most FDI inflows go to about a dozen or so emerging-market economies, many of which did not adopt or fully implement neoliberal reforms. Often, FDI is located in special enclaves, detached from the rest of the country, its labour laws or taxation net, leading to weak linkages between export sectors and the rest of the economy. The claim that neoliberal reforms to liberalize financial sectors would lead to higher economic growth and attract more FDI inflows has similarly been debunked by actual outcomes, which show that economic growth rates are no higher in countries that have liberalized their capital accounts – yet they are now much more vulnerable to destabilizing external shocks, and rapid inflows and outflows of capital. Additionally, proponents of capital account liberalization have neglected the crucial distinction between actual long-term FDI inflows and the increase in short-term, speculative portfolio investment (PI) inflows, which tend to contribute to exchange rate problems, destabilizing asset price bubbles and increased unemployment that typically result from mergers and acquisitions. The claim that neoliberal policy reforms to fiscal and monetary policy would lead to higher economic growth rates and successful economic development has been debunked by the actual outcomes, which have shown that IMF fiscal and monetary policies may be able to stabilize an economy, but they have done little to promote higher growth, higher public investment or employment. Monetarist policies that constantly prioritize empirically unjustifiable low rates for inflation and fiscal deficits in the short term over adequate financing for long-term public investment have kept public expenditure at unnecessarily low levels for much of the last three decades, leading to collapsing agriculture and infrastructure and dilapidated health and education systems. The claim that neoliberal policy reforms would lead to better degrees of poverty reduction have been debunked by the actual outcomes – the past twenty-five years (1980–2005) under neoliberal reforms have seen a significantly slower rate of progress on social indicators for the vast majority of low- and middle-income countries than the previous twentyyear period (1960–80). The overall policy thrust of neoliberalism has been incorrect. As Stein (2008) notes, the problem all along was not that the state was overextended and prices were distorted, as was argued by the proponents of neoliberal structural adjustment programmes (including the 1981 Berg Report), but that the state was underqualified and market structures

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were underdeveloped. In essence, ‘getting prices right’ and less state intervention from the beginning would have done little to address the institutional and structural weaknesses of African economies, just as it did little after 1980. In sum, the unsubstantiated claims by proponents of neoliberal policies have been an unmitigated disaster for economic progress in developing countries, and for the increased health budgets and improved health outcomes many would have liked to have seen.

th r ee  |  Con seque nc es H e a lt h

for

i nt r o d u ct i o n

The chapters in Part Two detailed the disastrous consequences that neoliberal policies have had for economic development generally. Part Three will explore more deeply exactly how such policies have consequently impacted negatively on health budgets and health systems. Chapter 9 provides an overview of the demise of the 1978 Alma-Ata consensus in favour of public health as neoliberalism came into ascendancy in the 1980s, and the World Bank’s shift towards the promotion of user fees, private sector provision of health services, deregulation, liberalization and decentralization of the health sector. Chapter 10 then reviews the harmful consequences of the IMF’s restrictive fiscal and monetary policies on national budgets and wages, and the subsequent chronic underfunding of health sector budgets, wages and long-term public investment in the underlying health system infrastructure. It shows the failure of neoliberal reforms to improve health outcomes, with deadly consequences for the people in these countries. As the development model’s failures have become increasingly obvious over the years, particularly through worsened health outcomes, Chapter 11 explains the slow transition of the international health community away from the free market policies of privatization and liberalization and back towards an emerging consensus in support of strengthening public health systems and enabling the provision of universal access for primary healthcare that is reminiscent of the Alma-Ata principles of thirty years earlier. Then, despite this emerging consensus, Chapter 12 explores the ways in which this new support for strengthening public health systems and health workforces is being blocked by the IMF’s fiscal and monetary policies and their associated budget restrictions and wage bill ceilings. It documents the last ten years of numerous published studies and reports, conference declarations, parliamentary statements and official reports from international agencies, which have increasingly identified the obstructionist role of the unnecessarily restrictive IMF policies in efforts to advance the new public health agenda. Lastly, it describes the mounting international concern and the increased advocacy work being done to address this problem by HIV/AIDS activists and public health advocates, and how much more needs to be done.

9  |  T h e D e m i s e o f P u b l i c H e a lt h a nd t h e R i s e o f N e o l i b e r a l i s m

The World Bank, which had been historically more focused on large infrastructure projects, did not issue its first healthcare policy report until 1975, when it published the Health Sector Policy Report, which was heavily influenced by the WHO, the FAO and UNDP, all of which were leading in the field at the time, and with a policy emphasis on social goals and the productive investment dimensions of health that reflected the current development literature. The report reflected much of the thinking throughout the UN system at the time that the best approach was large-scale public investment in the public health systems and aiming to provide universal access to primary healthcare (PHC). The PHC approach sought to address the main health problems in communities by providing preventive, curative and rehabilitative services. Basic elements included education concerning prevailing health problems and the methods of preventing and controlling them; maternal and child healthcare, including family planning; immunization against infectious diseases; prevention and control of endemic diseases; appropriate treatment of common diseases and injuries; provision of essential drugs; and PHC-recognized synergistic connections between health and promotion of food supply and proper nutrition, adequate supply of safe water and basic sanitation. Interestingly, the 1975 World Bank report warned about relying too narrowly on the market and private sector to deliver health goods, because fundamental ‘market failures’ would prevent effectiveness. The report underscored four key points upon which healthcare financing was predicated: according to this view, healthcare consumers have insufficient understanding and information to make sensible choices, and there are too many externalities associated with disease for it to be left up to the individual’s decision-making, thus people benefit from access to preventive care; because hospitals are capital intensive, they are monopoly-like and similar to a public utility, which means that healthcare involves too little competition to function effectively within a free market for health; and uneven income distribution can also act as a barrier as it will limit

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the ability of the poor to gain access to healthcare through the market (World Bank 1975; Stein 2008). Remarkably, each of these concerns about the dangers and limitations of privatizing public health systems would be completely abandoned only a few years later as the wave of neoliberalism came into ascendancy in the early 1980s. Up until the end of the 1970s, however, there was a near-universal acknow­ledgement of the importance of investment in public health systems generally, and in PHC in particular. The apex of this consensus occurred during the 1978 WHO conference in Alma-Ata, Kazakhstan, at which UN agencies, health representatives of 134 countries and 64 organizations drafted broad-based plans for health reforms. The revolutionary significance of the conference declaration was that access to healthcare was formally recognized to be a human right. This acknowledgement implied tremendous new obligations on all governments to therefore adopt policies that would make healthcare accessible, affordable and more socially responsible (Golladay and Liese 1980; Stein 2008). In the late 1970s, the World Bank began shifting away from minor health projects within larger loan programmes for other sectors and towards developing policy reform strategies exclusively for health sectors, and in 1979 created its Health, Nutrition and Population (HNP) unit. At this time, the World Bank was influenced by the prevailing perspectives of the Alma-Ata Declaration, and its annual World Development Report (WDR) 1980 also expressed the idea of healthcare as a universal human right and showed a strong commitment to primary healthcare. And like other major international institutions at the time, the World Bank’s WDR 1980 clearly saw the interconnections between primary healthcare and education, food and nutrition, water and sanitation, and was consequently very much in support of food subsidies for improving life expectancy and actually warned against introducing user fees for health, education and water. In fact, the 1980 WDR provided strong admonishments against the use of markets to allocate healthcare: ‘The use of prices and markets to allocated healthcare is generally not desirable’ (World Bank 1980; Stein 2008). The World Bank basically supported the prevailing logic of the day, which presumed that achieving universal coverage of primary healthcare was possible if political support could be effectively mobilized, public expenditures were adequately increased and public sector administrative capacities improved. The ambitious nature of the Alma-Ata vision of universal access for primary healthcare was becoming recognized, however, as the massive costs for fulfilling such obligations became apparent in many ­countries

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by the early 1980s (Lee and Goodman 2002). In recognition of these realities, UNICEF began to scale back its focus away from PHC and towards more selectively targeted priority areas. Other approaches remained committed to PHC but considered alternative methods of financing. A new consensus began to emerge in the 1980s that public sector efficiency could be improved by introducing user fees, which in theory would raise the additional revenue necessary to make the health sector financially viable. Within the World Bank, the recognition of a shortage of funds to finance PHC goals was first underscored in the 1981 report Accelerated Development in Sub-Saharan Africa, also known as the ‘Berg Report’ (mentioned in Chapter 2). The Berg Report is considered an important turning point in World Bank thinking away from the Keynesian economics, which had dominated from the 1930s to the 1970s, and towards the market-oriented approaches of neoliberalism. Instead of finding ways to try to finance PHC, the report called for industrial insurance schemes, charging user fees at public health clinics, reorganizations and lay-offs of staff in public health systems, streamlining administrative procedures, liberalizing the pharmaceuticals trade, and ‘contracting out’ to private firms to build latrines and lay water pipes (World Bank 1981). Stein (2008) documents the particular influence of the Princeton University neoclassical economist David de Ferranti on the evolution of neoliberal thinking in health sector reform at the World Bank and the rise of so-called ‘health economics’. De Ferranti wrote ten papers for the HNP unit at the World Bank between 1981 and 1985, focusing on Malawi, Nigeria, Argentina and Peru, which played an important role in introducing neoclassical economic principles such as ‘affordability’ and ‘effectiveness’ into healthcare decision-making. He defines affordability along the lines of the voluntarism and equilibrium inherent in neoclassical economics: ‘a health program is affordable if and only if each of the parties that must contribute to financing its operation at its design scale are able and willing to do so … [and] affordability is a necessary condition for achieving an efficient balance of resource use’ (Prescott and de Ferranti 1985). According to this logic, ‘affordability’ would require an accurate estimate of the recurrent costs of programmes (which were traditionally insufficiently analysed) and a balancing of costs against available resources, including from central and local governments, health insurers, donors, NGOs and private households. According to Stein (2008), although de Ferranti warns of the looming gap in available resources for health programmes, he does not ever propose any ways to mobilize greater public expenditures. Instead, he

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only suggests policy adjustments that would restrain the public sector’s role in healthcare while increasing non-fiscal resources, such as charging user fees. Instead of viewing healthcare as a human right – which government policy should be obligated to try to fulfil – de Ferranti’s logic depoliticized and negated the state’s obligation to this commitment and inverted the perspective to instead ask only how much healthcare could be afforded ‘subject to the resource constraint’. As this logic took hold throughout the World Bank, the earlier high-profile commitments to the Alma-Ata principles of access to health as a human right and supporting public health provision of PHC were rapidly abandoned. A key turning point was the 1985 policy paper by de Ferranti, ‘Paying for health services in developing countries: an overview’, which introduced neoclassical economics to healthcare analysis, whose logic would form the foundation of the World Bank’s thinking on health reform during the era of structural adjustment. In the paper, de Ferranti (1985) inverts the earlier World Bank view that price and market allocations for healthcare were generally not desirable. The new official position became that focusing on prices and markets was the best route to improve the efficiency of healthcare. The paper draws on the basic neoclassical proposition that efficiency is maximized by competitive market prices, which equal the marginal private cost of production, and according to Stein (2008), the paper attempts to delimit the circumstances in which marginal cost prices are relaxed such that healthcare is allocated in line with the principles of market efficiency. He suggests that user fees also should approach the marginal cost of production for efficiency purposes, and that they are also better for the poor since they provide improvements on the supply side. Concerns about the ability and willingness of poor people to pay user fees are dismissed by either citing badly flawed studies or by simple assertions unsupported by any form of data. De Ferranti (1985) directly undermines the earlier widespread acceptance of the logic of providing preventive care services by suggesting that people already inherently have all of the medical information about their health status that they need and they will rationally go to seek medical care ‘when an illness or injury occurs’, but this assertion that symptoms are universally understood, unambiguous or unaffected by weighing the potential burden of seeking medical care ‘shows no understanding of the vast literature about medical anthropology and the related cultural issues’ (Stein 2008). A proper approach to analysing the effect of user fees would have been to actually observe the outcome, but according to Stein (ibid.), this

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was never done before the World Bank pushed user fees. In considering exceptions to setting user fees equal to the marginal cost of patientspecific services, de Ferranti (1985) argued that external factors in the transmission of infectious diseases provided a high level of justification for ‘subsidizing’ fees. This applied only to preventive services like vaccinations, however, because with regard to curative services, ‘it is doubtful whether any reduction in transmission probabilities is achieved … available technologies for treatment … rarely can be made effective before diseased individuals already have had maximal infections impact on others around them’. According to Stein (2008), this is precisely the kind of flawed reasoning that led to the imposition of user fees in sexually transmitted disease (STD) clinics in places like Kenya in the early 1990s, which discouraged attendance rates at the worst possible time – during the early stages of the HIV/AIDS epidemic in Africa. This neoliberal idea that individual ‘health consumers’, who rationally base every purchasing decision on how best to optimize their cost effi­ ciency, ought to ‘purchase’ health services only when they have begun to show symptoms – and not before – was more than just a convenient cost-cutting measure, it was precisely the kind of lethal reasoning that arguably has contributed to weakening the public health response to the HIV/AIDS crisis, thus making the epidemic far worse than it otherwise needed to be. De Ferranti’s 1985 paper also made a strong push for privatization of healthcare, claiming that the role of the private sector is ‘a key one’. While admitting that the evidence on private provision was so far inconclusive at the time, he still proposes a plan to foster the development of private institutions, in which the basic idea is to limit the growth of the public sector until the private sector can eventually take over. Privatization, along with defunding the public health system, is justified because if one can charge full-cost marginal pricing for patient care and then ‘for patient related services … the arguments in favor of a strong public role in the provision of healthcare are, on close inspection, not very compelling’ (ibid.). In 1987, de Ferranti co-authored a World Bank paper with Nancy Birdsall and John Akin, ‘Financing health services in developing countries’, which placed a heavy emphasis on government decentralization reforms within the health sector. Decentralization is appealing to both political progressives, who wish to strengthen community participation by devolving power and accountability to the local levels of government, and to neoliberals, because it is ‘market-like’ by making citizens into ‘customers’ of services that the local government is ‘selling’ (World Bank

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1987). According to the authors, the key to successful decentralization of the government health system is to ‘use market incentives where possible’ and encourage the collection of revenues ‘as close as possible to the point of service’ (ibid.). In such a process, the traditional crosssubsidization and redistributive benefits of national tax-based financing are disconnected, which then places more of the direct costs on to individual citizens, who have been transformed into individually paying customers in accordance with the neoliberal vision. By 1987, the World Bank had completely inverted its earlier position, as stated in the 1975 Health Sector Policy Report and the 1980 WDR report. The new dictum among neoliberal health sector reformers at the World Bank had become: ‘the use of prices and markets to allocate health is [highly] desirable’ (ibid.). According to Stein (2008), by the mid-1980s all of the intellectual pieces needed to justify the allocation of healthcare via the market with World Bank policy advice and loan conditions were in place, and became a key part of structural adjustment programmes, particularly throughout the 1990s. During the 1980s, the world of Keynesian economics had been completely overturned in favour of the neoliberal ideas that prices and interest rates should be determined by markets, fiscal deficits should be kept in check, and that when it comes to trade and industrial policies, the state should just get out of the way. Against the backdrop of IMF fiscal restraint and monetary tightening, these neoliberal ideas advanced by the World Bank would go on to influence foreign aid and international thinking on health sector reform, and would greatly transform the health sectors of dozens of developing countries around the world as deep budget cuts, staff lay-offs and user fees were applied throughout the 1980s and 1990s – with tragic consequences for millions of people. The World Bank’s annual World Development Report 1993 on ‘Investing in health’ was the first health-focused WDR report published by the Bank. It reiterated the neoliberal agenda already set by the previous working papers and reports discussed above, and underscored the World Bank’s commitment to promoting user fees, privatization, risk sharing and decentralization of government services found in the earlier policy papers. It similarly relies on a set of neoclassical economic principles, including an ‘unrequited commitment to methodological individualism, an axiomatic belief in the superiority of the private sector over the state, and a view that the state is overextended in healthcare and needs to be retracted’ (Stein 2008). The 1993 WDR asserts that

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studies on the effect of user fees are inconclusive and contradictory. One reason is that some researchers have failed to calculate the true cost to patients of treatment of government clinics. People often pay dearly for supposedly ‘free’ healthcare … the indirect costs such as transport and the opportunity cost of time spent seeking care are substantial. Since patients are already paying for supposedly free or low-cost healthcare, new user fees when accompanied by a reduction in indirect costs and improvement in services may increase utilization. (World Bank 1993)

But according to Stein (2008), ‘the argument that somehow imputed costs, like waiting, are the equivalent of cash payments is of course ridiculous to anyone except a neoclassical economist’. In cash-poor economies in rural settings, individuals do not simply weigh the possibility of less time at the clinic against an increase in the payment for a health service. Instead, they are much more likely to be focused on what essential goods will be forgone (often with health implications) to pay for a treatment. Consistent with the neoliberal vision of greater effectiveness of health outcomes by optimizing subject-to-resources constraints, the 1993 WDR introduces a new measurement tool to help with more precise health financing calculations for even greater efficiency optimization. The Disability Adjusted Life Years (DALYs) were a new common measurement of the economic burden of disease (World Bank 1993). By introducing the concept of DALYs, the World Bank was purportedly able to concentrate even more precisely on the optimal allocation of health sector resources, which was accomplished by comparing the cost per DALY of various types of health interventions. DALYs are, however, very problematic formulations, based on highly questionable assumptions, and they are certainly not the value-free optimization tool they purport to be. DALYs involve a simple linear summing of the adjusted values of all health-related losses for all in­ dividuals brought to the present using the discount rate. With DALYs, health economists could calculate how to get the maximal economic ‘bang for each healthcare buck’ by targeting greater proportions of per capita healthcare spending towards the maximally productive adult workers in the economy – with the concurrent implication being that it is also more efficient to spend less on the less productive workers, or the economically unproductive elderly, young and sick. Many objected to these implications, as well as the basis for DALYs, which ‘disregards the political, ethical, cultural and symbolic aspects

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of healthcare’ (Laurell and Arellano 1996). According to Stein (2008), DALYs treat individuals ‘not as subjects but as dehumanized objects that are used as inputs in a statistical artifact pretentiously presented as value-free. The lives of one group of human beings are traded off against the lives of another group in the name of optimization, which itself is subject to the artificially created resource constraints imposed by the World Bank’s and the IMF’s macroeconomic conditionality’ (ibid.). The World Bank’s 2004 World Development Report, ‘Making ser­ vices work for poor people’, continued to advocate the basic neoliberal ­approach. The report advises that governments should decrease their role as public health service providers, and instead encourage private healthcare providers to sell services to those wealthier citizen-customers who can afford to purchase their private services, and contract out with for-profit private companies (especially foreign operators) and not-forprofit private providers (NGOs) to deliver health services on behalf of the governments for poorer citizens (non-customers). By the time of the 1994 WDR report, the dominant neoliberal vision among donors, governments and much of the international health community about the role of government in public health was to reduce it to that of merely a regulator and purchaser of services from private providers and notfor-profit operators – government was urged to basically ‘get out of the way’, so that the magic of the marketplace and the private sector could be freed, leading naturally to improved health outcomes. In addition to the World Bank, an increasing number of other aid donors have promoted the engagement of the private sector as a necessary component within their respective health policies. USAID, DfID and the Asian Development Bank go farther and have followed the World Bank’s example in spending millions of aid dollars funding large-scale programmes to contract out service delivery to the private sector in countries such as Afghanistan, Bangladesh and Cambodia. According to Oxfam (2009), in the last few years there has been a noticeable increase in donor support for private sector engagement in health in developing countries. For example, in 2007 the International Finance Corporation (IFC), the private sector investment arm of the World Bank, launched a report sponsored by the Bill and Melinda Gates Foundation and researched by McKinsey & Co. The report, ‘The business of health in Africa: partnering with the private sector to improve people’s lives’ (IFC 2007), came with the announcement that the IFC will mobilize $1 billion in equity investments and loans to finance the growth of private sector participation in healthcare in sub-Saharan Africa. That year, the World Bank’s 2007 HNP strategy document

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committed it to work in ‘close collaboration’ with the IFC to improve the policy environment for public–private partnerships in health (World Bank 2007b). More recently, the World Bank and other donors have proposed a global ‘Affordable Medicines Facility for malaria’ (AMFm) for distribution of malaria drugs through subsidizing private providers. The UK government has already pledged £40 million to help fund it (Oxfam 2009). Oxfam (ibid.) criticized the strong neoliberal bias in the World Bank’s one-sided commitment to stepping up support for private-sector-led health services while to date not having made any similar commitments to build its expertise and capacity to support an expansion of government-led healthcare provision. Despite the demonstrable historical record of direct government provision, the World Bank in fact considers it as a potential option in only one of its six models of health service delivery outlined in its 2004 WDR. Even in the 2004 report, the World Bank denies any comparative advantage of the state over private contractors and leaves the option conspicuously underdeveloped as an important direction for public investment (ibid.). At the same time, powerful private sector health companies that benefit directly from the neoliberal policies have played an increasing role in international and national health policy-making, including in such spaces as the Global Fund to fight AIDS, Tuberculosis and Malaria (GFATM) and the Global Alliance for Vaccines and Immunization (GAVI), demonstrating a direct structural conflict of interest which most official development agencies appear willing to overlook (Ollila 2005). Rich countries are also promoting the commercialization and privat­ ization of healthcare services in the General Agreement on Trade in Services (GATS) negotiations within the broader World Trade Organ­ ization (WTO) talks, as well as in an array of bilateral free trade agreements (FTAs) and bilateral investment treaties (BITs) (Khor 2008). These have the potential to ‘lock’ countries into a position in which the profit-seeking private sector can accuse government health services of unfair competition. For example, 200 private investors from the USA are planning to use the North American Free Trade Agreement to sue the Canadian government if it continues to block access to investment or profit opportunities in the Canadian healthcare system (Russell 2008). Once developing countries sign up to such trade or investment agreements, it could prove very costly to reverse the policies later, despite the damage to health outcomes.

10 |  T h e C o n s e q u e nc e s f o r H e a lt h

The disastrous consequences of the thirty-year neoliberal policy experiment conducted on the healthcare systems of developing and transition economies have been well documented (UNICEF 1993, 1994; Costello et al. 1994; Evans 1995; Lurie et al. 1995; Schoepf et al. 2000; Fort et al. 2004; Poku and Whiteside 2004; Breman and Shelton 2006; Cornia et al.  2006: Navarro 2007). The consequences can be seen in the catas­ trophic decreases in life expectancy in the two regions that most fully adopted the neoliberal structural adjustment reforms, sub-Saharan Africa and the republics of the former Soviet Union. While the overall trend in life expectancy rates for the whole world greatly improved from 46.5 years to 65.2 years between 1955 and 2002, life expectancy actually fell in sub-Saharan Africa from 50 to 46, and in the former Soviet region from 69 to 66 between the years 1980 and 2003. In Russia alone, the decline was mainly among young men, whose life expectancy dropped from 70 in the mid-1980s to 59 by 2003 (UNDP 2005; World Bank 2005b). The declines in life expectancy rates in some African countries have been nothing short of tragic: from 62 to 46 in South Africa; 58 to 37 in Lesotho; 45 to 38 in Malawi; 56 to 39 in Zimbabwe; 49 to 36 in Zambia; and 57 to 38 in Botswana (Stein 2008). Although the HIV/ AIDS epicentre is in southern Africa, even other areas have seen declines, including Nigeria from 49 to 45; Côte d’Ivoire 50 to 45; Central African Republic 48 to 42; and Sierra Leone 37 to 35 (ibid.). Such outcomes are striking in the twenty-first century – way beyond simple policy failures, this human carnage can only be called an unmitigated disaster. Historically, decreases in life expectancy of these magnitudes have been associated only with historic events such as plagues, famines or natural calamities. But these decreases were certainly due in part to policy reforms based on certain sets of ideas. One of the earliest major studies to evaluate the impact of structural adjustment policies on poverty is the 1987 UNICEF report Adjustment with a Human Face (Cornia et al. 1987). The report concluded that two main effects of the adjustment programmes adopted were responsible for the failure to sustain growth and child welfare. ‘First, the predominantly

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deflationary character of most programmes led to growing poverty through depressed employment and real incomes; secondly, the direct negative effects of certain macroeconomic policies on the welfare of particular socioeconomic groups.’ In 1992, the Development Centre of the Organization for Economic Cooperation and Development (OECD) finalized a four-year series of studies which found that the costs of structural adjustment programmes appeared to have been borne largely by the poor and were often ­accompanied by increases in urban poverty. ‘In contrast to most previous work in this field,’ the report noted, ‘these studies lead to more cautious conclusions about the social costs of adjustment. The evolution of poverty, inequality, and the incomes of poor households varied greatly across countries, ranging from the cases of Chile and Ecuador, where the evolution was very unfavorable, to those of Indonesia and Malaysia, where improvement occurred during adjustment’ (Bourguignon and Morrisson 1992; Morrisson 1991). The 2002 SAPRIN report, which analysed the impacts of structural adjustment in seven countries, found that the privatization of public utilities, the application of user fees to healthcare and education, and cuts made in social spending in national budgets reduced access to affordable services. It found that rates of fee increases often fall disproportionately on the poor, increases in user fees in education had driven up school dropout rates, and user fees at health clinics had dissuaded many from seeking medical care. Social service infrastructure, availability of supplies, personnel training and wages had all suffered deterioration, particularly in rural areas and poorer regions of countries (SAPRIN 2002). While the exact degree to which public spending on healthcare was affected by IMF and World Bank austerity policies has been the subject of debate, one thing that is very clear is that upon adoption of the stabilization loan programmes, steep government cutbacks in public spending had an almost immediate effect on healthcare expenditures (Sahn 1992; World Bank 1994). In an analysis of healthcare expenditures as a proportion of total discretionary spending before and after the first structural adjustment loans in fifteen countries, Sahn (1992) found that health expenditures had fallen to about 5.75 per cent of discretionary spending from an already low level of around 6 per cent. Another survey of real health expenditures in twelve sub-Saharan African countries undertaking some adjustment over the 1980s indicated an average real per capita decline of close to 20 per cent; only four countries kept up with population growth. The study’s review of the

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longer-term data on public spending presents a very dismal picture for many African countries: Ghana spent $10 per capita in 1976 but a mere $6 in the period 1995–2000; Côte d’Ivoire dropped from $9 to $6; Zambia from $14 to $11; Nigeria from nearly $3 to $1.81; Liberia actually spent $7 per capita in 1976 compared to $1.50 in the most recent period. Excluding South Africa, expenses on healthcare in the region amount to a mere 4.1 per cent of GDP, which is roughly equivalent to $13 per capita – well below the WHO’s recommended level of at least $32 per capita (Stein 2008). Especially tragic is the number of preventable deaths: 74 per cent of deaths in Africa arise from communicable diseases, maternal and peri­ natal conditions and nutritional deficiencies (in contrast, only 6 per cent of mortality in Europe is from these sources). These are largely preventable diseases and are directly related to poverty and underdevelopment. In Africa, the infectious and parasitic diseases are the largest source of mortality in this category and accounted for 77 per cent of the total in 2002 (ibid.). Although the Alma-Ata Declaration acknowledges the health links to other sectors thirty years ago, today all developing-country regions continue to have high rates of diarrhoeal diseases largely from lack of clean water and poor sewage disposal. In Africa, malaria is a large killer of children, who continue to succumb to the disease at a much higher rate than adults. These are completely preventable diseases of extreme poverty and do not exist to any degree in the developed world. Meanwhile the level of malnutrition is rising in many sub-Saharan countries in line with rising poverty levels, leaving people more susceptible to disease. The FAO report on the State of Food Insecurity in 2005 found significant increases in the percentage of underweight children from 1994 to 2004 in a number of countries, with undernourished rates of greater than 20 per cent, including in Chad, Mali, Senegal, Sudan, Angola, Burundi, Zambia and Zimbabwe. Also apparent is the very high correspondence between the percentage of people below the poverty line and hunger (FAO 2005). As the Alma-Ata consensus understood, poverty worsens malnutrition, which in turn increases the susceptibility to HIV/AIDS and other sexually transmitted diseases. Access to healthcare and other related social goods is greatly differentiated by income level, resulting in poor people having less access to health facilities and treatments for sexually transmitted diseases. And poverty increases the likelihood that people will take on high-risk activities like prostitution. In the Journal of Health, Population and Nutrition, de Vogli and Gretchen (2005) explored how IMF policies create the conditions

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for exposing women and children to HIV/AIDS. They identified five different pathways of causation, connected changes at the macro level (i.e. removal of food subsidies) with effects at the meso (i.e. higher food prices) and micro (i.e. exposure of women and children to commercial sex) levels. They found evidence to suggest that ‘structural adjustment policies may inadvertently produce conditions facilitating the exposure of women and children to HIV/AIDS’. The authors conclude that more complex research designs are needed to further investigate this relationship, but recommend a shift in emphasis from an individual approach to a socio-economic approach in the study of HIV infection among women and children in developing countries. ‘Given the potential for IMF structural adjustment policies to exacerbate the AIDS pandemic among women and children, a careful examination of the effects of these policies on maternal and child welfare is urgently needed’ (ibid.). The World Bank had long claimed that user fees would have little impact on the poor, but numerous studies continued to indicate that visits by low-income people to health clinics and hospitals dramatically declined in the face of rising user fees. To compound the problem, because people would often wait until they were very sick before seeking treatment, delays meant that patients arrived at health facilities in worse condition, thereby making their treatment more expensive and less effective. Often user fees were referred to with different euphemisms, such as ‘cost recovery’ or, in the case of decentralization reforms, ‘community participation’. The empirical evidence continued to show that, financially, few additional revenues were generated from collecting user fees, and there was little or no evidence of an improvement in the quality of facilities, yet most alarmingly, data continued to find that utilization rates were dropping. For example, in Zambia attendance declined by one-third over two years; in Tanzania, the government hospitals in Dar es Salaam, which were known to be heavily frequented by poor people, saw a decline of 50 per cent when user fees were imposed (Blas and Limbambala 2001); in Ghana, outpatient attendance dropped by 40 per cent (Biritwum 1994); and in Niger, the decline was 41 per cent (Meuwissen 2002). A similar study on Zambia showed that although the goal of user fee implementation was to improve the quality of care, patients did not perceive that quality had improved (van der Geest et al. 2000). Stein (2008) points to an implicit value system inherent in the World Bank’s approach, which is basically to advocate for a health system that is financially functional but unresponsive to the health needs of the population. From a purely neoliberal perspective, there are no public health goals to be tax-financed, because there are really only individual

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customers seeking to purchase their own private healthcare services, and the public health system is only a distortion that should get out of the way. Because neoliberalism attempts to commodify and commercialize public health into individualized, separate units of health services to be bought and sold in the free market, it takes an accountant’s perspective to public health financing: only as much healthcare should be provided as is affordable by customers, as registered by the level of market demand and the going prices. The brutal calculus was laid bare in one World Bank report that explained if the poor could not afford to ‘contribute measurably to cost recovery and are too numerous to be subsidized by the smaller number of those better able to pay for medical care, they should do without medical care’ (Ruderman 1990; Stein 2008). The track record was little better for the World Bank’s claims that privatization and decentralization reforms would make the public healthcare system more efficient, more responsive to user needs, more effective and of better quality, since ‘private owners best respond to market signals’. The results of the empirical studies on privatization have proved just the opposite, however. Although the objective of privatizing care worked in some places, the impact of doing so was contrary to expectations. As Stein (2008) notes, it should not be a surprise that deregulated private health service markets would lead to the concentration of healthcare facilities in higher-income urban areas and the neglect of poorer rural areas, where facilities were most needed. The traditional cross­subsidization and redistributive benefits of nationally financed systems were lost, and in their wake what has emerged is more like a two-tiered ‘health apartheid’ system, in which private healthcare providers are ‘cherry-picking’ the wealthiest ‘customers’ concentrated in high-priced urban markets away from paying into the broader public health systems, which are then increasingly underfunded and servicing only the poor. For example, in Tanzania, while the number of health facilities almost doubled during the early period of structural adjustment (which was accompanied by conditionality relating to health policy reforms), 88 per cent of the new facilities were private, and a study by Benson (2001) of their distribution indicated that private facilities were consistently located in places where the need (measured using well-established demographic proxies) for healthcare was the least. Benson found that the proportion of private facilities was significantly higher where it could cater to a population of working-age males living in urban areas. Predictably, this finding essentially indicates that those populations by which healthcare was most needed (poor rural women and children) were neglected ­altogether by the private sector (ibid.). These types of basic ‘market failures’, which

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had been well understood since the 1930s, and were noted in the AlmaAta consensus and even in the World Bank’s 1980 WDR report, had apparently been completely forgotten, giving poor people in countries like Tanzania the opportunity to reteach us such obvious lessons about the hazards of relying too much on the unregulated market. Other studies indicated that, owing partly to poor regulations, private healthcare services were frequently of poor quality. Niger presents a typical case of the unintended consequences of privatized health services – often as a result of operating within badly regulated or unregulated markets. As in many places, in Niger privatization occurred as a byproduct of user-fee implementation. Because of the user fees, patients no longer sought care for relatively minor diseases, such as conjunctivitis, and therefore sought alternative treatments (Meuwissen 2002; Stein 2008). As neoliberal theory would predict, the private sector responded accordingly, with a rapid increase in informal drug vendors and a greater reliance on individual self-medication through the uncontrolled, illegal and unprofessional black market for pharmaceuticals and medicines. According to Stein (2008), both responses were perfectly in line with the neoclassical vision of the rational private sector responsiveness of autonomous customers, even though they had negative health consequences because the lack of oversight led to patients often receiving drugs that were expired, prohibited and/or incorrectly prescribed. This has been a common problem throughout developing countries, where public health systems have been liberalized in the absence of any semblance of regulatory capacity. One of the most common arguments used by advocates of increased private sector provision in poor countries is that it already plays a major role in providing health services and is already being used by the poor. A recent World Bank report claims that ‘almost two thirds of total health expenditure and at least half of health-care provision in Africa are accounted for by the private sector’ (World Bank 2007c). Because the private sector is already such a significant player in healthcare, the argument goes, then it is just a matter of common sense to promote its further expansion to meet the needs of poor people. Oxfam’s (2009) analysis of the data used by the World Bank, however, finds that nearly 40 per cent of the ‘private provision’ it identifies in Africa is, in fact, just small shops selling drugs of unknown quality (ibid.; Marek et al. 2005). In some countries such as Malawi, these shops constitute over 70 per cent of private providers. Lyer et al. (2007) note that evidence from India shows that poor women are the main users of these types of unqualified shopkeepers as

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a source of information and drugs. In the rich countries, it wouldn’t be considered acceptable for a poor woman to take her sick child to a private corner shop for diagnosis and treatment, and yet this is what the neoliberal market reforms in healthcare have brought for many. If the shops are removed from the calculation, counting instead only the clinics staffed by trained health workers (what most people would think of as ‘health services’), the share of services provided by the private sector falls dramatically. Comparable data across fifteen countries in sub-Saharan Africa reveal that only 3 per cent of the poorest fifth of the population who sought care when sick actually saw a private doctor (ibid.). Again, the rich countries have understood the dangers of unregulated pharmaceuticals markets since at least the 1930s, yet the costly neoliberal experiment has provided the opportunity for poor people in Niger, India, Malawi and elsewhere to remind us of these obvious lessons about ‘market failures’. Oxfam noted that ‘saving mothers’ lives, which many agree should lie at the heart of any scale-up strategy, requires more than the advice of a shopkeeper: it needs trained midwives and doctors’ (Oxfam 2009; McCoy et al. 2005). Similarly, reaching the 10 million people who lack access to HIV medicines and responding to the ever-growing burden of chronic diseases such as diabetes, cancer and cardiovascular disease, now responsible for 60 per cent of deaths worldwide, also requires far more than the service of private drug shops. It will require multiple visits to well-functioning health services that have effective and affordable medicines, qualified personnel and the capacity to monitor, treat and provide ongoing care for patients. The decentralization of government healthcare without the accompanying strengthening of local capacities can lead to disastrous health outcomes (Collins and Green 1994; Stein 2008). Overly premature decentralization has created a process by which certain decision-making powers over planning and management responsibilities and money are taken away from the central line ministries in the capitals and transferred to lower levels of government in the provinces, many of which are ill equipped and lack the trained personnel to effectively handle the new duties, and in the end the cumulative result is an overall weakened public health sector – weakened both at its centre and at its lower levels. Such an outcome is consistent with neoliberal imperatives to roll back the state from participating in the healthcare system. Often neoliberal critics will cite the chaos and incoherence generated by public health systems undergoing premature decentralization reforms as another reason for supporting privatization.

11 |  thirty Years Later: Coming Full Circle – Rediscovering Public Health

By 2004, DfID had begun rethinking its earlier enthusiasm for user fees as the data began showing the clear harm done to health by the fees. A September 2004 issues paper argued that ‘the case for abolishing user fees is strong: they raise little money, rarely meet their stated efficiency and equity goals, they are often associated with reduced use of services, especially by the poor and vulnerable; there is a higher failure to complete treatments; and delays in seeking treatment’ (DfID 2004b). The 2004 paper also claimed, however, that there are some circumstances in which user fees can improve access. But more pointedly, the paper recommended that removing user fees at health clinics needs to be accompanied by a range of other actions, including increased and well-directed funding, if it is to lead to sustained improvements in access for the poor. It also suggested that user fees may be a relatively minor issue in terms of the whole poverty reduction agenda, and that it may be more useful for DfID to push a broader line, such as making essential services more affordable for poor people (ibid.). The mounting data continued to suggest that outcomes could be greatly improved with different policies. For example, an alarming study by James et al. (2005) on the beneficial impacts of eliminating user fees found that lifting the charges could potentially prevent between 150,000 and 300,000 deaths annually in children under five years old in twenty African countries. Yates (2007) presents recent data from a DfID-led study on the impact of abolishing health user fees in six African countries and finds a similar pattern: that when user fees are abolished, clinic utilization rates go up dramatically. While that is good, it is often then hampered by a lack of supplies and insufficient personnel to meet the demand. In Uganda, the user fees for health clinics were abolished suddenly ten days before the presidential election, and the Ministry of Health staff were totally unprepared. Data show that monthly outpatient attendance in Kisoro district more than tripled after fees were removed.

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Even though health workers’ salaries were increased and emergency funding for drugs and new financing mechanisms was introduced, this still is not enough to meet the need for additional personnel, particularly in the rural areas (ibid.). In Zambia, when the president abolished fees in rural areas in April 2006, this was followed by an immediate surge in demand in these areas, in which outpatient attendance skyrocketed, on average increasing by 40 per cent by mid-2006, while in the urban areas, where clinics retained their user fees, outpatient attendance stayed the same. Despite recurrent problems with inadequate supplies of medicines, the policy change proved exceedingly popular and was a factor in the re-election of the president (ibid.). Neoliberal policies have descended into particularly depraved forms as desperate hospital managers try in vain to squeeze resources out of ‘customers’ who are too poor to pay. Despite public pressure having led the president of Burundi to intervene and release women and babies from hospitals in December 2005, the practice of detaining hospital patients until their families paid their bills remained widespread. A 2007 study of hospitals in Burundi by Human Rights Watch and the Association for the Promotion of Human Rights and Detained Persons found widespread use of the practice of detaining insolvent hospital patients (Kippenberg et al. 2008). Of eleven hospitals visited, nine were found to be holding former patients in detention for being unable to pay their bills. The detention of insolvent hospital patients was described as a routine practice, dating from the 1990s. Conditions of detention included overcrowding, insufficient food and water, and withholding of further medical treatment. Seventy-two per cent of patients interviewed had been detained for a month or longer at the time of interview. As elsewhere, when Burundi officially abolished user fees for matern­ ity and child health services in May 2006, it was followed by a surge in demand for services. In the first three months after these fees were abolished, there were significant increases in attendance for hospital services, including a 41 per cent increase for child outpatients, a 61 per cent increase for deliveries and an 80 per cent increase in attendances for Caesarean sections (Yates 2007). Similarly, in Rwanda, new outpatient attendances in Mayange jumped significantly when user fees were abolished in early 2007. But in the Democratic Republic of Congo (DRC), although utilization rates of health clinics in Goma by children under five, as measured in visits per hundred children per month, jumped from below 50 to over 350 when user fees were abolished in 2002, they later fell dramatically again when ‘partial fees’ were reintroduced (ibid.).

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The surges in demand whenever the fees are abolished suggests that the neoliberal premises upon which user fees were based do not hold true. The surges suggest that people actually do place tremendous value on healthcare services, and that the value has absolutely nothing to do with the going price such privatized services were fetching in the free market. The World Bank often uses its contorted ‘willingness to pay (WTP)’ opinion surveys that show people would be willing to pay more for better-quality and more efficient services to conclude that health should be privatized, but rarely do they ask people the more fundamental question, ‘What can you pay?’ Of course, the answers, and the conclusions one draws, are completely different. In 2008, the Sierra Leone office of UNICEF reported that user fees at health clinics were a significant barrier to greater access and called for their removal. In Sierra Leone, out-of-pocket expenses for those seeking healthcare are among the highest in Africa (about 70 per cent to be paid up front, at the time of the visit). Yet most of the population remains below the poverty line. Even modest charges tend to exclude over 50 per cent of the population from seeking healthcare, and exemption systems in current use do not seem to work. The report found, ‘This deters people from going to hospital which eventually leads to failing health for adults and children alike’ (UNICEF et al. 2008). The UNICEF report on Sierra Leone detailed similar conditions across many low-income countries. The high cost of the user fees ‘often deters women from the prompt use of health services for themselves and their newborn children’ and ‘The daunting difficulties that most people have with fees translates to the inaccessibility of health services and increasing patronage of unskilled traditional birth attendants’ (ibid.). ­Although the government officially has a free healthcare policy for children and pregnant women, this is rarely enforced and consequently health services end up rarely being free in Sierra Leone. The report noted, ‘One of the main issues contributing to this situation is that health staff is usually underpaid and poorly supervised which leads them to request money from patients’ (ibid.). The report also documented another issue, namely that government health facilities have a ‘cost recovery’ scheme in place. This means that drugs are sold to the public at cost price. With the cost recovery funds, the facility is able to go back to a central store to replenish its stock. In practice, however, there are no mechanisms in place to monitor these charges and the replenishment of supplies, as charges are not regulated (ibid.). By 2006, DfID’s White Paper ‘Eliminating world poverty: making governance work for the poor’ had set out its commitment to help

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governments abolish user fees for basic health services, as part of a wider effort to support quality and equitable healthcare for all and to make much longer and more predictable ten-year commitments. DfID acknowledged the mounting data which showed that in many countries user fees, and other charges, mean that poor people cannot afford to use clinics and hospitals when they get ill, and in 2008 underscored the unnecessarily tragic impact of neoliberal ideas by estimating that ‘over 3 million child deaths could have been avoided over the past 20 years had financial charges not been imposed’ (DfID 2008). Even some within the World Bank have begun to begrudgingly support countries that want to remove user fees from public facilities. In 2007, the World Bank stated: ‘Upon client-country demand, the Bank stands ready to support countries that want to remove user fees from public facilities …’ provided that ‘the lost revenue is replaced with sustainable, well-managed funds’ (World Bank 2007b). In June 2007, Dr Margaret Chan, director-general of the WHO, agreed with the position taken by DfID against user fees, and added, ‘If you want to reduce poverty, it makes sense to help governments abolish user fees’ (WHO 2007). In September 2007, Denmark’s state secretary acknowledged, The burden of maternal mortality is borne most of all by the poor. Financial barriers to emergency care and skilled delivery are major reasons for this burden and inequity. One obstacle relates to user fees; we are pleased to see that more and more countries are taking steps to improve access to healthcare by abolishing user fees for the poorest. A good place to start is by making services free for pregnant women and small children.

Based on this understanding, it was formally announced that Denmark would be ‘committed to support countries that wish to make healthcare free for pregnant women and small children to improve maternal and child health for the poorest’ (MNCH 2008). Ironically, despite neoliberal theories about greater private sector efficiency, even the World Bank’s own analysis of where women go to give birth showed that government services generally perform far better than the private sector for rich and poor women alike (World Bank 2003). In March 2008, new data collected by Médecins sans Frontières (MSF) during 2003–06 in the DRC, Burundi, Mali, Chad, Sierra Leone and Haiti found further evidence that corroborated the emer­ging consensus against user fees. It found that user fees dissuade people from coming to health centres for treatment; the people most excluded

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from healthcare are the poor; and exemption systems do not work. The study also noted that if a user fee system is in place, it is very hard to assess the real health needs of a population, which has important implications for knowing how best to manage public health interventions. The study found that user fees can impact negatively on the quality of care provided; even modest charges for primary healthcare risk further increasing the poverty of patients; the contributions patients living in poverty can make to financing their own healthcare are too small to be considered an essential part of health financing; and that abolishing user fees results in more people seeking health treatment, but – contrary to neoliberal claims – does not lead to an improper or unnecessary use of services (MSF 2008). MSF stated that it ‘strongly believes that people living in poverty should not be forced to choose between spending scarce resources on healthcare or going without treatment’ and fundamentally refutes the neoliberal idea that ‘asking poor patients to bear most of the financial burden for their ill-health is somehow conducive to better healthcare and to sustainable healthcare systems’ (ibid.). MSF explained that its position is based on its own experiences providing health services in poor countries, noting that ‘in the past, when we implemented user fee systems ourselves, we experienced significant difficulties ensuring that everyone had access to essential care. We also found that, when MSF projects were taken over by others and user fees introduced, user fees alone failed to ensure the sustainability of the health system.’ It is now MSF’s policy to provide medical care for free and to cover the cost of any patient care. ‘If local or national authorities refuse to let MSF provide free care, patient fees are reduced to the lowest possible level and combined with exemptions for patients who are unable to pay’ (ibid.). In September 2008, another important study by MSF on efforts to combat malaria also pointed to the failure of the neoliberal ideas upon which user fees were based. It released a report that found that the two main barriers for many poor people are the costs of malaria testing and of treatment, and the difficulties of reaching health centres. Based on its experience with administering the state-of-the-art cocktail of drugs known as ACTs to hundreds of thousands of malaria patients in Chad, Sierra Leone and Mali, MSF recommended that governments offer ‘free treatment’, expand the use of a ‘quick test’ and train villagers to identify and treat simple cases themselves as three important steps that  could bolster efforts aimed at wiping out the disease. MSF found that ‘Making tests and treatment for malaria free dramatically increases the number

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of people who seek treatment for the disease that kills 1 million people a year’ (AP 2008). The MSF study suggested that user fees had been undermining the fight against malaria by keeping people from seeking testing. For example, Christine Jamet, head of MSF’s operations in Chad, explained that the number of patients treated in one region of Chad after free tests and drugs were introduced jumped from 10,000 to 100,000 in one year. Some 90 per cent of villagers in the region subsisted on less than a dollar a day, she said. In contrast to the assumptions inherent in the World Bank’s willingness-to-pay (WTP) surveys, Jamet reiterated the fact that, in the real world, if people living in such circumstances are asked to pay for treatment, ‘they will have to decide: “Do I choose to pay, or do I choose to buy food?” It’s as basic as that’ (ibid.). Awa Marie Coll-Seck, executive director of the UN-led Roll Back Malaria Partnership, agreed with MSF’s recommendations that malaria testing and treatment should be free. The partnership was launched in August 2008 as a joint project of the World Bank and the UN health, children’s and development agencies to dramatically step up the fight against malaria. Coll-Seck noted that expanding testing through free services would help to ‘ensure that we are treating malaria and not other diseases’, and this would help prevent the lives currently lost because of improper treatment, as well as help experts refine their estimates of the toll malaria is taking. Roll Back Malaria estimates that 3.3 billion people – more than half the world’s population – live in areas where they risk contracting malaria. It estimated that it would cost $5.3 billion in 2009, $6.2 billion in 2010 and $5.1 billion annually from 2011 to 2020 to effectively fight the disease. The disease currently kills nearly a million people every year, most of them children in Africa, and many survivors may suffer brain damage. ‘Those figures are even more revolting when you know we have the medical tools … to diagnose the disease and treat it,’ said Seco Gerard, a Belgian-based MSF policy adviser. ‘But the fact is that very few patients have access,’ partly because of user fees (ibid.). According to DfID Senior Health Adviser Rob Yates (2008), who has monitored the emerging body of research on user fees, the conclusions reached by MSF on user fees are today also being reached by the WHO, the World Bank and bilateral aid donors such as DANIDA and DfID. The WHO is today directly calling for universal coverage and the EU/ EC is calling for universal social health protection. Data by Schieber et al. (2006) suggest that the neoliberal model of the poor as individual private customers in a free market health system has bumped up against its limitations. They note that over 60 per cent of

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total health spending is out of pocket in low-income countries; whereas in contrast this figure is only 20 per cent in industrialized countries. They also note that in Africa, out-of-pocket spending accounts for almost 50 per cent of total health spending, on average, and in thirty-one African countries it accounts for 30 per cent or more of total health spending. They also underscore the fact, however, that ‘Out-of-pocket spending is one of the most regressive and ineffective sources of health  sector financing for the poor because it denies individuals the benefits of income redistribution, risk pooling, and financial protection’ (ibid.). It is also noted that the evidence suggests that social health insurance (SHI) becomes increasingly important as a source of health spending as countries get richer, but for low-income countries it still amounts to only 2 per cent of total health spending. This small share raises questions ‘about whether social health insurance has the potential to become a viable mechanism for risk pooling in low-income countries, especially given the large share of informal employment in most of them’, and suggests that, for the medium term at least, there will remain a large need for public health provision in developing countries. In 2008, the G8’s Task Force on Health System Strengthening similarly noted how the entire landscape had shifted over time and that there was again a broad consensus emerging and much evidence showing that improving coverage of the poor, risk protection and equity requires a shift from out-of-pocket financing to public prepayment, using public tax financing and/or SHI. It also found that while SHI has worked in middleincome countries, it ‘has not worked in low-income settings, where only tax-financed systems have had some success’. And although the Task Force said further understanding is needed of how best-practice countries have used these approaches, it noted that it is increasingly clear that ‘other mechanisms, such as community-based health insurance, private insurance and user fees have not proved viable pathways to scaling-up coverage and effective social health protection’ (Rannan-Eliya 2008). The WHO’s 2008 World Health Report echoed this new consensus when it pointed out: ‘As the overall supply of health services has improved, it has become more obvious that barriers to access are important factors of inequity: user fees, in particular, are important sources of exclusion from needed care. Moreover, when people have to purchase healthcare at a price that is beyond their means, a health problem can quickly precipitate them into poverty or bankruptcy’ (WHO 2008b; EQUINET 2007). The WHO 2008 report summed up the overall experience with user fees, documenting how many countries introduced user fees in the 1980s

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and 1990s in an effort to infuse new resources into struggling services, often in a context of disengagement of the state and dwindling public resources for health. The report noted that ‘Most undertook these measures without anticipating the extent of the damage they would do.’ In many settings, ‘dramatic declines in service use ensued, particularly among vulnerable groups, while the frequency of catastrophic expenditure increased’. It also reviewed recent data, which show, ‘Where some countries have reconsidered their position and started phasing out user fees, this has resulted in substantial increases in the use of services, especially by the poor’ (WHO 2008b; EQUINET 2007). The report acknowledged how the world health community had seemingly come full circle in its thinking, harking back to the importance of public healthcare with an emphasis on a basic package of primary healthcare. It noted, There is today a recognition that populations are left behind and a sense of lost opportunities that are reminiscent of what gave rise, thirty years ago, to Alma-Ata’s paradigm shift in thinking about health in 1978. The Alma-Ata Conference mobilized a ‘Primary Healthcare movement’ of professionals and institutions, governments and civil society organizations, researchers and grassroots organizations that undertook to tackle the ‘politically, socially and economically unaccept­able’ health inequalities in all countries.

It noted that the ‘Declaration of Alma-Ata was clear about the values pursued: social justice and the right to better health for all, participation and solidarity. There was a sense that progress towards these values required fundamental changes in the way health-care systems operated and harnessed the potential of other sectors’ (WHO 2008b). A growing body of empirical evidence shows that making public health services work is the only proven route to achieving universal and equitable healthcare. For example, the WHO’s Commission for the Social Determinants of Health, a three-year international investigation by an eminent group of policy-makers, academics, former heads of state and former ministers of health, assessed the available evidence and recently concluded that, worldwide, publicly financed and delivered services continue to dominate in higher-performing and more redistributive healthcare systems (WHO 2008a). A similar major study by Equitap, a network of fifteen research teams across Asia and Europe, compared national health data in Asia and found that no low- or middle-income country has achieved universal or near-universal access to healthcare without relying solely or predominantly on tax-funded public sector

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delivery (Rannan-Eliya and Somantnan 2005). The data show that in rich and poor countries alike those that spend a higher proportion of total health expenditure through public health systems are associated with longer healthy life expectancy and lower under-five mortality rates (Koivusalo and Mackintosh 2004). Similar research has found that in developing countries government spending on health is as important as income per head in influencing child and maternal mortality (Bokhari et al. 2005). In various ‘breakthrough’ periods Botswana, Mauritius, Sri Lanka, South Korea, Malaysia, Barbados, Costa Rica, Cuba and the Indian state of Kerala all cut child deaths by between 40 and 70 per cent in just ten years (Mehrotra and Jolly 1997). Such studies have shown that while specific approaches differed, the critical factor for success in all of these countries has been committed action by governments in organizing and providing health services for the vast majority of their populations (Oxfam 2009). More recently countries such as Uganda and Timor-Leste have used coordinated donor funding to massively expand public health provision. In Uganda, the proportion of people living within 5 kilometres of a clinic increased from 49 to 72 per cent in just five years, and in only three years, the Timor-Leste government increased skilled birth attendance from 26 to 41 per cent (ibid.). While these are very positive steps forward, aid donors such as DfID are still a relatively small minority and will need the political support of HIV/AIDS activists and public health advocates in their work with other donor agencies to build support for this view. To its credit, DfID has also begun moving against thirty years of neoliberalism by taking important steps in recent years to refocus atten­ tion on the need to support the efforts of governments to once again provide free public healthcare. DfID has increased such aid for Uganda, Zambia, Burundi and Ghana to provide free access to essential health services, with technical assistance to these as well as Mozambique and Nepal (DfID 2008). As discussed in Chapter 1, there is an important recognition by the leading global health agencies and aid donors of the crisis of the global health workforce shortage, and an important new trend to offer increasing portions of foreign aid for the wages of public health employees, including through such funding mechanisms as PEPFAR, IHP+ and GFATM. In many ways, these new trends are also indicative of the broader emerging consensus in support of strengthening public health systems. As Global AIDS Alliance executive director Paul Zeitz says, ‘In many ways the GFATM is post-neoliberal because it doesn’t care

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if a country has the “right” macroeconomic framework in place or not before giving aid, it just wants to fund good proposals that can produce concrete outcomes and foster health equity’ (Zeitz 2009). DfID’s Rob Yates says China is a good example of the overall trend in the last thirty years of countries that have shifted emphasis away from funding public health towards supporting a private sector and then back towards a renewed emphasis on the importance of public health systems (Yates 2008). Yates (ibid.) and Gottret and Schieber (2006) note that all health financing systems are in fact mixes of various public and private mechanisms, yet there is indeed a consensus emerging that in order to increase access and ensure equity, countries should reduce the proportion of out-of-pocket expenditure and shift towards pooled SHI or tax-based systems. The key questions then, however, are what should replace user fees and how to close the financing gaps to achieve universal coverage. Yates explains that variations of tax-based financing are used everywhere – and while performance has been mixed, the record shows that ‘if we are serious about covering the poor, it should be the focus of our attention’ (Yates 2008). Yates (ibid.) and Gottret and Schieber (2006) say the evidence suggests that there is no one-size-fits-all approach and individual country contexts must be considered. Yates believes there is a desperate need to encourage countries to convene participatory, transparent and evidencebased discussions and public debates on which mix of mechanisms will best suit their particular needs and long-term development goals. This emerging consensus on rediscovering the importance of public health systems, primary healthcare (PHC) and tax-based financing, and on recognizing the failure of user fees, leads to policy conclusions that deviate sharply from the dominant understanding in neoliberal economics over the last thirty years. And today, after thirty years of trial and error with neoliberal policies and their impacts on health outcomes, the world has once again come around to the 1978 Alma-Ata ideals of supporting public health provision of universal coverage for PHC. Amid this new consensus, governments, donors, HIV/AIDS activists and  public health advocates are stepping up their advocacy work to rebuild public  health systems, provide free services and increase the numbers of the global health workforce needed for achieving universal ARV treatment access and primary healthcare goals. And almost every­ where, they are bumping up against the macroeconomic policies of the IMF or its neoliberal logic.

12 |  T h e I M F : B lo c k i n g P r o g r e s s o n P u b l i c H e a lt h

As discussed in Chapter 1, aid advocates have in recent years successfully lobbied for the rich donor countries to increase levels of foreign aid, particularly for fighting HIV/AIDS, TB and malaria, financing the Fast-Track Initiative for the Education for All (EFA) goals, and for achieving the other internationally agreed Millennium Development Goals (MDGs). As donor aid levels have increased, concerns have been raised about ‘bottlenecks’ in the disbursement of aid and the ‘absorptive capacity’ constraints within recipient governments. New questions have been raised about how much foreign aid low-income countries can accept at one time, and how quickly it can be spent effectively. Such questions began to increase after 2000, after several instances of IMF policies obstructing donor goals began to surface. For example, Uganda sent shock waves throughout the international global health community when it was discovered that the finance ministry was considering turning down a $52 million grant from the Global Fund to Fight AIDS, TB and Malaria (GFATM) on the grounds that spending it might somehow threaten Uganda’s macroeconomic stability. One of the leading daily newspapers in Uganda, the New Vision, carried a story on 19 December 2003 headed ‘Health, Finance agree on funds’, which stated: ‘Health minister Brigadier Jim Muhwezi has said the Ministry of Finance is cooperating with his office in receiving funds from donors to fight HIV/AIDS, TB and malaria in the country. He said the recent disagreement between the two ministries on whether Uganda should accept additional donor funding against the diseases had ended and the Ministry of Finance was cooperative and positive.’ Muhwezi’s announcements came after another newspaper, Sunday Vision, quoted the GFATM complaining that some finance ministry officials were frustrating anti-AIDS cash from the organization. The then GFATM executive director, Professor Richard Feachem, said, ‘We recently approved $136 million to cover Uganda for two years. But in the summer of 2002, a public row broke out between the health and finance ministries on whether these monies could be absorbed. It is a

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real scandal. Can you imagine that only $300,000 has been disbursed to Uganda?’ But Muhwezi said, ‘The matter was resolved when the Minister of Finance issued a clarification affirming Uganda’s commitment to accepting the funds as being additional to the Government resources.’ The hold-up in Uganda’s accepting the funds was related to the ­finance ministry insisting that the funds could not be spending ‘addi­ tional’ to the fixed health budget, whose ceiling had already been established with the IMF as it related to the agreed level of money supply and inflation targets. The finance ministry had stated for over a year and a half that it could accept the money from GFATM only if it then lowered the existing health budget by the same amount, which the GFATM rejected. GFATM money was always only intended to be ‘additional’ spending, but Uganda was threatening to cut an equivalent amount from its current health budget. ‘Any new donor monies absorbed into a government sector must be accompanied by a similar reduction with­in the sector in order to keep the expenditure limit,’ said Francis Tumuheirwe, then Director of Budget in Uganda’s Ministry of Finance (Wendo 2002). At first, the Ugandan finance ministry explained at a Public Expenditure Review meeting on 21 May 2002 that its objection to accepting the GFATM money was based on a concern that doing so would cause an appreciative effect on the currency and hurt the ability of Uganda to export more on international markets. This phenomenon is known as ‘Dutch Disease’, after the discovery of oil in the North Sea which led to huge new profits from oil exports flooding Holland’s economy in the 1970s and an overvalued currency that made their other exports less competitive on world markets. The former IMF adviser and Columbia University economist Jeffrey Sachs, however, wrote an open letter to the Ugandan government, read aloud at the May 2002 Public Expenditure Review meeting, debunking this concern about large aid inflows causing an appreciation of the Ugandan shilling as the main reasoning behind the finance ministry’s decision. Sachs pointed out, ‘the risks of currency overvaluation from donor-financed health spending are way overblown … I don’t know of a single country case where increased donor-financed health spending to respond to epidemics such as HIV/AIDS has been a trigger for macroeconomic instability’. On the contrary, Sachs added, greater ­in­action on current spending was the deeper problem. ‘There is real and shocking macroeconomic instability caused by the failure to respond to such epidemics, since these epidemics result in a cascading destruction of families, communities, and businesses’ (Sachs 2002).

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Concern about this problem of an appreciating exchange rate was especially important to the IMF as it directly relates to how quickly a borrowing country may be able to repay the IMF and other foreign creditors, since repayments must be made in hard currencies, which developing countries earn primarily through trade. Subsequent research has shown, however, that the picture is not always so clear, and that the financial harm done to exporters by an appreciated currency could be offset by benefits for other sectors, as well as temporal considerations – short-term pain may be offset by other benefits that only manifest themselves over time. Such more nuanced examinations into the Dutch Disease phenomenon suggest that earlier concerns about the harmful impacts on exchange rates that may result from major foreign aid inflows were overblown and that such inflows can be effectively managed. Later the Ugandan finance ministry said that ceilings for overall health spending in the economy (and its impact on the rate of growth of the money supply, i.e. inflation) had already been set for the medium-term expenditure framework. Their concern was that even if the funds were off-budget, if some were spent as wages in the domestic economy’s money supply this could still be inflationary. The decision had already been made in the minds of the IMF and finance ministry that it was better to prioritize maintaining the very low inflation rate over other needs, such as funding for HIV/AIDS. Such fatal calculations led Professor Francis Omaswa, then a senior official in the Ugandan health ministry, to complain about the influence of the IMF and the World Bank in limiting the necessary increases in health spending. He stated that sometimes ‘donor priorities are different than ours’, and that the IMF had successfully convinced the Ugandan finance ministry that the strict commitment to disinflation policies must take priority over providing adequate healthcare for Ugandans. ‘The IMF, World Bank and Ugandan Finance Ministry have decided that protecting against inflation is more important than [protecting] people’s lives,’ he said, referring to the many thousands of Ugandans who die each year unnecessarily because of lack of treatment for preventable diseases and curable illnesses (Nyamugasira and Rowden 2002). Finally, after nearly two years of indecision, an agreement was reached in which the Ugandan finance ministry backed down amid mounting international concern, and a new arrangement was made in which the $52 million from the Global Fund would fall outside the official health sector budget ceiling, and be spent more slowly over time so as to not accelerate the rate of growth in the money supply too much. ‘We were still negotiating for an increase in the ceiling so that we could have more

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resources,’ said Mike Mukula, then Minister of State for Health. Mukula is not concerned that increasing health expenditure would destabilize the macroeconomy. On the contrary, like many other economists, he thinks that if the government puts more money into health, then the economy will grow faster, and argues that a population that is not healthy cannot develop a nation. ‘If you have a parent who is not working to care for children who are suffering from malaria all the time, production and productivity will definitely be less than they could be,’ he said (ibid.). While the IMF might be correct in its claims that other administrative bottlenecks also played a role in the hold-up, these were not the key issues articulated by the finance ministry. The underlying logic in the thinking of both the Ugandan finance ministry and the IMF economists is that of monetarism, a belief that keeping the rate of growth of the money supply (inflation) and public spending constrained are the priorities for macroeconomic policy and that other goals are subordinated to these goals. Ultimately, the Uganda case was not about how or whether GFATM money should be counted as additional or not, but about the very efficacy of the IMF’s definition of macroeconomic stability, which includes ‘inflation in the low single digits’, and the overriding priority that monetarism takes over other social goals. While much attention has focused on how IMF policies affect aid inflows, however, another important issue, which has received far less attention, is the question of the degree to which IMF-led macroeconomic policies adopted in many developing countries block them from being able to scale up public expenditure to levels projected to be needed to achieve the MDGs and fight HIV/AIDS effectively. The WHO conducted a follow-up project to the 2001 Commission on Macroeconomics and Health report, which included having a team advising twenty countries on how to increase their health budgets and implement other recommendations of the Commission. Several countries established their own national commissions and other bodies on macro­ economics and drafted their own Health Investment Plans to implement the Commission report’s findings. But the WHO project found that progress on increasing health budgets was terribly slow. Dr Sergio Spinaci, executive secretary of the Coordination of Macroeconomics and Health Support Unit, explained that while the Commission’s work had resulted in establishing a far better understanding that good health can in fact help to increase future GDP growth and productivity rates, ‘this was coupled with a frustration in many developing countries that macro­ economic policies endorsed by global lending institutions could undermine their ability to implement the Commission’s ­recommendations’.

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­ ccording to Spinaci, ‘It is not easy within present budgetary constraints A to invest more in health, especially if you have a large proportion of the budget invested in debt repayments and a macroeconomic policy focused on containing even minor inflation and setting rigid spending ceilings for the social sectors’ (Kapp 2004). A June 2004 study co-authored by the Netherlands-based Wemos and UK-based Medact, which examined the impact of IMF policies on health budgets in six developing countries, found, ‘In none of the countries has there been explicit public debate over the possible tradeoffs of tight fiscal policy for spending in the social (and other) sectors, nor are line ministries or parliaments involved in these decisions that usually take place between Ministries of Finance and the IMF. In any case, trade-offs between different policy options are not discussed in PRGF [Poverty Reduction and Growth Facility] loan documents’ (Verheul and Rowson 2004). Concerned about the tight deficit-reduction and inflation-reduction targets in the IMF macroeconomic frameworks for the countries examined, the report cautioned, ‘The consequences of this are grave in countries where public investment is already at low levels and where extra resources to assist public services and stimulate private sector growth are urgently needed’ (ibid.). When health ministers gathered at the December 2004 High-Level Forum on the Health MDGs in Abuja, Nigeria, their analysis suggested that part of the reason for not developing more robust macroeconomic frameworks within their national poverty reduction strategy papers (discussed below) may be the recognition that ‘in practice, the macro­ economic framework that is actually implemented has to be negotiated with the IMF, since the existence of an on-track IMF program remains a prerequisite for accessing significant external aid or HIPC debt relief’ (HLF 2004). The health ministers said that IMF fiscal and macroeconomic frameworks have been too pessimistic regarding the resources potentially available, resulting in countries implementing unnecessarily modest public expenditure plans that do not permit rapid enough progress towards the MDGs. Consequently, the aid donors are prone to then misread these signals and offer less foreign aid. The final communiqué coming from the 2004 forum warned that ‘the IMF may unintentionally restrain future aid commitments by producing fiscal frameworks that assume only modest growth in aid levels. Countries may not push for additional aid flows, nor will donors offer such aid, if the macroeconomic projections on which the expenditure program is based do not show a clear need for additional aid’ (ibid.).

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Participants at the forum questioned the striking uniformity of public expenditure constraints, which plateau at roughly 25 per cent of GDP in most countries implementing IMF-led policies. Given that countries actually differ in their economic growth rates, public expenditure levels, needs and ability to attract foreign aid, the Abuja meeting concluded that there was ‘a strong case for a more open debate on the macroeconomic framework’ imposed in these countries (ibid.). There is no question that the high degree of budget austerity in many IMF loan programmes is directly at odds with the spending increases needed to achieve the MDGs and fight HIV/AIDS. Not a single country in the industrialized world spends less than 5 per cent of GDP on government-financed health services. Yet rarely does spending on health in developing countries reach that level, despite the much greater need; in most cases, it is less than half that proportion, only 0.9 per cent in India, for example, and 2 per cent in China. Similarly, rarely do industrialized countries spend less than 4.5 per cent of GDP on publicly financed education. Only a small proportion of developing countries allocate as much (Mehrotra 2003). The conclusion is simple. Significant increases in health and education spending are not possible under the current macroeconomic framework as designed by the IMF, which prioritizes low inflation, low deficits and market-based high interest rates over other social spending goals. To achieve the MDGs and universal treatment access for ARVs, or reverse the spread of HIV, will take more expansionary fiscal and monetary policies than are currently permitted. Advocates of significant increases in public expenditures for HIV/ AIDS, health and education must understand the IMF’s position on increasing foreign aid and social spending in order to argue for change. The IMF’s rhetoric on this point can be tricky. When the IMF says it is in favour of increased social spending, this is technically true. But when their statements are examined more carefully, one can see that the ‘increases’ allowed for are nowhere near the levels projected to be needed to finance the scaled-up fight against HIV/AIDS or for achieving the other MDGs. This is because the permitted ‘increases’ in public expenditures are gauged carefully to stay within the confines of the IMF’s own disputed definition of ‘macroeconomic stability’ – i.e. inflation in the low single digits and low fiscal deficits. The real thing for advocates to focus on is not what the IMF says, but whether the IMF executive board is placed under enough pressure for it to finally change its official long-standing policies and policy advice to borrowing countries that inflation must be below 5–7 per cent and fiscal deficits

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must be below 3 per cent of GDP. The IMF can and likely will say many things, but health advocates need to make sure it is these official policies which are changed. As mentioned in Chapter 2, concern over the IMF policy problem was explained well in a US Government Accountability Office (GAO) review of IMF loan programmes, which noted that there is still a lack of understanding among economists in the field about the boundaries of the so-called ‘grey area’, or the range of possible options in between those macroeconomic policies that are considered too loose, and can lead to macroeconomic instability, and those that are considered too tight, and can actually undermine economic growth rates. While much of the emphasis of IMF programmes has been focused on ensuring that policies are not too loose, the GAO report cautioned, ‘Policies that are overly concerned with macroeconomic stability may turn out to be too austere, lowering economic growth from its optimal level and impeding progress on poverty reduction’ (GAO 2001). Unfortunately, the GAO’s caution ran against the dominant grain of neoliberalism and of course went unheeded. For HIV/AIDS and MDG advocates, exactly how the boundaries of this ‘grey area’ are calculated in each different country context has become of tremendous importance as the international donor community and governments seek to vastly scale up public expenditure. By default, seemingly abstract and arcane economic policy concepts like deficit reduction targets and budget ceilings on the public wage bill are becoming of central importance in the fight against HIV/AIDS, and in broader discussions on how countries can scale up their absorptive capacity for more donor aid and generate more of their own domestic resources over the long term. Speaking at the World Bank in November 2003, then UNAIDS executive director Peter Piot raised the IMF problem when he explained his frustration with the spending restrictions. He stated: ‘When I hear that countries are choosing to comply with the … ceilings at the expense of adequately funding AIDS programmes, it strikes me that someone isn’t looking hard enough for sound alternatives …’; then World Bank president James Wolfensohn acknowledged that the problem of the strict budget ceilings in the medium-term expenditure frameworks (MTEFs) was ‘a very real issue’ and that the World Bank was ‘working with the IMF on this issue of limits on medium term expenditure framework’ (Piot 2003). But in fact the World Bank has done little to get IMF policies changed. This is partly due to a sincere belief in monetarist principles among World Bank staff, and partly to respect for turf boundaries

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between the institutions and the IMF’s purported expertise in monetary matters, and partly out of fear of being labelled a heretic for challenging the political dominance of neoclassical mathematical modelling, and the axiomatic reasoning that follows, in the context of Washington, DC, which is the centre of the Washington Consensus policies. Stephen Lewis, former UN Special Envoy for HIV/AIDS in Africa, was especially incensed about the budget cutbacks demanded of Zambia by the IMF as a precondition for benefiting from a partial debt-relief programme, and issued a statement following the July 2004 G8 summit. Although the G8 nations were congratulating themselves on their generosity towards the debt-relief programme, Lewis noted that in Zambia the debt relief deal was conditioned on its compliance with strict fiscal and monetary policy targets, and ‘the imposed [IMF] macroeconomic policy means that the Ministry of Health can hire no more staff, and fully twenty per cent of the municipal districts have no doctors and no nurses’. Lewis explained, ‘The Government urgently wants to confront the pandemic, but it cannot do so with its financial policy and planning in a straitjacket … The Board of the IMF must come to realize that rigid macroeconomic conditionality is putting Zambia at risk … I have argued before in cases involving the IMF, and I argue again that it has failed to grasp the demonic force of the human and economic carnage caused by HIV and AIDS’ (Lewis 2004). In June 2004, the UNAIDS annual Report on the Global AIDS Epidemic 2004 responded to concerns of finance ministries and IMF officials about the possible harmful side effects of too much aid money coming into countries at one time by trying to put things into perspective. ‘The short-term inflationary effects of increased and additional resources ­applied towards tackling the HIV epidemic pale in comparison with what will be the long-term effects of half-hearted responses on the economies of hard hit countries. AIDS is an exceptional disease; it requires an exceptional response’ (UNAIDS 2004). Concerns over the IMF policies were also expressed in the June 2005 Final Report of the Global Task Team on Improving AIDS Coordination Among Multilateral Institutions and International Donors, which noted that ‘AIDS plans are often … unconnected to macroeconomic frameworks’ and this ‘has caused problems in some countries when public expenditure constraints limit social-sector spending and the wage bill, restricting the ability of governments to rapidly add staff to deliver services essential to an effective AIDS response’ (GTT 2005). The IMF problem also came up in the January 2005 report of the UN Millennium Project, which stated,

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IMF program design has paid almost no systematic attention to the [Millennium Development] goals when considering a country’s budget or macroeconomic framework. In the vast number of country programmes supported by the IMF since the adoption of the goals, there has been almost no discussion about whether the plans are consistent with achieving them … In its country-level advisory work, the UN Millennium Project has found that multilateral and bilateral institutions have not encouraged countries to take the Millennium Development Goals seriously as operational objectives. Many lowincome countries have already designed plans to scale-up their sector strategies, but due to [overall national] budget constraints could not implement them. In other cases, countries are advised to not even consider such scaled-up plans. (MP 2005)

In advance of the July 2005 G8 summit in the UK, at which a new high-profile commitment by rich countries to double foreign aid by 2010 was showcased, in March 2005 the UK released its special Commission on Africa report, which directly called on the IMF to loosen its ‘analytically unfounded’ fiscal and monetary policies so that health and other public spending and investments could be increased. The report stated that ‘Developing-country governments must have room in their budgets to make investments necessary for development, and they must have the room to adjust to shocks,’ while also acknowledging that basic fiscal constraints will always exist. ‘But’, noted the Commission, the IMF should not tighten this common-sense, indeed fundamental, constraint further by applying analytically unfounded fiscal rules. Changes are needed in two key areas. First, the IMF should treat current and capital expenditures differently: capital expenditures are an investment that should yield future payoffs, and hence offset indebtedness taken on to finance them. Second, the IMF should adjust its permitted deficit limits for shocks and business-cycle effects. Deficit ceilings that are perfectly sensible when an economy is growing may well cause unnecessary pain when they are applied rigidly in the midst of a cyclical recession or after a temporary shock. The IMF should allow for shocks and use cyclically adjusted budgets when it makes its assessment of country fiscal performance. (COA 2005)

The IMF issue was also raised by a public statement issued by civil society organizations in advance of the third High Level Forum (HLF) on Millennium Development Goals (MDGs) on health in November 2005 in Paris. The groups expressed concern that ‘The IMF’s position

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on fiscal space does not engage with the need to revise the macroeconomic targets in IMF programmes’ (NGO 2005). Increased spending is accepted, but only as long as macroeconomic stability is not put at risk. While nobody wants to destabilize the economy, the IMF does not explain, or discuss, how exactly they define macroeconomic (in)stability. The IMF claims it is just being cautious and wants to be on the safe side, with low single-digit targets for inflation and fiscal restraint. This black-and-white thinking is mirrored in the views of many ministries of finance and central banks, in which there are only two options: the cautious targets and macroeconomic stability, or out-of-control hyperinflation and macroeconomic instability. The open letter from civil society groups pointed to this problem: ‘There seems to be only one sound model – the one advocated by the IMF. However, macroeconomic studies do show contradictory results. There is no agreement on evidence for what constitutes “sound” macroeconomic targets. For example there is no consensus on the level of inflation that would endanger economic growth or poverty reduction’ (ibid.). The NGO statement goes on to elaborate important points: In a recent paper the UNDP [Roy and Weeks 2004] provides evidence that increasing public expenditure is necessary for both economic and social development. Where the IMF usually calls for reallocation within the existing budget to make expenditure more pro-poor, the UNDP study shows this is not enough and argues for different monetary and fiscal policies that allow for more expansionary public expenditure and public investment. Estimates of the loss of economic growth due to malaria or AIDS also clearly show that investing in health is a wise economic decision. (ibid.)

Finally, the NGO statement called on the High-Level Forum to emphasize that a shift in priorities is needed if we are serious about the MDGs. Governments should weigh the tradeoffs between prudent macroeconomic targets and large-scale long-term investments in people and development, instead of simply taking low single digit macroeconomic targets as the overriding objective. The IMF should loosen its belt-tightening prescription, open up to discussion of alternative policy options and play a much more pro-active role in helping countries to mobilize resources. (ibid.)

The problem of IMF policies also came up during the first meeting of the Global Steering Committee on scaling up towards universal access for ARVs, co-chaired by UNAIDS and DfID in January 2006

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in Washington. Amid ‘strong discussions’ on whether new resources would be available and provided in such a way that countries could receive maximum benefit, concerns were raised about ‘how to ensure that macroeconomic constraints do not limit the expansion of life-saving treatments and programmes’ (UAB 2006). In a 2005 review of IMF policies by the European Parliament’s Committee on Economic and Monetary Affairs, the Committee welcomed the IMF’s 1999 transformation of the Enhanced Structural Adjustment Facility (ESAF) loan to the Poverty Reduction and Growth ­Facility (PRGF) loan programmes, but expressed concern that ‘the IMF continues to use the same rigid economic model and fails to recognize different macroeconomic frameworks; [the Committee] fears, therefore, that the much-hailed poverty focus of the PRGF will become largely discredited’. The review recommended that ‘the IMF’s macroeconomic approach in relation to development strategies must become more flexible and less dogmatic. In particular, public expenditure devoted to health and education must stop being regarded purely and simply as drains on the budget to be reduced at all costs, and start being seen on the contrary as genuine investments in a country’s human and economic development’ (EU 2006). The review also commented that Opening the country up to international trade must no longer be demanded as a sine qua non, and it must be possible to take account of other factors such as the need for customs revenue, often indispensable in the short term, and the need to protect certain emergent economic sectors on a temporary basis from the sudden impact of international competition. In meeting the objective of liberalizing the financial sector, it must be possible to take account of the country’s institutional capacity to establish an adequate regulatory and super­ visory framework. (ibid.)

The IMF problem came up in testimony given at a November 2005 UK House of Commons International Development Committee hearing, at which Mr Hans-Martin Boehmer, from DfID, explained that the IMF may advise countries against planning to pay for long-term commitments, such as recruiting more health workers, using unpredictable sources of funding, such as donor financing (as opposed to more predictable flows such as domestic tax revenues). The tremendous power of the IMF’s ‘signal effect’ was pointed out by Mr Boehmer as he explained that if a country went against IMF advice and decided to finance the recruitment of health workers using what the IMF judged

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to be an unpredictable source of financing, the IMF could withdraw its support for a country’s fiscal framework. This, Mr Boehmer admitted, could have very serious consequences for a country’s receipt of funds from other donors. ‘Donors do not have the fiscal capacity to assess: “Is this a sound fiscal framework or not?” But they do provide budget support or other support through the national budget. If the IMF says, “We do not advise that this is a sound fiscal framework,” many donors would shy away from putting their money into the budget’ (IDC 2005). In the final hearing report, the Select Committee on International Development concluded, ‘The Committee understands the IMF’s ­rationale for encouraging countries to minimize risks when designing their fiscal framework. We are, however, concerned to hear that IMF fiscal advice may dissuade countries from investing in their public health infrastructure, particularly since this is key to the expansion of ARV programmes. We encourage DfID to continue working with the IMF and other donors to increase the coordination and long-term predictability of donor funding for HIV/AIDS, in order to enable countries to use donor finance to fund long-term health infrastructure commitments’ (ibid.). A March 2006 report by the International Council of Nurses explained succinctly how the IMF’s macroeconomic policies set the stage for overall spending in national budgets, which consequently limits the spending for health, as well as levels of staffing and workforce development. And in many countries, particularly those highly dependent on foreign aid, the report found that governments ‘are facing macroeconomic constraints that are impacting their ability to increase much needed social spending for health and workforce development’ (ICN 2006). The report called for governments and international financial institutions to ‘work together to ensure informed macroeconomic decision-making that creates en­ abling fiscal environments supportive to workforce development and a well-functioning, responsive health system’ (ibid.). The report went on, ‘New and existing national agreements with the IMF or other financial institutions should not require or lead to freezes in the recruitment of health workers (including nurses), prevent payment of salaries, or prevent the hiring of unemployed health personnel.’ Instead, ‘Policies should be in line with national health and development priorities and should not result in fewer resources for education or other sectors central to advancing development’ (ibid.). As criticism and scrutiny began mounting about how its fiscal and monetary policies were interfering with the spending of foreign aid, a string of IMF research and publications beginning in August 2005 reflected some new thinking on small steps towards looser policies

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for inflation targets within macroeconomic frameworks in its lending programmes, primarily in the context of making way for higher spending associated with increasingly available donor aid inflows for HIV/AIDS and other MDGs. It remains to be seen, however, how far this new thinking goes, and whether it also reflects a deeper reconsideration of the inflation–growth relationship. The August 2005 IMF report Monetary and Fiscal Policy Design Issues in Low-Income Countries suggests that perhaps inflation rates in the 5–10 per cent range may now be considered acceptable, in order to accommodate higher aid inflows, which is at least some movement from the long-standing ‘5 per cent or below’ (IMF 2005c). The issue of managing inflation in the context of larger aid inflows was also addressed in a 2006 IMF publication entitled Macroeconomic Challenges of Scaling Up Aid to Africa: A Checklist for Practitioners, which explained, The scaling-up scenario needs to include the likely effects of increased aid flows on inflation. Some additional inflationary pressure is inevitable as domestic demand increases. Even so, the IMF argues that although high inflation is clearly harmful to economic growth, the gains from continued moderate inflation on growth are ambiguous. The negative effect on growth of high inflation stems from the associated increase in inflation uncertainty, which clouds price signals and limits both the quantity and the quality of investment. On the other hand, moderate inflation can enhance real wage flexibility. Furthermore, if nominal prices are inflexible, an excessively low inflation target can render an economy more vulnerable to prolonged downturns in case of adverse supply shocks. Therefore, an inflation target below 5 per cent may not be appropriate. (IMF 2006)

In a February 2006 interview with the IMF’s Civil Society Newsletter, Andy Berg, then head of IMF’s Policy Development and Review unit, elaborated on recent IMF work and explained, There’s been a lot of discussion about whether the IMF is too tight on inflation, and whether our anti-inflation stance has limited the ability of countries to increase spending and work to meet the MDGs. The point that sometimes inflation may be part of a needed relative price adjustment is something we’ve emphasized more in this paper than in the past. And it highlights that we have to think about inflation targets in context … But we all agree that reducing inflation from high levels can carry real costs in the short run. The recent review of the Poverty Reduction and Growth Facility (PRGF) program design,

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of which the aid inflows paper is just one piece, underscored that we have to be careful about bringing inflation down too fast.

The IMF has made attempts to deflect criticism by engaging the HIV/ AIDS advocacy community, including the international health agencies, academia and civil society. These attempts have included participation in international meetings, hosting open dialogues with civil society and the health community and a 2005 policy discussion paper directed at civil society entitled ‘Understanding fiscal space’ (Heller 2005), mentioned above. The discussion paper assured readers that the IMF would support increased spending on HIV/AIDS, as long as it occurred within the boundaries of what the IMF believes to be ‘macroeconomic stability’. This statement then goes largely unchallenged by the health community for two important reasons. First, no one wants to sound as if, by questioning the IMF, they are in favour of macroeconomic instability. And more importantly, few in the health community are aware that the IMF’s definition of what constitutes macroeconomic stability is highly contested, not backed up by the empirical literature, and based on monetarist principles about the prioritization of low inflation and deficits over other goals. So while the IMF’s paper on ‘Understanding fiscal space’ claims that the IMF is in favour of more spending on health, the paper neglects to describe exactly how much more spending the IMF is willing to tolerate, nor does it address the crucial contradiction between the much higher levels of spending projected to be needed to fight HIV/AIDS and meet the MDGs and the levels of spending currently possible under IMF programmes. In not even mentioning the existence of alternative macroeconomic possibilities, ‘Understanding fiscal space’ offers civil society advocates a less than comprehensive analysis for HIV/AIDS, health and education spending. Instead of informing borrowing governments that a range of more expansionary fiscal and monetary policies exist, and doing everything in their power to help poor countries utilize such policies to maximize public spending on HIV/AIDS and other people-centred programmes, the IMF remains silent. What it says to the governments is, ‘So sorry, you have what you have; now live and die within your meagre means.’ This twisted logic translates into IMF programmes whereby health budgets in impoverished countries are allocated at the rate of four or five dollars per person per year, compared with US spending of more than $5,000 a year per citizen. As discussed in Part Two, the overriding reason why the IMF is such

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a barrier to enabling donors and countries to make more progress on achieving the MDGs is that it sticks rigidly to its world-view of public spending constraints. The IMF has a very short-term world-view, in which it is always monitoring the macroeconomic fundamentals of countries over an eighteen-month time horizon. Its limited time horizon often prevents it from distinguishing between wasteful current expenditure and strategic long-term public investment that may have a large multiplier effect over twenty years and will eventually more than pay for itself; in the short term the IMF will see only a big expenditure. By taking this stand, the Fund neglects any distinction between wasteful or productive spending and their consequences. The inability to see the difference – or to trust that governments will make the best decisions – is just one example of how the IMF’s logic has trapped poor countries into a destructive cycle of unnecessarily low spending over the last twenty-five years. The most fundamental indicator of successful economic development – sustained high rates of public investment as a percentage of GDP – has been held hostage and chronically underfunded for much of the last twenty-five years owing to the IMF’s narrow ‘logic of availability of resources’, in which a country only has to spend whatever it can raise in tax revenues and from foreign aid in any one year. This perspective, however, is not shared by industrialized countries, which regularly engage in strategic deficit spending during economic slowdowns and recessions (as we saw most dramatically in the global economic crisis beginning in 2008), often on investments that have longer-term multiplier effects. Ironically, the biggest rich countries, which allow themselves to engage in counter-cyclical fiscal and monetary policies when they deem it necessary, are also the largest shareholders on the executive board of the IMF and regularly approve IMF loans programmes and surveillance reports that demand the very opposite policies for developing countries. One reason why the IMF prohibits moderately higher deficit spending is because of the high interest rates poor countries must pay on servicing their deficits. This is because interest rates have been deregulated under structural adjustment and are today often determined by the free market, or by the level of risk or creditworthiness of the government as perceived by those in the bond markets. A further complication is the short-term duration of the bond issues in many developing countries, often as short as 90 or 180 days. This has created opportunities for an exploitative situation, in which international banks go into places like Malawi or Uganda and purchase bonds, wait sometimes as little as 60 or 90 days, then pocket upwards of 20 per cent interest and take that money back home and out of the domestic economy. Under such

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conditions, no wonder it is so easy for governments to run up fiscal deficits that the IMF warns are ‘unsustainable’. University of Massachusetts Professor James Heintz says that if the IMF really wanted to be more helpful, it could work with the World Bank, other aid donors and key financial actors to take clear steps to address this problem directly and proactively by providing governments with loan guarantees and subsidized rates of credit and other tools that would allow them to engage in deeper and long-term deficit spending at lower, more affordable rates. But as it stands, the IMF and other aid donors leave governments in the current vice grip that prevents them from engaging in affordable deficit spending. The current neoliberal preferences for market-based interest rates keep such decisions solely in the hands of those who purchase government bonds, who generally perceive such a high risk that they demand very high interest rates. The prohibitively high interest rates have prevented governments from being able to make long-term capital investments in the underlying health infrastructure, as an increase in public investment as a percentage of GDP, and such chronic underinvestment has taken its toll after a couple of decades in many cases. In the lead-up to the UK hosting the annual G8 summit in Glen­­ eagles, Scotland, in July 2005, at which rich countries pledged to double current levels of foreign aid by 2010, the Financial Times reported on a disturbing phenomenon – how the ‘Under-use of aid threatens Africa funds’ (White 2005). According to the report, the real question was not just how much extra money the richest donors meeting at the G8 summit would deliver ‘but how well African countries can use it’. The Commission for Africa, the panel set up by UK to host the summit, concludes in its report that ‘over the next three to five years aid levels could be doubled and used productively’, but funds already available often remain underutilized. Even in a country such as Senegal, with a relatively good record of budget management, leading donors such as the World Bank and the European Commission say large parts of their assistance portfolios are unused. They blame this on a shortage of administrative capacity in government, and on slow bureaucratic processes that provide openings for corruption. It is both tragic and ironic that the World Bank spent the 1980s telling the world’s poorest countries to cut public expenditures drastically as conditions for loans; spent the 1990s telling them to cope with significantly fewer doctors, nurses, teachers and administrators by charging the poor ‘user fees’ for basic healthcare and primary education; then has spent the past five years trying to finish off their crumbling public health

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and education systems by mandating privatization and contracting-out to cadres of non-governmental organizations (NGOs) as replacements; and yet now the World Bank is apparently shocked to find that poor countries cannot ‘absorb’ higher amounts of foreign aid because they lack ‘administrative capacity’ and sufficient staff. Regarding the existing funds from donor aid that ‘often remain underutilized’, advocates are growing concerned by instances of trained nurses and schoolteachers sitting unemployed in many poor countries (MSF 2007). The IMF permits borrowing governments to spend foreign aid on building reserves at the central bank, paying down the deficit, or debt payments to foreign creditors, but discourages spending on hiring more people, which it fears could lead to ‘macroeconomic instability’, despite its definition being contested. The IMF’s harsh, low-spending austerity approach might have seemed reasonable when countries were faced with crises of hyperinflation in the 1980s, but these policies are no longer appropriate for dealing with the kinds of spending and foreign aid increases sought today by other aid donors, UNAIDS, the GMAFTM and many others. Further alarm was generated by a 2007 report by the quasi­independent Internal Evaluation Office (IEO) of the IMF, which confirmed the worst fears of aid advocates when it detailed how restrictive fiscal and monetary policies in IMF loan programmes are ‘blocking’ the spending of increasingly available foreign aid. The report examined IMF loan programmes to twenty-nine sub-Saharan African countries between 1999 and 2005 (years when there were sizeable increases in foreign aid flows) and found that only about $3 of every $10 in annual aid increases had actually been programmed to be spent in the recipient countries examined, largely because of the IMF’s insistence on two policies on currency reserve levels and inflation rates. Roughly $7 of every $10 in annual aid increases from donors had been diverted into either building up international currency reserves or paying down domestic debt (IEO 2007), but was not permitted to be spent as intended by the aid donors. The data were so shocking because having so much of the new aid increases not being spent was certainly not the intention of the donors, or citizens in donor countries. According to the IEO report, the ‘main driver’ in decisions to curtail spending of the aid was the IMF’s insistence on very low levels for inflation. Countries that had failed to comply with the IMF’s insistence on getting inflation down to the IMF policy level of 5–7 per cent a year were allowed to spend only 15 per cent of their annual aid increases, or just $1.50 of every $10 in annual aid increases by donors.

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Speaking at a seminar in London on 2 April 2007, the lead author of the report, Joanne Salop, said the IEO report team recommended that since the 5–7 per cent threshold was, in fact, the operative policy of the IMF, it should be publicly stated and clarified – but the IMF executive board and management rejected the recommendation. Arguably, the IMF executive board knows that, although the position is derived from monetarist principles, it is not empirically justifiable and so is hoping to avoid a discussion of it, which is precisely why HIV/AIDS activists and public health advocates should focus energy on demanding the policies be revisited, updated and modified, in a transparent and participatory manner that is evidence-based. Critics who have previously raised concerns about IMF loan programmes being a factor in the slow absorption and spending of foreign aid were alarmed by the IEO report. ‘This is the most shocking report I’ve read in years,’ said Mr Gorik Ooms, then general director of Médecins sans Frontières (MSF) in Belgium. It really was an eye-opener. It reveals, almost casually, that the IMF did not block the reception of additional aid at all; it simply blocked the use of additional aid. So this is the picture: On the one hand you have hundreds if not thousands of organizations and individuals pleading their government to provide more aid to provide better healthcare or education, to realize the MDGs, to keep children from starving and to keep people with AIDS from dying perfectly avoidable deaths; and on the other hand you have the IMF making sure that 80 per cent of all that aid is not being used. This picture is too grotesque for my imagination, and yet it is what has happened since 1999, and as far as I know it simply continues to happen. (Thapliyal and Rowden 2007)

Donors give aid to help countries both increase their domestic spend­ing (‘aid spending’) and import needed goods such as medicines, machinery and textbooks (‘aid absorption’). Ideally, countries receiving foreign aid should be able to both ‘spend’ aid in order to finance larger government programmes and ‘absorb’ aid in order to import more needed goods from abroad. If governments that receive aid are neither fully ‘spending’ nor ‘absorbing’ their aid, then the basic purpose of foreign aid is being defeated. The IEO report found that two key variables – the level of international currency reserves and the rate of inflation – were the main basis for informing the IMF’s decisions about how much of an annual foreign aid increase (over the previous year) could be spent by the

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recipient countries. The IMF prefers that a low-income country maintain international currency reserves equal to 2.5 or 3 months of imports. The report found that, for countries that already had sufficiently high levels of international reserves, the IMF then based its decision about how much of the annual aid increases could be spent on the country’s rate of inflation. Countries that had already achieved and maintained the IMF’s preferred low inflation target of 5 per cent or below were allowed to spend up to 79 per cent of their annual aid increases, with only 21 per cent being redirected into international reserves or for paying down domestic debt. Most other countries in the study, however, which failed to satisfactorily comply with the IMF’s target of 5 per cent inflation, were penalized by being allowed to spend only 15 per cent of their annual aid increases, while upwards of 85 per cent was redirected (IEO 2007). The IEO report noted, ‘these findings are consistent with Boardapproved policy on the accommodation of aid, management guidance and feedback to staff, and staff views. However, they also help to explain why outside observers perceive the IMF as “blocking” the use of aid.’ David Goldsbrough, former economist at the IEO and lead author of a similar study at the Center for Global Development on how IMF macroeconomic policies have been integrated with the management of health expenditures in a context of scaled-up aid (CGD 2007), said, in my view, the most important finding of the IEO is not that IMF programmes, on average, target that only 28 cents of every additional dollar of aid go for supporting a fiscal expansion (aid spending). What is more striking is that, when classified by countries’ initial conditions, the IMF seems to be recommending almost polar solutions: (i) if international currency reserves are less than 2.5 months of imports, virtually all extra aid should be saved in the form of higher reserves; (ii) if reserves are above this level, but domestic macroeconomic conditions do not meet a very high test of stability (5 percent inflation), the vast bulk of extra aid (85 cents on the dollar) should be used to reduce domestic debt; and (iii) only if both of the above tests are met should most of the aid be used for additional spending. This is a very conservative macroeconomic policy stance that goes beyond the evidence. (Thapliyal and Rowden 2007)

Regarding the IMF’s stipulation on building international currency reserves up to three months of imports, Goldsbrough added, Reserves accumulation is an appropriate initial response to higher aid

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when reserves are low, but the degree to which this should be pursued is open to question. It will depend upon how consistent the additional aid is expected to be. The IMF programmes implicitly assume that all aid increases will be very temporary, which cannot always be true. It is also not clear that countries with relatively high reserves ought to use virtually all additional aid to reduce their domestic debt, even if domestic macroeconomic conditions are less than perfect. The exact linkages between domestic debt reduction and objectives such as growth are opaque, at best, and highly country-dependent.

Professor Fernando Cardim de Carvalho, of the Institute of Economics at the Federal University of Rio de Janeiro, said, the data presented in the IEO report confirms what the critics of the IMF’s policies for poor African countries have been arguing for some time now. Aid has been offered in amounts that are far lower than the necessary minimum to cover the needs of the African people. Even these amounts, however, have not been fully used to leverage economic development in the region because the IMF imposes unreasonable criteria for macroeconomic stability on African governments, just to allow them to spend some of the aid they get. As the IEO report points out, the IMF staff admitted that ‘the empirical literature on the inflation/growth relationship is inconclusive.’ Despite this, the Fund still goes on to assume that inflation rates should be kept in the 5 per cent to 10 per cent interval, which is below what is proposed by many researchers.

‘The IEO report shows that much of the IMF never really went along with the “poverty-reduction” rhetoric, or pro-poor growth strategies,’ said Jo Marie Griesgraber, executive director of New Rules for Global Finance Coalition. ‘The IMF puts the aid money into reserves not to “promote growth” but to ensure macroeconomic stability. The IMF does not perceive its role as promoting growth; as others have observed, few claim to know what triggers and sustains growth. Nor does the Fund know about poverty reduction: it has defined its mission as promoting macroeconomic stability – full stop. The IMF works for stability over growth and stability over poverty reduction.’ According to Griesgraber, the key question for aid advocates to ask is: ‘To what extent is the IMF’s prioritization of macroeconomic stability in direct conflict with the imperative to increase foreign aid and increase public spending to achieve the MDGs and fight HIV/AIDS, and what are you going to do about it?’

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‘We joined with other US groups to bring this problem to the atten­ tion of the US Treasury over two years ago and their response then was that “price stability (low inflation) is the most important thing,” suggesting that other matters, such as scaling-up spending to fight HIV/AIDS, take a back seat,’ said Paul Zeitz, executive director of the Global AIDS Alliance. ‘Enough is enough. The findings of this IEO report show that the IMF is still way too preoccupied with macro stability over any other goals. Aid advocates clearly never intended for this much of the aid increases we have fought for to just sit there and go unspent. There is just no way this will be perceived as acceptable.’ Over the last twenty-five years, IMF policies have been characterized by a macroeconomic framework that prioritizes achieving macro­ economic stabilization while subordinating other development goals, such as higher GDP growth rates, higher employment rates and higher levels of public investment as a percentage of GDP. They have also been characterized by a perception of health and education spending as wasteful ‘consumption’, rather than as long-term public investment. Although the IMF was ostensibly supposed to change this order of priorities in 1999 with the transition of the IMF loan programmes from the Enhanced Structural Adjustment Facility (ESAF) to the Poverty Reduction and Growth Facility (PRGF), the new IEO report found that generally the IMF has, in recent years, not lived up to its public relations rhetoric about changing its focus more towards ‘poverty reduction’ and helping to enable a scaling-up environment to achieve the MDGs. In the 1999–2001 period, the IMF and the World Bank agreed to adopt very high-profile changes to the IMF’s very restrictive fiscal and monetary policy positions and structural adjustment programmes with a new emphasis on ‘poverty reduction’. Rather than maintaining the IMF policies on very low inflation and deficit-reduction targets that had characterized the previous twenty-year focus on achieving then maintaining macroeconomic stability, the leaders agreed to take steps to loosen such policies in order to allow for the so-called ‘scaling up agenda to achieve the MDGs’. Michel Camdessus, managing director of the International Monetary Fund from 1987 to 2000, and James D. Wolfensohn, president of the World Bank from 1995 to 2005, had made arrangements to amend the policies, but Camdessus did not drive such an understanding through the senior management or executive board of the IMF, and thus this apparent agreement collapsed upon his retirement in 2000. What ensued thereafter has been described as a ‘disconnect’ between the intentions of other donors seeking to increase foreign aid and the IMF, which remained exclusively focused on macroeconomic stability.

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This disconnect was one of the major overarching findings of the April 2007 IEO report, which noted that the IMF executive board and senior management were never really enthusiastic about the high-profile change in emphasis placed by donors on ‘poverty reduction’ in 1999 or the new efforts to scale up aid and spending for the MDGs in 2000. Without strong leadership directing any real top-down policy changes in this regard, the IEO report found, the IMF staff simply reverted to prioritizing the IMF’s definition of macroeconomic stability over other goals as they always had and nothing ever changed. Consequently, according to the IEO report, on the one hand donor governments are encouraging developing countries to increase social spending on HIV/ AIDS and the MDGs while at the same time they are also regularly approving IMF loan programmes that restrict that spending. While the rich donor countries were pledging to double levels of foreign aid during the annual G8 summit in 2005, a New York Times editorial appropriately summarized this current disconnect in donor policies: There is a desperate need for greater policy coherence in a period when many national governments, including Washington, are sensibly exhorting African governments to spend more on primary healthcare and education while international financial institutions largely controlled by those same Western governments have been pressing African countries to shrink their government payrolls, including teachers and healthcare workers. (NYT 2005)

Also in 2007, a major study by the Washington, DC-based Center for Global Development entitled ‘Does the IMF constrain health spending in poor countries? Evidence and an agenda for action’ was produced by the CGD Working Group on IMF Programmes and Health Spending, chaired by David Goldsbrough (CGD 2007). The study explored criticisms of the IMF’s macroeconomic policies and the impact they actually have on health spending in low-income countries, supported by in-depth case studies from Mozambique, Rwanda and Zambia. On fiscal policy (deficit-reduction targets), the report found: ‘The evidence suggests that IMF-supported fiscal programmes have often been too conservative or risk-averse. In particular, the IMF has not done enough to explore more expansionary, but still feasible, options for higher public spending.’ On monetary policy (inflation-reduction targets), the report noted: ‘Empirical evidence does not justify pushing inflation to these levels in low-income countries.’ Among its many recommendations, the CGD report called on the IMF to ‘help countries explore a broader

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range of feasible options’, with ‘less emphasis on negotiating short-term programme conditionality’ (ibid.). The IEO report and the CGD study, along with other research and analysis, led the House Financial Services Committee of the US Congress to write to the IMF in November 2007, ‘We are concerned by the IMF’s adherence to overly-rigid macroeconomic targets’ and ‘It is particularly troubling to us that the IMF’s policy positions do not reflect any consensus view among economists on appropriate inflation targets’ (Financial Services Committee 2007). The IMF’s wage-bill ceilings

One IMF policy that has brought together health and education advocates has been the imposition of strict wage-bill ceilings, or restrictions on how much of the national budgets can be spent on the wages of public sector employees. The IMF began resorting to imposing wage-bill ceilings when many countries continued to slip and fail to meet their agreed deficit-reduction targets. In many developing countries, the government budget is a larger part of overall spending, and within this, the budget for public sector wages is also a significant part. Therefore, the IMF believed it could prevent larger budget deficits by constraining the  portion of the budgets going to public employees’ wages. Unfortunately, the wage-bill ceilings ended up creating bizarre situations in which hundreds of trained, professional teachers, nurses and healthcare workers are desperately needed and ready to be deployed yet sit unemployed because of budgetary restrictions on hiring new employees, which is an extension of the IMF deficit-reduction target. Ambrose (2006) documents the case of Kenya, and how the logic of neoliberal policies has negatively affected the health system. As in most African countries, Kenya’s healthcare system was hit hard by the structural adjustment policies in IMF and World Bank loan programmes in the 1980s, which have left a lasting mark on Kenya’s health. As usual with such programmes, the emphasis was on cutting budget expenditures and, as a result, local health clinics and dispensaries had fewer supplies and medicines, and charging user fees for services that had once been free became more common. The public hospitals saw their standard of care deteriorate, increasing pressure on the largest public facility, Kenyatta National Hospital in Nairobi. As a consequence, that hospital, once the leading health facility in East Africa, began, like so many other African hospitals, to ask patients’ families to provide food, medicine and medical supplies. Most beds at Kenyatta and the regional and local hospitals accom-

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modated two patients. Professional staff have taken jobs – some parttime, some full-time – at private healthcare facilities, or have migrated to Europe or North America in search of better pay. Between 1991 and 2003, the Kenyan government reduced its workforce by 30 per cent, cuts that hit the health sector particularly hard, and for the period 2000–02 alone, the government was scheduled to lay off 5,300 health staff (ibid.; NGO 2005). These requirements to reduce public sector workers were externally imposed. A World Bank document from November 2003 discussed a loan condition that ‘required retrenching 32,000 personnel from civil service over a period of two years’ but which noted that in practice only ‘23,448 civil servants were retrenched in 2000/01 before the program was interrupted by lawsuits’ and that a new commitment was ‘to reduce the size of the civil service by 5,000 per year through natural attrition’ (IDA 2003; Ambrose 2006). Although the very same document supports the health ministry’s assessment of current needs – ‘the health sector currently experiences a staff shortage of about 10,000 health workers’ – strikingly it draws no connection between the shortage and the insistence on cutting more workers (Ambrose 2006). The impact of the lay-offs and budget slashing in the health sector over the last fifteen years was cited recently by Member of Parliament Alfred Nderitu as the primary motivation for his motion of censure against the IMF and the World Bank in the Kenyan parliament. His initiative would insist that any future loans from the institutions get parliamentary approval (Kenya Times 2006). Although many African countries have shortages of medical staff because of lack of training capacity, Kenya is in another more disturbing category, in that it has thousands of trained health workers ready to go but who remain unemployed or underemployed. While many donors and governments routinely talk about increasing ‘health spending’ generally, they tend to mean one-off purchases on goods, equipment or medicines – but not more health personnel (IMF 2005d). Kenya’s Chief Economist in the Ministry of Health, S. N. Muchiri, explained that while the IMF and the World Bank support nominally increased expenditures on health, they forbid spending that money to pay for additional staff wages. The IMF accomplishes this through insisting on a ceiling on wage expenditures; in Kenya, the targets were 8.5 per cent of GDP in 2006 and 7.2 per cent for 2008. It is important to understand that the IMF does not specify that hiring in the health sector specifically must be limited, but when the overall national wage bill must be suppressed, the chances of getting any new health personnel are quite slim. The

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result is perverse scenarios in which donors provide funding for more clinics for which there are no personnel. Frustrations over the limits on wages have at times escalated in Kenya – for example, in March 20006, when Kenya’s assistant minister for health, Enock Kibunguchy, told the press that Kenya urgently needs to hire 10,000 additional professionals in the public health sector, blurting out: ‘We have to put our foot down and employ. We can tell the Inter­national Monetary Fund and the World Bank to go to hell’ (Mwai 2006). Muchiri provides valuable insights about the contradiction discussed above in which funding initiatives like the GFTAM and PEPFAR have made stemming the most critical health crises in Africa more possible while at the same time the IMF’s power over borrowers’ economic policies and its narrow focus on keeping inflation and payrolls as low as possible actively discourage governments from putting the available funds to use. Muchiri notes that more and more economists – outside the IMF – are taking a more nuanced view of growth and inflation (Stiglitz et al. 2006; Cardim de Carvalho 2005b; McKinley 2005a; Roy et al. 2006; Epstein and Grabel 2007). Rather than insisting that a country have a demonstrated ‘absorptive capacity’ before increasing the flow of revenues, they look at the likely impact of increased flows. In the case of increased spending on healthcare, not only is employment created (if wage ceilings are set aside), but the population’s overall economic capacity improves, and private sector activity, rather than being discouraged by public funds, is actually spurred on by the increasing availability of resources. From the perspective within Kenya’s health ministry, Muchiri concurs with concerns about the IMF’s unnecessarily restrictive disinflation policies and their harmful impact in undermining higher growth, spending and investment, and supports the view that public spending, especially on healthcare, will encourage higher growth. But he acknowledges that the Kenyan government has committed to maintaining a low inflation target in its IMF programme at 3.5 per cent, and is concerned about the consequences. ‘It’s too low for an economy that is supposed to be growing at a rate of 5 percent of GDP per year. A certain level of inflation is healthy for generating higher levels of activity – you can’t grow otherwise’ (Ambrose 2006). But the response Muchiri receives from Kenya’s finance ministry is the same logic one gets from finance ministries and central banks and university departments throughout sub-Saharan Africa and elsewhere: that health ministries must limit expenditures on healthcare in order to prevent any risk of inflation rising. Many finance ministries of developing

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countries that have either committed to the IMF’s inflation-reduction targets in loan programmes or are just looking for a seal of approval in the IMF’s annual surveillance report on their economy have in many cases made achieving the targets the centrepiece of their macroeconomic policy, and are deeply reluctant to do anything that might allow inflation to increase. The psychological power of this singular notion as a driving force in public finance should not be underestimated by HIV/ AIDS activists and public health advocates. Many central bankers believe that meeting the targets will not only win praise from the IMF, but will bolster their perceived ‘policy credibility’ in the minds of bond investors, both international and domestic. Not only would missing the targets risk IMF disapproval and blacklisting, but it would also be seen as reversing a position they have publicly, and politically, committed to. And this is the very political wall that HIV/ AIDS activists and public health advocates must break through if public finance is to be freed. As Ambrose (ibid.) notes, ‘Until this intellectual logjam is broken, a higher quality of life – even life itself – will continue to elude many thousands.’ What is notable about the Kenyan case, however, is that a campaign of sustained international pressure by advocacy groups and a series of official negotiations between the IMF and donors finally allowed for adjustments in the IMF programme so that Kenya could hire more health professionals if it could find donors willing to provide extra funds. The donors would have to be comfortable with the impacts and risks that hiring additional health staff might have. This was perceived as a victory, as it was this concession by the IMF which allowed Kenya to use funds from the Clinton Foundation, PEPFAR and the GFATM to hire about two thousand new nurses and other health professionals (Barasa 2005; Openda 2005). This was an exceptional case, however, and required an exceptional effort by many people in many countries just to get the IMF to budge a little in this one instance, and the new health personnel gained still may not be enough. The very real problem that continues for Kenya and many other countries is the very existence of the IMF policies, and their consequences. When Muchiri reflects on the damage done by all of the spending that was prevented over the years, he recalls watching mothers and children die in hospitals for lack of surgeons or preventive care, and wonders whether the IMF and the World Bank could reasonably be charged with genocide. ‘The only difference from what happened in Rwanda is that here they don’t use pangas [machetes], they use policies’ (Ambrose 2006).

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In April 2007, ActionAid issued a report about these contradictions called Confronting the Contradictions: The IMF, wage bill caps and the case for teachers, which found that a major factor behind the chronic and severe shortage of teachers is that IMF policies required many poor countries to freeze or curtail teacher recruitment. The IMF has varying degrees of influence in directly setting the level of funds available for wages of public sector employees, or the ‘wage bill ceilings’. By insisting, however, on overly restrictive macroeconomic policies that unneces­ sarily  constrain overall government spending in national budgets, and thus constrain ­sector budgets and public employees’ wages, the IMF is in part responsible for the persisting teacher shortage (ActionAid 2007b). The IEO report showed that a significant amount of foreign aid was not being programmed to be spent by the IMF because of two of its policies on reserve levels and inflation rates. The CGD study found that there is no empirical evidence to justify one of those policies, that on low inflation. Taken together, the two reports suggest that a significant amount of foreign aid for health is not being spent because of a policy that is not adequately based on empirical evidence. This is, of course, unacceptable to aid advocates. The CGD report recommended: ‘The IMF should help countries explore a broader range of feasible options for the fiscal deficit and public spending. This requires less emphasis on negotiating short-term program conditionality and a greater focus on helping countries strengthen their understanding of the consequences of different options … The IMF should be more transparent and proactive in discussing the rationale for its policy advice and the assumptions underlying its programs.’ And the ActionAid report recommended: ‘The IMF should stop attaching specific policy conditions to their lending and surveillance programmes, including on inflation levels, fiscal deficits and wage bills. Any advice they give must provide a range of policy options to enable governments and other stakeholders – including parliaments and civil society – to make informed choices about macroeconomic policies, wage bills and the level of social spending.’ Similarly, an Oxfam International report on public services found that ‘IMF policies present massive obstacles for poor countries trying to employ more teachers and health workers … While the IMF is right that countries should manage their economies carefully, its overly rigid stance is incompatible with achieving the Millennium Development Goals on health [and] education’ (Oxfam and WaterAid 2006; ActionAid 2007b; Klees 2008).

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Both the ActionAid (2007b) and CGD (2007) reports found that wage-bill ceilings could be harmful to education and health personnel needs. The reports echoed calls by the IMF’s IEO report that a broader array of fiscal and monetary policy options should be made available to policy-makers in borrowing countries. After both health and education advocacy networks in many countries used their international linkages and stepped up international pressure, the IMF finally responded to these issues and concerns by issuing two policy papers in June 2007, ‘Aid inflows – the role of the Fund and operational issues for program design’ and ‘Fiscal policy response to scaled-up aid’, which acknow­ ledged unintended negative consequences from the use of wage-bill ceilings (IMF 2007a, 2007b). The IMF executive board responded to these papers by changing its policy on wage-bill ceilings by committing to use them less frequently in the future and, when still necessary in extreme cases, to offer better justifications of how they are determined (IMF 2007c). Although the successful advocacy pressure effectively pushed the IMF to officially abandon the widespread use of wage-bill ceilings, however, this policy change does not solve the deeper underlying problem of insuffi­cient health or education budgets. Even without actual wagebill ceilings in IMF programmes, the excessively tight fiscal (deficit­reduction) and monetary (inflation-reduction) policies will still keep overall national budgets constrained at unnecessarily low levels, and dampen future GDP growth rates, employment and tax revenue levels, with the consequential impacts on sector budgets and wages for personnel. The IMF press statement on the executive board’s policy change confirms that little has actually changed, and that its use of wage-bill ceilings (for overall public sector wages or for specific sectors) will continue to be based on undefined ‘macroeconomic considerations’ rather than on any balancing with sectoral needs or priorities. Each time ‘alternative policy scenarios’ are mentioned, they are qualified by stating the need to first maintain or preserve macroeconomic stability, yet never is any definition of ‘macroeconomic stability’ provided. And here is the key hurdle. The ongoing discussions between the IMF, donors and HIV/AIDS and health advocates on these issues will mean very little unless and until the advocates can effectively challenge the IMF on its specific definition of ‘macroeconomic stability’ (what levels of inflation, of deficits, and based on what literature) and get widespread acknowledgement among stakeholders that the IMF’s definition lies at an extreme end of a range of other perspectives and a body of empirical research. It is imperative that advocates work with economists and other

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stakeholders to broaden this debate to insist that the IMF acknowledge that a range of alternative policy options is possible and should be considered; otherwise the official dialogue with donors and the IMF will mean very little. Regarding the ‘grey area’ of alternative policy options between those that may be considered too austere and those that cause macroeconomic instability, the IMF executive board has been operating from one narrow end of this range of possibilities by insisting on extremely restrictive policies. In so doing, it has been preventing other reasonable options, what the CGD report called ‘more expansionary options for increased public spending’, from being explored or considered. The recent IMF programmes for Sierra Leone and Malawi offer a classic display of what Amartya Sen called ‘anti-deficit radicalism’, with deficit-reduction targets that will seek to nearly balance their budgets over the next few years, despite the fact that both countries have massive unemployment and underemployment problems and immense development needs. Both IMF programmes also contain inflation-reduction targets that will raise interest rates in an attempt to drive inflation from the mid-teens down into the middle single digits over the next couple of years. Achieving both of these policy targets will require public spending constraints that are unnecessarily restrictive. Doctors, nurses and teachers that might otherwise be employed will not be. At meetings with civil society advocates, economists, parliamentarians and finance ministry officials in Freetown and Lilongwe in the autumn of 2006, ActionAid was asked to seek clarification from the USA about why such unnecessarily restrictive fiscal and monetary policies were approved in their respective IMF loan programmes. At a January 2007 meeting with ActionAid at the US Treasury Department in Washington, DC, the then US Executive Director to the IMF, Meg Lundsager, explained that the USA ‘didn’t trust’ the governments in either country to engage in any productive or efficient deficit spending, so they went along with approving IMF deficit-reduction targets that basically blocked those countries from being able to do so. The US Treasury did not apparently consider the cost of such a position in terms of forgone jobs for doctors, nurses and teachers, and/or forgone capital investments in the health and education systems. Lundsager also suggested that any deficit spending would ‘crowd out’ available credit for the private sector, despite the mounting evidence for the reverse, as noted by IMF’s Sanjeev Gupta et al. – depending on the nature of the public investments, public spending can actually have a ‘crowding-in’ effect that creates new opportunities for private investment (IMF 2006).

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Lundsager made the US Treasury’s position on IMF disinflation goals very clear. When presented with hard copies of all nine of the major studies in the empirical research (listed in Chapter 8), which collectively show there is no justification for pushing inflation to these levels in low-income countries, Lundsager pushed the stack of hard copies away and said she ‘didn’t care’ that there was no substantial evidence for driving inflation so low, the USA simply ‘believed’ that inflation should be this low, and that was why they approved the IMF loans for Sierra Leone and Malawi with such unnecessarily restrictive inflation-reduction targets. But for health and education advocates who are trying desperately to maximize budgets and wages and get every additional doctor, nurse and teacher hired, such faith-based economic policy-making is totally unacceptable. This logic behind the need for low inflation is preventing an array of other reasonable alternative policy options for increasing public spending from even being considered. WHO’s 2008 World Health Report cited the over-commercialization of the healthcare industry as a consequence of the neoliberal structural adjustment reforms. The report noted that healthcare delivery in many governmental and even in traditionally not-for-profit NGO facilities has been de facto commercialized, ‘as informal payment systems and cost-recovery systems have shifted the cost of services to users in an attempt to compensate for the chronic under-funding of the public health sector and the fiscal stringency of structural adjustment’ (WHO 2008b; Périn and Attaran 2003; Creese 1990). At the first meeting of the Global Health Workforce Alliance (GHWA) in Kampala in March 2008, the delegates expressed concern about how IMF policies undermined the ability of countries to scale up the needed investments in health personnel. The GHWA’s Kampala Declaration singled out the IMF when it officially called for ‘Governments to increase their own financing of the health workforce, with international institutions relaxing the macroeconomic constraints on their doing so’ (GHWA 2008a). And the official report of its Task Force for Scaling Up Education and Training for Health Workers, ‘Scaling up, saving lives’, noted that ‘There are also concerns in many countries that the IMF and the world monetary framework militate against adequate investment in health.’ Among its recommendations to donors it called for ‘greater flexibility from finance ministries and the International Monetary Fund’ in order ‘to allow increased support for human capital development and greater investment in the development of health and education systems’. As mentioned in Chapter 1, the GHWA was created as a reflection of the emerging global political response mobilizing to call for concerted

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international action to address the worsening healthcare worker crisis in many countries, and the associated brain-drain dynamics. The alli­ ance is comprised of a diverse group of governments, multilateral, bilateral and academic institutions, civil society groups, the private sector, and health workers’ professional organizations, which recognizes the need for immediate action to resolve the accelerating crisis in the global health workforce, including the global shortage of over four million health ­workers needed to deliver essential healthcare (GHWA 2008b). In July 2008, a startling Cambridge University-led study on the impact of IMF policies on health spending found: ‘IMF economic reform programmes are associated with significantly worsened TB incidence, prevalence and mortality rates in 21 Post-communist Eastern European countries, independent of other political, socioeconomic, demographic and health changes in these countries’ (Stuckler et al. 2008). The international research team found that tuberculosis in eastern Europe and the former Soviet Union had been worsened by the budget austerity and other economic policies of the IMF, and IMF loan programmes are ‘strongly associated’ with large increases in tuberculosis incidence and deaths, costing tens of thousands of lives every year, and producing hundreds of thousands of new tuberculosis cases. ‘The findings show that IMF economic reform programmes are strongly associated with significantly worsened tuberculosis rates in this region,’ said David Stuckler, a sociologist at Cambridge University who led the study. The Cambridge study found that IMF programmes were linked to a fall in government spending as a percentage of GDP, a drop in the number of physicians per head of population and a reduction in the availability of Directly Observed Therapy (DOTs), a treatment method recommended by the WHO for treating tuberculosis, to prevent deaths and resistance to tuberculosis medications. Yale University’s Sanjay Basu, another co-author of the study, explained the apparently fatal nature of the IMF policies: ‘What we have found suggests that while the IMF intends to produce economic stability in these countries, it could be destabilizing public health programmes and taking a toll in human lives’ (ibid.). In August 2008, WHO released a three-year study by its Commission on the Social Determinants of Health, which found: ‘Ceilings on public expenditure associated with the need to secure IMF approval of national macroeconomic policies may limit the ability of governments to pay badly-needed health professionals, although the relative contribution of IMF demands and other factors must be assessed on a country-specific basis.’ The study discussed the Medium Term Expenditure Frame-

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works (MTEFs), which are tools to provide three-year rolling budget windows used for planning national budgets. Of particular concern are the numbers that IMF and finance ministries put into the frameworks. While the MTEFs themselves do not explicitly place a cap on recurrent costs, such as recruitment of and salaries for much-needed healthcare staff, the way in which the MTEFs were used was found to discourage such expenditure, leading to underinvestment in the human capacity critical for healthcare systems. According to the Commission study, ‘[the numbers that go into the] MTEFs are set in negotiations between ministries of finance and the IMF, which prioritize very low inflation and avoiding fiscal deficits rather than addressing poverty or health needs. This process limits the size of the total budget and, within the budget, non-discretionary expenditures such as debt repayments tend to be prioritized, limiting sectoral budgets’ (WHO 2008a). The study also reported that, in all four African countries examined, health ministries had difficulty influencing this budget-setting process. ‘Although the IMF stipulates that ceilings are not placed on recurrent costs such as the health sector wage bill, there is evidence that in practice the MTEF process has had a suppressant effect on adequate budget allocations to investment in the health workforce.’ And, ‘While the IMF does not explicitly set limits on health spending, its overall policies and targets … limit the resources available for healthcare and health personnel, and health ministries have difficulty influencing the budget-setting process’ (ibid.). Continuing concerns about IMF policies were also raised in August 2008 at the eighth International Aids Conference in Mexico City by Médecins sans Frontières (MSF), which issued a press statement drawing attention to the fact that a wage-bill ceiling imposed by the IMF in Rwanda is complicating the roll-out of an effective ARV treatment plan to reach millions of needy recipients (RNA 2008). Experts from the medical group said that the wage-bill ceiling has blocked efforts by countries like Rwanda to recruit qualified staff to manage the ART programme. An estimated 70 per cent of people living with HIV/AIDS who need antiretroviral therapy (ART) are still not receiving it, and MSF says the growing numbers of those who have been started on ART have only increased the burden on existing healthcare staff. According to MSF, the shortage of qualified health staff in public health services in many countries is linked to constraints in attracting, recruiting and retaining health staff actually present in the country but unable to join the workforce. For example, Rwanda, Zambia, Kenya and Tanzania have substantial numbers of unemployed clinicians and

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nurses in their capitals because of wage-bill restrictions or salary freezes agreed with the IMF, the World Bank, health-reform strategists and their finance ministries that effectively ‘block employment of extra health staff as well as the use of international funds for salary increases in the public sector’ (ibid.). MSF warned of the impact that the lack of healthcare workers is ­having on AIDS treatment and care – especially in southern Africa. Experts described the scope and impact of the healthcare worker shortage as well as the critical need to increase government and donor commitment to taking immediate concrete steps to retain and support healthcare workers now. Low salaries, poor working conditions and a lack of support and supervision are just a few of the reasons why it is growing increasingly untenable for many healthcare staff to stay and continue providing quality care, MSF said. ‘In Thyolo district, Malawi, one nurse keeps 400 patients alive by following up their essential treatment, but her basic salary amounts to just US$3 a day,’ said Dr Moses Massaquoi, MSF Malawi Medical Coordinator (ibid.). One successful coping strategy being piloted by MSF and other partners in Rwanda and other places aims to better utilize existing healthcare worker staff, especially in rural areas. With proper training and support, nurses and lay counsellors can reach more patients, without compromising on quality and continuity of HIV/AIDS care. MSF data presented at the Mexico conference show that such targeted ‘task shifting’ has allowed much quicker roll-out of ART in Malawi, Lesotho, South Africa and Rwanda, without loss of quality of care. ‘Task shifting’ refers to a process of delegation of tasks to health workers with lower qualifications. It may include task shifting between different groups of professional workers or from professional to lay health workers (Egeh 2008). MSF is not convinced, however, that task shifting can solve the wider problem. ‘Task shifting is no panacea to the healthcare worker shortage. It cannot replace concrete action to tackle the fundamental problems undermining the health workforce,’ it said. For that, the underlying policies driving the chronic underinvestment in the health infrastructure must be addressed, as MSF underscored in its 2007 ‘Help wanted’ report, when it recommended action be taken to address the ‘limits on spending from ministries of finance and international finance institutions, which can hinder governments’ ability to invest adequately in the health workforce’ (MSF 2007). The IMF issue was also raised at the August 2008 International AIDS Conference (IAC) in Mexico City by the international health advocacy network Action for Global Health (AfGH). Because one of

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the focuses of the conference was the need to invest in health systems in order to achieve universal access to HIV treatment, prevention, care and support, AfGH held a panel on ‘IMF policies blocking the response to HIV/AIDS’, investigating how the IMF policies restrict budgets and wages and push high interest rates that limit the ability of developing countries to invest sufficiently in their health workforce. Questions were raised about the extent to which donors are taking into account the challenges that developing countries are likely to face in regard to these IMF policies as donors begin to invest more in health systems strengthening. In terms of steps that advocates can take to address the challenges presented by the IMF policies, AfGH suggested that Northern-based NGOs, including those based in Europe, need to put more pressure on their ministers of development, ministers of health and ministers of finance to use their governments’ seats and influence on the executive board of the IMF to formally revise the long-standing IMF policies of inflation in the 5–7 per cent range and fiscal deficits below 3 per cent of GDP. On the panel, Eric Friedman of Physicians for Human Rights explained how IMF policies were still a problem in Africa, where there continues to be a severe shortage of 800,000 doctors, nurses and midwives, almost 50 per cent of the global shortage of 1.5 million. In order to address this gap, $14.6 billion is projected to be needed in sub-Saharan Africa on an annual basis by 2015, and he highlighted that wages can account for up to 30 per cent of health budgets in Africa. While donors stand ready to help, Friedman noted that meeting the goals outlined in Uganda’s Human Resources for Health Strategic Plan for 2005–10 will not be possible because of IMF-imposed budget ceilings that limit plans for expanding the health workforce. And in Kenya, the goals in its Human Resources for Health Strategic Plan for 2007/08 to 2009/10 are ambitious, but also will not be possible without changes in the IMF’s wage bill limits (AfGH 2008). The AfGH panel on the IMF problem at the Mexico City IAC is just one example of growing interest and awareness, and of the advocacy work being done on the need to change IMF policies by HIV/AIDS and public health advocacy networks. Concerned advocates are also conducting similar sessions to raise awareness about the IMF policies and their harmful impact on health budgets in places such as the annual American Public Health Association conventions, the global GHWA conference on the health worker shortage in Kampala, at annual funding meetings for the GFATM and other similar international venues, and by and for foreign aid advocates and other advocacy networks in capital

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cities like Washington and London, and with health groups in cities like Nairobi, Lilongwe, Seattle and Boston. These advocacy briefings by civil society groups about IMF policies are part of a growing international wave of concern that has been reflected in recent open letters to the IMF calling for policy, transparency and governance reforms, including an October 2007 letter signed by over 120 civil society advocacy organizations, and an October 2008 letter signed by over 225 NGOs from around the world. While these are important steps, much more still needs to be done. Health repression

In summary, the chapters in Part Three have reviewed the costly consequences of neoliberal policies for health outcomes. It provided an overview of the demise of the 1978 Alma-Ata consensus in favour of public health as neoliberalism came into ascendancy in the 1980s, and the World Bank’s shift towards the promotion of user fees, private sector provision of health services, deregulation, liberalization and decentralization of the health sector. It has reviewed the harmful consequences of the IMF’s restrictive fiscal and monetary policies on national budgets and wages, and the subsequent chronic underfunding of health sector budgets, wages and long-term public investment in the underlying health system infrastructure. It has documented the failure of neoliberal reforms to improve health outcomes, and the slow transition of the international health community back towards an emerging consensus reminiscent of the Alma-Ata principles of thirty years earlier, with renewed support for strengthening public health systems and enabling the provision of universal access for primary healthcare. Finally, it reviewed the ways in which this new support for strengthening public health systems and health workforces is being blocked by the IMF’s fiscal and monetary policies and their associated budget restrictions and wage-bill ceilings. As stated in the Introduction, a key aim of this book is to inform HIV/AIDS activists, public health advocates and all who are concerned with foreign aid and development issues that much greater potential financing for public health – and economic development generally – is being unnecessarily blocked by a certain set of economic policies that are informed by a certain set of ideas, many of which have been proved incorrect. The global foreign aid system will not give aid unless the IMF signals that a recipient country has the ‘right’ policies in place, but today we must challenge the IMF’s definitions. In order to undo this ideological policy straitjacket on public financing and truly enable a significant scaling-up of public health spending required to achieve

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universal treatment access for HIV/AIDS and other major diseases of poverty, advocates must work with economists and others to engage in questions of development economics, and challenge this set of ideas, its core precepts and axiomatic reasoning, and demand that alternative policy options be made available for developing countries. To date the current debate between the IMF and health advocates has been acrimonious and narrow because too few advocates have been asking enough of the right questions, and the debate has remained within the confines of neoliberal discourse: it is presumed that the top priorities are that the IMF and foreign creditors will be repaid above all else, that low inflation is necessary for development and growth, that development can happen under this radical policy experiment, which bears no resemblance to the way in which the industrialized countries developed. Advocates should seek the support of economists and work with policy-makers to reopen some of these long-closed key underlying debates in development economics. They should convene public forums in which broad groups of stakeholders reconsider the basics, such as whether the low-inflation goals of monetarist philosophy should be locking countries into low-growth, low-spending, low-employment modes, or whether ‘other policy options to increase public spending’ should not also be considered, and by a wider group of stakeholders. What has been the historical role of the state in promoting domestic industries and building the tax base in the industrialized countries, and why don’t students of economics learn this history today? What are the alternatives to neoliberal ideas, and what will it take to get a more open debate with a broader group of stakeholders? These are central questions advocates must think through and answer. Advocates should take a page from the copybook used successfully by the neoclassical economists and financial sector lobbyists in the 1970s, who rallied behind the McKinnon-Shaw thesis to claim that government regulation of the financial sector had overly constrained the animal spirits of financial innovation and entrepreneurial creativity, and that this was tantamount to ‘financial repression’. The logic was that Wall Street firms needed to be ‘liberated’ from government regulatory oversight, and indeed deregulation became a key plank of the policies adopted by Reagan and Thatcher. Today, HIV/AIDS activists and public health advocates must be just as vigorous in their claims that IMF fiscal and monetary policies are tantamount to ‘health repression’ and are undermining global health goals, and that public financing to support health systems needs to be ‘liberated’ from such constraints through the

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freedom for developing countries to use more expansionary fiscal and monetary policy options. The World Bank and the IMF can sometimes be pushed, and have in the past been confronted with demands for change that at first were refused, but then ultimately they capitulated. For example, when the global religious community and civil society activists demanded debt cancellation for poor countries, the World Bank and the IMF at first said no, claiming that it was completely impossible, but after enough years of mobilizing political pressure, debt cancellation deals from bilateral and multilateral lenders did get pushed through for some countries, despite remaining difficulties. After years of strong support for user fees, the World Bank was forced to relent. When the World Bank was against universal ARV treatment, HIV/AIDS activists continued to push on this issue until the Bank changed its position. And when confronted with international pressure on its wage-bill ceilings, the IMF was forced to officially back down and soften its policy, although difficulties remain. Now, in order to achieve their health goals, advocates must make a sustained and dedicated effort to demand changes to the IMF’s unnecessarily tight fiscal and monetary policies, based in monetarism, which have proved so deadly. As Health GAP’s Brook Baker says, ‘The inability to effectively fight HIV/AIDS is both the lens and the wedge for activism against monetarism’ (Baker 2009).

C o nc lu s i o n

What is development?

If you ask foreign aid advocates to tell you what the foreign aid is supposed to be for in the first place, many will answer ‘to help countries develop’. But people get perplexed if you press them further and ask, ‘What is development?’ It is striking how many of the major development and aid agencies, institutions and think tanks neglect to offer a definition. For example, the Paris Declaration on Aid Effectiveness mentions ‘development’ seventy-six times without defining it; the World Bank similarly does not offer a clear definition, and even the Washington, DC-based Center for Global Development, which one would think would have a definition of ‘development’, does not offer one. Perhaps the proliferation of aid contractors and the aid industry, with its thousands of individual projects and programmes, has narrowed the issue of development down to simply meaning the completion of a particular project: has digging ten wells in villages or administering 3,000 vaccinations in a district become a stand-in for ‘development’? With so many looking at such narrow outcomes, few stand back often enough to ask what the broader goals are supposed to be, anyway. Is meeting the Millennium Development Goals (MDGs) supposed to be tantamount to development? Is reducing poverty supposed to be the same thing as development, or is development something more? This book suggests that HIV/AIDS and health advocates, and others, have an obligation to ask. Cardim de Carvalho (2005a) says that the well-intentioned and high-profile effort to achieve the MDGs focuses on poverty rather than the actual crisis of underdevelopment, and therefore it specifies a list of needs to be satisfied rather than any economic development strategies to be implemented. But it is necessary to ‘jump-start’ the development process. Transformational dynamics are required. New production factors have to be organized and coordinated so that opportunities are created, enjoyed and increased at a sustained pace in the future. This ought to be at the very heart of the concept of development, but sadly it is not addressed by the MDGs, donors or the aid community.

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In many ways, the official aid donors, major development NGOs and contractors in the ‘aid industry’ have been sidetracked by the last ten years of the poverty reduction discourse. It has become increasingly difficult to distinguish between ‘foreign aid’, ‘poverty reduction’ and ‘development assistance’, for example, as these terms are often used interchangeably in official documents and discourse. Many wellintentioned and highly competent professionals in advocacy NGOs working on development issues, who champion the MDGs, have been unwittingly led into a ‘poverty reduction’ sideshow in which they are now distracted and not asking fundamental questions about development economics and the massive problems presented by the failure of neo­ liberal policies to achieve their promised outcomes. It’s a global problem in the non-profit sector, but especially pronounced in Washington, DC, where the Washington Consensus policies go largely unchallenged in the craven and acquiescent aid community. HIV/AIDS activists generally have shown a determination and ten­ acious drive which distinguish them among other aid advocates, and give hope that the broader, over-arching questions that other NGOs have neglected for many years might get asked: What is ‘foreign aid’ or ‘development assistance’ supposed to really be for, anyway? What is the difference between ‘poverty reduction’ and ‘economic development’ – or are these supposed to be interchangeable terms? One hopes their moral outrage will give them the guts to say the emperor has no clothes and ask why the dominant neoliberal policies have failed to deliver on the economic development that will ultimately be necessary to finance health systems capable of adequately responding to HIV/AIDS. One hopes they will create an opening, a space into which others can also step to begin demanding alternative policy options. There are many questions that have been neglected for too long, and which urgently need broader reconsideration. What are the key factors that ought to constitute the actual ‘economic development’ of poor or middle-income countries? What would a successful development trajectory look like? What would its attributes be? Even though some low-income countries will be dependent on foreign aid for the foreseeable future, shouldn’t all countries be capable of building their own domestic sources of financing for their own development over time? If not, as Gorik Ooms suggests, how can we then conceive of making aid permanent and finding that acceptable, of formalizing not just a global fund for AIDS, but global funds for health, education, housing and so on, forging a sort of global social welfare system of redistribution on a long-term basis? But if we do expect countries to one day finance their

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own needs and build their own tax revenue bases, what are the best policies for domestic capital formation? What does the history of how all the rich countries did it show us? Why don’t students of economics today get taught this history at the ‘best’ universities? Shouldn’t an essential part of economic development include job creation and more formal sector employment? If so, why is job creation not one of the MDGs? Why does no one talk about it any more? Which are the best policies for bringing companies from the informal sector into the formal sector? Shouldn’t economic development include the diversification of the domestic economy, or are places like Malawi intended to forever stay as a plantation for a few primary commodities in the global production chain? Will women then just be expected to forever die needlessly in childbirth in the countryside for lack of an adequate health budget? If we’re serious about enabling countries to build their own domestic tax revenue bases over the long term, then shouldn’t economic develop­ment include the creation of more domestically owned firms (as distinct from wholly owned subsidiaries of multinational companies)? Shouldn’t economic development mean diversification of the economy through government-financed research and development (R&D) for such companies? Shouldn’t it mean industrialization? If so, what are the most appropriate industrial policies and tax policies governments can use to support their domestic industries (and why have they all been outlawed by IMF and World Bank loan conditions or WTO arrangements over the years)? What can be done about getting them back, about helping countries to regain some of their ‘policy space’ within which they can do so? These are the questions that HIV/AIDS activists and everyone else need to be asking. Jomo and Reinert (2005) point out a very interesting thing about the history of economics, something quite important of which we should all be aware. They trace the last 500 years of the history of the actual economic policies used by the rich countries to develop successfully (something that is not taught in most contemporary economics departments) and note that for the greater part of the time the field of development economics has been dominated by periods in which the dominant schools of thought were based on inductive approaches, or the study of best practices, in which most economists asked what has worked well in the past and then sought to inform policies on this basis. These economists took note of features that would later be totally neglected by neoliberals, such as the importance of the inherent differences between different types of economic activities: how some would offer diminishing returns over time while others would offer

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increasing returns over time; the importance of geographical differences as they related to trading routes; the importance of the educational or experiential quality of people; the importance of a division of labour and of certain government policies. Often the metaphors used were derived from biology, i.e. Darwinian evolutionary economics, and theories were based on induction from observations of reality towards higher levels of abstraction. They note, however, that this long tradition in economics has been punctuated by ‘historical parentheses’ of periods in which a parallel, alternative stream of thought would occasionally come to prominence, one in which theory was built from above, through a deductive, a priori analysis, using metaphors derived from physics – for example, the invisible hand that maintains the trajectory of the planets in the solar system, and the notion of equilibrium. For most of these 500 years, however, policies were derived through induction, not deduction, and the emphasis had always been on the importance of economic diversity, manufacturing and industrialization in development strategy, from when Henry VII came to power in England in 1485 to the East Asian ‘miracle’ of the last fifty years. Although the two schools of thought often coincided, there were three brief notable periods in which the physics-based, deductive theories were dominant. The first two such periods, 1758–70 and 1817–95, both came to an end ‘because of the social problems created’. The brief reign of the physiocracy in France came to an end when scarcity and dearth caused famines. ‘The social contract – for the French king to feed his people adequately – had been broken, opening the path to the French revolution’ (ibid.). The excess of market optimism also came to an end in the mid-1840s with the revolutions of 1848 and ‘the social question’ that would dominate European politics for the next fifty years. These periods of physics-based, deductive theories of economics justified blocking industrialization and locking some areas into plantation mode, and inevitably came to an end because of the damage they caused to the poor. Unfortunately, for the last thirty years, we have all been living through the third and most recent period of dominance of the physics-based, deductive theories, in which the invisible hand of the market and the ‘magic of the marketplace’ reign supreme in dominant economic thinking. The current global crisis of HIV/AIDS and other diseases of poverty, however, combined with the failure of neoliberal policies to achieve economic development in Africa and many other parts of the developing world, may well start a global version of 1848. Arguably, ‘the lessons from 500 years of development economics are about to be rediscovered’.

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i nd e x

3 x 5 Campaign, 19 abstinence-until-marriage, 17 Abuja Declaration, 27 ActionAid, 98, 118, 135–6, 196, 198 Action for Global Health (AfGH), 202–3 Adam Smith Institute, 64 African Civil Society Coalition on HIV/AIDS, 22 African Union (AU), 27 Agarwala, Ram, 75–6 Agreement on Agriculture (AoA), 136 Agreement on Investment (AoI), 94 agriculture, 81, 98, 124, 132, 134–7, 138, 139 Ahluwalia, Montek Singh, 103 AIDS Law Project, 15 Akanni, Olayide, 22 Alma-Ata Declaration, 3, 4, 38, 143–7, 155, 167, 169, 204 American Enterprise Institute (AEI), 63, 64 Amsden, Alice, 93, 94 Annan, Kofi, 18 anti-colonialism, 56–62 antiretrovirals (ARVs), 9, 14–17, 19, 20, 31, 33, 36, 46, 169, 175, 179, 201, 202 antiretroviral therapy (ART), 9, 19, 23, 32, 33, 201 Argentina, 25, 27, 65, 106, 146 Artemisinin-based combination therapy (ACTs), 12, 164 Asia, 27, 32, 33, 35, 56, 60, 83, 84, 85, 92, 93, 95, 104, 106, 108, 123, 137,

151, 167, 210; East Asia, 84, 92, 93 104, 108, 210; South Asia, 35, 85, 123; Central Asia, 85 Association for the Promotion of Human Rights and Detained Persons, 161 Australia, 34 Baker, Brook, 206 Baker Plan, 66 Bandung Conference, 60–1 Bangladesh, 29, 32, 151 Barbados, 27, 168 Baran, Paul, 57 Basic Capabilities Index (BCI), 86 Belarus, 131 Belgium, 165 Berg Report, 75, 139, 146 Boehmer, Hans-Martin, 180–1 Boston, 204 Botswana, 25, 168 brain drain, 29–37, 80, 200 Brazil, 25, 27, 65, 93, 111 Bretton Woods: conference, 53–5; era of fixed exchange rates, 71 Buffett, Warren, 12 Burundi, 161, 163, 169 Bush administration, 16–17 Cambodia, 25, 27, 151 Cambridge University, 200 Camdessus, Michel, 112, 190 Canada, 13, 30, 34 capital account liberalization (CAL), 70, 86, 108, 110–13, 139 capital flight, 59, 60, 95, 113 Caribbean, 9, 27, 42, 78, 106 Cato Institute, 64

i n d e x   |  237 Center for Economic Policy and Research (CEPR), 84, 106, 128 Center for Global Development (CGD), 102, 188, 191–2, 198 Center for International Development (Harvard), 13, 15–16 central banks, 68, 74, 94–6, 113–16, 179, 186, 194, 195; central bank independence (CBI), 113–16; central bank policy, 94–107, 113–16 Central Intelligence Agency (CIA), 13 Chad, 155, 163, 164, 165 Chan, Margaret, 163 Chicago’s School of Economics, 63 Chile, 122, 128, 154 China, 27, 44, 69, 84, 85–6, 106, 111, 169, 175 Christian Aid, 122, 123, 124 civil society, 15, 18, 19, 22, 25, 27, 67, 80, 100, 115, 167, 178, 179, 183, 196, 198, 200, 204, 206; see also NGOs Clausen, A. W., 75 Clinton administration, 14, 16 Clinton Foundation, 12, 195 Coll-Seck, Awa Marie, 165 colonialism, 56–62, 95 Columbia University, 171 Commission on Macroeconomics and Health, 28, 173 community-based health insurance (CBHI), 44–6 companies, domestic, 70, 94, 123, 129, 135, 151, 209; small and medium-sized enterprises (SMEs), 8, 109, 209; state-owned enterprises, 63, 66, 67, 70, 75–6, 81, 125, 126, 127, 135 comparative advantage theory, 71, 72, 73, 74, 80, 133–4, 152 Compensatory Financing Facility (CFF), 76 Congress (US), 17, 102, 192 Coors Foundation, 64 Core Labour Standards (CLS), 130–1 Corn Laws, 62

Costa Rica, 168 Cuba, 27, 168 DANIDA, 165 Darwinian evolutionary economics, 210 de-agrarianization, 88, 136–7, 138 debt, external, 16, 53, 81, 84, 90, 97, 99, 174, 186, 201; and debt cancellation programmes, 16, 53, 98, 99, 174, 177, 206; and debt crisis, 58, 59, 65–70, 97; and domestic, 117–18, 120, 186, 188, 189 decentralization, 3, 143, 148, 149, 156, 157, 159 decolonization, 51, 56–62, 95 de Ferranti, David, 146–8 de-industrialization, 122–3, 138 Demey, Nicholas, 39 Democratic Republic of Congo (DRC), 161, 163 Denmark, 163 dependency theory, 57–62 deregulation, 66, 67, 74, 78, 79, 81, 107, 130, 137, 143, 204, 206 development, 4, 51–2, 61, 67, 178, 184, 189, 190, 204, 205, 206–10; and development economics, 4, 58, 205; and development model, 2–3, 47–8, 51, 61, 62, 66, 69, 70, 71–7, 180; and development theory, 57, 59, 70, 72–4; and failure of development model, 78–140; and underdevelopment, 57, 89, 155, 207 DfID (Department for International Development), 66, 151, 160, 162, 163, 165, 168, 169, 179, 180, 181 Directly Observed Therapy (DOTs), 200 ‘Doing business’ report, 130–3 Dominican Republic, 25 Dutch Disease, 171–2 Economic Partnership Agreements (EPAs), 136 Enhanced Structural Adjustment Facility (ESAF), 77, 180, 190

238  |  i n d e x

Equitap, 167 Ethiopia, 135 Europe, 35, 38, 41, 44, 53, 55, 56, 57, 64, 65, 69, 85, 92, 93, 94, 107, 127, 131, 155, 167, 180, 185, 193, 200, 203, 210 European Commission, 185 European Network on Debt and Develop­ment (EURODAD), 98, 118 European Parliament, Committee on Economic and Monetary Affairs, 180 exchange rates, 67, 70, 71, 76, 79, 94, 102, 111, 125, 172; and fixed exchange rate system, 55; and floating exchange rates, 55 export processing zones (EPZs), 123, 132 Feachem, Richard, 170 financial liberalization, 67, 108–12 financial programming model, 71, 98–100 financial repression, 98, 205 Financial Times, 70, 185 First World War, 70 fiscal space, 115–17, 179, 183 Fischer, Stanley, 101, 102 food security, 134–7 foreign aid (or ODA), 116, 117, 118, 134, 137, 149, 151, 165, 168–9, 170–204 foreign direct investment (FDI), 59, 68, 80, 83, 88, 98, 106, 110–11, 114, 138–9 France, 11, 210 Freetown (Sierra Leone), 198 Friedman, Milton, 63, 96 Ford Foundation, 64 Foundation for Economic Education, 64 Fukuyama, Francis, 69 G8’s Task Force on Health System Strengthening, 166 Gates Foundation, 12, 36, 151

Generalized System of Preferences (GSP), 61, 131 Gerard, Seco, 165 Gerschenkron, A., 57 Ghana, 36–7, 43, 61, 122, 155, 156, 168 Ghana Health Service, 37 Gleneagles (Scotland), 19, 185 Global AIDS Alliance (GAA), 31, 168, 190 Global AIDS Vaccine Initiative (GAVI), 10, 23, 39, 152 Global Fund to Fight AIDS, TB and Malaria (GFATM), (also The Global Fund), 2, 10, 18, 19, 21, 23, 23, 39, 47, 152, 168, 203, 204; governance structure, 19; lives saved by, 23; origins, 18; and Uganda, 170–3 Global Gag Rule, 17 Global Health Workforce Alliance (GHWA), 35, 199–200, 203 Global March for Treatment Access, 15 Goma (DRC), 161 Gore, Al, 16 Government Accountability Office (GAO), 102, 176 Great Depression, 56, 58 green light (signal effect), 66, 67–8, 99, 174, 180, 205; IMF approval, 66, 195, 200 ‘grey area’, 198 Group of 8 (G8), 11, 19, 21, 39, 166, 177, 178, 185, 191 Group of 77 (G77), 61, 69 Haiti, 27, 125, 163 Hayek, Friedrich von, 63, 64 Health GAP, 16, 206 Heckscher-Ohlin model, 71 Henry VII, 210 Heritage Foundation, 64 High-Level Forum on the Health MDGs, 174, 178–9 Hong Kong, 92 Hoover Institution, 64

i n d e x   |  239 horizontal aid, 38–9 House Financial Services Committee (US Congress), 102, 192 House of Commons International Development Committee (UK), 180 Howitt’s Rule, 103 Human Rights Watch, 161 import-substitution industrialization (ISI), 57–8 Independent Evaluation Office (IEO) at IMF, 112, 186–97 India, 27, 29, 32, 42, 44, 58, 61, 84, 85, 94, 106, 111, 158, 159, 168, 175 inflation, 96–107; asset price inflation, 111; IMF policy on, 186–8; inflation-targeting (IT) regimes, ­113–14; literature on inflation/ growth relationship, 101; need to change IMF inflation policy, 203; US policy on, 198–9; US Treasury policy on, 198–9 Indonesia, 32, 60, 61, 120, 154 industrialization, 57–9, 72, 92, 107, 120, 209, 210; and deindustrialization, 122–3, 138 industrial policy, 92, 93, 95, 97, 112, 138, 149, 209 Institute of Economic Affairs, 64 intellectual property rights (IPRs), 14, 18, 84 Internal Evaluation Group (IEG) at World Bank, 124, 130 International AIDS Conference (IAC), 13, 15, 16, 39, 202, 203 International Bank for Reconstruction and Development (IBRD), 55 International Clearing Union, 54 International Confederation of Free Trade Unions (ICFTU), 128; International Trade Union Confederation (ITUC), 131–2 International Conference on AIDS and STIs in Africa (ICASA), 22 International Council of Nurses, 181

International Financing Facility (IFF), 10 International Health Partnership Plus (IHP+), 10, 39, 168 International Labour Office, 125 International Labour Organization (ILO), 31, 45, 132 International Monetary Fund (IMF): impact on development, 78–140; impact on health, 152–9; origins, 53–6; policies that must change, 203; and debt crisis, 65–6; and IMF riots, 78–9; and structural adjustment, 66–7, 71–7; and UNDP, 82; and WTO, 65, 83 International Organization for Migration (IOM), 35 International Stabilization Fund, 55 International Treatment Preparedness Coalition (ITPC), 9, 26, 39 Ireland, 10, 11 Jamet, Christine, 165 Japan, 44, 56, 107 Joint Learning Initiative (JLI), 31–2 Journalists against AIDS in Africa, 22 Kazakhstan, 145 Kenya, 25, 148, 192–5, 201, 203 Kenyatta National Hospital (Nairobi), 192 Kerela, 42, 168 Keynes, John Maynard, 53–6, 96; and Keynesianism, 56–7, 62–3, 65, 69, 76, 111, 115, 116, 117, 146, 149 Kibunguchy, Enock, 194 Kisoro district (Uganda), 160 Krueger, Anne, 75–6 Krugman, Paul, 106 labour flexibility, 125–34 Latin America, 9, 27, 56, 57, 58, 60, 78, 79, 82, 83, 85, 86, 104, 106, 119, 122, 123, 128, 135 Lesotho, 32 33, 34, 153, 202 Lilongwe (Malawi), 198, 204 Lundsager, Meg, 198–9

240  |  i n d e x

macroeconomic stability, 91, 96, 97, 100, 102, 126, 170, 173, 175, 176, 179, 183, 189–91, 197; and macroeconomic instability, 102, 120, 171, 176, 179, 183, 186, 198 malaria, 11, 12, 17, 18, 19, 21, 23, 39, 152, 155, 165, 170, 173, 179; deaths by, 11, 155; testing and treatment, 26, 164–5 Malawi, 27, 32, 33, 36, 122, 135, 146, 153, 158, 159, 184 Malaysia, 27, 42, 154, 168 Mali, 130, 154, 163, 164 Malloch-Brown, Mark, 82 Manchester system, 62 Mandela, Nelson, 14, 15 Manhattan Institute for Policy Research, 64 manufacturing, 58, 90, 94, 122–3, 124, 132, 133, 137, 210 Massaquoi, Moses, 202 Mauritius, 168 McKinnon–Shaw analysis, 98, 205 Medact (UK), 174 Medécins sans Frontières (MSF), 2, 9, 32, 33, 47, 164, 165, 186, 187, 201–2 Medium Term Expenditure Frameworks (MTEFs), 176, 200–1 Mellon Foundation, 64 Mexico, 27, 39, 65, 69, 93, 106, 111, 201, 202, 203 Mexico City Policy, 17 Middle East, 60, 62, 85 Millennium Development Goals (MDGs), 16, 22, 31, 42, 83, 86, 87, 116, 119, 170, 173, 174, 175, 178, 179, 182, 183, 184, 187, 189, 190, 191, 207, 208, 209 monetarism, 71, 96–107, 131, 173, 176, 183, 187, 205, 206; origins, 96–7 Mongolia, 43, 120 Mount Pèlerin Society, 64 Mozambique, 27 Muchiri, S. N., 193, 194–5 Muhwezi, Jim, 170–1 Mukula, Mike, 173

multinational corporations (MNCs), 14, 15, 82, 94, 122, 136, 152, 209 multiplier effect, 116, 117–18, 132, 184; see also Keynesianism Myrdal, Gunnar, 75 Nairobi, 192, 204 Namibia, 25, 45 Nasser, Gamal Abdul, 61 national health service (NHS), 41–6 nationalization, 59 Natsios, Andrew, 15 Nayyar, Deepak, 89–91, 95, 105 Nehru, Jawaharlal, 61 Netherlands (Holland), 10, 11, 174, 171 New Deal, 62, 63, 64 New International Economic Order (NIEO), 61, 69 New Rules for Global Finance Coalition (US), 189 New York, 15, 18 New York Times, 106, 191 Niger, 156, 158, 159 Nigeria, 27, 80, 94, 146, 153, 155, 174 Nkrumah, Kwame, 61 Non-Agricultural Market Access (NAMA), 121 Non-Aligned Movement (NAM), 61, 69 non-governmental organizations (NGOs), 12, 34, 36, 80, 122, 146, 151, 179, 186, 199, 203, 204, 208; see also civil society North America, 35, 57, 152, 193 North–South relations, 57, 60, 68 offshore financial centres, 59 Okun’s Law, 103 Olin Foundation, 64 Omaswa, Francis, 35, 172 Ooms, Gorik, 24, 39, 187, 208 Organization of Petroleum Exporting Countries (OPEC), 56, 62 output gap, 117 Oxfam International, 85, 98, 115, 151–2, 158, 159, 168, 196

i n d e x   |  241 Pakistan, 27 Panama, 130 Paris, 15, 178 Paris Declaration, 207 people living with HIV (PLHIV), 25 Peru, 146 Physicians for Human Rights, 202 Polak model, 71 policy credibility, 113, 114, 195 policy space, 95, 112, 209 portfolio investment (PI), 110–11, 139; and speculative flows, 81, 82, 95, 109 Poverty Reduction and Growth Facility (PRGF) loans, 174, 180, 183, 190 Prebish, Raul, 57 President’s Emergency Plan for AIDS Relief (PEPFAR), 10, 17, 21, 22, 23, 36, 38, 39, 168, 194, 195 primary healthcare (PHC), 4, 5, 26, 38, 39, 143–7, 164, 167, 169, 191, 204 Princeton University, 146 Private Sector Development Strategy (PSD), 126 privatization, 64, 66, 67, 74, 77, 78, 79, 81, 83, 85, 125–6, 127, 128, 137, 143, 186; impacts of, 154–9; and healthcare, 148–52 property rights, 67, 74; intellectual property rights (IPRs), 14, 18, 84 Reagan, Ronald, 1, 2, 3, 16, 51, 53, 62, 65, 68, 69, 75, 96, 206; Reagan Revolution, 59, 62–90; and HIV/ AIDS, 16; and monetarism, 96; and the NIEO, 69 reproductive health, 17 research and development (R&D), 3, 11, 51–2, 61, 134, 138, 209 Ricardo, David, 62, 71 Robbins, Lionel, 54 Rockefeller Foundation, 31 Rodney, Walter, 57 Roll Back Malaria Partnership, 165 Roosevelt, Franklin Delano (FDR), 62 Rostow, W., 57

Rwanda, 43, 161, 191, 195, 201, 202 Sachs, Jeffrey, 15, 83, 171 sacrifice ratio, 103–4, 114, 115 Sagoe, Ken, 37 Salop, Joanne, 187 SAPRIN (Structural Adjustment Participatory Review Initiative Network), 80–2, 154 Scaife Foundation, 64 School of Oriental and African Studies (SOAS), 104 Scotland, 185 Scott Hospital Health Service Area, 33 Seattle, 204 Second World War, 51, 53, 54, 56, 58 sectoral adjustment loans (SECALs), 77, 81 Select Committee on International Development (UK), 181 Sen, Amartya, 198 Senegal, 21, 22, 122, 155, 185 Serbia, 130 Sierra Leone, 153, 162, 163, 164, 198, 199­ signal effect (green light), 66, 67–8, 99, 174, 180, 205; IMF approval, 66, 195, 200 Singapore, 92 slums, 83 Smith, Adam, 62, 64 social health insurance (SHI), 42–6 socialism, 69 Social Watch, 86–7 ‘sound’ macroeconomic policies, 67, 120, 179, 181 South Africa, 14, 15, 23, 27, 32, 33, 79, 80, 111, 130, 133, 153, 155, 202 South Korea, 92, 168 Soviet Union (USSR), 60, 68, 69, 70, 153, 200 Spence Commission on Growth and Development, 103 Spinaci, Sergio, 173–4 Sri Lanka, 42, 168 Stanford University, 64 statism, 59, 62, 76

242  |  i n d e x

Stern, Ernest, 74–5 Stiglitz, Joseph, 93, 109, 127 Stop AIDS Campaign, 25 Structural Adjustment Facility (SAF) loans, 77 structural adjustment loans (SALs), 74, 76 structural adjustment programmes (SAPs) loans, 51, 62–70, 92, 95, 106, 124 sub-Saharan Africa, 9, 13, 14, 15, 22, 26, 32, 58, 75, 79, 80, 85, 115, 121, 122, 123, 133, 151, 153, 154, 159, 186, 194, 203 Sukarno, Achmad, 61 superpower, 60 Swan-Salter model, 71 Swaziland, 25 Sweden, 10, 11 Taiwan, 92, 94 Tanzania, 156, 157, 158, 201 task shifting, 25, 202 tax evasion, 58, 91, 113 Thailand, 43, 94 Thatcher, Margaret, 1, 2, 3, 62, 65, 68, 69, 104 Third World nationalism, 60, 62 Thurman, Sandra, 16 Thyolo district (Malawi), 202 Timor-Leste, 168 TINA (There Is No Alternative), 69 Tito, Josip Broz, 61 trade liberalization, 66, 67, 77, 81, 120–5, 135, 136; impacts of, 120–5 Trade-Related Aspects of Intellectual Property Rights (TRIPs), 18, 84 trade unions, 54, 56, 81, 125, 127, 129, 130, 131 treatment access movement, 3, 5, 15, 22, 16 Treatment Action Campaign (TAC), 15 Tshabalala-Msimang, Mantombazana, 15 Tuberculosis (TB), 11, 18, 19, 21, 39, 200

Tumuheirwe, Francis, 171 Tunisia, 27, 80, 94, 146, 153, 155, 174 Turkey, 130 Uganda, 25, 160, 168, 170–3, 184, 203 Ukraine, 130 UNAIDS, 9, 11, 13, 19, 20, 24, 176, 177, 179, 186 unemployment, 3, 56, 58, 59, 62, 65, 71, 72, 78, 79, 81, 85, 90, 97, 104, 110, 117, 121, 127–8, 130, 139, 198 UNICEF, 13 Union of Soviet Socialist Republics (USSR), 60, 68, 69, 70, 153, 200 United Kingdom (UK), 10, 11, 19, 34, 36, 53, 62, 64, 65, 66, 68, 69, 76, 128, 152, 174, 178, 180, 185, 210 United Nations Conferences on Trade and Development (UNCTAD), 61–8, 69, 87, 88, 122, 124, 132, 133, 134 United Nations Economic Commission on Latin America (UNECLAC), 57, 106 United Nations General Assembly, 60, 61, 68 United Nations General Assembly Special Session on HIV/AIDS (UNGASS), 9, 17, 18, 19, 20 United Nations Habitat Programme (UN-habitat), 83 United States, 10, 16, 17, 21, 30, 34, 36, 41, 44, 55, 56, 60, 62, 65, 66, 68, 76, 93, 99, 102, 107, 117 152, 183, 190, 198, 199 University of Chicago, 63, 64 University of Massachusetts, 185 USAID, 15, 31, 66, 74, 151 US Treasury Department, 2, 55, 66, 137, 190, 198 vertical aid, 38–9 Vietnam, 30, 94, 120 wage-bill ceilings, 192–7, 206 Wallerstein, Immanuel, 57 Washington Consensus, 2, 51, 53,

i n d e x   |  243 65–70, 77, 82, 105, 113, 127, 137, 177, 208; origins, 62–70; theoretical foundations, 71–7; and central bank independence, 113; and Chicago School, 63; and development, 137; and Joseph Stiglitz, 127–8; and structural adjustment, 65–70 Watkins, Kevin, 85–6 Wemos (The Netherlands), 174 White, Harry Dexter, 55 WHO Commission for the Social Determinants of Health, 167 William Volker Fund, 64 willingness to pay (WTP) surveys, 147, 162, 165 Wolfensohn, James, 176, 190 World Bank: origins, 53–6; and agriculture, 134–7; and ARVs, 15–16; and funding for HIV/ AIDS, 22; and health, 144–69; and inflation, 101–2; and labour, 126–34; and Multi-Country

AIDS Program (MAP), 10, 22, 23; and neoliberalism, 65–70, 71–7, 127; and poverty, 87, 106; and structural adjustment, 62–70, 92, 95, 106, 124; and trade liberalization impacts, 124; and UNDP, 82, 86; and user fees, 144–69; and WTO, 65, 121 World Health Assembly, 12, 36 World Health Organization (WHO), 2, 11, 13, 19, 23. 26, 28, 29, 31, 32, 33, 35, 38, 47, 144, 145, 155, 163, 165, 167, 173, 199, 200 World Trade Organization (WTO), 18, 65, 83, 84, 94, 121, 136, 152, 209 Yale University, 200 Yates, Rob, 160, 161, 165, 169 Zambia, 25, 31, 36, 114, 122, 135, 153, 155, 156, 161, 168, 177, 191, 201 Zeitz, Paul, 31, 168, 190 Zimbabwe, 25, 153, 155