Neo‐liberal emphases and the 1990s

In the 1990s, questions as to how to increase the effectivity of development aid were reposed, and new solutions were suggested to solve social and economic problems. Some donors, such as the EC, a new player on the ground, began to provide support mainly through direct budgetary support, 28

earmarked funds paid directly into the state budget, as a means to address the ills of what was seen as donor dependency. Incentive schemes were introduced to solve what was seen as a lack of proper motivation among key government staff. Whilst reporting on programming was not a new element of development projects and programs, increasing emphasis was placed on monitoring progress against a common set of indicators. Following 9/11, US foreign aid began to increasingly promote its ‘freedom agenda’ to address development which was conjoined with democratization (Dallmayr 2005).

Neo-liberalism, as Bose and Jalal (1997) write, was endorsed in the 1990s by the IMF and the World Bank, inspiring various structural adjustment programs in developing countries to resolve the perceived ills of their economic situations. The rationale of neo-liberal state organization followed a pattern, described by Rose and Miller (1992, 31) as follows:

Against the assumption that the ills of social and economic life are to be addressed by the activities of government, it warns against the arrogance of government overreach and overload. It counter-poses the inefficiencies of planned economies to the strength of the market in picking winners.

In developing countries, the incorporation of a neo-liberal rationale in planning and implementing societal change, in efforts to reform governance, signified a shift towards the inclusion of the private sector as a partner in national development plans and an emphasis on the markets as a principle means of achieving development; from a state-led approach in reform to a pro-market approach. This stance is exemplified by the work of Nobel prize winner Amartya Sen (1999) whose central argument is that development should be approached as a means to increase individual freedom (ensuring individuals political-, economic- and social rights as well as transparency guarantees and protective security) and that a central means to do so, is that of ableviating economic unfreedom and ensuring individual agency.

Argyriades (2006, 156) claims that this period was marked by ‘entrepreneurial management’ and

‘imperial executive’, a shift government to governance, “offering visions of largely decentralized, cooperative ventures in which the public service and private enterprise, together with civil society, partake in power-sharing” (157). The term ‘governance’, Argyriades (ibid.) argues, was first introduced by World Bank in 1989. It is thus worth quoting at length one of the initial definitions

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offered by World Bank, in its book first published in 1992, Governance, The World Bank’s Experience, quoted in Argyriades (ibid., 158):

Good governance is epitomized by predictable and enlightened policy making (that is, transparent processes); a bureaucracy imbued with professional ethos; an executive arm of government accountable for its actions; and a strong civil society participating in public affairs and all behaving under the rule of law.

In place of the economic conditionality introduced by the World Bank at the end of the 1980s, focus now shifted to political conditionality, to a focus on democratization and human rights, and related sanctions (Simensen 2007), which was perhaps most aggressively pursued through the Bush administration’s ‘transformational diplomacy’ approach with its ‘freedom agenda’ (see Brainard, Chollet & LaFleur 2007, 23 – 28). Political conditionality was not without effect: for example Simensen (ibid., 175) writes, “[i]n general it seems clear that the threat of aid sanctions played a considerable role in the transition to multi-party democracy world wide during this period.” The multi-party democracies that were established during this point in time were, however, often weak.

Governance needed to monitored to prove the efficacy of donor support, and relatedly, the 1990s witnessed the emergence of UNDP’s Human Development Reports, which identified development in political and social freedoms against measurable indicators of ‘human development’, defined by UNDP (2007, 14) as the “satisfaction of people’s basic needs, placing emphasis on widespread human development rather than on the simple pursuit of economic growth”. In line with Sen’s approach, human development, according to UNDP (ibid.),

embraces issues of democratic decentralization, human rights and freedom from fear. The essence of human development is to strengthen people’s capacities and opportunities to build an enabling environment to improve everyone’s human development potential, in all of its fields (14).

Reflecting this turn towards an emphasis on human development, in the early 1990s development aid switched to a focus on infrastructure and services (including education, health, water, sanitation), and towards the end of the 1990s, development aid increasingly focused on sector support, the rationale being that such multiyear support was more predictable, and would thus enable governments to implement more sustainable change. As Simensen (2007, 177) argues, both the political left and the

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political right of donor countries had specific reasons for their dissatisfaction with development aid as it had been organized:

From the left the argument is that aid has created dependency and consolidated class interests of the ruling elite, providing a buffer against popular dissatisfaction and possible regime change. From the right, the criticism has been that aid for too long supported the futile policies of a state directed economy and subdued private initiative and the drive for self-help.

In the 1990s the economies of many developing countries experienced a decline. This has been explained through, for example, decline in commodity prices, the burden of debt, and the intervention of international financial agencies such as the IMF and the World Bank in the politics of developing countries. Whilst the financial flows of official development assistance decreased considerably during the 1990s, this was, in part, compensated for by a surge in private financial flows to developing countries, with private flows having become the most important source of funding to developing countries since 1993.⁶ (Hjertholm & White 2004, 19 - 23.) As of the mid 1990s, multilateral aid has increased to about 30%, up from about 23 % in the 1970s. Leading multilaterals include the World Bank, UN agencies, and the European Commission. In the 1990s another significant change that took place in the environment was that of a shift towards increased grant-based aid – whereas in the 1970s, about 60% of aid was grant based, in 1996 this figure had increased to about 75%. (Goldin

& Reinert 2007; Hjertholm & White 2004.)

Financing micro-enterprises, which had already taken place in small scale, expanded rapidly as a means to address poverty in the poorest segments of society. Increased emphasis was placed on small and medium-sized enterprises, and in part this drew momentum from the end of socialism in Eastern and Central Europe, Russia and Central Asia. In the mid-1990s support for establishing enterprise funds waned, but support for combining credit for SMEs, technical assistance, and training and advice to governments on policy reform through its aid-funded activities abroad continued. (Lancaster C, Nuamah K, Lieber M, Johnson T. 2002.)

In the second half of the 1990s, the focus of aid in support of private sector development shifted once again. USAID, for example, began to center much of its enterprise development around two

6 Although as Hjertholm and White (ibid., 23) point out, this was not the case in the poorest of the poor countries, to which, in part due to a poor investment climate, private sponsors were more reluctant to increase their funds.

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goals: to expand the competitiveness of the private sector in developing countries, and to help private enterprises take advantage of the new trade opportunities that were expected to develop as a result of the African Growth and Opportunity Act, the Free Trade Area of the Americas, other bilateral free trade arrangements, and the Doha Round of WTO trade negotiations. As a result of continuing disappointing levels of investment in many developing countries, combined with the growing prominence of “competitiveness” as a lens through which to assess business opportunities, aid-giving agencies began to focus on improving microeconomic policies in an effort to encourage investment. Such efforts included policies to limit the number of procedures necessary to establish a business, labour laws and the elimination of corrupt practices. (Lancaster et al, 2002, 7).

USAID, albeit the largest, is only one among many of bilateral donors whose governments have programs to support private sector development in developing countries. Most European governments have investment funds that provide equity funding for enterprises rather than directly providing the investments themselves. The UK, for example, operates through the Commonwealth Development Corporation; in France, the PROPARCO is associated with the Agence Francaise de Dévelopement, Many other countries, including Germany, Finland, The Netherlands, Denmark and Belgium, have similar programs. In most of these cases, the government provides some or all of the investment capital in the equity funds with the expectation that it will eventually be repaid and that the funds will function on a non-profit basis. (Lancaster et al, 2002, 9.) The most important international organisation currently providing equity and loan capital to private enterprises in developing countries is the International Finance Corporation (IFC). The IFC offers some loans and equity finance and even a small number of grants for SME pilot projects, but its primary focus is on providing loans. (Lancaster et al, 2002, 10.)