Debt and Adjustment: Muddling Through

Abstract

The decade of the 1980s was dominated by developing country debt problems. The chapter analyzes the different problems facing different groups of developing countries and the international community’s response to them which was led by the IMF and the World Bank. The two institutions attempted to deal with the problems through the provision of credits conditioned on the undertaking of reforms that would help countries’ adjustment. The so-called “structural adjustment” programs often referred to as reflecting the “Washington Consensus,” focused on macroeconomic stabilization and liberalization of trade policy. They became controversial as critics argued that they ignored the impact of the economic adjustment on poverty. The chapter evaluates the criticism and suggests the circumstances and policies needed for success. In practice, the program results were mixed: while some countries succeeded many did not, growth slumped, and the debt problems were not solved. The last part discusses the new initiatives involving actual debt reductions that were launched toward the end of the decade under the so-called “Brady” scheme and later in the 1990s through the program of debt forgiveness for Highly Indebted Poor Countries (HIPC).