Development and Conditionality

After a break to relocate to Washington, D.C., I have posted a work on conditionality and its perils. As China seeks a greater role in lending to Africa and Latin America, so the lessons learnt from Structural Adjustment programmes need reexamination.

This essay attempts to do two things; the first is to provide a summary of the economic reforms constituting structural adjustment programmes across the globe since the late 1970s and the second is to present and evaluate the evidence detailing the positive and negative impacts of structural adjustment reforms on the poorer majorities in developing countries. The work begins by defining structural adjustment and then looks at the causes of poverty which stimulate the formulation of structural adjustment programmes in developing countries. The impact of structural adjustment policies on these causes of poverty allows us to evaluate their performance. Following on, the essay then outlines the first and second generation of structural adjustment reforms. The subsequent section describes and critically examines the evidence from development literature which put forward the cases for and against the reforms in reference to their impact on the poorer majorities in developing countries. Evidence is presented from Africa, Asia and South America. This section is illustrative of the extreme opinions which exist about structural adjustment and these polarized views are depicted throughout the essay. The paper then concludes that the first two generations of structural adjustment reforms have had a varied impact on the world’s poor depending upon localized economic conditions and that structural adjustment reforms form part of a long-term ameliorative process of economic reform in developing countries which is far from finished and is intended to eventually ‘get it right’.

The definition of structural adjustment is embedded in controversy. One of the principal advocates of adjustment reforms, the World Bank, describes them as “a package of reform measures which is adopted by our partner country in order to reduce economic imbalances and improve economic incentives, which are both necessary to bring about sustainable growth and development and poverty alleviation.” (Akpa, 1998: 5). Conversely, structural adjustment has been described as “a set of standardized, far-reaching austerity and ‘openness’ measures that typically include the removal of restrictions on foreign investment, the abolition of public subsidies and labor rights, reduced state spending, deregulation, lower tariffs, tighter credit, the encouragement of export-oriented industries, lower marginal tax rates, currency devaluation, and the sale of major public enterprises.” (Finnegan, 2003; para. 13). However, for this essay I will take structural adjustment to mean “that part of development policy which is devoted to achieving a boost to the supply side of an economy by the removal of market imperfections” (Mosley, 1991: 223). This distinguishes structural adjustment programmes as separate from stabilisation programmes whose objective according to Mosely is to “seek to control the demand side”. (Moseley, 1991: 223).

With such diverse opinions on structural adjustment what prompts governments to instigate a reform programme? The need to fulfill economic conditions for International Finance Institution (IFI) loans is certainly a pragmatic reason but also the need to address the causes of poverty at a macroeconomic level is a central motivation. Killick suggests three decisive factors in tracing the causes of poverty at the macroeconomic level. The impact that structural adjustment reforms have had against these factors provides a guide as to their effectiveness. They are:

Incomes and productivities

“Since economic growth is the dominant influence [on structural adjustment programmes], poverty should be seen as resulting from inadequate incomes and productivities”. Killick elaborates; because the poor in developing countries lack the educational opportunities to develop skills which contribute to a modern economy they have to work with assets having low productivity and as a consequence the poor have little access to credit.

Socio-political factors

Killick states there are two elements to this factor; economic dependency in the forms of large family sizes and under-employment and a lack of market and political power which result in government led structural adjustment programmes which rarely include those they are intended to help.

Inequality

“For a given total national income the amount of poverty will be a rising function of the degree of inequality.” Killick adds that growth which is capital intensive and low on job creation hits the poor hardest. Although the poor are the most likely to rely on direct incomes to support themselves and their families, with fewer opportunities in the job market, they find it the most difficult in gaining employment. (Killick, 1999: paras. 18-21)

This analysis of the causes of poverty at a macroeconomic level leads us to a description of the kinds of structural adjustment reforms which were proposed and implemented to address them. The following section looks at the first generation of reforms.

What came to be known as the first generation of reforms began as series of neoliberal macroeconomic reform proposals aimed at liberalizing the market from state control in order to achieve macroeconomic stability. “Key policies included liberalization of domestic markets, privatization, trade opening, and opening to international flows as well as the withdrawal of the state from many previous areas of economic activity”. (Reinhardt and Peres, 2000: 1544-1545). The World Bank marks out this period as lasting from 1979 to 1985 and characterizes it as “a number of programmes that focused on the critical issues of the day, being macroeconomic imbalances, public finance deficits trade imbalances and the large balance of payment problems.” (Akpu, 1998: 8). An example of how structural adjustment reforms aimed to restrict state control is to be found in the reform of exchange rates to open international trading flows. ‘Trade Policy Loans’ were offered to countries, such as Pakistan, the Ivory Coast and Bolivia, who were willing to revise the overvaluation of their currencies. State decreed currency valuation over the value of currencies as set by the market was seen to be preventing exports and increasing the consumption of expensive imports. However, the need “to create a new incentive environment [for trade and industrial policy], which would permit the economies to adjust to new international conditions and pick up growth again…focused so much on growth, that there was not enough attention paid to who actually benefits from growth.” (Akpu, 1998: 8).

This distributional problem of growth led to calls for a more socially responsive approach where there was shift away from the removal of the state from areas of economic activity to a rediscovery for the need of the state in macroeconomic policy. The World Development Report of 1991 and the Washington Consensus are seen as the starting points for this shift and the genesis of the second generation of structural adjustment reforms. The World Development Report of 1991, ‘The Challenge of Development’, asserts that “promoting economic growth and poverty reduction is most likely when governments complement markets; dramatic failures result when they conflict. The Report describes a market-friendly approach in which governments allow markets to function well, and in which governments concentrate their interventions on areas in which markets prove inadequate.” (World Bank, 1991: iii).

While the World Bank’s World Development Report indicated a change in thinking about poverty reduction, the Washington Consensus, a term coined by John Williamson of the Institute for International Economics in 1990 for broad agreement of “major power centres and think-tank agencies in Washington” (Saha, 2004: 4) on achieving economic growth in developing countries and the conditions for IFI loan approval, looked to practical measures to address the distributional problems of the first generation of reforms. While the consensus does include socially responsive measures it has also “increasingly moved towards both consolidating and augmenting the first generation of reforms.” (Khan, 2004: 9). Briefly, the policies Williamson outlined were: (1) Fiscal Discipline: to avoid “large deficits that led to balance of payments crises and high inflation that hit mainly the poor because the rich could park their money abroad.” (2) Reordering Public Expenditure Priorities: “this suggested switching expenditure in a pro-poor way, from things like indiscriminate subsidies to basic health and education.” (3) Tax reform. (4) Liberalizing Interest Rates. (5) A Competitive Exchange Rate. (6) Trade Liberalization. (7) Liberalization of Inward Foreign Direct Investment. (8) Privatization of State-owned Enterprises. (9) Deregulation. (10) Protecting Property Rights. (Williamson, 2002: para 3).

In this post Washington Consensus environment the second generation of reforms can be summarized as being “aimed at redesigning the state and its institutions to ensure the smooth development of the market economy”. (Casimira, 2003: 2). According to James Wolfensohn, the second generation of structural reforms which began in 1996 focused on:

• Improvement of the administrative, legal, and regulatory functions of the state.
• Increasing the quality of government, “in terms of regulation, in terms of people, in terms of capacity.”
• Improving financial supervision and control.(Taraqqi, 2001: para. 8)

In addition two further reforms can be added:

• Speeding the technology transfer to developing countries.
• Increasing the performance of capacity building and education. (Williamson, 1997.

This essay now turns to the criticisms directed at the first and second generation of structural adjustment reforms. By referring back to Kilick’s three decisive factors in tracing the causes of poverty at the macroeconomic level; incomes and productivities, socio-political factors and inequalities, evidence will be presented which illustrates the negative impact on these three factors.

“For some regions, notably Latin America and some countries in the Caribbean, the 1990s is regarded as a lost decade precisely because of the absence of economic growth”. (Melville, 2002: 4). The growth in prosperity and the increase in incomes for the poorest majorities in developing countries which the series of structural adjustment reforms had intended to bring about did not materialize in many parts of the world. Argentina, which had experienced disappointing results from structural adjustment programmes throughout the 1980s manifesting in a currency collapse in 1981 and hyper-inflation, went through serious reversals in its economic growth in the 1990s after pursuing the new generation of reforms. The growth rate of the Argentine economy fell to -4.6 in 1995 and a serious crisis emerged with the IMF regarding its debt repayments. In Jamaica structural adjustment reforms saw a reduction in the capacity building opportunities for the poorest of its citizens. There was a decrease in expenditure going to social, community and educational services for the poor. In fact “real expenditure on education, training and cultural activities, housing, and water, was lower than in the preadjustment period.” (Melville, 2002:7). In these two examples macroeconomic conditions created by structural adjustment impacted negatively on the abilities of the poor in Argentina and Jamaica to increase their productive assets. The World Bank has conceded in its review of the first generation of reforms that “no specific attempt was made to either soften the impact of the changes induced on the poor or to deliberately create avenues for those people who are not able to participate in growth directly. (Akpu, 1998: 8).

Regarding socio-political factors, evidence indicates there has been little improvement in the participation of the poor in structural adjustment policies. The perceived beneficiaries of structural adjustment have little voice in the policies that shape their lives. This ‘top-down’ approach is unlikely to address poverty or garner much support from those it intends to help. Evidence from sub-Saharan Africa illustrates the authoritarianism in structural adjustment policy formulation and implementation. Many African states, “which are desperate to meet IMF conditionalities, often turn against [their] own people.” (Ibhawoh, 1999: 160). Ibhawoh cites examples from all parts of sub-Saharan Africa. “In Ghana, early openings in democratic direction were stifled in the interest of authoritarian control as SAP gathered momentum.” She adds that in Zambia “the regime, faced with cross-pressure from domestic opposition and international financial and aid agencies, was constrained to adopt repressive measures to complement traditional methods of political management.” In Senegal, “the authoritarian features of one-party dominance were reasserted in the face of political tension precipitated by adjustment reforms”. Nigeria also experienced political opposition to structural adjustment reforms which it similarly dealt with through oppression. (Ibhawoh, 1999: 160). Killick adds that structural adjustment programmes “can do little for the empowerment of the poor. They are not addressed to the initial inequalities which aggravate the poverty problem.” (Killick, 1999: para. 2). Finally, the example set by IFIs in their relationships with developing countries regarding structural adjustment policies is not without questionability. The consultation process between IFIs and developing countries in deciding what is best for them cannot be said to be a partnership of equals, “the balance of power has shifted further away from the developing countries to the benefit of foreign creditors and investors”. (Ghai, 1992: 7).

Examining structural adjustment policies addressing inequality issues the evidence from Argentina does not indicate an improvement either. Unemployment remained in double digits in the 1990s in Argentina, peaking at 18.4% in 1995. The poorest of Argentines, unable to find or maintain work, could not come to rely on the incomes they needed to support themselves and their families, “450,000 Argentines died of hunger between 1990 and 2003” according to Argentinean agronomist Alberto Lapolla. (Rush, 2004: para. 2). Therefore, “the findings suggest that SAPs have had a disproportionate and detrimental effect on the poor and inequality...we can see that in SAPs in Latin America led to a redistribution of income away from labour to capital”. (Melville, 2002: 4).

Although evidence can be collected to present the case against structural adjustment, evidence which supports the notion that structural adjustment has had a positive impact on the lives of the poorest majorities in developing countries can also be found. Again Killick’s three decisive factors will be used to contextualize the evidence presented for this view.

Consistent implementation is at the core of successful structural adjustment programmes and those countries that have followed this line have seen GDP per capita increases according to World Bank statistics. “This faster growth in all likelihood reduced the deterioration in the conditions of the poor. Incomes have been rising (or not declining so fast) so the depth of poverty is likely to have been less severe”. (World Bank, 1994:165). The evidence presented by the World Bank suggests that when the Ivory Coast discontinued a structural adjustment policy in 1986, its GDP fell in 1987 and there was an increase in poverty. The percentage of poor people rose by 16% from 30% in 1985 to 46% in 1988, “the main lesson: inadequate adjustment can seriously erode the living standards of the poor.” (World Bank, 1994: 166). Evidence shows that the capacity building and educational needs of the poor have been served in some countries under structural adjustment. The World Bank argues that “adjustment programs in Africa have not cut public spending in the aggregate,” (World Bank, 1994: 169). The table below shows how there were increases in health and education expenditures in selected African countries from 1980-83 to 1987-89.

Country % increase in health spending from 1980-83 % increase in education spending from 1980-83

Burkina Faso 11.7/13.4

Cameroon 18.5/60.4

Kenya 1.5/33.8

Zimbabwe 37.6/30.9

(World Bank, 1994: 171)

The notion that authoritarianism is a consequence of structural adjustment is a contested one. The democratization of South America and Eastern Europe in the 1990s has been linked to the processes of economic reform. In Guyana for example where structural adjustment programmes were linked to democratic practices, “it was with respect to electoral democracy that the interaction between structural adjustment and good governance was most vividly played out”. (Ifill, 2002: para. 7). However Ghai challenges this argument and states that any connection between structural adjustment and democratization is merely coincidental. Ghai adds that authoritarian regimes in East and South-East Asia, such as Singapore, have market economies while recently highly regulated ones such as India and Sri Lanka are democracies. (Ghai, 1992: 19).

Evidence is available to illustrate how structural adjustment reforms have had positive impacts on reducing inequalities in developing countries. Demery and Addison cite examples where there has been a drive to open job markets to the poor. The fact that employment assistance programs frequently accompany the policies of structural adjustment displays how governments are incorporating the social side to their reforms. For example, Guinea-Bissau successfully reemployed the 20% of public workers who lost their jobs in the reform process. (Demery and Addison, 1988: 25). Similarly, in Chile a number of Emergency Employment Programs (EEPs) have helped 240,000 people remain employed since the beginning of 1986 to offset the high unemployment experienced under structural adjustment. (Demery and Addison, 1988: 22). However, the question still remains over job creation which covers more than the losses experienced.

Finally, Killick adds that we must assess the counterfactual, i.e. to look at what would have happened if structural adjustment programs had not been implemented in developing countries and refers to an OECD study, “when the option of not adjusting was simulated the results were conclusive: defining non-adjustment as governmental refusal to modify budgetary, monetary or exchange policies, the simulations found all adjustment policies were better for economic growth, and more equitable, than not adjusting.” (Killick, 1999: para. 23).

In conclusion, the evidence is contradictory. Examples can be found which support the arguments of the advocates and opponents of structural adjustment. The evidence which maintains that the policies of structural adjustment have had positive impacts on the poor in developing countries illustrates that without the process of economic reforms in some countries poverty would have been more severe. The evidence which upholds this view is found in voices from the developing world and outside of The World Bank. Yet the evidence which speaks out against structural adjustment brings up two points. One is that the conditions for a successful structural adjustment reform policy are not a blueprint and each country has its own economic environment which should dictate the process. This point raises the question of increased participation by those who are deemed to be the targets of structural adjustment policies-the poorest majorities. The imposition of ‘top-down’ policies will have little support without this participation. Secondly, a series of ameliorative changes to policies as shown in the first and second generations of reforms, in order to ‘get it right’, display an awareness among donors that review is necessary but the consideration of wholesale overhaul must not be overlooked in the processes of setting an adjustment programme intended to help the poorest majorities in developing nations.

References:

Akpa, E., (1998) ‘The World Bank and the State of Structural Adjustment’ in World Bank and Structural Adjustment, Helsinki, Service Centre for Development Cooperation, pp.5-11.

Casimira, A., (2003) ‘The Misuse of the Term “Good Governance”’, [Online] Available at: http://www.ecrea.org.fj/webpages/publications_files/Papers/21.doc (accessed 12 January 2005).

Finnegan, W., (2003) ‘The Economics of Empire: Notes on the Washington Consensus’ in Harpers Magazine, May 2003, [Online] Available at: http://www.mindfully.org/WTO/2003/Economics-Of-EmpireMay03.htm (accessed 12 January 2005).

Ghai, D. (1992) ‘Structural Adjustment, Global Integration and Social Democracy’ Geneva: United Nations Research Institute for Social Development.

Ibhawoh, B. (1999) ‘Structural Adjustment, Authoritarianism and Human Rights in Africa’ in Comparative Studies of South Asia, Africa and the Middle East, Vol. XIX No. 1, pp. 158-167.

Ifill, M. (2002) ‘Structural Adjustment and Political Reform in Guyana’, [Online] Available at: http://www.landofsixpeoples.com/gynewsjs.htm (accessed 16 January 2005).

Khan, H. A. (2004) ‘Using Macroeconomic Computable General Equilibrium Models for Assessing Poverty Impact of Structural Adjustment Policies’, [Online] Available at: http://www.adbi.org/files/2004.07.dp12.macroeconomic.equilibrium.models.poverty.pdf (accessed 13 January 2005).

Killick, T., (1999) ‘Making Adjustment Work for the Poor’, London: ODI.

Melville, J. (2002) ‘The Impact of Structural Adjustment on the Poor’, [Online] Available at: http://www.caribank.org/EAP.nsf/StrucAdj/$File/StrucAdj.pdf?OpenElement (accessed 14 January 2005).

Moseley, P., (1991) ‘Structural Adjustment: A general Overview’, in Balasubramanyam, V.N. and Sanjaya Lall (eds.) Current Issues in Development Economics, Basingstoke: Macmillan, pp. 223-242.

Reinhardt, N. and Peres, W. (2000) ‘Latin America’s New Economic Model: Micro Responses and Economic Restructuring’, in World Development, Vol. 28 No. 9 pp. 1543-1566.

Rush, C. (2004) ‘Cartels' Soy Revolution

Kills Argentine Farming’, in Executive Intelligence Review, November 2004 [Online] Available at: http://www.larouchepub.com/other/2004/3145soy_argentina.html (accessed 16 January 2005).

Saha, S. (2004) ‘Structural Adjustment and the Framework of Neoliberal Reforms’, Lecture Notes from Development Issues and Theory, University of Wales, Swansea.

Taraqqi (2001) ‘The Second Phase of Economic Reforms’, [Online] Available at: http://www.geocities.com/aipsg/taraqqi.htm (accessed 16 January 2005).

Williamson, J. (1997) ‘The Washington Consensus Revisited’, in Economic and Social Development into the XXI Century, Washington DC: Inter-American Development Bank.

Williamson, J. (2002) ‘Did the Washington Consensus Fail?’, [Online] Available at: http://www.iie.com/publications/papers/williamson1102.htm (accessed 12 January 2005).

World Bank (1991) ‘World Development Report 1991: The Challenge of Development’, Oxford, Oxford University Press for World Bank.

World Bank (1994) ‘Adjustment in Africa: Reforms, Results and the Road Ahead’, New York: Oxford University Press.