IMF Structural Adjustment Program - Term Paper Example

IMF STRUCTURAL ADJUSTMENT PROGRAMME Introduction The untenable policies of the World Bank and International Monetary Fund are considered as a major cause of Third World Debt. Their policies had had induced heavily indebted countries to borrow more. Refusal to comply would mean suffering the consequences of economic and political sanctions. Instead of debt reduction policies, the World Bank and IMF imposed policies that buried third world nations into the quagmire of debt and debt servicing. Third world countries had to approach IMF or the World Bank and concede to their policies to avoid economic and political repercussions. Some of the conditions that third world debtors needed to fulfill were devaluing currency, import liberalization, privatisation, “cuts in government expenditure”, continued debt servicing, economic development focused on exporting goods and moratorium on hiring and pay increases for both public and private sectors (Kreye and Schubert,1988, p.264). “One of the measures proposed by the IMF to ease the burden of debt was to introduce stabilisation programmes referred to as structural adjustments. The IMF highlighted the structural adjustments requisites to include programs that emphasize productive capacity as critical to economic performance" and measures to raise the economys output potential and to increase the flexibility of factor and goods markets (Ferraro and Rosser 1994). “The structural adjustment scheme was primarily implemented to address balance of payments issues”. These issues were largely generated by internal conditions such as high inflation rates, budget deficits or inefficient allocation of resources. The IMF assumed that in order to recover from the debts, third world countries must tighten its expenditures and divert them to more productive domestic investments. However, tightening the belt meant reduced government subsidies on food and services, higher interest rates, more lay-offs, higher interest rates and taxes. The scheme inadvertently affected the poorest segments of the third world country. Ferraro and Rosser (1994) noted that instead of easing the burden debt, the policies of the IMF appeared to drive the country into further debts. The IMF’s policies with exclusive emphasis on internal economic improvements failed to consider external factors such as oil price movements or global recession that might affect the fiscal positions of the third world nations. Their policies had pushed the heavily indebted countries into more desperate conditions and the future of economic growth in these countries was hampered. The structural adjustment programmes were perceived as benefiting more the creditors than debtor countries. In addition, the foundation of the SAP framework was rooted in neoliberalisation and an emphasis on export capacities of debtor countries. The SAP also would require the poor country to be integrated into the international market economy. Most of the poor nations hardly had the right political and economic structures that would address the demands of the IMF SAP. Instead of easing the burden of debt, SAP appeared to have driven the poor countries into dire positions. The intent of the SAP was to remove any government controls over key economic sectors to induce a free market financial condition. Socio-Economic Impact of IMF SAP The inappropriateness of IMF structural adjustment programmes could be seen in various aspects of socio-economic structures of a debtor country. The stringent conditions imposed by the SAP on the debtor countries as a requisite to avail of the IMF financing has affected the poor nation’s socio-economic fundamentals. Currency Devaluation The currency devaluation requisite of the IMF SAP meant that the population would experience increases in basic cost of goods formerly accessible. In addition, essential items like agricultural machineries, medicines and other provisions included in the development project would be expensive (Riddell, 1992, p.57). The purchasing power of the local currency would be weakened because of the devaluation. The currency devaluation would cause to increase the prices of imported basic necessities like food and gasoline. It would also decrease the prices of exported goods. This would mean little or no increase in foreign exchange earnings for the debtor countries (Kreye and Schubert, 1988, p.266). Removing Government Intervention With imposed moratorium on hiring and increase in basic wages of government workers, the government would have to resort to retrenchments because they have to reduce their fiscal expenditures to submit to the requirements of SAP. Cuts in government expenditure in Kreye and Schubert’s (1998) view would induce a “contraction in domestic demand that would lead to an overall fall in output and investment” (p.266). Since the public sector is considered a major source of employment, an increase in unemployment rates is expected. Reduction of government expenditures would mean putting on hold projects that are essential for the development improved service delivery. Most expenditure cuts would be experienced in the aspects of education, health and other relevant government programmes. The lack of appropriate funding to improve these services will hamper the progress of the debtor country. Most of these services are relevant poverty-alleviation programmes that are sorely needed by the population. The privatisation of key government corporations delivering affordable services like water, electricity and telecommunication will impact on the population. The services will no longer be provided at affordable rates and would conform to the profit-oriented policies of the new owners or operators. Elimination of Subsidies Subsidies on oil and food when eliminated would make them too expensive for the population to afford them. Price controls imposed on food products helped majority of the poor in the debtor countries to cope with the difficult times. With the elimination of subsidies, this would lower the standard of living and push the products beyond the reach of the poor. Moreover, the impact would be felt across all levels of society. The urban and rural poor would be most affected by the imposition of this policy. Trade Liberalisation Trade liberalisation is an attempt of the IMF to integrate poor nations into the International market. However, due to the lack of preparation of these countries for a liberalised market, this in turn has placed additional pressures on their already floundering economies. Trade liberalisation would mean that the debtor countries would be producing cheaper raw materials for the more affluent nations that require them. The result would be an imbalance trade of cheap raw materials in exchange for more expensive processed products. The introduction of market liberalisation would remove the protection of the government on local industries that are not equipped to compete in the global economy. The removal of government protection over the local industries and the entrance of cheaper foreign goods into the market would destroy a thriving local economy. This would result in the closure of many local firms and the loss of jobs for many who are dependent on these local industries. A concentration on exports would mean that the debtor country would have little opportunity to develop and meet domestic demands. This would increase dependence on imported goods and would reduce the chances of the debtor country of ever recovering their domestic market economy. Other Effects of SAP The SAP’s propensity to encourage huge projects purported to be for “development” purposes has caused serious complications on the bio-diversity of the debtor countries. An example would be the construction of huge dams that would destroy chunks of agricultural lands. The consequences of building dams to supply water or electricity had been negative. When agricultural lands are affected, this would also mean that food production would also be reduced. Just because IMF would like the debtor country to emulate highly industrialized nations, the environment has to suffer the consequences. The disparity between the rich and the poor in the debtor countries widened because the IMF SAP policies tend to put resources into the hands of those who are more affluent and are perceived to be drivers of economy. The SAP policies ultimately put out of reach the needed financial mechanisms for the poor. Unable to access funding for modest domestic businesses due to high interest rates meant that opportunities for the poor become narrower. According to Geo-Jaja and Mangum (2001), the SAP was not wholly intended for liberalization and stabilisation of the economy alone. Instead it was an oppressive mechanism meant to continue the “existing conditions of maldevelopment” (p.33). The authors were speaking largely about the Sub-Saharan African experience. The resultant impact of the IMF SAP could be found in the “neglect and undefunding” of important social services like education and health (p.35). It also prevented the debtor country from developing a pool of skilled workers to support economic activities. The myopic view that IMF applied for finding solution to third world debt exacerbated the situation of debtor countries. Conclusion The policies of IMF structural adjustment programme do not subscribe to nationalist views on how nations should manage their people and resources. Their policies uphold the interests of the international banking system that are more interested in pursuing profits than genuinely aiding the developing nations. The SAP is framed along neoliberalist philosophy that is quite incompatible to the traditional values of each debtor countries. Although not all countries had the same set of conditions for SAP, nevertheless, the policy still worked along those lines. While the intention of the IMF structural adjustment programme was to promote economic balance of payments for debtor countries, it became apparent that the policies were inappropriate and had negative consequences. The IMF’s direction was for a long-term relationship with developing nations and the group thought that by imposing those requisites, they would discipline erring debtors. References Ferraro, V. and Rosser,M. (1994). Global debt and third world development in world security: Challenges for a new century, Michael Klare and Daniel Thomas (eds) New York: St. Martins Press, pp. 332-355 Retrieved 22 March 2007 from: http://www.mtholyoke.edu/acad/intrel/globdebt.htm Geo-Jaja, M.A. and Mangum, G. (2001). Structural adjustment as an inadvertent enemy of human development in Africa. Journal of Black Studies, 32(1); 30-49. Kreye, O. and Schubert, A. (1988). Social implications of third world debt. Dialectical Anthropology. 12; 261-270. Riddell, J.B. (1992). Things fall apart again: structural adjustment programmes in sub-Saharan Africa.The Journal of Modern African Studies, 30(1); 53-68. Read More