To address economic instability in LDCs, the IMF and World Bank developed a standardized policy toolkit that became the orthodox approach to crisis management in the latter half of the 20th century. This framework is built upon two core pillars: Stabilization and Structural Adjustment. These strategies, often implemented in sequence or concurrently, are designed to correct macroeconomic imbalances in the short term and reshape the underlying structure of the economy for long-term growth.

• Stabilization policies are primarily concerned with achieving internal and external balance. These measures, typically implemented under the guidance of the IMF, involve a combination of monetary, fiscal, and exchange-rate adjustments. The goal is to reduce aggregate demand, curb inflation, and correct balance of payments deficits. Key tools include restricting money supply growth, reducing government spending, and devaluing the domestic currency to make exports more competitive and imports more expensive.
• Structural Adjustment policies, often championed by the World Bank, are supply-side reforms aimed at increasing economic efficiency and capacity. The core tenets of structural adjustment include privatization of state-owned enterprises (SOEs), deregulation of industries to promote competition, decontrol of wages and prices to allow markets to function freely, and the liberalization of trade and financial markets.

The intellectual foundation for this orthodox framework is the “Washington Consensus,” a term referring to a set of policy prescriptions favored by the IMF, the World Bank, and the U.S. government. The consensus promotes reliance on market prices for resource allocation, fiscal and monetary discipline, trade and exchange-rate liberalization, and the privatization of public enterprises. This approach assumes that removing state intervention and allowing market forces to operate freely will lead to greater efficiency and economic growth. The implementation of these far-reaching reforms, however, sparked a critical debate over the appropriate pace and sequencing of policy change.