Over the course of the 1980s, implementation of neo-liberal economic reform in the developing world repeatedly forced both international advisers and national economic policy makers to attempt (often with little success) to impose a relatively standard set of policy recommendations on stubbornly complex and idiosyncratic societies. In the realm of economic performance alone, results were extremely mixed. By the early 1990s, most African countries were still mired in recession, while a few grew rapidly; and a number of Latin American countries experienced their first growth in almost a decade.

In some cases, international technical assistance and advice undoubtedly played a role in overcoming the immediate crisis and re-establishing order in the national economy. The threat of conditionality could also be utilized at times to give national policy makers greater room for manoeuvre within their own domestic political context. In a number of instances, in fact, Third World leaders were at least as convinced of the benefits to be obtained from radical neo-liberal reform as were counterparts in the international financial community.

Nevertheless one of the lessons to be learned from accumulated experience with economic reform over the past several decades is that neo-liberal economic policy prescriptions are of limited utility to governments of indebted countries and can in fact be dangerous.

Perhaps the most dramatic examples of this point are provided by the disastrous experiments in free-market economics initiated during the 1970s in the Southern Cone of Latin America. With the support of military régimes, policy makers in Argentina, Chile and Uruguay adopted free-market models then gaining adherents in the United States. Both the trade and financial systems were (in varying degrees) liberalized, exposing the national economy to severe shocks with serious long-term effects.

Unlike the situation in the 1980s, this was the halcyon time when international credit was widely available and cheap. The opening of financial markets in the Southern Cone therefore allowed an enormous accumulation of private foreign indebtedness, which financed both a flood of imported goods and unprecedented speculation. The experiment ended in the collapse of the financial system, the bankruptcy of many national enterprises and the generation of massive private debt, later assumed by the public sector. A significant part of that debt was attributable to capital flight, as people took advantage of easy credit to buy dollars and send them out of the country.

Ironically, then, the onset of the debt crisis in the Southern Cone was directly related to an early adoption of radical neo-liberal adjustment strategies in the 1970s. Examples of the problems created during the following decade by more piecemeal adoption of certain policies, designed in the abstract and applied with little understanding to local realities, could be recounted for many parts of the world. Although general advice to balance the budget, export a sufficient amount to cover the cost of imports, and otherwise exercise responsible economic judgement was unobjectionable, difficulties quickly arose when designing concrete measures for attaining those ends in many different national economic settings.

By the mid-1980s, the repeated failures of most free-market adjustment programmes promoted experimentation with new approaches which retained the goals of imposing fiscal discipline, liberalizing internal markets and promoting export-oriented growth while adapting the means employed to attain these ends. The extreme view that stabilization and adjustment could best be attained by entirely liberalizing all markets, and allowing all prices to be set by the unfettered play of "free-market forces", gave way to recognition that such "orthodox" programmes seemed less effective than more "heterodox" strategies relying on fixing and defending certain key prices in the economy.

The majority of the debt-related adjustment experiences now considered to have been relatively "successful" — and they are a small number in relation to the total group of countries engaged in stabilization and adjustment programmes — have restored economic order through reliance on "heterodox" programmes. They have defended the exchange rate from sharp fluctuation (often allowing it to suffer very small daily changes), imposed price controls on a few strategic goods and services, fixed interest rates within certain limits, and brought workers and employees into agreements guaranteeing relative stability of wages and mark-ups or profit margins. At the same time, trade and financial régimes have remained relatively open to international markets.

This requires a strong state, not a weak one. It also requires effective mechanisms for agreement among representatives of the government, business sector and working class — as well as channels which, in turn, link representatives of these sectors to their clientele. (In some cases, such agreement has been reached through relatively democratic consultation; in others, through the imposition of conformity through repression.) Beyond this, "heterodox" success stories seem to require fulfilling other, more specifically economic, conditions.

The first of these is obtaining access to large reserves of foreign exchange, or to a continuous flow of fresh outside resources. Defending exchange rates, interest rates and other elements of the economy which ensure predictability and attract foreign capital takes foreign exchange. Therefore it is not surprising that "successful" experiments like those in Chile and Mexico were carried out by governments owning major export industries (copper in the first instance and oil in the second). These industries were never privatized. It is possible, however, for governments to sell large state-owned industries to foreign investors, precisely to generate the foreign exchange for supporting stabilization measures, as was the case in Argentina.

Foreign aid or lines of international credit can also play a central role in permitting relatively "successful" stabilization and adjustment efforts. This has certainly been the case in Ghana, where the international community has poured resources into the adjustment experiment, and in Costa Rica, where the United States provided large amounts of new foreign aid. Very large revenues from the drug trade have also supported stabilization programmes in Bolivia and strengthened the balance-of-payments position of Colombia and Peru.

Such external support does not, of course, guarantee recovery. A number of countries are large oil or copper exporters, or have obtained foreign aid without being able to stabilize their economies. Prudent economic management, as well as an efficient institutional structure, is essential. But it is still important to note that most indebted Third World countries have not had access to the level of external resources which would be required to support a thoroughgoing economic reform with some chance of success.

Although it has become fashionable to say that the debt crisis is over, this is true on a global level only to the extent that sufficient time has elapsed since 1982 for the international banks to build protection against default and ensure the stability of the system. For most developing countries, debt continues to constitute an enormous stumbling block in the way of any "successful" stabilization and adjustment effort, which could lay the groundwork for renewed growth. Some private and public debt has been rescheduled (often repeatedly) and an increasing proportion of the bilateral debt of least developed countries has been cancelled; but multilateral financial institutions still resist any suggestion that they institute programmes of debt relief. In the meantime, continuous pressure to settle back accounts produces constant new borrowing. Between 1982 and 1991, in fact, the total foreign debt of sub-Saharan African countries grew from 57 billion to 144 billion US dollars, and that of Latin American countries from 354 billion to 470 billion.¹

A significant reduction in international interest rates over the past few years has temporarily decreased the cost of servicing this debt. And declining interest rates in the industrialized world have also provided an important incentive for investors to turn toward "successfully adjusting" Third World countries which boast relatively stable economic and political conditions and offer significantly higher levels of interest than those which can be obtained in Europe, Japan or the United States. During the past few years, an unprecedented volume of foreign private investment has flowed into these "emerging markets", sustaining renewed growth in some countries whose economies have been stagnant for decades.

This is, however, an extraordinarily fragile arrangement. Interest rates in the industrialized world are beginning to rise again, thus tempting capital to return to Northern markets and simultaneously increasing the volume of expenditure required to service Third World debt. Furthermore massive flows of foreign capital toward "emerging markets" in recent years have created onerous obligations. Investors in stocks and bonds expect high returns and are prepared to withdraw on very short notice. Therefore economic policy in "successfully adjusting" countries is fundamentally constrained by the potential for instability inherent in the current model of recovery, based so precariously on foreign private capital markets.

1 For sub-Saharan Africa, this meant an increase in the ratio of debt to gross national product, from 60 per cent in 1982 to 110 per cent in 1991; while for Latin America, somewhat better growth reduced the ratio from 52 to 41 per cent. United Nations, Department of Economic and Social Information and Policy Analysis, World Economic Survey, 1993, New York, 1993, Tables A-35 and A-36.