Beginning in the 1980’s radical free-market fundamentalism, as exemplified by the so-called “Chicago Boys“, became the dominant thinking at international agencies such as the International Monetary Fund (IMF), World Bank, and the U.S. Treasury. This resulted in an approach to helping developing and poor countries called the Washington Consensus. The essence of the Washington Consensus was
“Stabilize, privatize, and liberalize” became the mantra of a generation of technocrats who cut their teeth in the developing world and of the political leaders they counseled.
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. In practise 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 tends to involve
Macro Economic – Structural Adjustment
- Policies to tackle Inflation (e.g. tightening of monetary or fiscal policy). In practise 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
- Abandoning Fixed Exchange Rates and allowing currency to float – In practise 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 micro economic side, policies are designed to increase competitiveness and productivity in the economy. These tend to involve ‘free market’ supply side policies such as:
- Privatisation – selling state owned assets to private sector
- Reducing red tape and bureaucracy
- Closing tax loopholes and reducing corruption
- Deregulation – Increasing competitiveness in economies
Now the criticisms:
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 a 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.
Spending Cuts falls on 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 have 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.
Like many general policies such as structural adjustment, it depends 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 macro economic 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.
But these are only the economic criticisms. There are larger, economic system and political criticisms. As I mentioned earlier, structural adjustment programs were heavily associated with violence and suppression of elections or democratic processes (at least temporarily). In many cases, structural adjustment programs were forced onto countries, even though the “adjustments” had nothing to do with what precipitated the crisis. An excellent example of this is how structural adjustment programs were forced onto the Asian Tigers and Russia during the 1997-98 Asian Crisis, even though they adjustments did not address the causes of the crisis (international currency speculation).
Some critics, most notably Naomi Klein in her book Shock Doctrine, have alleged that structural adjustment programs were, in fact, attempts to force nations into allowing multi-national corporations and banks (particulary US and UK) to take-over successful local businesses and public utilities at extraordinarily profitable low prices – in effect, a new form of colonialism.
For an excellent video presentation of how structural adjustments affected Jamaica, see the video Life and Debt. (info here and a link to online viewing here, but online viewer doesn’t work in all browsers)
One of the greatest untold economic stories of the last 2-3 decades (there are so many) is how the economy (both US and global) has consolidated. In industry after industry, there’s just not the level of competition or entry or innovation that we formerly had. This is significant for many reasons.
One, historically the Great American Job Machine came from innovation, entreneurship, and new businesses. As a practicing corporate planner and later as corporate strategic planning consultant I witnessed the phenomenon. In the 1980’s and even early 1990’s, the route to success in business was make a better product, innovate, find new customers, adopt new technology to control costs, improve efficiency. All the textbook stuff. That has long ago shifted. That approach is old-school (showing my gray hair now). Now business and corporate success comes from playing a financial gin game: buy companies, sell companies, cut employees and hollow-it-out, don’t get involved in the core business, and most of all: eliminate competitors. Use patents, use special government favors & legislation, illegal threats, buy your competitors, whatever. Just eliminate the competitors. Then raise prices. Then eliminate consumer options and choice. Eventually consumers become the “property” of your company (much like serfs).
Second, since the reality is that most industries are no longer competitive, it also means that macro-economic policies from the Classical-New Classical-Supply Side-Monetarist-Rational Expectations-Libertarian schools won’t work. They all assume that all markets are competitive. But they aren’t in reality!
In the real world, true radical innovation and invention (the stuff that really advances our living standards and productivity) rarely comes from large organizations and corporations. They have too much to lose from upsetting the status quo. The modern, large, hierarchical organization is actually designed and intended to squash innovation, despite all the consultant hype and buzz about “networks” and “learning organizations” (puh-leeze!). I mean, if a large hierarchical, command-and-control organization brought innovation and invention, then wouldn’t we have a stereotype of Army Generals as the most creative inventive types around instead of our mythology of the mad scientist or the wild works-in-his-garage inventor?
Anyway, for more on this topic (and much better written) try Who Broke America’s Job Machine by Lynn and Longman in Washington Monthly. Also, for the curious, there’s wealth of surprising info on how even your favorite little local business or product has become an oligopoly at Oligopoly Watch, although this nice little blog doesn’t seem to have been updated since 2009.
If you are worried about the deficit, or if you’d like to receive Social Security some day when you retire (or if you become disabled), then Jamie Galbraith’s article In Defense of Deficits in the Nation is a must-read.
the deficit phobia of Wall Street, the press, some economists and practically all politicians is one of the deepest dangers that we face. It’s not just the old and the sick who are threatened; we all are. To cut current deficits without first rebuilding the economic engine of the private credit system is a sure path to stagnation, to a double-dip recession–even to a second Great Depression. To focus obsessively on cutting future deficits is also a path that will obstruct, not assist, what we need to do to re-establish strong growth and high employment.
Either way, until we have effective financial reform, public budget deficits are the only way toward economic growth. You don’t have to like budget deficits to realize that we must have them, on whatever scale necessary to restore growth and jobs. And we will need them not just now but for a long while, until we’ve shaped a strategic program for investment, energy and the environment, financed in part by a reformed, restored and disciplined financial sector.
It’s possible, of course, that all the deficit hysteria is intended to divert attention from the dysfunctions of private banking, and so to help thwart calls for financial reform. Is that giving them too much credit?
Personally, I definitely see the deficit hysteria as the con-man/magician’s hand-waving distraction. TPTB agitate and stir the pot to get folks upset about some boogie-man called the deficit. It’s hand-waving. While the public (particularly the Tea-Partiers) are watching the hub-bub about the deficit, Wall Street and the big banks continue to loot country and (they hope) shoot down the idea of social security. It’s nonsense, but the danger is real. Not the danger of deficits, but the danger of being distracted by the deficits.
- From the Wall Street Journal: Bring Back the Robber Barons . I think I’ll pass. I mean why stop with the robber barons? Why not go all the way back to feudalism where most workers are the personal property of some monied rich baron who’s buddy-buddy with the king?
- From Maxine Udall (girl Economist): Bring Back the Robber Barons? I don’t Think So. You go girl.
- “The $800 billion federal stimulus bill has boosted employment by 1 million to 2.1 million and helped the economy grow about 1.5% to 3.5% larger than it would have without the stimulus, the nonpartisan Congressional Budget Office said Tuesday.” Read more as the CBO smacks down the arguments of critics of the stimulus.
- Rajiv Sethi on Intellectual Property and Guard Labor. Great article including good further links about how wasteful and unproductive copyrights, patents, and other forms of government-granted private monopolies on ideas. Really such efforts as copyright and patent schemes are really another form of attempted thought-control by a minority at great expense to the rest of us. [disclaimer: I own a patent myself, but have never attempted to restrict it’s use]
- Gavin Kennedy at Adam Smith’s Lost Legacy with What Adam Smith Actually Identified as the Appropriate Roles for 18-century Governments responds to one of the latest attempts to claim Adam Smith was an advocate of tiny-government, libertarian policies. Gavin has a very detailed list of the many functions that Smith specifically said governments should provide (and not outsource to a private profit-making firm). It’s not at all what the Republicans, Libertarians, or Chicago Boys claim. I really wish people would read the books before they claim some dead author supports them.
- For the student interested in economic history, particularly macro, the history of Say’s Law is essential. It defines the difference between Classical theory vs. Keynesianism/Progressive. Brad Delong has an excellent post on this.
via Tejvan Pettinger at EconomicsHelp.org:
On my other blog I wrote a few articles about British Economic history. It was inspired by watching Andrew Marr’s entertaining – Modern British history. One of my first memories of the news was the coal miners strike. I lived in Yorkshire and in 1984 would have been 7 years old. I remember everyday the local news always carried pictures of these people huddled over outside fires and wondering what they were doing. The modern economic history of Britain is in many ways stranger than fiction.
- Economics of the 1920s – a legacy of war debt, deflation and life under the gold standard
- Economics of the Great Depression 1930s – the economics of mass unemployment.
Post War Economy
- Economics of the 1940s and 1950s – Austerity, rationing, war debt, but full employment, new welfare state and rising living standards.
- 1960s – The ‘You’ve never had it so good era’ starts to unwind.
- 1970s – The Era of Discontent. Strikes, 3 day weeks, inflation, boom and bust. The 70s had everything except stability
- 1980s – The Thatcher era gave us two deep recessions, an experiment with monetarism mass unemployment, broke the power of trades and one of the most memorable booms of post war Britain.
- 1990s – Recession and then the great stability
- The economics of the 2000s