Economic structural adjustment programme

14.02.2020
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THE IMPACT OF IMFS STRUCTURAL ADJUSTMENT PROGRAMME ON THE ECONOMIC ...

ABSTRACT

The adoption of the International Monetary Fund (IMF) Structural Adjustment Programme (SAP) in 1986 resulted in the transition from fixed exchange rate regime to floating exchange rate regime in Nigeria. Ever since, the exchange rate of naira vis-a-vis the U.S dollar has attained varying rates all through different time horizons. On this basis, this study examines the reliability, persistency, and severity (degree) of volatility in exchange rate of Nigerian currency (naira) vis-a-vis the United State dollar using monthly time series data from 1986 to 2008.

International Monetary Fund (IMF) is a large organization, a system of government that functions by rules. They give loan and advices to member states. IMF was envisaged as a financial institution with lending power designed to aid members respond to balance of payment deficits without disparaging measures to national or international prosperity, and to facilitate the expansion of balance growth of international trade. The economic crises in Nigeria since 1970s was caused by high unemployment rate, high inflation rate, disequilibrium in the countrys balance of payment, management of internal and external debt and all these contributed to the decline in the living standard of the people. The standard Purchasing Power Parity (PPP) model was used to analyze the long-run consistency of the naira exchange rate while the time series properties of the data was examined using the ADF and PP approach, the stationary process, and order of the incorporated series. The ARCH and GARCH models were used to examine the degree or severity of volatility based on the first difference, standard deviation and coefficient of deviation estimated volatility series for the nominal and real exchange rate of naira vis-a-vis the U.S dollar. These economic problems stated in Nigeria as a result of glut in worlds oil market, the prices of oil fell, resulting in the decline in foreign exchange earnings that were mainly coming from the oil sector. The policy formulation in Nigeria has been strongly influenced by the IMF Since 1986 to 2008. Although government rejected the IMF loan in 1985. It directly or indirectly adopted the IMF conditions as official policies in 1986 through the World Bank supported structural adjustment programs (SAP).Our recommendation is that since government has adopted most of the IMF recommendations as official policies. It should go ahead and obtain the IMF loan and make sure that the loan is effectively and efficiently utilized In productive and development projects.

This however proves the ineffectiveness of monetary policy in stabilizing exchange rate and therefore, calls for the need of more tightened measures especially in controlling the high demand for foreign currency.

CHAPTER ONE

INTRODUCTION

BACKGROUND TO THE STUDY

The Nigeria economy experienced a major increase in its revenue subsequent the increase in output and prices of crude petroleum in the 1970s and early 1980s. This led to the building of a network of inter-state roads, expansion of educational infrastructure in the form of universities, construction of shell plants reference, petro-chemical facilities, vehicle assembly plants etc. The relatively steady growth in real gross domestic growth (GDP) achieved over the period 1960 to 1975 increased until lately when it slumped. The rapid descent that followed the period of boom resulted in a clear crumple of the economy in that many sectors of the economy suffered due to neglect from the government and consequently output and the nations GDP decreased. The economy had in fact fallen off gear and needed serious restructuring. There exist in the economy huge debts owned foreign countries and individuals, a good proportion of which is short-term trade debts. The level of imports of the country had been far in excess of its current foreign earnings from exported and therefore, the trade debts were getting larger and larger.

This is so because the policy orientation and management style of the earlier years had encouraged heavy dependence on imported raw materials, foods, spare parts and technology, thus all manufacturing and other establishments depended on some imported items. Tastes and consumption were oriented towards international standards. Because of near total dependence on imported goods and services to fuel productive facilities, a drastic fall in national foreign exchange resources meant a national calamity. As a result of this import and consumption pattern that was very quickly established during the 1975-1976 oil boom years when export receipts began to fall imports could not be restrained. million The origin of external debt in Nigeria can be traced back to the first decade of existence as an independent sovereign nations. External debt is defined according to oyejide(1985) as a repayable obligation that has either a maturity of up to one year,(that is short-term debt), or a maturity of over one year,(that is medium and long-run term debt), is owned to non-residents and is repayable in foreign currency. The countrys foreign indebtedness during its first decade of existence reached, at its peak, first over half a billion US dollars. Thus in 1970, total debt outstanding including undisbursed, wasN690.7 out of whichN458.8 million was disbursed. By 1972, total debt outstanding had gone over the billion-dollar mark, and by 1974 disbursed debt itself stood at $1.22 billion. Total debt rose by about $2billion or about 160% between 1976 and 1978. There was another quantum jump from $3.28 billion to $8.84 billion (a further 170% increase between 1978and 1980. By 1983, Nigeria external debt obligations were well in excess of $18 billion (World bank, 1985). The countrys external debts were owned largely to multi-lateral organizations and bilateral sources of concessional laws of financial resources.

The government had to commence refinancing (a device for transforming short term debt obligation into long term ones) and re-scheduling (re-negotiation of the term of an outstanding debt which depends on an agreement with the lender country institution to become effective arrangements). These arrangements led to the conversion of $1.9 billion of these short-term trade credits into public medium term debt at floating interest rates in 1983.The establishment of the international monetary fund was conceived in July 11944 during the united nations monetary and financial conference, originally with 45 government representatives that met in the mount Washington hotel in the area of Bretons woods. New Hampshire, united states, with the delegates to the conference agreeing on a framework for international economic cooperation. The IMF was formally organized on December 27, 1945, when the first 29 countries signed its articles of agreement, with a goal to stabilize exchange rates and assist the reconstruction of the worlds international payment system. On April 17, 1943, the secretary of the United States treasury published a preliminary draft outline of a proposal for an international clearing union was published by the United Kingdom government. The IMF describes itself as an organization of 187 countries (as of July 2010), working to foster global monetary cooperation secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty.

The IMFs influence in the global economy steadily increased as it accumulated more members including the international bank for reconstruction and development (IBRD). The member of IMF member countries has more than quadrupled from the 44 states involved in its establishment, reflecting in particular the attainment of political independence by many developing countries and more recently the collapse of the soviet bloc. The expansion of the IMFs membership, together with the changes in the world economy, has required the IMF to adapt in a variety of ways to continue serving its purpose effectively. The main objectives of the IMF is to promote a freer system of the world taste and payment leading to the expansion and balanced growth of international trade which is geared towards the promotion and maintenance of high levels of employment and real income essential to an improvement in living standards (Richard a, 1970).

SPECIFIC OBJECTIVES IN TERMS OF IMF

Deletion of trade reconstruction and so to facilitate the settlement of international financial obligations or indebtedness. Achieving stability in exchange rate. The IMF performs the following functions. It regulates international payments. It acts as a consultants in providing a centre for international co-operation as well as advice and technical assistance for its members and finally. With resources amounting to over $20 billion, it acts as a banker prepared to lend on short-medium term to member countries faced with balance of payment deficits.

There has considerable date over the decision to accept or not to accept the IMF loan as a result of loan conditionality. Conditionality, according to the managing director of IMF. Dr. Lawscere refers to the economic and financial measures which are needed in a particular country in order to restore a sustainable external position at the end or towards the end of a fund program, that is, a deficit that can be financed by long-term capital flows without undue burden or strain on the service position of the country in question (IMF 1984).

These conditionalities include;

Devaluation of the domestic currency. Trade liberalization. Cancellation of government subsides. Wage control and higher interest rate or loan to local businessmen.

In order to meet IMF conditionalities, the country introduce SAP on July 1, 1986. According to Andre Martins (1987), SAP is generally designed to perform many roles as,

Stabilization towards reducing total domestic demand. Efficiency towards increasing supply through the better use of factors of production. International competitiveness, devaluation of national currency. Growth towards increasing supply through an expansion of endowment of the production factors. Institutional discipline.

STATEMENT OF THE PROBLEM

In critical observations, some schools of thought believe that Nigerias economic problems originated from economic mismanagement. Some hold the views that the civil services and the parastatals as they were constituted at the time were not able to formulate and put into practice sound economic programmes. In any case, the problem could be stated in many other ways. There was inadequate sense of priorities, poor management information system, project and programmes were implemented which had minimal impact on growth and development. White elephant projects were often time given preference over projects that could stimulate the economy in a way to greatly benefit majority of the people. Statistical and accounting information flows were inadequate to monitor performance of operational and capital budgets. Argentina, which has been considered by IMF to be a model country in its compliance to policy proposals by the Breton woods institutions, experienced a catastrophic economic crisis in 2002, which some believe to have been caused by IMF-induced budget restrictions which undercut the governments ability to sustain national infrastructure even in crucial areas such as health, education and security and privatization of strategically vital national resources. Since 2005, IMF is constantly making mistakes when it appreciates the countrys economic finances. Accounts of governments were in arrears of over five years in some cases. Thus, inefficiency, fraud and corruption were hidden. The magnitude of finance as well as its sources and uses were only partly revealed, so were the performance achievements and failures.

OBJECTIVES OF THE STUDY:

In view of general objectives, the intention of the study is to; among a few others access the collision of IMF on Nigerian economy via policy formulations of the past ten years or thereabouts. It is also hoped that the study will bring forth the extent of awareness and precaution generated on Nigeria as a result of her indebtedness to external creditors.

Besides, it is the objective of the study to use the above findings to offer suggestions and recommendations on well-organized management of resources and policy formulation. The IMF provides policy advice to member countries primarily in the context of its surveillance of their economic policies and its financial support for their adjustment programs. The objectives of IMF policy advice to member countries are to contribute to the promotion and maintenance of high levels of employment and real income to the development of their productive resources.

The specific objectives are;

To know position of the of Nigerias foreign reserve before and after SAP. To evaluate the conditionalities attached to IMF policy formulations To relate the IMF policy formulation to Nigerias economic growth (or backwardness).

RESEARCH QUESTIONS

  • What are the possible factors that affect adversely the management information system, project and programmes on the growth and development of IMF?
  • What is the relationship between the IMF policy formulation and Nigerias Economic Growth?
  • What are the adjusted programs on Nigerias economy and development facilitated by IMF?
  • What are the effective IMF policies that will assist the economic and growth of Nigeria?

STATEMENT OF HYPOTHESES

H0: Inadequate sense of priorities, poor management information system, project and programs were implemented which had minimal impact on growth and development which cannot resolve the problems of IMF.

H1: Inadequate sense of priority, poor management information system, project and programs were implemented which had minimal impact on growth and development can resolve the problems of IMF.

H0: there is no significant relationship between the IMF policy formulation and Nigerias Economic growth.

Hi: there is a significant relationship between IMF policy formulation Nigerias Economic growth.

SIGNIFICANCE OF THE STUDY:

Nevertheless, the study is considered important in a number of ways, but first in the area of enlightenment. There is compensatory and contingency financing facility (CCFF). The compensatory element provides resources to a member an export short fall or excess in cereal import costs that are due to factors largely beyond the members control.

Then, this study is considered essential as it analyses critically most financial decisions of government in the areas of budgeting and policy with respect to her indebtedness to external creditors. Creditors and blames would be appropriately apportioned irrespective of the consequences of such decision. With this, it is hoped that the study will be contributing to the economic development of Nigeria and hence beneficial to the Nigerian public.

SCOPE OF THE STUDY:

On a wider note, the scope of this study is to find out how much pressure the IMF has brought to bear on Nigeria with respect to the latters economic policy formulation from 1988-2003. The scope of this work therefore will cover what necessitated the debt, the extent of indebtedness, IMFs conditionality, the impact of the economic policy formulation in Nigeria especially as reflected in her budget and other economic policy prouncements during the period under consideration. The objective of the IMFs policy discussion in developing countries (Nigeria) has their focused on economical ways to retain basic elements of equity in the new social security arrangement s within a sustainable fiscal policy framework.

The IMF has drawn attention to a broad range of social policy issues, including unemployment and labour market issues in industrial countries, the economic benefits of reducing unproductive expenditures, institution, building and human capital investment in developing countries, and labour market policies and social safety nets in transition economies.

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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 to 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 stabilization 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" programmes 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 programmes 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.

Since the late 1990s, some proponents of structural adjustments (also called structural reform),[4] 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. Within the IMF, the Enhanced Structural Adjustment Facility was succeeded by the Poverty Reduction and Growth Facility, which is in turn succeeded by the Extended Credit Facility.[5][6][7][8]

As of 2018, India has been the largest recipient of structural adjustment program loans since 1990.[9][10] Such loans cannot be spent on health, development or education programs.[11] The largest of these have been to the banking sector ($2 trillion for IBRD 77880) and for Swachh Bharat mission ($1.5 trillion for IBRD 85590).[9][12]

Conditions

Typical stabilisation policies include:[1][13]

  • 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)
  • eliminating food subsidies
  • raising the price of public services
  • cutting wages
  • decrementing domestic credit.

Long-term adjustment policies usually include:[1][13]

  • liberalization of markets to guarantee a price mechanism
  • privatization, or divestiture, of all or part of state-owned enterprises
  • creating new financial institutions
  • improving governance and fighting corruption (from the perspective of a neoliberal formulation of 'governance' and 'corruption')
  • enhancing the rights of foreign investors vis-a-vis national laws
  • focusing economic output on direct export and resource extraction
  • increasing the stability of investment (by allowing foreign investors) with the opening of companies
  • reducing government expenditure e.g. reducing government employment

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.[14] 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). 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.

Loans made under SAP conditions at the time were advised by the top economists of both the IMF and World Bank.

After the run on the dollar of 197980, 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.[15] Giovanni Arrighi has observed that this scarcity of capital, which was heralded by the Mexican default of 1982,

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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.[16]

Mexico was the first country to implement structural adjustment in exchange for loans. During the 1980s the IMF and WB created loan packages for the majority of countries in Latin America and 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.[17] 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".[14] 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.

Effect of SAPs

Structural adjustment programs implemented neoliberal policies that had numerous effects on the economic institutions of countries that underwent them.

End of the Structuralist model of development

After the Second World War, a Structuralist model of development relying on Import Substitutions Industrialization (ISI) had become the ubiquitous paradigm. It entailed the substitution of foreign imports by goods produced by national industries with the help of state intervention. State intervention included providing the infrastructure required by the respective industry, the protection of these local industries against foreign competition, the overvaluation of the local currency, the nationalization of key industries and a low cost of living for workers in urban areas.[18] Comparing these inward-oriented measures to neoliberal policies demanded by the SAPs, it becomes obvious that the structuralist model was fully reversed in the course of the debt crisis of the 1980s.

While the structuralist period led to rapid expansion of domestically manufactured goods and high rates of economic growth, there were also some major shortcomings such as stagnating exports, elevated fiscal deficit, very high rates of inflation and the crowding out of private investments.[19] The search for alternative policy options thus seemed justified. Critics denounce, though, that even the productive state sectors were restructured for the sake of integrating these developing economies into the global market. The shift away from state intervention and ISI-led structuralism towards the free market and Export Led Growth opened a new development era and marked the triumph of capitalism.[20]

Competitive insertion into the world market

Since SAPs are based on the condition that loans have to be repaid in hard currency, economies were restructured to focus on exports as the only source for developing countries to obtain such currency. For the inward-oriented economies it was therefore mandatory to switch their entire production from what was domestically eaten, worn or used towards goods that industrialized countries were interested in.[21] However, as dozens of countries underwent this restructuration process simultaneously and often times were told to focus on similar primary goods, the situation resembled a large-scale price war: Developing countries had to compete against each other, causing massive worldwide over-production and deteriorating world market prices.[22] While this was beneficial for Western consumers, developing countries lost 52% of their revenues from exports between 1980 and 1992 because of the decline in prices.[21] Furthermore, debtor states were often encouraged to specialize in a single cash crop, like cocoa in Ghana, tobacco in Zimbabwe and prawns in the Philippines, which made them highly vulnerable to fluctuations in the world market price of these crops.[23] The other main criticism against the compelled integration of developing countries into the global market implied that their industries were not economically or socially stable and therefore not ready to compete internationally.[22] After all, the industrialized countries had engaged in the free trade of goods only after they had developed a more mature industrial structure which they had built up behind high protective tariffs and subsidies for domestic industries.[19] Consequently, the very conditions under which industrialized countries had developed, grown and prospered in the past were now discouraged by the IMF through its SAPs.[22]

Removal of trade and financial barriers

The erosion of the Bretton-Woods-System in 1971 and the end of capital controls caused multinational cooperations (MNCs) to gain access to large sums of capital that they wanted to invest in new markets, such as in developing countries. However, foreign capital could not be freely invested yet because most of these countries protected their nascent industries against it. This changed radically with the implementation of SAPs in the 1980s and 1990s, when controls on foreign exchange and financial protection barriers were lifted: Economies opened up and foreign direct investment (FDI) flowed in en masse. A great example of this is the fall of the local textile industry within many African nations, replaced in part by Chinese counterfeits and knockoffs. The scholars Cardoso and Faletto judged this as yet another way of capitalist control of the Northern industrialized countries,[24] it also brought advantages to local elites and to larger, more profitable companies who expanded in size and influence. However, smaller, less industrialized businesses and the agricultural sector suffered from reduced protection and the growing importance of transnational actors led to a decline in national control over production.[19]

Overall, it can be said that the debt crisis of the 1980s provided the IMF with the necessary leverage to impose very similar comprehensive neoliberal reforms in over 70 developing countries, thereby entirely restructuring these economies. The goal was to shift them away from state intervention and inward-oriented development and to transform them into export-led, private sector-driven economies open to foreign imports and FDI.

Criticisms

There are multiple criticisms that focus on different elements of SAPs.[25] There are many examples of structural adjustments failing. In Africa, instead of making economies grow fast, structural adjustment actually had a contractive impact in most countries. Economic growth in African countries in the 1980s and 1990s fell below the rates of previous decades. Agriculture suffered as state support was radically withdrawn. After independence of African countries in the 1960s, industrialization had begun in some places, but it was now wiped out.[26]

Undermining 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. One of the core problems with conventional structural-adjustment programmes is the disproportionate cutting of social spending. When public budgets are slashed, the primary victims are disadvantaged communities who typically are not well organized. An almost classic criticism of structural adjustment is pointing out the dramatic cuts in the education and health sectors. In many cases, governments ended up spending money on these essential services than on servicing international debts.[27]

Neo-colonialism, neo-imperialism

SAPS are viewed by some postcolonialists as the modern procedure of colonization. By minimizing a government's ability to organise and regulate its internal economy, pathways are created for multinational companies to enter states and extract their resources. Upon independence from colonial rule, many nations that took on foreign debt were unable to repay it, limited as they were to production and exportation of cash crops, and restricted from control of their own more valuable natural resources (oil, minerals) by SAP free-trade and low-regulation requirements. In order to repay interest, these postcolonial countries are forced to acquire further foreign debt, in order to pay off previous interests, resulting in an endless cycle of financial subjugation.[28]

Osterhammel's The Dictionary of Human Geography defines colonialism as the "enduring relationship of domination and mode of dispossession, usually (or at least initially) between an indigenous (or enslaved) majority and a minority of interlopers (colonizers), who are convinced of their own superiority, pursue their own interests, and exercise power through a mixture of coercion, persuasion, conflict and collaboration".[29] The definition adopted by The Dictionary of Human Geography suggests that Washington Consensus SAPs resemble modern, financial colonisation.

Investigating Immanuel Kant's conception of liberal internationalism and his opposition to commercial empires, Beate Jahn said:[30]

... private interests within liberal capitalist states continue to pursue the opening up of markets abroad, and they continue to enlist their governments' support, through multilateral and bilateral arrangementsconditional aid, International Monetary Fund (IMF), and World Trade Organization (WTO). While the latter agreements are formally "voluntary," in light of the desperate economic dependence of many developing states, they are to all intents and purposes "imposed." Moreover, the beneficiaries of these agreements-sometimes intentionally so, often unintentionally-turn out to be the rich countries. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), it has been argued, turned the WTO into a "royalty collection agency" for the rich countries. The Structural Adjustment Programs (SAPs) connected to IMF loans have proven singularly disastrous for the poor countries but provide huge interest payments to the rich. In both cases, the "voluntary" signatures of poor states do not signify consent to the details of the agreement, but need. Obviously, tradewith liberal or nonliberal statesis not a moral obligation, yet conditional aid, like IMF and WTO policies, aims at changing the cultural, economic, and political constitution of a target state clearly without its consent.

Privatization

See also: Privatisation Opposition

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.[31]

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 have argued that SAPs and neoliberal policies have negatively affected many developing countries.[32]

Austerity

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

For example, if a government cuts education funding, universality is impaired, and therefore long-term economic growth. Similarly, cuts to health programs have allowed 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. 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.[33]

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. 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.[34]

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. However, the World Bank also provides balance of payments support, usually through adjustment packages jointly negotiated with the IMF.

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 2? and 4 years. Today, there are a few longer term options available, which go up to 7 years,[35] as well as options that lend to countries in times of crises such as natural disasters or conflicts.

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. However, the largest donor only holds 18% of the votes.

Some of the largest donors are:

  • United Kingdom
  • United States (18%)
  • Japan
  • Canada (2%)
  • Germany
  • France

See also

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

References

^ a b c d e Lensink, Robert (1996). Structural adjustment in Sub-Saharan Africa (1st ed.). Longman. ISBN9780582248861. lensink structural adjustment..mw-parser-output cite.citation{font-style:inherit}.mw-parser-output .citation q{quotes:"\"""\"""'""'"}.mw-parser-output .id-lock-free a,.mw-parser-output .citation .cs1-lock-free a{background:url("//upload.wikimedia.org/wikipedia/commons/thumb/6/65/Lock-green.svg/9px-Lock-green.svg.png")no-repeat;background-position:right .1em center}.mw-parser-output .id-lock-limited a,.mw-parser-output .id-lock-registration a,.mw-parser-output .citation .cs1-lock-limited a,.mw-parser-output .citation .cs1-lock-registration a{background:url("//upload.wikimedia.org/wikipedia/commons/thumb/d/d6/Lock-gray-alt-2.svg/9px-Lock-gray-alt-2.svg.png")no-repeat;background-position:right .1em center}.mw-parser-output .id-lock-subscription a,.mw-parser-output .citation .cs1-lock-subscription a{background:url("//upload.wikimedia.org/wikipedia/commons/thumb/a/aa/Lock-red-alt-2.svg/9px-Lock-red-alt-2.svg.png")no-repeat;background-position:right .1em center}.mw-parser-output .cs1-subscription,.mw-parser-output .cs1-registration{color:#555}.mw-parser-output .cs1-subscription span,.mw-parser-output .cs1-registration span{border-bottom:1px dotted;cursor:help}.mw-parser-output .cs1-ws-icon a{background:url("//upload.wikimedia.org/wikipedia/commons/thumb/4/4c/Wikisource-logo.svg/12px-Wikisource-logo.svg.png")no-repeat;background-position:right .1em center}.mw-parser-output code.cs1-code{color:inherit;background:inherit;border:inherit;padding:inherit}.mw-parser-output .cs1-hidden-error{display:none;font-size:100%}.mw-parser-output .cs1-visible-error{font-size:100%}.mw-parser-output .cs1-maint{display:none;color:#33aa33;margin-left:0.3em}.mw-parser-output .cs1-subscription,.mw-parser-output .cs1-registration,.mw-parser-output .cs1-format{font-size:95%}.mw-parser-output .cs1-kern-left,.mw-parser-output .cs1-kern-wl-left{padding-left:0.2em}.mw-parser-output .cs1-kern-right,.mw-parser-output .cs1-kern-wl-right{padding-right:0.2em} ^ a b c Lall, Sanjaya (1995). "Structural adjustment and African industry". World Development. 23 (12): 20192031. doi:10.1016/0305-750x(95)00103-j. ^ Greenberg, James B. 1997. A Political Ecology of Structural-Adjustment Policies: The Case of the Dominican Republic. Culture & Agriculture 19 (3):85-93 ^ David B. Audretsch, Erik Lehmann, The Seven Secrets of Germany, Oxford University Press, 2016, p. 104. ^ "IMF Concessional Financing through the ESAF (factsheet)". International Monetary Fund. April 2004. Retrieved 5 October 2015. ^ "The IMF's Enhanced Structural Adjustment Facility (ESAF): Is It Working?". International Monetary Fund. September 1999. Retrieved 5 October 2015. ^ "The Poverty Reduction and Growth Facility (PRGF) (factsheet)". International Monetary Fund. 31 July 2009. Retrieved 5 October 2015. ^ "IMF Extended Credit Facility (factsheet)". International Monetary Fund. 15 September 2015. Retrieved 5 October 2015. ^ a b "Total laons and credit extended - India". www.finances.worldbank.org. World bank - Finances. Retrieved 29 October 2018. ^ "India - structural adjustment loans". www.worldbank.org. World Bank. Retrieved 29 October 2018. ^ Shah, Anup (24 March 2013). "Structural Adjustmenta Major Cause of Poverty". Global Issues. Retrieved 29 October 2018. ^ "Structural adjustment in India". www.worldbank.org. Individual evaluation group (IEG), World Bank. Retrieved 29 October 2018. ^ a b White, Howard (1996). "Adjustment in Africa". Development and Change. 27 (4): 785815. doi:10.1111/j.1467-7660.1996.tb00611.x. ^ a b See IMF website on conditionality ^ Arrighi 2010, p.34. ^ 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." ^ See Towson.edu webpage on SAPs Archived 2011-09-27 at the Wayback Machine ^ Duncan, Green (2003). Silent revolution: the rise and crisis of market economics in Latin America (2nd ed.). New York: Monthly Review Press. pp.16. ISBN978-1583670910. OCLC53907487. ^ a b c Robert N. Gwynne, Cristobal Kay (1999). Latin America transformed: globalization and modernity. London: Arnold. pp.85. ISBN978-0340731918. OCLC41247780. ^ Veltmeyer, H. (1993). "Liberalisation and Structural Adjustment in Latin America In Search of an Alternative". Economic and Political Weekly. 28 (39): 20802086. ^ a b Jauch, H. (1999). "SAPs: Their origin and international experiences". Labour Resource and Research Institute Namibia: 3. ^ a b c Shah, Anup (June 3, 2007). "Third World Debt Undermines Development". ^ The Socialist Party of Great Britain. "Globalisation Part 3 - The IMF, World Bank and Structural Adjustment". ^ Cardoso, Fernando H.; Faletto, Enzo (1979). Dependency and development in Latin America. Berkeley: University of California Press. pp.160. ISBN978-0520031937. OCLC4847028. ^ For another overview, see Towson.edu Archived 2009-04-22 at the Wayback Machine's page ^ Ndongo Samba Sylla (1 August 2018). "Descent into hell". D+C, development and cooperation. Retrieved 29 October 2018. ^ Jurgen Kaiser (3 August 2018). "Interfering in national sovereignty". D+C, development and cooperation. Retrieved 29 October 2018. ^ McGregor, S (2005-05-03). "Structural adjustment programmes and human well-being". journals2.scholarsportal.info. Retrieved 2016-02-10. ^ Osterhammel (1997). "The Dictionary of Human Geography" (PDF). Cite journal requires |journal= (help) ^ Jahn, Beate (2005-01-01). "Kant, Mill, and Illiberal Legacies in International Affairs". International Organization. 59 (1): 177207. doi:10.1017/S0020818305050046. ISSN1531-5088. ^ Cardoso and Helwege, "Latin America's Economy" Cambridge, MA: MIT Press (1992) ^ McPake, Barbara. 2009. Hospital Policy in Sub-Saharan Africa and Post-Colonial Development Impasse. Soc Hist Med 22 (2):341-360. ^ New York Times: Rise in TB Is Linked to Loans From I.M.F ^ Bernard, Ikubolajeh Logan and Kidane Mengisteab. "IMF-World Bank Adjustment and Structural Transformation on Sub-Saharan Africa". Economic Geography. Vol 69. No 1, African Development. 1993. Print. ^ See the IMF website on lending.

Bibliography

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  • Arrighi, Giovanni (2010). "The world economy and the Cold War, 19701985". In Melvyn P. Leffler and Odd Arne Westad, eds., The Cambridge History of the Cold War, Volume 3: Endings (pp.2344). Cambridge: Cambridge University Press. ISBN978-0-521-83721-7.
  • Reinhart, Carmen M.; Rogoff, Kenneth S. (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press. ISBN978-0-691-14216-6.

External links

  • IMF Factsheet on Conditionality
Retrieved from "https://en.wikipedia.org/w/index.php?title=Structural_adjustment&oldid=936227936"

Structural Adjustment definition and criticisms - Economics Help

Structural adjustment is a term used to describe the policies requested by the IMF in condition for financial aid when dealing with an economic crisis in. The policies are designed to tackle the root cause of the problem and provide a framework for long term development and long term growth.

Structural adjustment policies usually involve a combination of free-market policies such as privatisation, fiscal austerity, free trade and deregulation. Structural adjustment policies have been controversial with detractors arguing the free-market policies are often unsuitable for developing economies and lead to lower economic growth and greater inequality.

Supporters of structural adjustment (IMF and World Bank) argue that these free-market reforms are essential for promoting a more open and efficient economy, which ultimately help to improve living standards and reduce relative poverty.

In practice, they have had mixed results. Often criticised for creating painful changes in the economy which give as many costs as benefits. Recently, Structural adjustment policies have placed greater focus on poverty reduction, with countries encouraged to draw up Poverty Reduction Strategy Papers (PRSPs)

Structural adjustment policies

Macroeconomic Structural Adjustment

  • Policies to tackle Inflation (e.g. tightening of monetary or fiscal policy). In practice, this may involve higher interest rates or higher taxes.
  • Policies to deal with a budget deficit. Higher taxes, lower spending. Can be combined with the policy to reduce inflation.
  • Removal of Tariff Barriers which protect domestic industries and opening the economy to free trade.
  • Abandoning Fixed Exchange Rates and allowing the currency to float In practice, this involves a devaluation. This can help give exports greater competitiveness and help boost domestic demand. However, it increases the cost of imports and usually reduces living standards.

Micro Economic Structural Adjustment

On the microeconomic side, policies are designed to increase competitiveness and productivity in the economy. These tend to involve free market supply-side policies such as:

  • Privatisation of state-owned industries. This raises money for the government, but also, in theory, can help improve efficiency and productivity. because private firms have a profit incentive to be more efficient.
  • Ending food subsidies. This can distort the market and lead to over-supply and hold back diversification of the economy to a more industrial-based economy.
  • Reducing red tape and bureaucracy
  • Closing tax loopholes and reducing corruption
  • De-regulation of markets to encourage competition and more firms to enter the industry.

Problems With Structural Adjustment

1. Policies of tackling inflation. Higher interest rates, higher taxes, often cause a recession and mass unemployment. They are often painful in the short term. This is perhaps the biggest reason why structural adjustment is often very unpopular in the countries where it is implemented.

    • To defend structural adjustment, we could say, it is necessary to deal with inflation. If left untackled, the inflation could just get worse leading to a more painful future adjustment. Also, the pain is often temporary. Once tackled low inflation provides for a period of economic stability.

2. Spending Cuts falls on the poorest section of society. Often structural adjustment has led to spending cuts on important welfare services such as education and health care. Structural adjustment has often been perceived as widening inequality.

  • There is no reason spending cuts have to fall on the poorest sections of society. Spending cuts could be focused on military spending. Or the budget reduced through higher taxes on high earners. Recently, the IMF has encouraged poverty reduction to be a part of structural adjustment policies with things such as Poverty Reduction Strategy Papers (PRSPs).
  • However, critics argue that despite these new targets for reducing poverty, the essential policies remain the same.

3. Loss of National Sovereignty. IMF policies need to be implemented otherwise there can be a heavy financial penalty. This gives foreign bodies great influence over key economic issues in developing economies.

4. Greater inequality. Structural adjustment policies have often shown a tendency to greater inequality. For example, privatisation has often benefitted a small rich elite (e.g. Russia 1995) and have not benefitted a wider population.

5. Ignore social benefits. Privatisation of key public utilities like Water (e.g. Bolivia) have led to higher prices for a key commodity. Arguably market incentives dont have the same importance when the industry plays an important social welfare function. But, structural adjustment policies have often stuck to a certain ideology even when not appropriate.

6. Unemployment. Control of inflation and fiscal austerity has led to higher unemployment and lower economic growth at least in the short-term.

7. Social development ignored. To meet fiscal criteria, governments have often cut welfare spending programs which benefit the poorest members of society.

8. Free trade often hampers diversification. Developing economies often have a comparative advantage in selling raw materials. But, this prevents economy diversifying. To make things worse, developed countries often impose tariffs on agricultural exports, but then want developing countries to have free trade for their exports. See: free trade

Evaluation of structural adjustment

  • Like many general policies such as structural adjustment, it depends on how it is implemented. To make sweeping statements such as Structural adjustment is good/bad is too vague. It depends on the quality of supply-side policies.
  • At best, structural adjustment can provide the political will to take necessary and difficult steps to deal with an economic crisis and provide a framework for long term growth and stability.
  • At worst, it can place too much emphasis on macroeconomic objectives such as low inflation, balanced budget causing an unnecessarily deep recession. It can provide an opportunity to pursue market-oriented supply-side policies which do little to improve productivity but increase inequality and poverty.

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The Economic Structural Adjustment Programme
Blank 133x176 The Economic Structura... by
A.S. Mlambo

The Economic Structural Adjustment Programme

by A.S. Mlambo 0.00 Rating details 0 ratings 0 reviews Zimbabwean people were exploited and marginalised in the colonial era. But the quality of life improved considerably after independence, the country achieving successes in the provision of health, education and other services for the Zimbabwean majority. The economy overall however did not perform as well as expected in the first ten years of independence. The author, an economic historian, accepts that an economic reform programme was needed in 1990. His study contends however that the government's decision to implement the IMF/World Bank economic reform programme was misguided, for not only did it impact negatively on the welfare of the people, it also effectively reversed most of the gains made in education and health. He further contends that such structural adjustment programmes are hostile to the poor and have adverse effects on economies and societies of such countries as Zimbabwe.

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Paperback, 105 pages Published January 1st 1997 by University of Zimbabwe Publications More Details... Original Title The Economic Structural Adjustment Programme ISBN 0908307721 (ISBN13: 9780908307722) Edition Language English None found ...Less Detail Edit Details

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