Structural Adjustment

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.[3]
Dani Rodrik, Professor of International Political Economy, Harvard University
Nations would find themselves needing international loans or assistance to weather currency crises or other major macro- and international- phenomena.  The price for aid or loans from the IMF or World Bank became a commitment by the receiving nation to re-make it’s economic system the way the IMF or World Bank or US Treasury thought it should.  This process was called “structural adjustment”.  It was, and still is, highly controversial.   Any government attempting “structural adjustment” nearly always found it necessary to do so forcefully through repression, violence, or suppression of ordinary democratic functions.
I’ll let Tejvan R. Pettinger of Economics.org first explain what “Structural adjustment” is, and then, below, I’ll let him summarize some of the criticisms of it.

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)

worst global economic crisis since the 1930s

I will have more to say on Tuesday at the LCC Global Perspectives Conference, but it’s not pretty.  The planet’s in trouble.

Both the IMF and World Bank are now forecasting an outright fall in global output in 2009, with a larger contraction than previously forecast in the advanced economies and sharply lower expected growth in the emerging world. I am not sure that even Nouriel Roubini was forecasting an outright fall in global output a year ago. Anything below 2% is generally considered a global recession.

The most visible manifestation of the scale of the downturn continues to come from Asia — with the sharp fall in Asian exports to the world mirroring the sharp fall in global demand. Japan’s exports are now down 50% from last February. The IMF is now forecasting a 6% of GDP contraction in Japan in 2009. That is a contraction of magnitude as emerging economies experience during their crises.

via Brad Setser: Follow the Money » Blog Archive » “This is unquestionably the worst global economic crisis since the 1930s”.