What is Neocolonialism?

Neocolonialism involves the use of economic, political or cultural pressures to influence other countries, especially former colonies.

Previous colonial methods of invasion, violence and direct control have become outdated. If developed countries, which now mostly claim to honor democracy and human rights, tried to directly colonize another country, there would be much backlash from global society. The new form of colonization involves taking over a country’s resources and systems under the guise of offering help. Although this is rarely discussed in the context of colonization, neocolonialism is almost as, if not equally, harmful to developing countries’ economy and its people’s well-being as the original forms of colonization were.

Role of the IMF and the World Bank

The International Monetary Fund (IMF) and the World Bank are global lending and multilateral aid institutions that were set up for the purpose of promoting growth and the alleviation of poverty in developing countries. However, despite their massive aid and lending programmes, they have rarely been successful in fulfilling the above.

Before delving into the ways in which these institutions perpetuate neocolonialism, I want to address the most common rebuttal: “What about all the good they do?”. Dambisa Moyo, a Zambian economist, was asked this very question during an interview where she argued against aid to Africa. She mentioned that if the current aid was removed from African countries, people who would be most affected would actually be the African elite, since most Africans (and especially those in poverty who actually need it) do not see most of the aid. In fact, people living in poverty are often more disadvantaged by aid programmes –  a report by the International Consortium of Investigative Journalists found that poor people end up worse off by the World Bank’s projects. This is often because many people are economically or physically displaced by these projects that often involve infrastructure which requires the destruction of homes and work opportunities (eg: a dam that destroys a fishing site).

Going back to the main topic at hand, many economists who are critical of the IMF and World Bank believe that they were designed by Western countries to keep previous colonies under their power. Voting rights in both institutions are allocated according to the capital contributed. As a result, already wealthy countries have more voting rights – the U.S.A. has almost 20% of voting rights as it is the biggest contributor, while all 47 Sub-Saharan African countries only hold 7% of voting rights together. This gives developed countries, especially those in the West more voting rights, the power to make lending decisions and set unfavorable conditions to their benefit. Developing countries are forced to accept unfavorable conditions due to desperation, or because politicians in these countries are financially induced to accept them.

The remainder of this article discusses some of the conditions and Structural Adjustment Programmes imposed by the World Bank and IMF that fuel neocolonialism.

Privatization

The most common condition tied to aid/loans from the World Bank and IMF is the privatization of local industries. This policy is extremely detrimental to the poorer people in a country, while benefiting the already wealthy business owners and foreign investors. This is because while privatization would involve increased efficiency and profits it would also mean expenditure cuts, causing increased unemployment, and more expensive goods and services in an attempt to increase profit margins, making everyday life harder for citizens. This shows that privatization would negatively affect poorer populations the most even though they are the alleged target of World Bank projects. Additionally, privatizing industries, especially natural resource industries, allows foreign companies to insert themselves into the market and reap most of the profits. For example, in Ecuador, 90% of all mining firms are Canadian-owned. Instead, nationalized industries, even if not as efficient, could provide steady and well-paid employment, and affordable services.

Trade Liberalization

Another common condition is the liberalization of markets, involving reduced trade barriers. Although this is supposedly prescribed to help trade relations, it actually damages the recipient country’s trade balance. Lower trade barriers allow other countries, especially developed countries, to more easily export their goods into the country while keeping their own trade barriers up so that it is harder for the country to export goods to them. This results in a negative or worsening of the trade balance and less income for local firms and producers.

Fiscal Austerity

Fiscal Austerity is often imposed as a condition in order to reduce the budget deficit that most developing countries have. However, this again has devastating effects on the poorer populations. This is because fiscal austerity usually involves social spending cuts, such as on healthcare and education, which leaves people living in poverty worse off with less access to free or affordable healthcare and education. This goes on to create a vicious cycle of poverty. Ironically, the biggest contributor to developing countries’ budget deficits is often debt. This leads to increased desperate borrowing and agreeing to extremely unfavorable conditions in order to finance the large amounts of debt. This effectively keeps developing countries dependent on funds from the World Bank and IMF and keeps them from sustainable economic growth which would actually benefit those in poverty. A more effective way in which to reduce these developing countries’ budget deficit would be to work on reducing dependency on lending organizations like the IMF so that the country could eventually pay back most of its debt and spend more of its budget on its citizens.

In addition to this, many IMF conditions also prohibit recipient countries from offering subsidies to local producers and firms in order to maintain prices. However, this makes the country’s exports less competitive and reduces the opportunity for growth and increased employment opportunities within companies. Meanwhile, the World Bank and the IMF will make it conditional that any resources needed for the projects must be bought from specific countries – usually the ones with the most voting rights, giving their own exporters more business and export income, and improving their own trade balance.

A prime example that illustrates the dangers of the above conditions is the case of Haiti.  During the 1980’s the World Bank and the United States Agency for International Development (USAID) had a joint development plan to restore democracy in Haiti. The World Bank and the IMF gave recommendations that backed the presence of the U.S. military in Haiti, seemingly for the benefit of the U.S.’ geopolitical interests. Once democracy was ‘restored’, the USAID refused to give aid until the government privatized cement and flour mills for the benefit of wealthy Haitians and foreign investors. Additionally, foreign-owned businesses received electricity subsidies, while local businesses could not receive any form of subsidies as it was prohibited by the IMF. All of this shows the neo colonisation of Haiti by the U.S., using the World Bank and the IMF as its tools.

Most of these conditions are text-book prescriptions for economic growth. However, they are better suited for already developed countries that need to strengthen their economy and foreign relations. They are not helpful for developing countries with large proportions of people in poverty, as these conditions take away resources from those who need it the most.

Alternatives and the Future

Firstly, aid and loans should not be tied to conditions that only benefit the donor. Instead, they should be based on extensive research and in collaboration with economists and researchers in the recipient country.

Secondly, and more importantly, multilateral aid and lending organizations need to change. For too long we have seen the dominance of the West and their subsequent abuse of power to keep themselves at the top and to subjugate poorer countries. Reshaped multilateral organizations should not allow voting rights that can be bought through funding. Instead, all countries should have an equal say in decision-making.

In fact, there is currently a shift away from organizations which seem to promote neo colonialism led by the West to more local aid and lending organizations. For example, countries in Latin America pooled together resources to start the ‘Banco del Sur’ which would be locally headed. Angola also cancelled all negotiations with the IMF and subsequently closed its markets to foreign companies, allowing it to thrive economically. The Asian Development Bank was also founded to focus on poverty alleviation in Asia and the Pacific.

We should continue to create institutions that do not perpetuate existing global power structures and maintain the economic dominance of the West. Instead, multilateral aid and lending organizations should be created or reformed to fulfill their actual purpose of reducing poverty and promoting sustainable economic growth in developing countries, without seeking to benefit or exploit.