Structural adjustment

Structural adjustment is a term used to describe the policy changes implemented by the International Monetary Fund (IMF) and the World Bank (the Bretton Woods Institutions) in developing countries. These policy changes are conditions (Conditionalities) for getting new loans from the IMF or World Bank, or for obtaining lower interest rates on existing loans. Conditionalities are implemented to ensure that the money lent will be spent in accordance with the overall goals of the loan. The Structural Adjustment Programs (SAPs) are created with the goal of reducing the borrowing country's fiscal imbalances. The bank from which a borrowing country receives its loan depends upon the type of necessity. In general, loans from both the World Bank and the IMF are claimed to be designed to promote economic growth, to generate income, and to pay off the debt which the countries have accumulated.

Through conditionalities, Structural Adjustment Programs generally implement "free market" programs and policy. These programs include internal changes (notably privatization and deregulation) as well as external ones, especially the reduction of trade barriers. Countries which fail to enact these programs may be subject to severe fiscal discipline. Critics argue that financial threats to poor countries amount to blackmail: that poor nations have no choice but to comply.
Since the late 1990s, some proponents of structural adjustment such as the World Bank, have spoken of "poverty reduction" as a goal. Structural Adjustment Programs were often criticized for implementing generic free market policy, as well as the lack of involvement from the country. To increase the borrowing country's involvement, developing countries are now encouraged to draw up Poverty Reduction Strategy Papers (PRSPs). These PRSPs essentially take the place of the SAPs. Some believe that the increase of the local governments participation in creating the policy will lead to greater ownership of the loan programs, thus better fiscal policy. The content of these PRSPs has turned out to be quite similar to the original content of bank authored Structural Adjustment Programs. Critics argue that the similarities show that the banks, and the countries that fund them, are still overly involved in the policy making process.

Conditions

Some of the conditions for structural adjustment can include:

• Cutting social expenditures, also known as austerity,
• Focusing economic output on direct export and resource extraction,
• Devaluation of overvalued currencies,
• Trade liberalization, or lifting import and export restrictions,
• Increasing the stability of investment (by supplementing foreign direct investment with the opening of domestic stock markets),
• Balancing budgets and not overspending,
• Removing price controls and state subsidies,
• Privatization, or divestiture of all or part of state-owned enterprises,
• Enhancing the rights of foreign investors vis-a-vis national laws,
• Improving governance and fighting corruption.

These conditions have also been sometimes labeled as the Washington Consensus.

History

Structural adjustment policies emerged from two of the Bretton Woods institutions, the IMF and the World Bank. They emerged from conditionalities that IMF and World bank have been attaching to their loans since the early 1950s. In the beginning, these conditionalities mainly focused upon a country's macroeconomic policy.
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. These fiscal disasters led policy members to decide that deeper intervention was necessary to improve a country's overall well being.
In 2002 SAPs underwent another transition, the introduction of PRSPs. PRSPs were introduced as a result of the bank's beliefs that, "successful economic policy programs must be founded on strong country ownership". In addition, SAPs with their emphasis on poverty reduction have attempted to further align themselves with the Millennium Development Goals (MDG). 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, as well as economic mis-management. Since their inception SAPs have been adopted by a number of other International Financial Institutions (IFIs).

Criticisms

There are multiple criticisms that focus on different elements of SAPs.

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 their own best interest of a sovereign nation. Thus, SAPs are unnecessary. Yet, Third World debt is a nearly universal fact, with some of the worlds 47 poorest nations already $422 billion dollars in debt in 2003.
Due to this near universality of debt, a popular criticism is that the structural adjustment's terms have become a template for the governance of much of humanity. Hence, some argue that the democratic policy process of countless countries has been undermined by decisions formulated miles away by western economic bureaucrats and that the implementation of such policy has solely benefited the largest donor countries (the U.S., UK, Canada, and Japan).
For example, the opening of countries to outside investment allows U.S. corporations to build factories in impoverished areas. The corporations are able to exploit the surplus of inexpensive labor, and usual lack of environmental regulations to create goods at a lower price. As a result, corporate profits rise and trade flows increase for that particular country. While this increases the GDP the majority of the profit actually benefits the corporation and the country in which the corporation is based.
Conversely, many argue that the people employed by the corporations are desperately in need of any work at all. That the alternative forms of employment, or life styles available to them are much worse.

Privatization

A common policy required in structural adjustment is the privatization of state-owned industries and resources. Ostensibly, this policy aims to increase efficiency and investment, and decrease state spending. State-owned resources are to be sold whether they generate a fiscal profit or not.
Critics, however, have condemned privatization requirements. 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. Many have argued, for example, that the privatization of water in Bolivia and India, has harmed more than helped the poor.

Agriculture

The agricultural, anti-land reform and food trade policies associated with SAPs have been pointed to as a major engine in the urbanization of the global South, the ballooning of megacities, worldwide migration towards the global North, and the growth in urban poverty and slums.
In the irrigation sub-sector the trend has been towards disengagement of governments from irrigation development and management. This has led to a process of delegation of maintenance and operation activities of irrigation schemes to the organized users with mixed results. Indeed, the loans from the World Bank, the major lender for irrigation development, have fallen sharply from the mid 1970's showing some recovery only since 2003.
They are also a source of contention for environmental activists. A large portion of SAPs policy on agriculture focuses on the increased use of fertilizers and pesticides which harm the health of local bodies of water and therefore fish populations. The runoff caused by the over use of fertilizers increases the amount of algae in local water bodies, causing different scales of dead zones (areas where oxygen is consumed by decomposing algae and fish). Dead zones affect both local and international bodies of water.

Environment

Local environments can easily become casualties of pro-trade policies. Pro-trade policy promotes an increase of industry geared toward Western needs. As a result of the new policy, local industries begin to focus on producing inexpensive goods to sell on the international market. The focus on creating the least expensive product often leads to environmentally exploitative industry. As these new industries are often unregulated there are no laws prohibiting this exploitation.
For example, emissions from factories are much less regulated in developing nations. As a result, the environmental cost (the harm done to the ozone layer for example) of producing a product like steel in China is much greater, than it would be in the U.S.
Another example would be the run off of chemicals or pharmaceuticals into local rivers and other bodies of water. In developing nations the pollution of rivers has become a cause for international intervention. This pollution not only affects local populations who sometimes bathe and drink the polluted waters but is also damaging the oceans on a large scale.
It is possible for SAPs to include clauses that require industry regulations. However, for the most part, regulatory clauses have not been included in SAPs. The majority of the policy creators view these regulations as a hindrance to trade and therefore to economic development.
In addition, many argue that it is unfair for developed nations (and IFIs) to demand that their environmental policies be followed. All developed nations have gone through a period of industrialization wherein local environments were damaged. While these periods of industrialization led to increased environmental problems, they also greatly contributed to the development, prosperity, and increased standard of living for the country's citizens. They argue that developed countries essentially have had a head start in economic development, and that less developed countries deserve their own head start. Critics debate whether the world can handle this head start.

Austerity

Critics hold SAPs responsible for much of the economic stagnation that has occurred in borrowing countries. SAPs emphasize maintaining a balanced budget which forces austerity programs. The casualties of balancing a budget are often social programs.
The programs most often cut are education, public health, and other miscellaneous social safety nets. Commonly, these are programs that are already underfunded and desperately need monetary investment for improvement.
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.

Inequality

Since the implementation of traditional SAPs in the late 1970's the global gap between rich and poor has been steadily increasing. Critics cite not only SAPs but the fact that they promote neo-liberal ideas, and therefore corporations.
The sole goal of a corporation is to lower costs and maximize profits. As a result, corporations contribute to the availability of goods at a lower cost, and thus arguably an increase in the standard of living. Yet in their cost consciousness, such policies also decrease wages. So while goods and services cost less, people generally earn less.
SAPs have also contributed to the disparities between Developed countries, and Developing countries, or the North and the South. The IFIs that provide need based loans still receive interest on the payments.

Praise

Many claim that borrowing countries are running on borrowed time, and will eventually have to make such changes to balance their budgets or control inflation. If these conditionalities are not implemented, the countries can expect even bigger problems in the future.
In principle, conditionality is a tactic used not only to make sure loans are paid back, but also to ensure that they are used effectively. If there are no conditions on the loan, the country might not use the money to reduce poverty (see fungibility).

Empirical evidence

There is some evidence that IMF stabilization programs do have a positive impact on the balance of payments and the current account. However, evidence for reductions in inflation, and encouragement of growth, is rather limited and questionable. However, there are some serious problems in measuring the empirical success of Fund programs. It is extremely difficult to calculate the counterfactual; that is, what would have happened had the Fund not intervened. Indeed, the 'before and after' evidence of success in the balance of payments is weaker than calculations of success relative to the counterfactual.

IMF SAPs versus World bank SAPs

While both the IMF and World Bank loan to depressed and developing countries, their loans are intended to address different problems. The International Monetary Fund 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.

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 2½ and 4 years. Today there are a few longer term options available; up to 7 years, as well as options that lend to countries in times of crisis; either natural disaster, or conflict.

World Bank SAPs

World Bank SAPs or SALs (Structural Adjustment Loans) focus on providing loans and grants to countries that provide funding on a project basis. For example, a loan or grant from the World Bank, could provide funds to improve infrastructure in a region of a developing country. The World Bank is divided into two lending and development institutions; the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD focuses on "middle income and credit-worthy poor countries" while the IDA focuses on the lowest income and least credit worthy countries.

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 2009) 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.
Some of the Highest Donors are

• United States
• United Kingdom
• Japan
• Canada