The World Bank and International Monetary Fund - Essay Example

?Introduction The World Bank and International Monetary Fund (IMF) introduced structural adjustment programs, targeting developing countries in as preconditions for securing loans from the global financial institutions1. Since its inception, structural adjustment has had various impacts on the social economic development of the recipient countries. This has generated intense controversies on the effectiveness of the structural adjustment policies. This paper explores the controversies surrounding the effectiveness of the structural adjustments in the developing economies. Structural adjustments are measures formulated to facilitate and accelerate economic development in the targeted economies3. According Ahmed and Lipton structural adjustment polices are intended to rectify the structural imbalance in the foreign and public balances2. The policies could be initiated internally by the country concerned or external forces such the World Bank and the international monetary fund. The structural adjustments reforms endeavour to reduce and eliminate the various financial distortions, such as over valued exchange rate, huge monetary deficits and to restrict inefficient public services that hinder fair distribution of the resources in the economy of particular country1. 1I. Ahmed, and M. Lipton, “Impact of Structural Adjustment on Sustainable Rural Livelihood: A Review of the Literature.” (1997), http://www.ids.ac.uk/files/Wp62.pdf Accessed 14 January 2012. 2 ibid., p25 3 F. Stewart, and A. Berry. “Globalisation, Liberalization and Inequality: Real Causes.” Challenge, February 2001, 45-86. In general, the structural adjustments are intended to minimise or eliminate the balance of payments and the public sector deficits, with an objective of stimulating high economic growth. In addition, the policies aim at achieving an appropriate structural change capable of sustaining a robust economic growth and a favourable monetary environment in a particular economy3. One of the major characteristic of the structural adjustments is promoting specialization where the targeted economy is influenced to produce commodities “tradable” in the global market and reducing factors that enhance production of commodities with no or little economic value especially in the public domain4. Enhancing the flexibility and adaptability of the targeted economy to the changing global economic environment is an important objective of the structural adjustments. This reduces the effects of adverse global economic changes on the economy of a particular country 3. Structural adjustment policies comprise of measures aimed at facilitating short-term economic stability and long-term adjustments3. Short-term stabilisation measures are usually intended to the improvement of macro economic balance and overall stability. In order to attain the envisaged stability, structural adjustments enforce measures aimed at reducing the cumulative demand 3. Therefore, the major segments targeted include reduction of expenditure accrued in the public sector, increasing taxes and interests rates on loans. Usually, short-term stabilisation measures combine monetary, fiscal reforms and devaluation of currency, which deflates the actual exchange rate. These measures influence the value of commodities traded in the international market in relation to those produced and consumed in the local market 3. 3 P. Agenor, P. “Macroeconomic Adjustment and the Poor: Analytical Issues and Crosscountry Evidence “(2002). www.worldbank.org accessed 14 January 2012. 4 Ibid., p 33 Measures for ensuring short-term economic stabilisation include credit restrictions or ceilings, adjustment of exchange rate, minimising expenditures in the public sector, high tax policies and reforming the pricing of commodities3. Greenaway and Morrissey argued that the short-term nature of the stabilisation measures makes such policies to rely heavily on the managing and controlling the demand of the targeted economy. Eventually, the economy adopts a tendency of monetary absorption in the course of controlling the demand6. The medium term policies of structural adjustment policies target the reformation of economic structure in a particular economy in order to facilitate greater efficiency especially in investment and allocation of resources in various sectors5. To achieve these objectives, the global financial institutions especially the World Bank requires liberalisation of trade and prices in addition to reforming institutions and sectors of the targeted economy5. Abouharb argues that these measures are usually intended to streamline and eliminate various distortions in the commodity and fiscal markets5. The implementation of stabilisation and adjustment measures in developing economies has generated mixed results mainly due to overlapping of roles between World Bank and international monetary fund. According to Greenaway and Morrissey, implementation of adjustment programs funded by the World Bank requires prior existence of an International Monetary Fund supported stabilisation program7. 5 R. Abouharb, “World Bank Structural Adjustment Programs and Their Impacts on Economic Growth: A Selection Corrected Analysis.” (2010). http://147.142.190.246/joomla/peio/files2011/papers/Abouharb,%20Duchesne%2030.09. 2010.pdf Accessed 14 January 2012. 6 D. Greenaway, and O. Morrissey, O. “Structural Adjustments And Liberalization in Developing Countries: What Lessons Have We Learned?” KYKLOS, Vol .46/2, 2004 pp 240-268. 7 Ibid, p 256 In the recent times, both global financial institutions undertake joint reform programs. They include the International Monetary Fund’s “extended financing facility” that is also supported by the World Bank 8. Other joint fiscal measures include structural adjustment loans of the World Bank that borrows heavily from the International Monetary Fund’s framework8. Ahmed and M. Lipton note that majority of policies and measures used for adjustment and stabilisation such as reform of interests rates; currency devaluation increasing taxes are similar in both financial institutions 8. The effectiveness of structural adjustment depends on the pace and the sequence of their implementation9. Consequently, two opposing sides have emanated regarding the effectiveness of the programs on developing economies. Proponents of structural adjustments argue that they stimulate economic growth while opponents contend that they adversely affect development. Depending on the pace of their implementation, Melville argues that the reforms of structural adjustments are either rapid or gradual, which cause both negative and positive effects depending on the status of the particular targeted economy 9. In economies with significant financial challenges, gradual reforms could worsen the situation because benefits accrued from one segment could increase the cost of other existing financial distortions in other sectors 8. In addition, gradual reforms take long time to attain the projected objectives, and this could alter the economic and political aspects of a country8. Moreover, gradual reforms create long periods of uncertainty, which could cause political instability. 8I. Ahmed, and M. Lipton, “Impact of Structural Adjustment on Sustainable Rural Livelihood: A Review of the Literature.” (1997), http://www.ids.ac.uk/files/Wp62.pdf Accessed 14 January 2012. 9 J. Melville, “The Impact of Structural Adjustment on the Poor.” (2002), http://www.caribank.org/titanweb/cdb/webcms.nsf/AllDoc/082CC59DA21706B00425741E00535A3A/$File/StrucAdj%5B1%5D.pdf Accessed on 14 January 2012 Short-term reforms provide quick indicators of economic recovery in response to the proscribed economic policies8. This enables policy makers to establish short-term effectiveness of the structural adjustment programs that could facilitate future predictions. In spite of the apparent shortcomings of gradual reforms, inflict less adjustment cost to the targeted economy8. Therefore, gradual reforms are recommended for countries with weak economies, rigid and retrogressive regions that take longer time than usual to adjust to the changes8. In addition, gradual reforms are favourable because they provide various governments with time to implement and build relevant political support for their implementation, which is difficult or impossible with rapid reforms. It is important to examine the impact of structural adjustment reforms with consideration to the time and pace of their implementation in order to establish their effectiveness. The severity and origin of the initial macroeconomic disparity also plays a critical role in determining pace and sequence of structural adjustment reforms. In economies experiencing extremely high levels of inflation, small price changes emanating from structural adjustments would have little effect in such a market 10. Effectiveness of structural adjustments also depends on how they have been implemented 10. In many countries, Easterly notes that structural adjustments have been implemented partially and at gradual pace but with different sequence from the original plan10. Easterly argues that sequencing of reforms especially at micro, market and various levels of different sectors has generally been feeble. Consequently, the sustainability and effectiveness of structural adjustments is undermined profoundly10. 10 W. Easterly. “The Effects of International Monetary Fund Policies on Poverty. Policy Research Working Paper No 2517, World Bank “(2001) www.worldbank.org accessed on 12 January 2012. Therefore, it is crucial to understand and implement the reforms in the appropriate sequence in order to enhance effectiveness of structural adjustment especially in the developing economies. Ahmed and Lipton attributed marginal performance of structural adjustment reforms in developing economies to the failure of comprehending the need for appropriate policy sequencing by the relevant authorities11. Other factors influencing effectiveness of structural adjustment programs include partial or failure to implement the reforms completely at the initiation stage of the programs 11. This has been witnessed in sub-Saharan countries such as Tanzania and Kenya where partial implementation of the reforms and faulty sequencing caused adverse social economic effects. Various economists have examined the effectiveness of structural adjustments in various dimensions and contexts. The diverse approaches of examining the effects of structural adjustments have elicited contentious issues in respect to effectiveness under various contexts. Ahmed and Lipton examined the effects of structural adjustments on two approaches, counterfactual and control group 11. Counterfactual approach examines what would have happened in the targeted economy without implementing the structural adjustment11. Counterfactual methodology examines economic state of the country in period prior to and after enforcement of the reforms and then comparing the trend between the two phases 11. One of the major shortcomings of this approach is its failure to manage exogenous factors affecting economic growth 11. The comparison between the phases does not adequately demonstrate how structural adjustment contributed or undermined economic development of a particular state 11. 11 I. Ahmed, and M. Lipton, “Impact of Structural Adjustment on Sustainable Rural Livelihood: A Review of the Literature.” (1997), http://www.ids.ac.uk/files/Wp62.pdf Accessed 14 January 2012. Second approach is control group methodology, which compares economic performance between countries with and without structural adjustment policies11. However, the approach does not concisely reflect the actual effects of structural adjustments because of various paces, sequencing and levels of compliance in which the adjusting countries execute and adopt the policies11. Most developing countries have persistent challenges such as civil wars, conflicts, rapidly growing population, economies that heavily depend on weather for sustenance among others that undermine economic development 14. These factors often have greater influence in determining sustainable economic growth than structural adjustments do 15. In spite of these shortcomings, various conclusions could be elucidated regarding the effectiveness of structural adjustments in various contexts. In some situations, structural adjustments have been effective in stimulating slow economic growth while in other contexts they have not. In situations where slow growth is recorded, the rate is lower in comparisons with the pre-adjustment period 15. Economists from the global financial institutions attribute the marginal economic performance to poor implementation and slippage of the recipient countries 13. Various researchers have examined the effectiveness of structural adjustments in reducing economic inequality and poverty in the recipient countries. Critics argue that the adjustments have had unequal and negative effects on people living in poverty because the measures increase inequality of resource allocation between the rich and the poor 13. 13 G. Cornia, R. Jolly, and F., Stewart. Adjustment with a Human Face. London: Oxford University Press, 1987, pp 137-186 14 ibid., pp 140-49 15 ibid., pp 169-179 In other circumstances, the structural adjustments have made no impact whatsoever in reducing inequality and poverty. In periods of rapid economic growth, Alderman notes, that “poor people do not get favourable benefits while expansion of the economy results to more limited economic effects to the disenfranchised people” 16. In addition, economic growth benefits a small proportion of individuals, increasing inequality in the society 16. In Latin American, countries that implemented structural adjustments recorded a redistribution of income from labour to capital 17. The difference in wages between the skilled and unskilled employees widened because of liberalisation 17. Countries such as Jamaica and Trinidad and Tobago also recorded significant growth of economic inequality between the poor and the rich. According to Commander, inequality undermines economic growth and equitable adjustment promotes sustainable development 17. Structural adjustment measures such as currency devaluation, market liberalisation, increasing taxes and reducing public expenditure have had various adverse impacts on countries that have implemented the programs. Currency devaluation affects the returns of households because it directly affects the prices of inputs and outputs 16. Agriculture is one of the major sectors adversely affected by the devaluation, causing widespread poverty especially in rural households depending on the sector for sustenance 16. Commander argues that the impacts of currency devaluation depend on the relative increase in agricultural prices, the costs of inputs and existence of other measures such as market and price liberalisation 17. 16 H., Alderman, Ghana: Adjustment’s Star Pupil? Adjusting to Economic Failure in African Economies. Ithaca: Cornell University Press 1994, pp 45-59 17 S. Commander, S. (ed). Structural Adjustment and Agriculture: Theory and Practice. : London: Oversees Development Institute, 1989 pp 107-125. In various countries, such as Gambia, Mozambique, Burkina Faso and Zambia, currency devaluation in conjunction with market liberalisation increased the real producer prices in the agricultural sector 19. This resulted to a higher agricultural income and significant increase in labour returns. In other developing countries such as Zimbabwe, Malawi and Madagascar, currency devaluation failed to increase the prices of agricultural products 18. Consequently, the adverse economic returns demoralised farmers into producing more commercially viable products. Therefore, the effect of currency devaluation rely on the “proportion of tradable and non- tradable in the expenditure and income of people , in addition to their degree of expenditure and the fluctuations in prices of the commodities” 18. The objectives of market and price liberalisation measures includes raising the agricultural producer prices and increasing the prices of farm exports with an intention of improving income accrued from the sector 19. In developing countries, most rural households depend on agriculture and hence liberalisation measure was intended to improve on their economic status. However, liberalisation has had mixed results in developing countries. In countries such as Gambia, increase in agricultural producer prices improved production of tradable agricultural produce especially groundnuts 20. However, production of other food commodities declined because farmers concentrated more on groundnut farming 20. 18 J., Baffes, and M.,Guatma. “Price Responsiveness , Efficiency and the Impact of Structural Adjustment on Egyptian Crop Producers. “ World Development, Vol. 24, 1996, pp 760- 776. 19 D. Booth. “Economic Liberalisation Real Markets and the Reality of Structural Adjustment in Rural Tanzania.” Sociologia Ruralis, Vol .34 .1 1994 pp 40-65 20 I. Ahmed, and M. Lipton, “Impact of Structural Adjustment on Sustainable Rural Livelihood: A Review of the Literature.” (1997), http://www.ids.ac.uk/files/Wp62.pdf Accessed 14 January 2012 In Egypt, liberalisation and currency devaluation increased the income and output of several crops especial sugarcane, rice, maize and wheat while it adversely affected cotton production21. In countries such as Malawi, market liberalisation increased the prices of major agricultural products especially tobacco, maize and groundnuts but inflation undermined the economic gains 21. In developing countries such as Kenya and Ethiopia, devaluation of the local currency increased the cost of farm inputs especially fertilizers and machinery 22. This caused a gradual decline in the use of fertilizers and other important inputs, leading to reduced agricultural production. Market and price liberalisation measures affected acquisition of assets, inputs and access to services 21. Several countries recorded an increased access to these commodities while others failed to register significant gains. In countries such as Malawi, liberalisation resulted to the closure of over many agricultural markets and huge economic disparities emerged because the private sector failed to carry out the roles that were previously assigned to government organizations effectively22. Similarly, Senegal recorded total collapse of fertilizer distribution after the removal of input subsidies 23. In other countries such as Zimbabwe, that had an efficient and vibrant private sector, liberalisation improved availability and distribution of farm inputs and other important support services24. This implies that liberalisation is not a solution for stimulating economic growth in countries with ineffective or poorly organized private sector. 21 P. Agenor, P. “Macroeconomic Adjustment and the Poor: Analytical Issues and Crosscountry Evidence “(2002). www.worldbank.org accessed 14 January 2012 22 F. Stewart, and A.,Berry. “Globalisation, Liberalization and Inequality: Real Causes.” Challenge, February 2001, 45-86 23. ibid., p 63 24 ibid, p 77. Structural adjustments have had profound impacts development of human capital especially because of promoting budgetary cuts in public expenditure. In developing countries, resources allocated to important health and education sectors were drastically reduced, leading to poor quality and inaccessibility to important social services 25. According to Booth, the sustainability of health and education services was adversely affected by measures to reduce expenditure in the sectors25. For instance, Ghana reported an increased child mortality rates from 21 percent in 1970 to about 25 percent fifteen years later in 1985. In addition, the number of children suffering from malnutrition increased significantly by 20 percent from 1970 to 1985 26. Booth notes that most countries undertaking the structural adjustments recorded deterioration of nutritional levels in their respective populations during the period 27. In education sector, the reduction of resources allocated undermined the quality of the services in virtually all educational levels. The affected countries introduced charges in education institutions in order to supplement government efforts of enhancing quality 25. In poor communities, the additional costs were not sustainable and this caused reduced school enrolments and significant school drop out rates especially in rural and marginalized communities. The effectiveness of structural adjustments in achieving long-term stability and security is debatable. Besides increased income, Booth argues that attainment of a sustainable livelihood also depends on minimizing vulnerability to and reducing fluctuations in consumption, wellbeing and income in the long term 27. 25 G. Cornia, R. Jolly, and F., Stewart. Adjustment with a Human Face. London: Oxford University Press, 1987, pp 137-186 26 D. Booth. “Economic Liberalisation Real Markets and the Reality of Structural Adjustment in Rural Tanzania.” Sociologia Ruralis, Vol .34 .1 1994 pp 40-65 27 ibid, p 51 Developing economies depend heavily on agriculture and this increases their vulnerability especially because of weather fluctuations 28. Structural adjustments have failed to reduce vulnerability of these societies undermining the achievement of long-term stability and security28. Structural adjustments measures such as currency devaluation are ineffective if they are implemented without enforcing institutional reforms and trade liberalisation 29. This is one of the major impediments to attaining sustainable economic development in developing countries. In sub-Saharan Africa, Greenaway, and Morrissey argue that undertaking structural reforms has not been effective in establishing security and lasting stability especially in marginalised areas. Other adverse effects of structural adjustments include environmental degradation that is mainly caused by unsustainable agricultural practices such as deforestation to create more room for farming and soil erosion 29. Conclusion The effectiveness of structural adjustments in improving the quality of life and achieving the intended objectives remains highly controversial. Assessment of their effects in different countries demonstrate remarkable economic, environmental and social disparities in inequality levels, effectiveness of service delivery and increasing levels of poverty. The structural adjustments enhance the commitment of governments to use the funds from the global financial institutions for the intended purposes 29. 28 I. Ahmed, and M. Lipton, “Impact of Structural Adjustment on Sustainable Rural Livelihood: A Review of the Literature.” (1997), http://www.ids.ac.uk/files/Wp62.pdf Accessed 14 January 2012 29 D. Greenaway, and O. Morrissey, O. “Structural Adjustments And Liberalization in Developing Countries: What Lessons Have We Learned?” KYKLOS, Vol .46/2, 2004 pp 240-268. Different countries and regions demonstrate significant variation in the effectiveness of structural adjustments. This could be attributed to differences in implementing and adopting the prescribed measures and adjustments. Partial implementation and inappropriate sequencing of the structural adjustment are some of the factors that influence effectiveness of the reforms undermining long-term sustainability and stability 30. The emphasis of structural adjustments on market and pricing has excluded other external factors that determine economic growth, making it difficult to attain the intended objectives. Hence, the adjustments are not strategically formulated to bring the relevant structural reforms in order to guarantee sustainable economic development. 30 J., Baffes, and M.,Guatma. “Price Responsiveness, Efficiency and the Impact of Structural Adjustment on Egyptian Crop Producers. “ World Development, Vol. 24, 1996, pp 760-776. Bibliography Abouharb, R. “World Bank Structural Adjustment Programs and Their Impacts on Economic Growth: A Selection Corrected Analysis.” (2010). http://147.142.190.246/joomla/peio/files2011/papers/Abouharb,%20Duchesne%2030.09. 2010.pdf Accessed 14 January 2012. Agenor, P. “Macroeconomic Adjustment and the Poor: Analytical Issues and Crosscountry Evidence “(2002). www.worldbank.org accessed 14 January 2012. Ahmed, I., and Lipton, M. “Impact of Structural Adjustment on Sustainable Rural Livelihood: A Review of the Literature.” (1997), http://www.ids.ac.uk/files/Wp62.pdf Accessed 14 January 2012. Alderman, H. Ghana: Adjustment’s Star Pupil? Adjusting to Economic Failure in African Economies. Ithaca: Cornell University Press 1994. Baffes, J., and Guatma, M. “Price Responsiveness , Efficiency and the Impact of Structural Adjustment on Egyptian Crop Producers. “ World Development, Vol. 24, 1996, pp 760- 776. Booth, D. “Economic Liberalisation Real Markets and the Reality of Structural Adjustment in Rural Tanzania. ” Sociologia Ruralis, Vol .34 .1 1994 pp 40-65. Commander, S. (ed). Structural Adjustment and Agriculture: Theory and Practice. : London: Oversees Development Institute, 1989. Cornia, G., Jolly, R., and Stewart, F. Adjustment with a human face . London: Oxford University Press, 1987. Easterly, W. “The Effects of International Monetary Fund Policies on Poverty. Policy Research Working Paper No 2517, World Bank “ (2001) www.worldbank.org accessed on 12 January 2012. Greenaway, D., and Morrissey, O. “Structural Adjustments And Liberalization in Developing Countries: What Lessons Have We Learned?” KYKLOS, Vol .46/2, 2004 pp 240-268. Melville, J. “The Impact of Structural Adjustment on the Poor.” (2002), http://www.caribank.org/titanweb/cdb/webcms.nsf/AllDoc/082CC59DA21706B0042574 1E00535A3A/$File/StrucAdj%5B1%5D.pdf Accessed on 14 January 2012. Stewart, F., and Berry, A. “Globalisation, Liberalization and Inequality: Real Causes.” Challenge, February 2001, 45-86. Read More