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Virtually all developing countries—particularly in Latin America and Africa, and increasingly in the transition countries of east and central Europe—have implemented or are in the process of acceding to SAPs.
The economic policies dictated by the IFIs and Washington have greatly facilitated the process of global economic integration. SAPs have also largely succeeded inshrinking government budget deficits, eliminating hyperinflation, and maintaining debt-payment schedules. But while government balance sheets may improve, SAPs have failed to establish a base for sustainable, balanced economic development. In their wake, SAPs have bankrupted local industries, increased dependency on food imports, gutted social services, and fostered a widening gap between rich and poor.
To mitigate the harsh social impact of SAP-mandated economic restructuring and austerity measures, the IFIs have sponsored social investment funds. This new programming—called neostructuralism by some analysts—reduces the social and political impact of SAPs through temporary job programs and other relief measures. The objective of social investment funds is to provide temporary relief and stave off political unrest until the benefits of neoliberal reform start trickling down.
The underlying structural reasons for poverty, unemployment, and malnourishment are left unaddressed. The IMF and World Bank are expanding their loan conditions and hence their power to include reforms in tax, budgetary, and judicial system transparency, along with the traditional economic policies. Few would deny that such problems as persistent budget deficits, inefficient and ineffective government enterprises, and rapid inflation require reforms.
As a result, the standard structural adjustment package advocated by the IFIs and the U. SAPs often succeed in achieving specific objectives such as privatizing state enterprises, reducing inflation, and decreasing budget deficits.
Yet in many cases the GDP growth of countries undergoing structural adjustment is stagnant. The growth that does occur is commonly limited to a few sectors like raw materials extraction or goods produced with cheap labor, instead of a more well-rounded and sustainable growth in production. Even when a SAP-directed economy is growing, it is generally failing to create employment and generate the revenues needed to pay for the unregulated influx of foreign imports. Thus, reforms intended to open countries to foreign trade, investment, and finance may result in increased exports and greater access to foreign capital, but they also heighten financial volatility and speculative investment, flood the affected countries with imported luxury goods, undermine local industry, and constrict local buying power.
SAPs benefit a narrow stratum of the private sector—mostly those involved in export production, trade brokering, and portfolio finance. The IMF worked on reducing the fiscal deficit, limiting overall credit expansion, and containing the balance of payments deficit and external borrowing.
However, structural measures to increase supply were not ignored. In this context, many programs featured adjustment of the exchange rate to ensure the proper alignment of domestic and foreign prices.
However, since the mids there has been an increasing recognition that the problems of some members are more intractable than originally thought, given a world economic environment that has often created difficulties for developing countries.
The approach to economic adjustment has evolved accordingly and is reflected in a lengthening of the possible duration of adjustment programs supported by the IMF from one year to three years and most recently to a possible four years.
More important, from the point of view of this paper, the scope of issues stressed in adjustment programs has broadened considerably in recent years. Greater attention is being paid to the efficiency with which existing resources are used and to increasing the capability of economies to adapt to changing circumstances.
These efforts involve the economic pricing of goods and of factors of production as well as improved management and possible privatization of public enterprises.
The liberalization of restrictions on foreign direct investment and other measures to deregulate the economy, as well as the establishment of clear rules of the game for foreign and domestic investors, has led to the increased availability of foreign savings and technology.
Finally, efforts are being made to ensure more productive investment through better pricing and interest rate policies and careful setting of public sector investment priorities.
This greater focus on supply-side policies in the work of the IMF occurred at the same time that the World Bank was moving into the area of policy-based lending. These developments have been a factor leading to the intensified collaboration between the IMF and the World Bank. Of course, the greater emphasis on addressing supply-side problems does not imply that the adjustment process is painless. First, in a situation where a country has been living on excessive levels of foreign borrowing or inflationary financing, spending often needs to be reduced, even though the society will tend to resist such attempts to bring overall spending into line with available resources.
Second, efforts to improve the efficiency of the economy—to benefit society as a whole by raising overall levels of economic welfare—will be resisted by those groups that have enjoyed the extra income or rents associated with existing economic distortions.
It must be acknowledged that an important and frequent effect of adjustment programs is a change in the distribution of income and a lower level of spending by certain groups in society.
It is also recognized that the only way to alleviate poverty in a lasting way is through the sustained growth of output in a stable macroeconomic environment. However, it is important also to protect the poorest groups in society from possible short-run effects of adjustment. In its policy dialogue with member countries, the IMF is paying increasing attention to improving its knowledge of poverty in individual countries, to identifying the possible effects of adjustment programs on the poor, and to helping with the design of targeted programs to help shield the poor from adverse transitional effects of adjustment measures.
In addressing poverty concerns, the IMF cooperates closely with the World Bank, other specialized United Nations agencies, and social ministries and nongovernmental organizations in individual countries. Before turning to the experience of countries with macroeconomic and structural reform programs, it would be useful first to address important methodological points related to the assessment of adjustment programs.
This is a difficult area and the issues remain controversial. A number of studies have attempted to evaluate the effects of IMF supported programs on major macroeconomic variables, such as growth, inflation, and the balance of payments. More recently, studies have examined the effects of reform programs on income distribution and poverty. In the studies, various approaches have been followed, each with its own strengths and weaknesses.
The before-after approach compares developments in the macroeconomic variables in the period prior to the program with developments during and after the program. This is a fairly easy test to design.
Its major shortcoming is that it does not take account of changes in nonprogram factors—such as terms of trade, world demand, and weather conditions. The approach thus attributes any change in economic performance between the pre- and post-program periods to the program itself. Also, it may be the case that the pre-program situation would have been unsustainable under any policy approach—for example, when high levels of spending are supported by excessive levels of external borrowing.
In this context, the before-after approach incorrectly blames a deterioration in the economic situation on the adoption of adjustment measures rather than on the initial conditions facing the economy. A comparison of a group of countries undertaking IMF-supported programs with a group of countries without such programs—the with—without approach—may get around some of the problems arising from changes in nonprogram factors provided that these nonprogram factors affect both groups of countries in similar ways.
However, the simple with-without approach does not take into account the different starting positions of the two groups of countries. It generally could be expected that countries entering into IMF-supported programs start from a weaker position than other countries, and a comparison of the two groups may incorrectly attribute poorer relative performance to the IMF-supported program. As with the before-after approach, the with-without studies generally divide countries into two groups based on whether they have a program in place or not.
As such, the comparisons do not take account of the extent to which programs have been implemented as planned and thus may not represent an evaluation of the programs as originally designed. The third approach to program assessment is to compare the outturns for various economic variables with the objectives set out in the adjustment programs. This is an important comparison for an institution like the IMF to make when evaluating the effectiveness of the programs it has supported.
However, this assessment of adjustment programs will be affected by the ambitiousness of the targets themselves. Also, as with the before-after approach, nonprogram factors can also affect outcomes independent of the quality of the program itself. The problems are compounded in a major way by a serious lack of information in most countries on income distribution and on the sources of income and the spending patterns of the poor.
A number of studies on the effects of IMF-supported programs were surveyed in a recent paper by Mohsin Khan and can be summarized as follows.
Most of the studies conclude that, at least in the short run, the effects of the programs on economic growth were negative. In his paper, Khan also examined the adjustment experiences of about 75 developing countries over the period , correcting for some of the shortcomings in the standard approaches to program evaluation that were described above by taking account of certain nonprogram factors and differences in the starting positions of the adjusting countries.
However, it was not possible to differentiate between countries based on whether programs were fully implemented or not. In the first year of the programs, adjustment was seen as improving the external accounts and containing inflation, while the effects on growth were negative. When the analysis was extended to cover the first and second year of the program, the effect of adjustment on the external accounts and inflation was strengthened, while the negative effect on growth was lessened.
As regards growth performance under these programs, about half of the programs achieved or exceeded their growth objectives, and output rose by almost 4 percent a year Table 1. By way of comparison, output growth in these countries averaged about 2. The programs were somewhat less successful in meeting inflation targets. Only about a third of the programs met their inflation objectives and the median rate of inflation increased slightly from preprogram levels. In particular, it proved difficult to reduce inflation rates to below 10 percent a year.
In contrast to inflation performance, well over half of the programs met the external current account and overall balance of payments objectives. On average, the programs targeted a small increase in the current account deficit to allow for increased imports in light of increased foreign financing. In general, the weakening in the current account balance was contained to the targeted amount. The review of programs supported by stand-by and extended arrangements covered the period The objective for economic growth was met in about half of the programs, as were the objectives for inflation, the external current account, and the overall balance of payments.
The growth rate under these programs averaged about 2. Particular problems were encountered in meeting the inflation objectives in cases where the rate of price increase was targeted to remain relatively high in the program year. On average, the targeted improvement in the external current account was achieved, but the objective for the improvement in the overall balance of payments was not.
To review programs supported by stand-by and extended arrangements, an attempt was made in Table 2 to evaluate the effects of program implementation on economic performance. The results suggest a fairly strong association between the implementation of fiscal and credit policies and program results.
Objectives with respect to growth, inflation, and the balance of payments were met in percent of the cases when both credit and fiscal policies were implemented as planned. These objectives were met in fewer than half of the cases when neither credit nor fiscal targets were met. For programs meeting both fiscal and credit targets, the rate of economic growth averaged 4. In 11 of the 22 programs where terms of trade movements met or exceeded projections, both credit and fiscal targets were met.
In contrast, only 3 of the 16 programs that experienced weaker than expected terms of trade met both credit and fiscal targets. There was also a close relationship between terms of trade developments and performance with respect to the external current account. In almost all of the cases where the terms of trade met or exceeded expectations, the current account target was met. The association between the implementation of fiscal and credit policies and the achievement of inflation and external objectives suggests that the approach to financial programming has been broadly appropriate.
The possible linkages between fiscal and credit policies and growth performance are more complex. The correlation between program implementation and higher than projected growth could suggest that adjustment supports economic growth, even in the short run. The results also point to the importance of a balanced approach to adjustment. Credit policy was relatively effective in containing inflation even in those cases where fiscal policy was not implemented as planned, but this mixed approach was associated with weaker than projected economic growth.
Care is needed in drawing conclusions about cause and effect relationships based on the program-versus-actual approach. However, the growth performance of countries under recent IMF-supported programs is encouraging. It suggests that the approach to adjustment adopted in recent years, involving a comprehensive set of macroeconomic and structural measures, is supportive of growth.
At the same time, the recent drop in output in the Eastern European countries, as these economies adopt comprehensive reforms, suggests that the transitional costs of a fundamental transformation of economies—short-run declines in output and employment—may be substantial.
A recent study by the IMF of the effects of adjustment programs on the poor, based on case studies of selected countries, concluded that many adjustment measures directly benefit the poor—currency depreciation raised the incomes of the rural poor Ghana, Kenya, and the Philippines ; financial system reform increased the availability of credit to the poor Ghana, Kenya, and Chile ; and the removal of price controls reduced rents based on political privilege Ghana and the Philippines.
At the same time, the study acknowledged that some adjustment measures can hurt the poor. Examples were the adverse effects of currency devaluation on the urban poor or in a nontradable goods sector that was labor intensive Chile, the Dominican Republic, and the Philippines , cuts in health and education expenditure accruing to the poor Sri Lanka and the Philippines , and restrictive monetary policies affecting employment the Philippines.
These measures fall into four main categories—consumer subsidies of certain goods; income transfers from the budget; wage policies, job programs, and other measures to directly raise the income of the poor; and protection of education and health expenditures.
Among the various adjustment programs, consumer subsidies have involved direct subsidies for certain goods consumed by the poor or indirect subsidies through an exemption of the sales tax on basic foodstuffs as well as the waiving of user charges in priority sectors, such as basic health and education. These efforts have been better targeted in recent programs. Income transfers from the budget have varied and included direct financial support to some affected groups and a general reallocation of central government expenditure.
Direct financial support has been provided to civil servants laid off in the wake of administrative reforms or to low-paid civil service employees after the removal of subsidies on the sale of basic foodstuffs. The reduction in central government transfers and subsidies has been accompanied by a change in its composition—increased direct transfers and special programs food stamps and midday meal programs to the poorest households.
A third group of actions has consisted of efforts to raise directly the income earned by the poor. In a number of programs, this action was undertaken through an increase in the minimum wage or the creation of employment opportunities, for example, through road repairs and irrigation projects.
Finally, most programs have recognized the need for increases in social expenditure for basic education and health and the need for poverty alleviation. In general, increases in this area were aimed at meeting basic needs as well as redressing inequities caused by expenditure cuts in the adjustment program.
In most cases, this additional expenditure has been funded by a cut in other categories of expenditure, including budgetary subsidies and restraint in the growth of wages and salaries. Basic education and health have been identified as priority sectors in a number of programs. In designing adjustment programs, a number of important programming issues arise, including the linkages between macroeconomic stabilization and structural reforms, the appropriate pace and comprehensiveness of reforms, and the sequencing of reforms.
The adjustment strategy that is chosen will depend on the particular circumstances of each country, but some general lessons are emerging to guide the choices facing country authorities.
In the end, the success of the effort will depend crucially on the commitment of the government to the program and the perseverance shown in its implementation. Macroeconomic stability can be seen as a prerequisite for sustained growth of output. In other words, there appears to be no trade-off, especially in the medium term, between output growth and inflation. When developing countries are divided into two groups depending on whether they have an inflation rate above or below the median, the countries with low inflation had an average national saving rate almost 10 percentage points of GDP higher than the high-inflation countries over the period; their growth rate averaged about 3.
It is also generally accepted that structural reform will be largely ineffective in a situation of financial instability.
High rates of inflation mean that prices and other market signals will not be particularly useful to economic agents in deciding how to allocate resources. This suggests that macroeconomic adjustment should precede structural reforms or that steps to restore macroeconomic balance should be taken simultaneously with structural measures.
The lesson from partial market-oriented reforms in centrally planned economies in the s—particularly China and Yugoslavia—is that once direct controls are relaxed a good deal of progress in the structural area may be needed to maintain macroeconomic stability. As more autonomy is given to enterprise managers and other economic agents, control over the demand and supply of credit and over wage policy may decrease unless deeper reforms of enterprises and the financial system are undertaken, leading to a hardening of the budget constraint facing producers.
The recent experience of the countries in Eastern Europe confirms this linkage between the need for progress in the structural area and the establishment of macroeconomic stability.
A second issue to be addressed in the design of adjustment programs is the comprehensiveness and sequencing of reforms. The comprehensiveness of needed reforms depends on the extent of the distortions in the economy.
Given the linkages between various reforms, a comprehensive approach is needed in an economy with pervasive distortions. For example, reform of the exchange and trade system would have little effect if distortions in the domestic pricing system are not also removed. At the same time, price reform would have little effect on the allocation of resources unless enterprise reform is undertaken to give firms an interest in increasing profits and make them responsible for their losses.
Credit would not be allocated efficiently unless the financial system is reformed to strengthen the supervision of banks and give greater play to market forces. Tax reform would not necessarily improve efficiency if personal and business income is based on a distorted wage and price structure. The reallocation of labor among different industries and geographical areas and the related transitional costs of higher unemployment can be smoothed by the establishment of social safety nets.
In societies where family allowances, health benefits, and housing are provided by employers, it will be necessary to make the provision of these benefits and services independent of the place of employment in order to increase labor mobility.
Indeed, the theory of the second best suggests that the removal of a single distortion, while other distortions remain, may actually worsen economic welfare rather than improve it. For example, the decentralization of economic decision making in a situation of continued serious price distortions may result in a less efficient allocation of resources than the continued centralized control of resources.
This argument strengthens the case for a comprehensive approach to reforms. However, many countries lack the administrative capacity for a comprehensive approach, or governments may not have sufficient political support to undertake reforms simultaneously across a broad front. In these circumstances, some sequencing of reforms may be necessary. The ideal sequence depends on the particular circumstances of each case, but as a general rule it is considered appropriate to reform first those markets that are slowest to adjust or most costly to change.
More specifically, labor and goods markets generally should be freed before financial markets. Thus, it is widely accepted that one of the problems encountered in the liberalization programs of the southern-cone countries Argentina, Chile, and Uruguay in the late s and early s was that financial markets and the capital account of the balance of payments were liberalized ahead of trade reform.
Following on this argument, financial system reform affecting the allocation of investment resources would not be efficient if it were attempted before a reform of domestic prices took place that ensured resources are moved into appropriate activities. Similarly, it would not be appropriate first to adjust the structure of domestic prices in order to clear domestic markets and then, only after the costly reallocation of resources had occurred, to open up the trade system for a further round of changes in production and consumption patterns based on world prices.
Thus, in the recent reform programs in centrally planned economies, particular emphasis has been placed on the early reform of prices and the trade and exchange rate systems. The debate over the speed of adjustment—a gradual approach versus shock therapy—is a long-standing one, to which there is no easy answer. However, the experience with shock approaches to the elimination of inflation in Argentina, Bolivia, Brazil, and Israel in the mid- s, after the repeated failure of gradualist approaches, showed that inflation could be brought down quickly even in countries with a history of high inflation.
In these cases, output also recovered fairly quickly, after an initial period of weakness.
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