Structural Adjustment - Essay Example

DISCUSS THE TYPICAL INTERNATIONAL MONETARY FUND STRUCTURAL ADJUSTMENT PACKAGE FOR SEVERELY INDEPTED COUNTRIES AND EXPLAIN THE OBJECTIVES OF THESE POLICIES. WHAT ARE THE ECONOMIC AND SOCIAL COSTS OF THESE PROGRAMMES? Generally, structural adjustment is a terminology used to refer to IMF and World Bank macroeconomic programmes prescribed for developing countries whose economies are going through the throes of stagnation, decline, debt, and fiscal imbalances. Adherence to structural adjustment programmes (SAPs) have been used by the IMF (and the World Bank) as conditionalities for giving loans and grants to developing countries over the years, especially from the 1980s when many sub-Saharan African countries (and some other developing countries) were facing chronic economic catastrophes and had to sign on to the SAPs in order to access needed loans from the IMF. (Musa, n.d.) The SAPs used as conditionalities by the IMF before granting loans for severely indebted countries have increased the leverage of the IMF in the macroeconomic policy direction of many poor countries and Harvard Development Economist, Jeffery Sachs, has described the IMF’s leverage as a proconsular force. (Sachs, 1999) The use of conditionalities by the IMF for granting loans is however not a novel phenomenon. As far back as the early 1950s, the IMF applied conditionalities to loans it granted to countries. (IMF, n.d.) The use of packaged macroeconomic interventions (i.e. SAP) in economies of heavily indebted countries can be traced to the late 1970s during the global economic turmoil epitomised by the oil crisis, debt crisis, ‘stagflation’, and multiple recessions. (World Bank, n.d.) The implementation of IMF SAPs in different developing countries have a lot of similarities though the actual or specific country implementation are not necessarily the same. (Stein, 1992) Some notable similarities in the IMF SAPs include the following: privatisation of state owned enterprises, abolition of price controls and implementation of price liberalisation, elimination of subsidies maintained by governments on food items and other popular consumables, considerable currency devaluation, reduction in public sector expenditures, and public sector retrenchment of workers. (Naiman and Watkins, 1999; Mosley, and Weeks, 1993) Other common features of IMF SAPs implemented in developing countires include trade liberalisation epitomised by free/open market reforms, introduction of firm controls on credit, introduction of user fees for facilities like health and education, and an easing of foreign exchange controls and ownership of foreign investment. (Stein, 1992) Generally speaking, IMF SAPs restrict government’s direct intervention into the market or economy and thus operates on free market principles. The above stated features of the IMF’s SAPs represent the typical measures that are implemented in severely indebted countries as a package programme of economic recovery. Some of the stated measures and the objectives for their implementation will be discussed beneath. The main objective of the IMF SAPs is to institute structural changes to the economies of developing countries (or heavily indebted countries) in crisis to aid them achieve economic stability and sustained growth in their economies. the SAPs are premised on the objective of ensuring prudent macroeconomic policies, while allowing for free markets to operate, and ensuring a stable and predictable environment to encourage economic activity in the private sector. It is important to note that the IMF’s Structural Adjustment Programmes have been repackaged into other programmes bearing different names but still maintaining some of the core ethos and objectives stated above. The IMF’s Enhanced Structural Adjustment Facility (ESAF) was for instance established in 1987 to provide low interest loans to poor countries. (IMF, 1999) The duration for repayment of loans granted under the ESAF is also longer (from five and half to ten years) than the normally short term loans given under the usual SAP. Another SAP type programme maintained by the IMF in heavily indebted countries is the Highly Indebted Poor Country (HIPC) initiative. The HIPC initiative is a programme that is used by the IMF as a condition for debt relief. under the HIPC initiative, a country is expected to adhere to IMF structural adjustment for three years before reaching a decision point. At the decision point, donors agree to lower the country’s debt to a level that is sustainable. It is only at the completion point of the HIPC initiative that a country may actually be granted debt relief. Reaching a decision point however, does not necessarily guarantee debt relief for countries on the HIPC programme as the debt relief could be delayed if the IMF determines that a country has gone off track from the IMF mandated reforms (which would normally toe the line of the traditional structural adjustment principles). (Naiman and Watkins, 1999) The measures implemented under the IMF’s SAP have been severely criticised as producing some adverse social and economic effects in the countries that have been on these programmes. Naiman and Watkins (1999) for instance report that IMF SAPs have caused African countries to decrease spending in social areas like health care, education, and sanitation. Evidently, the reduction of government expenditure in the public sector and the removal of subsidies (both notable SAP measures), would logically register adverse effects in the social sector of countries implementing SAPs. Watkins (1999) for instance observes that IMF SAPs have had negative effects on the health and education in poor countries because dwindling incomes of poor households have resulted in children being pulled out of school due to inability of parents to financially support their children’s education. (UNICEF, 1999) Also, poor people are not able to access health facilities due to inability to pay for healthcare. The social cost of structural adjustment can thus be very exorbitant even if some economic gains are made. Achieving a statistical growth in the economy does not also necessarily translate into better living conditions especially for the poor. Consequently, one of the criticisms that has been levelled against the IMF is that the neo-liberal economic paradigm that it espouses in its structural adjustment programmes results in a widening of the gap between the rich and the poor. Thus, economic growth does not lead to poverty reduction. Unsurprisingly, recent variations of IMF structural adjustment programmes have been presented as poverty reduction initiatives. (Moore, 2007) Negative economic and social effects causing disillusionment with IMF SAPs and the increasing backlash on the intrusive and controlling nature of the SAPs on sovereign states in the developing world resulted in the IMF launching the Poverty Reduction Strategy Papers (PRSP). (Moore, 2007) The PRSP is supposed to give governments more say in the management of their economies instead of the SAPs that were imposed on countries by the IMF. The emphasis is also not just economic growth but rather poverty reduction. As discussed above, one of the main criticisms levelled against the IMF is that economic growth has not translated into poverty reduction. The direction of the PRSP towards policy ownership by governments and poverty reduction have however been also criticised as not being markedly different from the SAPs in terms of the programme content. Another important area that has been identified as a flaw in the IMF structural adjustment programmes is the emphasis on ‘total’ privatisation of state owned enterprises. Evidently, where governments have not been able to manage corporations well, resulting in a collapse of such corporations, a privatisation would be a prudent way of allowing investments from the private sector (or foreign investment) to come in and rejuvenate collapsing corporations. However, adopting privatisation on a ‘global’ scale without taking into consideration whether the state owned enterprise is profitable cannot be justified. It results in privatisation for privatisation sake and not necessarily for the sake of efficiency. Also, privatisation looses sight of the fact that some state owned enterprises even when running at a loss, served both economic and social needs. They provided jobs for the population and some produced goods used by the poor at a subsidised rate. They thus constituted a form of public or social wealth. When they are privatised, the wealth is taken from the public domain and restricted to private investors whose main aim is to make profit even at the social cost of laying off workers. (Cardoso and Helwege, 1992) Also, privatisation of social services like water has had negative social effects as accessibility to water by the poor becomes restricted. (Cardoso and Helwege, 1992) One of the main areas that the IMF SAPs are supposed to address is the reduction of the debt burdens of countries who adhere to the stringent measures of the SAPs. Naiman and Watkins (1999) however observe that countries on the SAP instead of recording lower debts, rather recorded higher debts while on the SAPs. Also, developing countries who have been outside the SAPs have recorded higher economic growths than those who have been on the IMF’s SAP. (Naiman and Watkins,1999) Furthermore, the total external debt as a share of gross national product of countries on the Enhanced Structural Adjustment Facility (ESAF) for instance rose from 71.1% to 87.8% between 1985 to 1995. (Naiman and Watkins, 1999) The situation in sub-Saharan Africa was even worse. Its debt as a share of GDP increased from 58% to 70% between 1988 to 1996. (Naiman and Watkins, 1999) Other variations of the IMF’s SAP like the Heavily Indebted Poor Country (HIPC) initiative have not yielded positive results in sufficiently lowering the debt burdens of least developed countries. Countries like Uganda and Mozambique who have been on the HIPC initiative are still saddled with huge debts burdens and poor countries have had to use resources that would have been used for sectors like health and education, to service their external debts. (Naiman and Watkins, 1999) According to Charlotte Denny and Larry Elliott writing for The Guardian in the UK (April 19, 1999): “The U.S. dollar amounts of debt service owed by Burkina Faso and Mali are expected to increase” (p.21) though they were on the HIPC initiative. It appears however that criticism and defence of the IMF’s SAP is a very polarised one. The IMF (1999) for instance states that the real per capita incomes of countries on the ESAF programme has risen to an average of 2.5 per cent a year and this includes countries in sub-Saharan Africa. The IMF (1999) sees this trend of growth as “a payoff from the accumulated efforts that countries have made over the past ten years to stabilize and reform their economies with ESAF support”. (http://www.imf.org/external/pubs/ft/esaf/exr/index.htm) The IMF (1999) further claims that Mozambique and Uganda (two notable adherents of the ESAF) have witnessed a rise in real per capita incomes to a cumulative of 33 and 43 per cent respectively since their adoption of ESAF in 1987. Also, the IMF (1999) has stated that claims that its structural adjustment programmes reduce social spending and thus results in negative social effects is an out of date criticism as current ESAFs emphasise social spending in areas like health and education. It further states that some social forms of spending like health and education are used as conditionalisties in some ESAFs, hence steps have been taken to rectify the social cost of its macroeconomic policies. In conclusion it can be argued that the need to eradicate global poverty should be the over-riding ethos of economic programmes either prescribed by the IMF through its myriad variations of SAPs or by governments in their domestic macroeconomic management. Evidently, as discussed above, the SAPs have had some negative economic and social effects on countries that have run these programmes. Interventions of the IMF in the economies of sovereign states have also precipitated a dislike and resentment for it’s increasing hegemonic leverage on governments in the developing world. Such resentment is likely to cause criticisms of the IMF even where some successes have been achieved. One cannot also loose sight of issues like endemic corruption, red tape, social strife, and natural disasters like droughts in developing countries. Such issues in a lot of developing countries that invariably impact on their economies are outside the mandate and domain of the IMF, but they do contribute to low economic growth. Also, the neo-liberal economic paradigm advanced through the IMF’s SAPs must take cognisance of peculiar domestic situations that may not properly fit well in these economic paradigms. A more flexible and sequenced approach to macroeconomic prescriptions and implementation will go a long way to address the specific needs of individual states. (Stiglitz, 2002) References Cardoso and Helwege, (1992). Latin Americas Economy, Cambridge, MA: MIT Press Denny, C and Elliott, L. ‘Fund Admits Debt Plans Will Fail Poor’, The Guardian (U.K.), April 19, 1999 IMF, (1997) ‘The ESAF at Ten Years: Economic Adjustment and Reform in Low-Income Countries,’ Occasional Paper no. 156, Washington: IMF IMF (1999). ‘The IMFs Enhanced Structural Adjustment Facility (ESAF): Is It Working?’ http://www.imf.org/external/pubs/ft/esaf/exr/index.htm (accessed on 25/04/08) IMF (n.d.). http://www.imf.org/external/np/exr/facts/finfac.htm (accessed on 25/04/08) Moore, D. (2007). The World Bank: Development, Poverty, Hegemony, London: UKZN Press, Mosley, P. and Weeks, J. (1993). ‘Has Recovery Begun? Africa’s Adjustment in the 1980s Revisited’, World Development, 21(10) pp. 1583-1606 Musa E. A., (n.d.). Sudan Structural Adjustment Programme (Ssap): Some Implications for Labour in the Formal Sector, African Training and Research Centre in Administration for Development Naiman, R. and Watkins, N. (1999). ‘A Survey of the Impacts of IMF Structural Adjustment in Africa: Growth, Social Spending, and Debt Relief’, Center for Economic and Policy Research, http://www.cepr.net/index.php/a-survey-of-the-impacts-of-imf-structural-adjustment-in-africa/ (accessed on 25/04/08) Sachs, J. (1999). Comments made at forum, "How to Fix the IMF," sponsored by the Economic Policy Institute, Washington, D.C., April 7, 1999 Stein, H. (1992). ‘Deindustrialisation, Adjustment, The World Bank and the IMF in Africa’, World Development, 20(1), pp. 83-95 Stiglitz, J. (2002). Globalization and its Discontents, London: Penguin Press, 2002 UNICEF, (1999). State of the Worlds Children 1999, New York: UNICEF Watkins, K. (1999). Break the Cycle of Poverty: Education Now, Washington: Oxfam International World Bank (n.d.). http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~theSitePK:29708,00.html (accessed on 25/04/08) Read More