Structural adjustment

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Structural adjustment programs (SAPs) consist of loans provided by the International Monetary Fund (IMF) and the World Bank (WB) to countries that experienced economic crises.[1] The two Bretton Woods Institutions require borrowing countries to implement certain policies in order to obtain new loans (or lower interest rates on existing ones). The conditionality clauses attached to the loans have been criticized because of their effects on the social sector.[1]

SAPs are created with the goal of reducing the borrowing country's fiscal imbalances in the short and medium term or in order to adjust the economy to long-term growth.[2] The bank from which a borrowing country receives its loan depends upon the type of necessity. The IMF usually implements stabilisation policies and the WB is in charge of adjustment measures.[2]

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.[3] Through conditions, SAPs 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 that fail to enact these programs may be subject to severe fiscal discipline.[2] Critics argue that the financial threats to poor countries amount to blackmail, and that poor nations have no choice but to comply.[citation needed]

Since the late 1990s, some proponents of structural adjustment, such as the World Bank, have spoken of "poverty reduction" as a goal. SAPs were often criticized for implementing generic free-market policy and for their lack of involvement from the borrowing country. To increase the borrowing country's involvement, developing countries are now encouraged to draw up Poverty Reduction Strategy Papers (PRSPs), which essentially take the place of 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 and thus better fiscal policy. The content of PRSPs has turned out to be similar to the original content of bank-authored SAPs. Critics argue that the similarities show that the banks and the countries that fund them are still overly involved in the policy-making process.[citation needed]

Conditions[edit]

Typical stabilisation policies comprise:[1][4]

  • balance of payments deficits reduction through currency devaluation
  • budget deficit reduction through higher taxes and lower government spending, also known as austerity
  • restructuring foreign debts
  • monetary policy to finance government deficits (usually in the form of loans from central banks)
  • raising food prices to cut the burden of subsidies
  • raising the price of public services
  • cutting wages
  • decrementing domestic credit.

Long-term adjustment policies usually include:[1][4]

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

History[edit]

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.[5] Initially, these conditions focused on 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 least developed countries, or LDCs), 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 foreign direct investment (FDI) and promoting the 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 minerals and agricultural products. Where loans were negotiated on the basis of implementing large infrastructural projects such as roads and electrical dams, Western countries stood to gain by employing their domestic businesses and by broadening the means by which Western companies could more easily extract these resources.[citation needed]

Loans 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 global scale. This was successful, as can be seen from the current account of the country's balance of payments. Enormous capital flows to the United States had the corollary of dramatically depleting the availability of capital to poor and middling countries.[6] 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.[7]

During the 1980s the IMF and WB created loan packages for the majority of countries in Sub-Saharan Africa as they experienced economic crises.[1]

To this day, economists can point to few, if any, examples of substantial economic growth among the LDCs under SAPs. Moreover, very few of the loans have been paid off. Pressure mounts to forgive these debts, some of which demand substantial portions of government expenditures to service.

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.[8] These fiscal disasters led policy makers 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".[5] In addition, SAPs with their emphasis on poverty reduction have attempted to further align themselves with the Millennium Development Goals. 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 or economic mismanagement. Since their inception, SAPs have been adopted by a number of other international financial institutions.

Criticisms[edit]

There are multiple criticisms that focus on different elements of SAPs.[9]

National sovereignty[edit]

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.

Privatization[edit]

A common policy required in structural adjustment is the privatization of state-owned industries and resources. This policy aims to increase efficiency and investment and to decrease state spending. State-owned resources are to be sold whether they generate a fiscal profit or not. [10]

Critics have condemned these privatization requirements, arguing 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. Some scholars[who?] have argued that SAPs and neoliberal policies have negatively affected many developing countries.[11]

Austerity[edit]

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 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. A 2009 book by Rick Rowden entitled The Deadly Ideas of Neoliberalism: How the IMF has Undermined Public Health and the Fight Against AIDS claims 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 percentage of GDP in the underlying public health infrastructure. The book claims 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 it is illogical to assume that reducing funding to a program automatically reduces its quality. There may be factors within these sectors that are susceptible to corruption or over-staffing that causes the initial investment to not be used as efficiently as possible.

Recent studies have shown strong connections between SAPs and tuberculosis rates in developing nations.[12]

Countries with native populations living traditional lifestyles face 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 the disconnect between the informal sector of the economy as generated by traditional society and the formal sector 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 landownership and ownership of resources, land tenure, and labor practices due to custom and tradition provides a unique situation in regard to the structural economic reform of a state. Kinship-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 by considering only the formal sector of society and the economy, leaving out more traditional societies and ways of life.[13]

Empirical evidence[edit]

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. Even so, a study in the journal World Development found that the programs "often do not work", citing "high rates of recidivism, low rates of completion, and an insignificant catalytic effect on other capital flows".[14]

IMF SAPs versus World Bank SAPs[edit]

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[edit]

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.[15] as well as options that lend to countries in times of crises such as natural disasters or conflicts.

World Bank SAPs[edit]

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.[16]

Donor countries[edit]

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[edit]

References[edit]

  1. ^ a b c d e Lensink, Robert (1996). Structural adjustment in Sub-Saharan Africa (1st ed.). Longman. ISBN 9780582248861. 
  2. ^ a b c Lall, Sanjaya (1995). "Structural adjustment and African industry". World Development 23 (12): 2019–2031. doi:10.1016/0305-750x(95)00103-j. Retrieved 12 June 2014. 
  3. ^ Greenberg, James B. 1997. A Political Ecology of Structural-Adjustment Policies: The Case of the Dominican Republic. Culture & Agriculture 19 (3):85-93
  4. ^ a b White, Howard (1996). "Adjustment in Africa". Development and Change 27: 785–815. doi:10.1111/j.1467-7660.1996.tb00611.x. Retrieved 12 June 2014. 
  5. ^ a b See IMF website on conditionality
  6. ^ Arrighi 2010, p. 34.
  7. ^ Arrighi 2010, p. 35.
    Reinhart & Rogoff 2009, p. 206, likewise notes that "high and volatile interest rates in the United States contributed to a spate of banking and sovereign debt crises in emerging economies, most famously in Latin America and then Africa."
  8. ^ See Towson.edu webpage on SAPs
  9. ^ For another overview, see Towson.edu's page
  10. ^ Cardoso and Helwege, "Latin America's Economy" Cambridge, MA: MIT Press (1992)
  11. ^ McPake, Barbara. 2009. Hospital Policy in Sub-Saharan Africa and Post-Colonial Development Impasse. Soc Hist Med 22 (2):341-360.
  12. ^ New York Times: Rise in TB Is Linked to Loans From I.M.F
  13. ^ Bernard, Ikubolajeh Logan aand Kidane Mengisteab. "IMF-World Bank Adjustment and Structural Transformation on Sub-Saharan Africa". Economic Geography. Vol 69. No 1, African Development. 1993. Print.
  14. ^ Bird, G. "IMF Programs: Do they Work? Can they be made to work better?" World Development vol 29, no.11 (2001)
  15. ^ See the IMF website on lending.
  16. ^ For links to the IDA and IBRD websites, see the World Bank's webpage

Bibliography[edit]

External links[edit]