IMPACT OF STRUCTURAL ADJUSTMENT PROGRAMMES OF ECONOMIC DEVELOPMENT OF LDCs

Introduction

After a long period of primarily concentration on project lending, at the end of the 1970s was disillusioning the World Bank with it. Specific project lending for dams hospitals and infrastructure was felt by the World Bank to be failing to initiate the long-awaited sustainable growth in less developed countries (LDCs). A new explanation to this was that failure of individual projects was frequently due to unfavourable policy. Moreover, the abundance of international capital in the seventies and the relatively low interest rates had encouraged LDCs to borrow heavily to cover the resource gap to finance their import-substitution industrialization and to cover balance of payments deficits.

Structural adjustment policies are economic policies which countries must follow in order to qualify for new World Bank and International Monetary Fund (IMF) loans and help them make debt repayment on the other debts owed to commercial banks, governments and the World Bank. Although SAPs are designed for individual countries but have common guiding principles and features which include export-led growth; privatization and liberalization; and the efficiency of the free market.

SAPs first made its entry into economic crisis management policies of African countries in the late 1970s, spreading rapidly thereafter until virtually all African countries, with the exception of South Africa, Botswana, and Namibia, embraced it by concluding formal agreements with the International Monetary Fund and the World Bank. For about two decades, therefore, structural adjustment has been an integral part of the African policy environment, a highly ironic outcome given that in conception, it was initially seen and treated as a temporary diversion from the actual business of development, albeit it one necessitated by the economic disequilibria that had become a threat to the growth and development prospects of African countries.

Key policy goals and instruments of the adjustment framework have included devaluation of national currencies against the dollar; the adoption of measures aimed at liberating trade investment, and foreign currency transaction; the deregulation of prices and interest rates; the promotion of cost-cutting, deficit-reducing measures such as subsidy withdrawal, cost sharing and cost recovery; the trenchant of workers in public sector and the liquidation, privatization of public enterprises both for budgetary reasons and as part and parcel of the anti-statist, pro-market underpinning the framework; and the introduction of measures aimed at promoting the private sector whilst simultaneously rolling back the frontiers of the interventionist state. Adjustment measures were applied to the different economic and social sectors with a view to promoting across the board, market-based deregulation.

Devaluation makes their goods cheaper for foreigners to buy and theoretically makes foreign imports expensive. In principle it should make the country wary of buying expensive foreign equipment. In practice though, the IMF actually disrupts this by rewarding the country with a large foreign currency loan that encourage it to purchase imports.

Balancing national budgets can be done by raising taxes, which the IMF frowns upon, or by cutting governments spending which it definitely recommends. As a result, SAPs often result in deep cuts in programmes like education, health and social care, and the removal of subsidies designed to control the price of basics such as food and milk. So SAPs hurt the poor most, because they depend heavily on this services and subsidies.

SAPs encourage countries to focus on the production and export of primary commodities such as tea and coffee to earn foreign exchange. But these commodities have notoriously erratic prices subject to the whims of global markets, which can depress prices just when countries have invested in these so-called ‘cash crops’.

By devaluing the currency and simultaneously removing price controls, the immediate effect of a SAP is generally to hike prices up three or four times, increasing poverty to such an extent that riots are a frequent result.

Development was traditionally defined as the capacity of a national economy, whose initial economic condition has been more or less static for long time, to generate and sustain an annual increase in its gross national product at a rate of perhaps 5% to 7% or more. But later third world nations had realized their economic growth targets but levels of living of the masses of people remained for the most part unchanged signaled that something was very wrong with this narrow definition of development. Thereafter, in the 1970s, economic development came to be redefined in terms of the reduction of poverty, inequality, and unemployment within the context of growing economy. Thus, in this paper we shall view economic development as a general reduction or elimination of poverty, inequality and unemployment.

Developing economies will thus be defined as generally economies that experience one of the following faces; high level of unemployment and under-development; rapid rural-urban migration; environmental neglect and degradation; significance reliance on agriculture and primary product export and/or dominance, dependence and vulnerability in international relations.

Since the introduction of SAPs on the economies of LDCs as from 1980s, the SAPs have been integrated as policy tools for economic management. The context and political will for implementation of SAPs have to involve the following subject areas:-

(a)Liberalization of prices and marketing systems

(b)Devaluation of local currencies

(c)Financial sector reforms

(d)International trade regulation reforms

(e)Divestiture and privatization

(f)Civil Service reforms

(g)Cost-sharing

The above reforms have been implemented though in different levels within the economies of third world countries with more focus on price decontrols foreign trade liberalization, decontrol of interest rates, and foreign exchange rates through repealing of the foreign exchange control act.

Within these economies, the necessary framework has been established to reduce government spending, restructure the civil service, divest from regular economic activities that could better be undertaken by the private sector and provide necessary framework incentives to both local and foreign investors.

Impact of structural adjustment programme on economic development

While the conditions required by SAPs vary in detail from country to country, general prescription and the economic theory, which underlines them, are similar in all adjustment programs. Some assumption about LDCs economies led to the introduction of SAPs. These include; declining performance in international trade was due to poor production, and poor macro-economic policy, and that improving policy and export production, particularly of primary products, which had a “comparative advantage”, would improve trade balances and lessen indebtedness. Secondly, it was assumed that industrial development was hampered mostly by state interference in the economy. Thus SAPs have required states to sell off or shut down parastatals and privatize their economies. We will therefore examine impacts on various facets of the economy.

Export-Led growth

LDCs share of world exports, as well as export earnings, has fallen drastically since 1970. In the opinion of advocates of structural adjustment, this decline is due primarily to deteriorating export volumes. Advocates of export led growing advice LDCs to improve their export performance by increasing the volume of their export (particularly in primary commodities with a “comparative advantage”), implementing “realistic” exchange rates, diversifying export to include higher shares of manufactured products with greater value and price elasticity, and liberalization trade policies. They contend that if these measures are taken, developing states will acquire the capacity and efficiency necessary to generate steady, if modest, growth and to be competitive in international markets.

But critics claimed that SAPs have not improved the aggregate performance of adjusters. Bello notes that Mexico (considered to be a model reformer) achieved no real growth in its GDP between 1982 and 1988. The World Bank argues that adjustment takes time, and that the period from 1987 to 1991 has shown real, if modest, payoffs for adjusters. There appears to be some evidence to support World Bank’s claim in the short run. The World Bank reports that between the crisis period (1981 – 1986) and reform period (1987-1991), developing states with strong improvement registered a median difference of 1.5 percent and those with deteriorating policies suffered a decline of 2.1 percent.

However, the statistical indicators of economic growth alone do not show whether the IMF/World Bank prescriptions for export-led growth can be expected to produce long-term development in countries that implement them. This is because one must assess the varying opportunities available to countries in the international markets, as well as countries’ export structures and capacities. The IMF/World Bank recipe fails to do this, they assume that increasing the volume of production in commodities in which developing countries have comparative advantage will remedy the decline in export earnings, which has been debilitating them. It is most inconceivable in the present circumstances that developing countries could generate a sufficient volume of production in primary products to offset their debts.

Structural adjustment policies appear to have mixed effects on agricultural production. It has long been recognized that the setting of artificially low producer prices by state marketing boards as a means of generating tax revenue and subsidizing urban consumers has often discouraged agricultural production for sale. By requiring increases in producer prices, adjustment programs have helped to improve internal terms of tare for farmers. Where inputs are imported or where there prices is heavily influenced by the price of imported components, the devaluation of the currency and the tightening of credit required by structural adjustment may actually send the cost of these inputs out of reach of farmers.

Thus in these cases structural adjustment often produces more harmful distortions than those it is intended to rectify. First it tends to disrupt production rather than strengthen it. This is because the heightened competition for credit and foreign exchange drives many firms either out of the market altogether, or else out of production and into trade, where you can turn a better profit by importing finished products. Secondly, tight monetary policies and the liberalization of trade tend to displace locally owed enterprises in favour of multinationals or either foreign owned firm, which can compete more successfully for scarce credit and foreign exchange. Finally, adjustment policies tend to exacerbate oligopoly, since smaller firms are driven out of business and in turn this has a very negative impact on employment.

Privatization

Structural adjustment policies are intended to rectify a presumed imbalance between the state and the private sector. The international finance institutions assume that:-

(1)there are productive forces in the private sector which could presently generate economic growth;

(2)these forces are not being permitted to generate economic growth at percentage because they are being unduly regulate or crowded out by inefficient state-owned enterprises;

(3)direct state participated in the productive sectors of the economy in inherently inimical to the development of a strong private sector; and

(4)only the economically minimalist state can allow market forces to produce a healthy and efficient private sector which can generate and sustain economic growth.

In line with this assumption the World Bank and IMF has insisted that adjusting countries must privatise their economies. Governments are encouraged to reduce their spending by dismissing “redundant” workers, liquidate parastatals or sell them to private owners, remove subsidies and wage price controls and to charge fees for public operated facilities like schools and hospitals. It is thought that these will help curb corruption and government interference with the private sector, which will now have the breathing room it needs to develop and to respond to market incentives.

Economic growth has grown based on the idea that successful industrialization occur where private entrepreneurs pursued their objectives in a free market with only minimal involvement by the state. This is however not always the case. Secondly, this concept assumes that private entrepreneurs will respond to exclusively market forces as opposed to political exigencies and that by so doing corruption will be eliminated all together, but this is not the case.

One of the greatest difficulties attending privatization in developing countries is the fact that the capital markets are among the most underdeveloped in the world. Both domestic savings and foreign investment declined during the 1980s. Another obstacle is that African bureaucracies are often severally taxed by the technical problems of preparing parastatals for privatization. African countries lack expertise and where they have expertise available, the process of privatization is costly and lengthy.

Although the intent of IFIs is that when parastatals are removed from state ownership it will reduce corruption and other political practices, this preposition is unrealistic and biased. Privatization does not imply that opportunities to acquire public assets will be open to new entrepreneurs without previous special political connections.

Finally, despite its claims for structural adjustment, the World Bank has admitted that the reforms have only returned Africa to the slow growth path that it was on before the crisis. They reckon that growth rates even under reforms will not be sufficient to alleviate poverty much.

Social Consequences

During the first two decades of independence, all African governments without exception devoted substantial resources to social sector, especially in the areas of education and health care. Universal, free and compulsory primary education was initiated in most countries even as many more education institutions were built at the primary, secondary and universal levels. Several primary health care units were introduced. These offers were complimented by offers of assistance that come from such agencies as UNICEF and the WHO, especially in the area of mass preventive health and disease control and eradication. By the end of the 1970s, and this point is well noted in the UNICEF report pleading for adjustment with a human face, it was possible to point to concentrate gains that had been recovered in several social departments – literacy levels of school enrollment, healthcare coverage, access to potable water, life expectancy, etc even if there was still a lot of ground to cover. These gains were all exposed to systematic erosion following the onset of economic crisis in the 1980s and the implementation of structural reform programme that placed little or no premium on the need to safeguard them.

The broad context for the adverse consequences which structural adjustment had on the social sector was set by the kinds of policy instruments that were developed to secure the market reform agenda. Of particular significance in this regard was the effect which devaluation and cost cutting had on incomes and social livelihood. When adjustment measures began to be promoted across Africa, a distinct element of the marketing pinch that was adopted was the implicit and explicit assumption that it would spur economic growth and in so doing, produce the social benefits and flow from growth. Currency devaluation was defined as a key element in the restructuring of the economies in order to spur growth. It was complemented by a host of market liberalization measures that were expected to act with it to re-orient the basis of economic activity. Thus devaluation, interest rate deregulation subsidy withdrawal, and trade liberalization acted alone and together to further undermine the productive base of most economies, with industry collapsing and agricultural supply response falling way expectation.

Integral to the poor performance record of the adjustment years is the real incomes for public and private sector employees that accompanied every round of devaluation. These declines in incomes pushed many more individuals and households to poverty. Evidence reported from across the continent suggested that among those most badly hit by the income-eroding effects of sharp and repeated devaluation were the members of the different strata of the middle class. Many were pushed into the ranks of the new poor while the pre-existing category of the working poor were driven further below datum level. By the end of the 1990s, it was reported that in some African countries, as high a proportion as 80% of the population was living in poverty. Under such conditions, vulnerability to disease has heightened and health problems, which had previously been brought under control, appear to be undergoing resurgence.

Devaluation also had own inflation-inducing consequences, which together with generalized price liberalization moved the cost of key essential commodities beyond levels, which could be afforded by most households. Evidence from longitudinal studies has pointed to long-term declines in the nutritional status of members of the poor households. Amidst the spread of poverty and the swelling of the ranks of the poor, the income inequality between the rich, now much more of a numerical minority than ever before and the poor have widened in virtually all countries.