Poverty crisis in the Third World: the contradictions of World Bank policy

While free market ideology is on the rise, both in the developed countries and in the U.S.S.R., Eastern Europe, and China, the global capitalist system is entering the third decade of a profound structural crisis. The costs of this crisis and of the capitalist response to it-borne largely by the exploited and oppressed peoples of the periphery-are reflected in the World Bank's 1990 World Development Report (New York: Oxford University Press, hereafter WDR-90), which finds it necessary to outline a strategy specifically aimed at alleviating third world poverty. Indeed, WDR-90 proposes an intensified effort to ensure that the poor have access to both a safety net of basic social services (food, medical care, primary education, and family planning) and social and political institutions, infrastructure, and technology" which "promote the productive use of the poor's most abundant asset-labor." (p. 3)

This recognition that poverty will not be automatically removed by "trickle down" effects of capitalist growth (let alone by private charities-Bush's "thousand points of light") s a welcome development. But, unfortunately, WDR-90 does not use this insight to develop an analysis of how peripheral capitalist development reproduces mass poverty. Instead, it argues that basic needs satisfaction is consistent with free market policies of "adjustment" and "reform." The World Bank's position is that provision of basic social services, technology, and infrastructure makes people more productive. Then, if markets are allowed to allocate capital, labor, and the goods they produce, people will reap higher incomes from this increased productivity. In this view, if working people are poor it must be because (1) they are not producing enough, and/or (2) the income generated in the production and sale of goods is too low due to the government's failure to allow "market forces" to operate.

The basic problem with this whole approach is that it sidesteps the crucial question: production of what and for whom? By focussing on this question, the real meaning of WDR-90's "two-part strategy" becomes clear in three ways: First, by associating rising living standards with increased productivity, and by clever manipulation of data, WDR-90 defines third world poverty to make it consistent with the World Bank's true "basic needs" agenda: that of reproducing an exploitable labor force in the periphery.

Second, WDR-90's two-part strategy presumes that freemarket policies of adjustment and reform will lead in the long run to rising per-capita incomes. Here, recent experience suggests that the true purpose of' free-market policies is not increased growth, but rather: (1) extraction of surplus from peripheral countries going through external debt crises, and (2) a tighter integration of peripheral countries into the global capitalist system along lines consistent with the interests of core capital and allied capitalists within the periphery.

Third, even if WDR-90's limited definition of poverty is accepted, its assertion that financing the basic needs of the poor is consistent with free-market policies of adjustment and reform is completely unrealistic. Here, while recognizing that basic needs satisfaction may conflict with the interests of the non-poor," WDR-90 does not locate the non-poor in terms of the basic structure of global capitalism-a structure which by its nature marginalizes the basic needs of the peripheral working class. In this context, basic-needs programs inherently conflict with adjustment and reform policies, whose very purpose is to ensure the continued integration of peripheral countries into the global capitalist system. This contradiction is reflected in the fact that, whenever it discusses potential conflicts between the basic needs of the poor and adjustment of domestic demand or the interests of the non-poor, WDR-90 gives the latter top priority. Nature and Extent of Third World Poverty

WDR-90's concept of poverty tells us a lot about its views on the extent of the problem, the reasons it exists, and the limitations of its program for "the eradication of poverty from the world." (p.7) The World Bank basically divides the poor into two categories: the working poor, and the unemployed who are unable to work due to age or ill-health. WDR-90's proposed "safety net" of basic social services is meant to maintain the subsistence of the unemployed and to help the working poor become more productive. Meanwhile, the greater access of the working poor to infrastructure and technology is supposed to further increase the productivity of their labor. If markets are allowed to operate freely this higher productivity would translate into higher incomes and improved living standards for the working poor.

As previously noted, the crucial assumption here is that if working people are poor they must either not be producing enough, or, if increased production does not translate into higher incomes, this must involve inefficiency due to government interference with market forces. For WDR-90, this has two important implications. First, if third world people do have access to Income earning opportunities" in the "formal" i.e., organized capitalist sector-and if this sector is allowed to respond to market forces-then by definition these people are not poor. Thus, at one stroke, the eradication of poverty is defined to involve primarily raising incomes in the Informal" sector where production is not organized along strictly capitalist lines.' Indeed, WDR-90 states that "there is little poverty, in any case, in the formal sector." (p.63) The second, equally important implication is that if poverty does exist in the formal sector, this must be due to the "distortion" of market forces by government regulations. In short, if the government follows a free-market policy vis-a-vis the organized capitalist sector, then an expansion of this sector-partly engineered through provision of infrastructure (e.g., roads and utilities)-automatically leads to a reduction of poverty.

This methodology conditions WDR-90's estimate that one billion people in the third world live in poverty. Although a shocking statistic, this figure is based on a household poverty line set at $370 in income per person in 1985 prices), which is in turn based on "poverty lines estimated in recent studies for a number of countries with low average incomes-Bangladesh, the Arab Republic of Egypt, India, Indonesia, Kenya, Morocco, and Tanzania." (p.27) Thus, the one billion figure relies on the poverty lines of some of the poorest countries of the third world to measure the overall extent of third world poverty. This ignores WDR-90's own recognition that a poverty line must include "an amount that varies from country to country, reflecting the costs of participating in the everyday life of society." (p.26)

But more important is the purpose served by this questionalby methodolgy, as illustrated by the following hypothetical example. Suppose you are one of three children in a household in which your father works 50 hours per week (with no holidays) in a capitalist factory and whose wage is, say, $1300 per year (i.e., 50 cents an hour). Your mother earns $600 per year by working as a domestic servant in a capitalist household. The total household income is thus $1900 per year, or $380 for each of the five household members. According to the World Bank, this household is not among the one billion poor people in the third world.

The fact that WDR-90's estimate of poverty excludes our hypothetical household suggests that the figure of one billion third world poor is grossly understated. However, this is not the proper place for developing a more accurate assessment of third world poverty. More important, for present purposes, is how WDR-90's estimate is consistent with its view that poverty among working people results from (1) inadequate income earning opportunities in the informal sector, and/or (2) inadequate growth of the organized capitalist sector due to government "distortion" of market forces.

Let us first focus on the informal sector. What purpose does this sector serve, and why is it so large in the third world? The answer, according to the World Bank, is that the informal sector results from the survival efforts of people who are unable to find employment in the organized capitalist sector. But what is the relation between the two sectors? Here, the basic argument of WDR-90 is that once the working poor have access to basic social services, they will gain greater access to jobs in the organized capitalist sector-as this sector expands in response to infrastructure provision and the free operation of market forces.

Here we begin to see the real purpose of WDR-90's concern with the informal sector: that of maintaining a reserve army of exploitable labor for the organized capitalist sector. The World Bank recognizes that the Third World has experienced a severe economic crisis in the 1980s, and that this crisis has driven the living standards of many people in the informal sector below subsistence. Moreover, the majority of the working poor in the informal sector have little hope of obtaining jobs in the "formal sector" in the foreseeable future-for the simple reason that in most Third World countries, the informal sector comprises the majority of the population. Hence the proposals for raising incomes in the informal sector. But not too much! That would draw resources away from infrastructural and private capital investments in the organized capitalist sector. Thus, programs for increasing the income earning opportunities of the working poor must wherever possible be "cost effective." (p.3) In this connection, it is difficult to escape the conclusion that the poverty line of $370 per person is meant to make anti-poverty efforts consistent with high rates of surplus value in the organized capitalist sector. How else can we explain the questionable calculation of this poverty line-one which conflicts with WDR-90's own observations on the proper measurement of poverty? Clearly, despite WDR-90's arguments to the contrary, some underlying contradiction exists between raising the living standards of the poor and expansion of the formal sector" in the third world. Free Market Policies and Third World Poverty

The foregoing discussion suggests that WDR-90's woefully inadequate poverty line of $370 per person is inseparable from its assertion that poverty among working people is basically limited to the informal sector of Third World economies. This methodology reflects the primacy of free market policies vis-i-vis the organized capitalist sector in the World Bank's anti-poverty strategy. The World Bank's analysis of the accumulation and debt crises experienced by third world countries in the 1980s clearly reflects this subordination of basic needs to free market adjustment and reform.

The severe economic crisis experienced in most of the periphery in the 1980s is shown by World Bank data. During the 1980-1988 period, the average annual growth rate of real per capita GDP in the countries of Sub-Saharan Africa (excluding South Africa) was -2.4 percent. For Latin America and the Caribbean, per capita GDP growth averaged -0.7 percent. Overall, per capita GDP shrunk at an average annual rate of 0.8 percent in the countries which the World Bank classifies as low income excluding China and India). However, some countries managed to maintain output growth during the 1980s. For example, in China and India per capita GDP growth averaged 7.1 percent, while the corresponding figure for East Asia (excluding Japan) was 6.5 percent. Thus, one characteristic of the recent crisis is its uneven development in the periphery.

How does the World Bank explain the wide scope and uneven development of this criSiS?2 Their argument is that the crisis resulted from a failure of most third world countries to enact adjustments and reforms in response to adverse external shocks such as declining terms of trade and rising real interest rates. Conversely, the countries which managed to maintain output growth are said to be those which more consistently followed free-market policies. This interpretation colors WDRs 90'observations on poverty trends in the 1980s. Generally, the argument is that the regions which experienced increasing poverty in the 1980s were those Latin America and SubSaharan Africa) which failed to enact necessary adjustments and reforms," while poverty was either lowered or stabilized in the countries (e.g., East Asia) which maintained output growth by following the free-market strategy more closely. Naturally, this association of more rapid output growth with lower poverty is based on WDR-90's $370 poverty line, the main function of which (as noted above) is to support the a priori not on that little poverty exists in the organized capitalist sector. Hence, the assertion that poverty was lowered in countries re formal sector output showed relative growth is a tautology, not an analytical result.

By adjustment, the World Bank means decreased growth of domestic demand engineered through a reduction of government expenditures and by a devaluation of the exchange rate so as to cheapen exports and make imports more expensive. Reform basically involves greater reliance on market forces to determine prices and the allocation of production inputs and finance. Among the particular reforms proposed are removal of domestic price controls, interest rate ceilings, and credit restrictions, as well as a lowering of tariffs and other barriers to international trade. The basic assertion here is that such reforms will increase savings (hence investment), productivity, and exports-which in turn will raise the incomes of the working poor. There are two drawbacks to this argument, both stemming from WDR-90's neglect of the question: production of what and for whom?

The first point concerns the current external debt crisis in the periphery. Once one takes this crisis into account, it becomes clear that the primary effect of adjustments and reforms is not increased investment and growth, but rather intensified exploitation of peripheral workers and increased transfers of surplus value from the periphery to the core. For example, in the years 1980-88 the countries of Latin America and the Caribbean reduced their private and government consumption per capita at the annual rates of 1.0 percent and 0.2 percent, respectively, while their real export growth averaged 3.2 percent. Simultaneously, real imports decreased at a rate of 4.1 percent per year. Clearly, th's region cannot be blamed for

I 1 inadequate adjustment. But where did the export revenues go? Certainly not to domestic investment, which (in per capita terms) decreased at an average annual rate of 5.4 percent during this period. Rather, increased export revenues were used primarily to service the external debt. Indeed, the ratio of external debt payments to total exports for the Latin American countries rose om 34 percent in 1980 to 50 percent in 1986.(3) short, under these conditions any further "success" in lowering domestic demand and raising exports would have served mostly to line the pockets of multinational banks, core-country governments, and allied rentier interests in the periphery.

The second problem involves the basic notion that freemarket policies-along with strict control of' domestic demand-could ever help eradicate poverty in the third world. The World Bank's optimism concerning the positive effects of adjustment and reform is based largely on the ability of China, India, and East Asia to maintain output growth during the 1980s. This despite the fact that neither China nor India-even with some recent reforms-can be described as bastions of free-trade policy or domestic laissez-faire. South Korea is also enlightening in this respect. As economist Amartya Sen has argued strongly,

South Korea fostered an export-oriented growth on the secure foundations of more than a decade of intensive import substitution, based on trade restrictions, to build up an industrial base. Imports of a great many items are still prohibited or restricted. The pattern of' South Korean economic expansion has been carefully planned by a powerful government. If this is a free market, then Walras' auctioneer must surely be seen as going around with a government white paper in one hand and a whip in the other. ("Development: Which Way Now?" Economic journal, December 1983, p. 752)

This is not to say that these high growth areas of the periphery have really succeeded in eradicating or even reducing poverty in the 1980s. This would be true only if one accepted WDR-90's grossly inadequate poverty line-one which places workers in the corporate sector of South Korea among the ranks of the non-poor even though the living and working conditions of many of them are a travesty by any decent standard. Nor is it true that the experience of high growth countries can be fully explained by policies opposed to the World Bank's free-market agenda. South Korea's initial period of import substitution, for example, was facilitated by large amounts of external aid obtained through its strategic location vis-a-vis the global interests of U.S. imperialism." Nonetheless, these cases do highlight a contradiction between peripheral industrialization on the one hand, and participation in the global capitalist system along the lines of free trade on the other.

Why does the World Bank cling to free-market policies in the face of strong evidence against any correlation between these policies and successful industrialization? Here, the very emphasis that WDR-90 puts on the free-market agenda indicates that the real goal of' its proposed strategy is not reducing poverty, but rather a tighter integration of peripheral countries into the global capitalist economy. Indeed, we are told that external aid should be contingent on the willingness of countries to adhere to the World Bank's strategy-including adjustments and reforms. For countries not following the World Bank's strategy, [a]iming moderate quantities of aid directly at highly vulnerable groups seems the appropriate response." (p. 4) Moreover, WDR-90 applauds recent ruling class efforts (e.g., the Baker and Brady plans) to link the refinancing of the external debt of third world countries with the adoption of free-market policies.

Of course, if free market policies are the key to prosperity, one has to ask why, after several centuries of participation in global trade and finance, third world countries are still so underdeveloped-with burgeoning informal sectors. To put it differently, why have centuries of production for the world market left the majority of third world people with appallingly low living standards? One answer, familiar to the readers of this magazine, is that it is the global capitalist economy which itself reproduces underdevelopment and poverty in the third world. An increase in the living standards of the masses would require their needs to take the form of effective demand, and an orientation of investment and production toward that demand. But such a convergence of domestic resource use, domestic demand, and domestic needs is impossible if production is geared toward the world market under the control of corecapital and its domestic allies.) For under these conditions, the incomes of the masses of workers and peasants are viewed solely as a cost of production, to be kept at the bare minimum. Hence a lessening of poverty via growth of a domestic mass market is precluded from the start. Moreover, the extreme susceptibility of peripheral nations to external shocks itself reflects the fact that their economies are driven and shaped by the needs of core capital rather than by growth of a domestic mass market for consumer goods which might stimulate the development of local capital goods production. The failure of the World Bank to address these basic issues indicates that its real goal is not eradication of poverty from the world," (p. 7) but rather maintaining the basic structure of imperialist underdevelopment in the periphery. The Contradictions of World Bank Policy

WDR-90's strategy might still be an advance over previous ruling-class proposals if it could be shown that free-market policies are at least consistent with a reduction of poverty as measured by the World Bank. Unfortunately, even this is not the case. For even if we suppose that adjustment of domestic demand (along with various deregulation measures) does lead to increased investment and exports, this by definition implies a reduction of consumption. Meanwhile, the increased pressure of international competition resulting from trade liberalization places further downward pressure on wages-which helps to ensure that the burden of reduced consumption is shouldered by the working class. In this context, relaxation of credit controls is meant to facilitate the movement of' capital into sectors able to produce along the lines of international "comparative advantage"-i.e., a deepening of the basic structure of- underdevelopment which reproduces mass poverty in the third world.

WDR-90 denies that free-market policies inherently conflict with anti-poverty efforts. It is argued that fiscal and financial stringency can be maintained alongside: (1) "well-targeted" and "cost effective" provision of infrastructure, education, etc., to the working poor, and (2) maintenance of a safety net of basic social services for the unemployed. Of course, the World Bank is aware that such a program may conflict with the interests of the non-poor, but suggests that this conflict can be softened if anti-poverty policies are limited to tilting the distribution of new investment in favor of the poor" rather than "reshuffling the stock of existing assets" (e.g., through land reforms). (p. 53) In other words, policies to help the poor are okay as long as the don't upset the existing power structure in third world countries. As to how new investment is supposed to be tilted in favor of the poor without confronting the class structure associated with underdevelopment and poverty, one can only guess.

Peripheral countries normally undertake adjustment of domestic demand and free-market reforms as part of IMF stabilization programs. These programs are a prerequisite for rescheduling external debt payments and/or access to new loans from core-country banks and agencies like the World Bank. It is well known that the primary effect of these stabilization packages is to reduce the living standards of the working poor and the unemployed (hence the mass unrest often associated with these programs). Indeed, this is in the nature of the case, since the big core-country banks (and the core-country investors that finance the World Bank) are not interested in reducing poverty, but rather in maintaining and increasing their profits. And their profits depend on continued extraction of surplus from the peripheral work-force-which presumes a continuation of mass poverty in the periphery. Despite this, WDR-90 asks us to believe that measures such as "a temporary 'pause' in investment [and] for increased foreign capital flows pause I .. can soften the impact of adjustment" on the poor. (p. 106) But how are investments for the poor consistent with a pause in investment? And since when is the purpose of core capital's investments in the third world to reduce poverty rather than to maximize profits?6

When push comes to shove, WDR-90 tells us not only that anti-poverty efforts should as far as possible avoid direct confrontation with the interests of the non-poor, but that it is essential to convince the private sector that the [free-market] policy stance will be maintained." (p. 12) Anyone familiar with capitalist psychology knows that one of the best ways to convince the private sector that a third world country is a hospitable environment for profitable accumulation is for the government to keep social spending to the bare minimum military spending is, of course, a different matter). Moreover, WDR-90 itself argues that if transfers for the poor are enacted alongside free-market policies, "the budget deficit will be higher than otherwise; this will be justified only if effective action is taken on other aspects of public finance to ensure that the deficit is consistent with both short- and long-run objectives for inflation, investment, and savings." (p. 106) Presumably such effective action to sustain social spending will not be justified if it involves-contrary to World Bank policy-a direct confrontation with the non-poor or if it contradicts the need to pamper the "private sector," i.e., core capital and its domestic allies.

Ultimately, then, the World Bank subordinates even its grossly inadequate anti-poverty proposals to the prime function of its two-part strategy: the reproduction and deepening of the current structure of underdevelopment and capitalist power in the periphery. If this is the best that capitalism has to offer in the era of its supposed final triumph over socialism, then we can be sure that this triumph will continue to be punctuated, and perhaps even reversed, by severe crises and explosions of class struggle in the third world. NOTES 1. WDR-90 appears to use two concepts of informal sector which are not always

clearly distinguished. In the first, this sector comprises all enterprises (including

capitalist ones) which operate outside the bounds of taxes and government regulations.

The second definition of informal sector is essentially identical to the peasant

and small (owner-operated) business sector in urban and rural areas. To avoid

confusion the second definition is here utilized throughout. 2. The present discussion also draws from World Development Report 1989 (New York:

Oxford University Press), which concentrates on the free market aspect of the

World Bank's strategy. 3. For the entire third world, the ratio of debt payments to total exports rose from 1 3

percent to 25 percent during the 1980-1986 period. Mike Hall, The International

Debt Crisis: Recent Developments," Capital & Class, No. 35 (Summer 1988) pp. 12 - 13. 4. The experience of Taiwan (another "high growth" country) is similar in this

respect. Stephen Haggard and Tun-jen Cheng, State and Foreign Capital in the

East Asian NICS," in The Political Fconomy of the New Asian Industrialism, ed. F. Deyo,

(Ithaca: Cornell University Press, 1987 5. C.Y. Thomas, Dependence and Transformation (New York: Moiithly Review Press,

1974) provides a detailed analysis of this point. 6. In a detailed study of 18 Latin American countries over the 1965-1981 period,

Manuel Pastor found that IMF stabilization programs had a negative effect on the

share of wages and consumption in total income. This upward redistribution of'

income was associated with increased capital inflows. The International Monetary Fund

and Latin America: Economic Stabilization and Class Conflict (Boulder, Colo.: Westview

Press, 1987), Chapter 4.

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