Structural adjustment

Structural adjustments are the policies implemented by the International Monetary Fund (IMF) and the World Bank (the Bretton Woods Institutions) in developing countries. These policy changes are conditions for getting new loans from the International Monetary Fund (IMF) or World Bank, or for obtaining lower interest rates on existing loans. Conditions are implemented to ensure that the money lent will be spent in accordance with the overall goals of the loan. The Structural Adjustment Programs (SAPs) are created with the goal of reducing the borrowing country's fiscal imbalances. The bank from which a borrowing country receives its loan depends upon the type of necessity. The SAPs are supposed to allow the economies of the developing countries to become more market oriented. This then forces them to concentrate more on trade and production so it can boost their economy.

Through conditions, Structural Adjustment Programs generally implement "free market" programs and policy. These programs include internal changes (notably privatization and deregulation) as well as external ones, especially the reduction of trade barriers. Countries which fail to enact these programs may be subject to severe fiscal discipline. Critics argue that financial threats to poor countries amount to blackmail; that poor nations have no choice but to comply.

Since the late 1990s, some proponents of structural adjustment such as the World Bank, have spoken of "poverty reduction" as a goal. Structural Adjustment Programs were often criticized for implementing generic free market policy, as well as the lack of involvement from the country. To increase the borrowing country's involvement, developing countries are now encouraged to draw up Poverty Reduction Strategy Papers (PRSPs). These PRSPs essentially take the place of the SAPs. Some believe that the increase of the local government's participation in creating the policy will lead to greater ownership of the loan programs, thus better fiscal policy. The content of these PRSPs has turned out to be quite similar to the original content of bank authored Structural Adjustment Programs. Critics argue that the similarities show that the banks, and the countries that fund them, are still overly involved in the policy making process.

Conditions

Some of the conditions for structural adjustment can include:

• Cutting expenditures, also known as austerity.
• Focusing economic output on direct export and resource extraction,
• Devaluation of currencies,
• Trade liberalization, or lifting import and export restrictions,
• Increasing the stability of investment (by supplementing foreign direct investment with the opening of domestic stock markets),
• Balancing budgets and not overspending,
• Removing price controls and state subsidies,
• Privatization, or divestiture of all or part of state-owned enterprises,
• Enhancing the rights of foreign investors vis-a-vis national laws,
• Improving governance and fighting corruption.

These conditions have also been sometimes labeled as the Washington Consensus.

History

Structural adjustment policies emerged from two of the Bretton Woods institutions, the IMF and the World Bank. They emerged from the conditionality that IMF and World Bank have been attaching to their loans since the early 1950s. In the beginning, these conditions mainly focused upon a country's macroeconomic policy.

From the 1950s onward, the United States doled out loans and other forms of financial assistance to Third World nations (now commonly referred to as LDC's - Least Developed Countries), in part, to promote the economic tenets of neoliberalism, as spelled out in the Washington Consensus doctrine. Free market economics were encouraged in the Third World, not only as a measure of countering the spread of socialist ideology during the Cold War, but also as a means of fostering FDI (Foreign Direct Investment) and to promote access of foreign companies within the OECD nations to certain sectors of target economies. In particular, Western companies sought to gain access to the extraction of raw commodities, especially mineral and agricultural. Where loans were negotiated on the basis of implementing large infrastructural projects such as roads and electrical dams, the West stood to gain by employing their domestic businesses as well as broadening the means by which Western companies could more easily extract these resources.^{[citation needed]}

It is important to understand that the loans were made under SAP conditions at the time were advised by the top economists of both the IMF and World Bank.^{[citation needed]}

After the run on the dollar of 1979–80, the United States adjusted its monetary policy and instituted other measures so it could begin competing aggressively for capital on a globally. This was extraordinarily successful, as can be seen from the current account of the country's balance of payments. Enormous capital flows to the US had the corollary of dramatically depleting the availability of capital to poor and middling countries. Giovanni Arrighi has observed that this scarcity of capital, which was heralded by the Mexican default of 1982,

created a propitious environment for the counterrevolution in development thought and practice that the neoliberal Washington Consensus began advocating at about the same time. Taking advantage of the financial straits of many low- and middle-income countries, the agencies of the consensus foisted on them measures of "structural adjustment" that did nothing to improve their position in the global hierarchy of wealth but greatly facilitated the redirection of capital flows toward sustaining the revival of US wealth and power.

To this day economists can point to few if any examples of substantial economic growth amongst the LDC's under SAP's. And very few of the loans have been paid off. Pressure continues to forgive these debts, some of which demand substantial portions of government expenditures to make payments on.

Structural Adjustment Policies, as they are known today, originated due to a series of global economic disasters during the late 1970s; the oil crisis, debt crisis, multiple economic depressions, and stagflation. These fiscal disasters led policy members to decide that deeper intervention was necessary to improve a country's overall well being.

In 2002 SAPs underwent another transition, the introduction of Poverty Reduction Strategy Papers. PRSPs were introduced as a result of the bank's beliefs that, "successful economic policy programs must be founded on strong country ownership". In addition, SAPs with their emphasis on poverty reduction have attempted to further align themselves with the Millennium Development Goals (MDG). As a result of PRSPs, a more flexible and creative approach to policy creation has been implemented at the IMF and World Bank.

While the main focus of SAPs has continued to be the balancing of external debts and trade deficits, the reasons for those debts have undergone a transition. Today, SAPs and their lending institutions have increased their sphere of influence by providing relief to countries experiencing economic problems due to natural disasters, as well as economic mis-management. Since their inception SAPs have been adopted by a number of other International Financial Institutions (IFIs).

Criticisms

There are multiple criticisms that focus on different elements of SAPs.

National sovereignty

Critics claim that SAPs threaten the sovereignty of national economies because an outside organization is dictating a nation's economic policy. Critics argue that the creation of good policy is in a sovereign nation's own best interest. Thus, SAPs are unnecessary given the state is acting in its best interest. However, supporters consider that in many developing countries the government will favour political gain over national economic interests; that is, it will engage in rent-seeking practices to consolidate political power rather than address crucial economic issues. In many countries in sub-Saharan Africa, political instability has gone hand in hand with gross economic decline.

While public debt in developing and developed countries is a nearly universal fact, low-income countries face a much more vulnerable position to maintain balance of payments equilibrium, with some of the world's 47 poorest nations have already $488 billion in debt in 2003.

Due to this near universality of debt, a popular criticism is that the structural adjustment's terms have become a template for the governance of much of humanity. Hence, some argue that the democratic policy process of countless countries has been undermined by decisions formulated miles away by western economic bureaucrats and that the implementation of such policy has solely benefited the largest donor countries (the U.S., UK, Canada, and Japan).

For example, the opening of countries to outside investment allows U.S. corporations to build factories in impoverished areas. The corporations are able to exploit the surplus of inexpensive labor, and usual lack of environmental regulations to create goods at a lower price. As a result, corporate profits rise and trade flows increase for that particular country. While this increases the GDP the majority of the profit actually benefits the corporation and the country in which the corporation is based. Conversely, many argue that the people employed by the corporations are desperately in need of any work at all. It is argued that the alternative forms of employment or life styles available to them are much worse. This argument misses the out on increased employment numbers in the areas that the foreign investment brings to the impoverished area. By employing locals, and increasing the GDP of the country it alleviates poverty and increases tax revenue through business investment which may of not been able to handle the large initial costs of starting a business in that area.

At a time when Mozambique initiated an IMF- structural adjustment program, it took a huge toll on the country. The currency was devalued, government services were cut back, and prices increased. This resulted in the deterioration of the health system. The SAPs are implemented in the developing countries,and the policies are conditions for getting new loans from the IMF, or obtaining lower interest rates on existing loans, this seems detrimental to the already impoverished countries. The loans are to be paid back at one point, and as the interest increases, the development of the countries is hindered. The counter argument is that currency devaluation is meant to increase exports and decrease imports. When a currency is devalued it is meant to have a positive effect on the balance of payments. It does so by decreasing the price of domestic goods relative to foreign goods causing exports to rise. At the same time, currency devaluation is meant to make imports more expensive relative to domestic goods. A side effect of this policy is a price increase of imports, which will register as higher inflation. Since the BOP is zero-sum game in international economics, the IMF regularly assists countries that implement structural adjustments programs aimed at fixing their balance of payments deficit.

Structural adjustment became a major tool for global development of a system of nongovernmental organizations allowing for bypassing local administrations in poor countries in the realization of welfare policies. Critics accuse such policies to be "not-so-thinly-disguised wedge[s] for capitalist interests."

Privatization

See also: Privatisation

A common policy required in structural adjustment is the privatization of state-owned industries and resources. Ostensibly, this policy aims to increase efficiency and investment, and decrease state spending. State-owned resources are to be sold whether they generate a fiscal profit or not.

Critics have condemned privatization requirements. Critics argue that when resources are transferred to foreign corporations and/or national elites, the goal of public prosperity is replaced with the goal of private accumulation. Furthermore, state-owned firms may show fiscal losses because they fulfill a wider social role, such as providing low-cost utilities and jobs. Many scholars have argued that SAPs and neoliberal policies have negatively affected many developing countries; the privatization of water in Bolivia and the privatization of the health system in Sub-Saharan Africa are few examples of such negative implications. Privatization makes essential needs such as water and health care a commodity, and those who are poor are unable to access such basic necessities because they are unable to pay for these commodities. Therefore, many scholars have argued that SAPs are not in the interest of the borrowing country, but rather caters to the elites of the developing and undeveloped worlds. In other words, SAPs are extremely detrimental for poor countries who have structural adjustment programs in place, as many people cannot afford to pay for health care or education, leaving populations sicker and more uneducated. This causes negative consequences, as sick people are not productive and cannot work to bring themselves out of debt; therefore, the privatization of a previously social service such as health care is actually counter-intuitive to the alleged purpose of structural adjustment programs.

Agriculture

The agricultural, anti-land reform and food trade policies associated with SAPs have been pointed to as a major engine in the urbanization of the global South, the ballooning of megacities, worldwide migration towards the global North, and the growth in urban poverty and slums.

In the irrigation sub-sector the trend has been towards disengagement of governments from irrigation development and management. This has led to a process of delegation of maintenance and operation activities of irrigation schemes to the organized users with mixed results. Indeed, the loans from the World Bank, the major lender for irrigation development, have fallen sharply from the mid 1970s showing some recovery only since 2003.

They are also a source of contention for environmental activists. A large portion of SAPs policy on agriculture focuses on the increased use of fertilizers and pesticides which harm the health of local bodies of water and therefore fish populations. The runoff caused by the over use of fertilizers increases the amount of algae in local water bodies, causing different scales of dead zones (areas where oxygen is completely consumed by decomposing algae and fish, making it impossible for life forms needing oxygen to survive in the dead zones). Dead zones affect both local and international bodies of water.

An example of this degradation is, as Tiemen and Koeing reveal, Western Mali during the 1980s. Firstly, the privatization of the agricultural sector increased the inequality of food distribution and inequality wealth in general as some farmers adapted to privatization and flourished and others fell behind. Secondly, instead of "mining" (using a plot of land until it was depleted of nutrients then moving to a different plot of land allowing the first to replenish) the land like farmers did before structural adjustment, farmers were introduced to fertilizers that left the land nutrient barren and unusable.

"Despite the growth in the GDP, structural adjustment does not appear of much help to the agricultural sector. In theory, devaluation, by lowering the relative price of farm commodities on the international market, should make a country's agricultural exports more competitive. However, it is by no means certain that increased exports compensate for the loss of purchasing power of a cheaper currency."

Environment

Local environments can easily become casualties of pro-trade policies. Pro-trade policy promotes an increase of industry geared toward Western needs.^{[citation needed]} As a result of the new policy, local industries begin to focus on producing inexpensive goods to sell on the international market.^{[citation needed]} The focus on creating the least expensive product often leads to environmentally exploitative industry. As these new industries are often unregulated there are no laws prohibiting this exploitation. This argument misses on the voluntary nature by which the industry is created. If the producer of agricultural goods has an alternative to create more wealth via other routes of employment, then the producer in that right, would produce the good and/or service that allows them to increase their living standards.

For example, emissions from factories are much less regulated in developing nations. As a result, the environmental cost (the harm done to the ozone layer for example) of producing a product like steel in China is much greater, than it would be in the U.S.

Another example would be the run off of chemicals or pharmaceuticals into local rivers and other bodies of water. In developing nations the pollution of rivers has become a cause for international intervention. This pollution not only affects local populations who sometimes bathe and drink the polluted waters but is also damaging the oceans on a large scale.

It is possible for SAPs to include clauses that require industry regulations. However, for the most part, regulatory clauses have not been included in SAPs. The majority of the policy creators view these regulations as a hindrance to trade and therefore to economic development.

In addition, many argue that it is unfair for developed nations (and IFIs) to demand that their environmental policies be followed. All developed nations have gone through a period of industrialization wherein local environments were damaged. While these periods of industrialization led to increased environmental problems, they also greatly contributed to the development, prosperity, and increased standard of living for the country's citizens. They argue that developed countries essentially have had a head start in economic development, and that less developed countries deserve their own head start. Critics debate whether the world can handle this head start or not. It has been argued that developing countries would benefit more from debt cancellation than an industrial "head start."

Perhaps it is due to the ineffectiveness of Structural-Adjustment Policies that rural farmers must resort to measures that harm the environment. Extensive cultivation or the draining of resources has resulted from the industrialization implemented by the policies of SAPs. The objectives of SAPs may be to reform the economical structure of impoverished or developing nations. However, their lack of consideration and research completed for their influences on the household level can cause the global issue of environmental degradation as farmers may result to unsustainable measures. Potential deforestation and desertification are only a few of the negative results of extensive cultivation.

Austerity

Critics hold SAPs responsible for much of the economic stagnation that has occurred in borrowing countries. SAPs emphasize maintaining a balanced budget which forces austerity programs. The casualties of balancing a budget are often social programs.

The programs most often cut are education, public health, and other miscellaneous social safety nets. Commonly, these are programs that are already underfunded and desperately need monetary investment for improvement.^{[citation needed]}

For example, if a government cuts education funding, universality is impaired, and therefore long term economic growth. Similarly, cuts to health programs have allowed^{[citation needed]} diseases such as AIDS to devastate some areas' economies by destroying the workforce. In 2009, a book by Rick Rowden entitled The Deadly Ideas of Neoliberalism: How the IMF has Undermined Public Health and the Fight Against AIDS, claimed that the IMF's monetarist approach towards prioritizing price stability (low inflation) and fiscal restraint (low budget deficits) was unnecessarily restrictive and has prevented developing countries from being able to scale up long-term public investment as a percent of GDP in the underlying public health infrastructure. The book claimed the consequences have been chronically underfunded public health systems, leading to dilapidated health infrastructure, inadequate numbers of health personnel, and demoralizing working conditions that have fueled the "push factors" driving the brain drain of nurses migrating from poor countries to rich ones, all of which has undermined public health systems and the fight against HIV/AIDS in developing countries.^{[citation needed]} A counter argument is that its illogical to assume that by simply reducing funding to a program that it automatically reduces the quality of it. There may be factors within these sectors that are susceptible to corruption, and over staffing which cause the initial investment to not be used at its efficiently.

Recent studies have shown strong connections between SAPs with Tuberculosis rates in developing nations.

Countries with native populations living traditional lifestyles are faced with unique challenges in regards to structural adjustment. Authors Ikubolajeh Bernard Logan and Kidane Mengisteab make the case in their article IMF-World Bank Adjustment and Structural Transformation on Sub-Saharan Africa for the ineffectiveness of structural adjustment in part being attributed to an issue of the disconnect between the informal sector of the economy as generated by traditional society, and the formal sector of society generated by a modern, urban society.^{[citation needed]} The rural and urban scales and the different needs of each are a factor that usually goes unexamined when analyzing the effects of structural adjustment. In some rural, traditional communities, the absence of land ownership and ownership over resources, land tenure and labor practices due to custom and tradition provide a unique situation in regards to the structural economic reform of a state. Kin-based societies, for, example, operate under the rule that collective group resources are not to serve individual purposes. Gender roles and obligations, familial relations, lineage and household organization all play a part in the functioning of traditional society. It would then appear difficult to formulate effective economic reform policies if only the formal sector of society and the economy was taken into consideration, leaving out the more traditional societies and ways of life.

Involuntary resettlement

The introduction of a SAP may cause someone to be forced to involuntary resettle in order to work on the project at hand. Involuntary resettlement is important because it can make many people worse off than they were before. For example when someone is forced to move to a new location they could leave a larger plot of land or their farms behind. The involuntary resettlement could also move the person to a location with fewer resources or less arid land. The work created by the project they were forced to resettle for is also short-lived. In conclusion, involuntary resettlement can make people worse off and force them to have lowered their standard of living.

Praise

National sovereignty

Supporters consider that in many developing countries the government will favour political gain over national economic interests; that is, it will engage in rent-seeking practices to consolidate political power rather than address crucial economic issues. In many countries in sub-Saharan Africa, political instability has gone hand in hand with gross economic decline.

While public debt in developing and developed countries is a nearly universal fact, low-income countries face a much more vulnerable position to maintain a balance of payments in equilibrium, with some of the world's 47 poorest nations have already $488 billion in debt in 2003.

Due to this near universality of debt, a popular criticism is that the structural adjustment's terms have become a template for the governance of much of humanity. Hence, some argue that the democratic policy process of countless countries has been undermined by decisions formulated miles away by western economic bureaucrats and that the implementation of such policy has solely benefited the largest donor countries (the U.S., UK, Canada, and Japan).

Conversely, others argue that the people employed by the corporations are desperately in need of any work at all. It is argued that the alternative forms of employment or life styles available to them are much worse. By employing locals, and increasing the GDP of the country, the involvement of foreign corporations alleviates poverty and increases tax revenue. Locals may not have been able to handle the large initial costs of starting a business in that area.

The counter argument is that currency devaluation is meant to increase exports and decrease imports. When a currency is devalued it is meant to have a positive effect on the balance of payments. It does so by decreasing the price of domestic goods relative to foreign goods causing exports to rise. At the same time, currency devaluation is meant to make imports more expensive relative to domestic goods. A side effect of this policy is a price increase of imports, which will register as higher inflation. Since the balance of payments is zero-sum game in international economics, the IMF regularly assists countries that implement structural adjustments programs aimed at fixing their balance of payments deficit.

In principle, conditionality is a tactic used not only to make sure loans are paid back, but also to ensure that they are used effectively. If there are no conditions on the loan, the country might not use the money to reduce poverty (see fungibility). This argument however, logically misses the counter-argument that there are many other conditions which could be imposed which would not necessarily create the burden of payment (and therefore, the subsequent lack of ongoing governmental investment) which is seen by many critics as creating a vicious circle.^{[citation needed]} A corollary of this problem is that, should such a vicious circle indeed exist, its overriding tendency is to allow for outside multinational investment to provide the service and food needs to the society, which can no longer function in a productive, cost effective manner. The counter argument misses out on the IMF's tendency to liberalize the local economy and thereby help spur local investment within the developing nation itself. By taking down the barriers to investment on the local level it allows for greater participation of locals in the economy. Usually these countries are already heavily in debt, and have trouble attaining private loans in the foreign market due to this. The IMF, in relation to loans given to developed countries, takes huge risks in giving loans to developing countries that others would otherwise be against. The structural adjustment programs has help reduce corruption, increase efficiency, and lead to long-term economic growth. The loans provided to these countries are based upon voluntary agreements between the host nations and the IMF.

Austerity

Its illogical to assume that by simply reducing funding to a program it automatically reduces the quality of it. There may be factors within these sectors that are susceptible to corruption, and over staffing which cause the initial investment to not be used at its peak efficiency. A common occurrence in government sector spending is the act of rent seeking.

Privatization

See also: Privatisation

A common policy required in structural adjustment is the privatization of state-owned industries and resources. Ostensibly, this policy aims to increase efficiency and investment, and decrease state spending. State-owned resources are to be sold whether they generate a fiscal profit or not.

The profit motive in economics is a powerful incentive tool in using scarce resources more efficiently and providing goods and services. As private enterprise attempts to maximize profits, it uses two mechanisms, minimize costs and maximize revenue. In minimizing costs, private enterprise make the most use of the scarce resources they have available. By using prices as market signals, in its bid to minimize costs it indirectly makes use of the most abundant good relative to its demand. On the other end, in order to maximize revenue the enterprise must sell as many goods and/or services as possible. In order to do that, the firm must satisfy the needs of the consumers that it adheres to. The combination of these two process allow for private enterprise to be more efficient than public enterprises that are not subject to the profit motive.

Empirical evidence

There is some evidence that IMF stabilization programs do have a positive impact on the balance of payments and the current account. However, evidence for reductions in inflation, and encouragement of growth, is rather limited and questionable.^{[citation needed]} The case of Argentina' structural adjustments caused an augmentation of inequality and poverty.

There are some serious problems in measuring the empirical success of Fund programs. It is extremely difficult to calculate the counterfactual; that is, what would have happened had the Fund not intervened. Indeed, the 'before and after' evidence of success in the balance of payments is weaker than calculations of success relative to the counterfactual.

IMF SAPs versus World Bank SAPs

While both the International Monetary Fund (IMF) and World Bank loan to depressed and developing countries, their loans are intended to address different problems. The IMF mainly lends to countries that have balance of payment problems (they can not pay their international debts), while the World bank offers loans to fund particular development projects.

IMF SAPs

IMF loans focus on temporarily fixing problems that countries face as a whole. Traditionally IMF loans were meant to be repaid in a short duration between 2½ and 4 years. Today, there are a few longer term options available, which go up to 7 years. as well as options that lend to countries in times of crises such as natural disasters or conflicts.

World Bank SAPs

World Bank SAPs or Structural Adjustment Loans (SALs) focus on providing loans and grants to countries that provide funding on a project basis. For example, a loan or grant from the World Bank, could provide funds to improve infrastructure in a region of a developing country. The World Bank is divided into two lending and development institutions; the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD focuses on "middle income and credit-worthy poor countries" while the IDA focuses on the lowest income and least credit worthy countries.

Donor countries

The IMF is supported solely by its member states, while the World Bank funds its loans with a mix of member contributions and corporate bonds. Currently there are 185 Members of the IMF (As Of February 2007) and 184 members of the World Bank. Members are assigned a quota to be reevaluated and paid on a rotating schedule. The assessed quota is based upon the donor country's portion of the world economy. One of the critiques of SAPs is that the highest donating countries hold too much influence over which countries receive the loans and the SAPs that accompany them.

Some of the largest donors are:

• United Kingdom
• United States
• Japan
• Canada
• Germany
• France

See also

• IMF Stand-By Arrangement
• Washington Consensus
• Bretton Woods system
• International Monetary Fund
• World Bank
• Balcerowicz Plan

Bibliography

• Arrighi, Giovanni (2010). "The world economy and the Cold War, 1970–1985". In Melvyn P. Leffler; Odd Arne Westad. The Cambridge History of the Cold War, Volume 3: Endings. Cambridge: Cambridge University Press. pp. 23–44. 

External links

• Project on Structural Adjustment Programs Overview of SAPs from the Department of Political Science at Towson University
• Privatization of Third World from the Dean Peter Krogh Foreign Affairs Digital Archives
• IMF Factsheet on Conditionality
• Structural Adjustment Participatory Review International Network
• Big Picture TV Free video of Martin Khor (Director, Third World Network) discussing Structural Adjustment
• The Austerity Zone: Life in the New Europe - videos by The New York Times
• Structural Adjustment—a Major Cause of Poverty from Global Issues