World Bank: from ‘Structural Adjustment’ to ‘Comprehensive Development Framework’

A summary from John Pender’s article in Third World Quarterly, Vol. 22, No. 3, 2001. It explains why the World Bank shifted its policy from structural adjustment, the crisis in confidence the Bank went through in the mid-90’s and the reforms that took place subsequently. It explains the changing definition of development and how this has allowed the Bank to extend conditionality beyond macro-economic policy. 

This article summarises the shift in policy on development and conditionality pursued by the World Bank in the 1990s. It explains how the change arose due to policy failures. It has shifted its understanding of development from economic growth to a more comprehensive definition. Structural adjustment and the conditionality clauses that came with it no longer figure and the institution has developed its Comprehensive Development Framework (CDF), a partnership between itself as the ‘knowledge bank’ and the recipient country that has full control over the policies it pursues.

Development policy and conditionality in the era of adjustment

During the 1980’s and early 90’s the World Bank, like the IMF and policy think tanks in Washington, was committed to the sole development policy for the least developed countries of rapid and sustained economic growth. This is explicitly stated in the WB’s reports in 1981, 1989 and 1994. Per capita gross domestic product, or real income per person was the favoured method of measurement. This pursuit of growth was closely associated with the governments of Thatcher, Reagan and Kohl. This highly politicised policy stood against state-led development – at that point, most of the Third World. Structural adjustment took the form of fiscal discipline, tight control of inflation, minimising state expenditure and reducing balance of payments deficits, privatisation and attracting foreign direct investment. World Bank President Robert McNamara first proposed conditionality, which he described as encouraging economic growth and development by linking financial assistance to the adoption of policies prescribed by the WB. During the 80’s loans from the WB, IMF, regional development banks, aid from bilateral donors and even private banks was conditional on the implementation of certain economic policies. This seriously constrained the policies available to developing economies. As Paul Krugman described events, ‘governments that had spent half a century pursuing statist, protectionist policies suddenly got free market religion. It was, it seemed to many, the dawn of a new era of age of global capitalism’.

Growing uncertainty with the Western policy prescribing elite

A number of events led to a crisis of confidence within the WB in its own policies.

  • The 1993 WB study The East Asian Miracle analysed the policies pursued by the rapidly expanding East Asian economies which had nothing to do with WB policy. The institution changed its attitude towards the state; it could ‘ensure adequate investment in people, provide a competitive climate for private enterprise, keep the economy open to international trade, and maintain a stable macroeconomy’.
  • There were also serious doubt about adjustment in Africa; ‘there is considerable concern that reforms undertaken to date are fragile and that they are merely returning Africa to the slow-growth path of the 1960’s and 70s’. This was reported in Adjustment in Africa: Reforms, Results and the Road Ahead. Despite reforms, living standards inAfrica had fallen 2% annually, unemployment had quadrupled to 100 million and real wages had plunged by a third (Michael Hirsch).
  • Mexicowas regarded as a model country for its economic management. It had turned its state-run economy around and signed a free-trade pact with theUS. In 1994 it suffered a massive devaluation, termed the peso crisis.

Paul Krugman writing in Foreign Affairs seriously questioned key elements of WB policy – ‘the widespread belief that moving to free trade and free markets will produce a dramatic acceleration in a developing country’s growth represents a leap of faith, rather than a conclusion based on hard evidence’. Combined with heightened pressure on the institution’s 50th anniversary, these factors created a serious loss in confidence.

Reorientating the bank: early experiences June 1995-98

The WBG appointed a new president, James Wolfensohn, to oversee redefining the WB’s mission and renewing its sense of purpose. He immediately set to work turning the bank around, starting with the World Bank’s Task Force report on The Multilateral Debt Facility. The turnaround continued with the appointment of Joseph Stiglitz as the new Chief Economist, a key proponent of the ‘market failure’ view. Stiglitz expains:

I had certain objectives in mind when I came to the World Bank. One of them was to change the thinking, both with respect to the objectives-broadening them from just growth to this more broad-based democratic and equitable sustainable development. The second objective was to bring about a change in economics. The answers given in theWashingtonconsensus were either partial answers or actually wrong… The third objective was to change the process of the development dialogue. There was still the colonial mentality of the developed countries who were telling the rest of the countries what to do…

“While increasing GDP is not an end in itself, or the only end, increasing GDP is essential to achieving other objectives” (Stiglitz).  So how did GDP growth fit into the WB’s new objectives? It was regarded as important in contributing to broader developmental goals but should not come at expense of other measures (e.g. resource exploitation, rising inequality). Stiglitz made a crucial speech in 1998 titled More Instruments and Broader Goals: Moving Towards the Post-Washington Consensus and concerned a broader understanding of development. He highlighted the importance of the state in creating a strong financial system and encouraged efficiency and competition regardless of private or state ownership, as well as arguing strongly for investment in human capital and the role of the state in targeted industrial policy. The organisation was optimistic and had strong hopes for the future.

1998-2000: the consolidation of revised objectives and conditionality

In contrast to 1997, Wolfensohn’s 1998 speech was more sombre, understandable following the East Asian Crisis which has pushed another 20 million back into poverty. In his seminal speech, The Other Crisis, he set the tone for the bank’s new approach to development – focused policy on the world’s poorest. “We talk of financial crisis whilst in Jakarta, in Moscow, in Sub-Saharan Africa, in the slums of India and the barrios of Latin America, the human pain of poverty is all around us”. It was at this point that the Bank was most self-critical – “some countries followed policies of liberalisation, stabilisation, and privatisation but failed to grow as expected”. The Bank’s website declared our mission is ‘a world without poverty’. An important part of this was part of the 2000/01 World Development Report – The Voices of the Poor. It involved a consultation of 60,000 poor men and women globally; Clare Short (then secretary of DFID) added “poor people’s descriptions of encounters with a range of institutions call out for all of us to rethink our strategies”. The Bank had also changed its definition of poverty: it was formerly based on income but now focused on well-being (including nutrition, education and health status) using the Human Development Index. This approach is strongly associated with Amartya Sen’s capabilities approach to development. Controversy surrounded the World Development Report of 2000/01 following the departure of Stiglitz and Ravi Kanbur (the director of the report). The report signified that economic growth was still crucial to the WB’s agenda, but retained the commitment to helping the world’s poorest. This focus on poverty is reflected in the Comprehensive Development Framework – ‘an attempt to operationalise a holistic approach to development’. This direction aimed to put the financial, institutional and social together in an integrated approach.

“The idea that development has multiple goals and that the policies and processes for meeting them are complex and intertwined has provoked intense debate on the wisdom of traditional development thinking… [This report] emphasises the need to reach beyond economics to address social issues in a holistic fashion” – World Development Report 1999/2000

CDF aims to influence development policy in a far more all-encompassing way than previous approaches. Development policy would entail things such as open and honest government, property and personal rights,  financial and regulatory systems, health and education policy etc.

Conclusions: conditionality transformed?

Conditionality has been transformed with the WB’s changing definition of development. The CDF is a clear departure from the rigid macro-economic focus of structural adjustment. It is questionable however whether the WB has the right to insist on such as wide-ranging ‘good policy environment’. No longer is conditionality focused on achieving economic growth, rather its focus is on the subordination of society’s resources to meeting the perceived requirements of the poorest in that society.