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structural adjustment

  A policy package, prompted by balance of payment crises, inflation and the disarray of state finances, associated with the two multilateral regulatory institutions of contemporary capitalism: the International Monetary Fund (IMF) and the World Bank (IBRD) (Mosley et al., 1991). The increasing number of structural adjustment programmes adopted by (some would say forced upon) Third World economies since 1980 — sometimes referred to as stabilization programmes, sometimes as neo-liberal reforms — is a measure of what has been called the \'counter-revolution\' (Toye, 1987) in development thinking, and specifically the global influence of New Right ideology and the new global hegemony of neo-liberalism. While structural adjustment has come to mean the agreements between Third World governments and the multilateral development institutions — quite standard deflationary packages involving exchange rate reform, privatization of state enterprises and service provision, and social austerity programmes — most of the North Atlantic developed economies experienced some form of adjustment during the 1980s led by the governments of Ronald Reagan, Margaret Thatcher and Helmut Kohl. Structural adjustment, both as a set of economic practices and as an ideology grounded in a set of theoretical propositions, emerged from the eclipse of the post-1945 welfare state settlement (sometimes referred to as Fordism) as the North Atlantic economies slid into economic crisis during the 1970s. The origins and genesis of the crisis are complex and vary substantially across national economies. Nonetheless it is widely agreed that the US devaluation in 1973 which effectively ended the Bretton Woods system (established in 1944, in which the IMF and IBRD were the central products), which itself was rooted in the costs of the Vietnam war, was a key moment in the process by which the Fordist compromise — the liberal or social-democratic orthodoxy — was dismantled. The New Right theorists who came to political power on the backs of Reagan, Thatcher and so on offered a stark and brutal refashioning of economic liberalism and the centrality of the market. Milton Friedman (1962) was an important popular figure in the rise of laissez-faire economics, but the key ideas derived from the power of the market (efficiency, equity, liberal individualism, political freedom) were taken up in the sphere of development economics by the likes of Peter Bauer, Deepak Lal and Anne Kreuger.

The IMF and the IBRD were established at Bretton Woods in 1944 and gradually emerged as two of the most powerful regulatory institutions in the global economy (cf. globalization; money and finance, geography of). Both are dominated by US veto power, and have always been the mouthpieces of the Group of 7. While the IMF\'s role was as the lender of last resort for national economies, and the IBRD was a vehicle for project development in the Third World, in actual fact there has been a confluence in their activities, precipitated in part by the financial crisis and the debt problems of the early 1980s. Now both institutions are in the business of facilitating capital flows, of dealing with external debt problems and with macro-economic management of economies which are seen to have structural weaknesses (the balance of payments crisis simply being the most convenient measure of these weaknesses). To understand the structural adjustment package of the IMF and IBRD presupposes a particular economic architecture: the idea of a national economy, of particular endowments and entitlements, of a balance of payments (and the current account deficit), and patterns of state activity associated with investment, consumption and service provision. During the 1970s and early 1980s, many Third World governments borrowed heavily from private commercial banks (flush with oil dollars) in order to cover short-term deficits associated with the oil crisis, declining commodity prices and economic recession. By 1982 a number of key borrowers — Brazil, Mexico, Nigeria among them — were in effect bankrupt and unable to pay interest payments or cover key imports (cf. fiscal crisis); a number of these governments suffered from inflation and state collapse. Many of these indebted Third World states had also adopted import-substituting industrialization policies and limited their so-called openness to the global economy, to protect infant industries. In this sense free trade, and sometimes export promotion, was limited. In keeping with the nationalist developmentalism of the 1950s, most states were interventionist, at the level both of production (state-owned enterprises), of the market (State Marketing Boards, tariffs and protectionism) and service provision (public education and health). Against this background, the fiscal (and therefore political) crisis of many Third World states in the early 1980s was, in the view of the IMF/IBRD, a function of state overspending, of state mismanagement (and of its anti-market mentality) and of waste and corruption. To the extent that there was endemic government failure, the market could not work its wonders. Economic growth — meaning export-led growth — was stifled. What was needed was a complete overhaul of the macro-political economy (cf. growth theory). This is the heart and soul of structural adjustment. It rests on a particular reading and interpretation of the crisis — the Berg Report (World Bank, 1981) on Africa published in 1980 is one of the earliest and most influential neo-liberal accounts of the African, and by implication, the Third World\'s misfortunes — and provides a neat blueprint: what by the mid-1980s was called the \'Washington consensus\' or the New Realism.

The structural adjustment package — the majority of Third World economies have signed some sort of agreement with the IMF or the IBRD since 1980 — endeavours to cure the problem not through adjustment by expansion (this was in fact the solution to the balance of payments crises of the 1970s as commodity price falls compelled governments to borrow, i.e. expand) but through austerity and contraction. The cure is to redress state action through two reform processes: reforms to compel the state to restructure its own taxation and social provision (to cut back on social expenditures and to raise more revenue), and reforms of how the state regulates prices and intervenes in the market (to create \'a favourable climate for investment\'). For the former, public expenditures are to be cut back (including food and other subsidies which are seen to be wasteful and sources of rent) and user fees charged for necessary service provision. The market reforms turn on \'getting the prices right\' and on exchange rate reform (the principle being that most currencies are overvalued). The main policy measures are devaluation of the currency, raising interest rates (to prevent inflation and put enterprises to the test of competition), the abolition of price controls and subsidies, and the abolition of barriers to foreign competition and foreign investment. Devaluation makes exports cheap and compels belt-tightening through a more prudent use of imports; interest rates restrain spending; and subsidy abolition redresses distorted prices (and waste). The entire adjustment package seeks to open up the national economy to world market competition, to promote export-led growth and to restrain domestic spending. Growth will be encouraged and its benefits will trickle down.

The structural adjustment package has been the subject of enormous debate, both within policy circles and among Third World leaders (Pastor, 1987; Killick, 1995; World Bank, 1994). Opposition to adjustments cites the limits of a standard blueprint and its authoritarian, top-down and imposed nature. Markets can of course fail just like governments, and the costs of this failure for the poor and vulnerable (women, children, peasants and urban poor) can be, and have been, enormous. A group of scholar-activists in fact brought a case to the World Court against the IMF in the 1980s for crimes against humanity. Adjustment in the short term necessarily involves the bankruptcy of enterprises, falling employment and real wages, cuts in public provisioning and rising food prices. The political costs of this adjustment may be substantial. On the one hand, many governments withdraw from IMF/IBRD agreements, others adopt authoritarian and anti-democratic practices to quell social instability, and still others face what have been called \'IMF food riots\' (Walton and Seddon, 1990) as the popular classes (informal sector workers, students, trades unions and so on) organize against adjustment which is seen as anti-democratic, undermining national sovereignty and a \'new\' form of imperialism. To the extent that adjustment often involved the placement of IMF/IBRD personnel in key ministries and government offices, there is a good deal of truth to these popular claims. Adjustment has always been politically charged, but it is clear that there is no simple relation between economic liberalism and political democratization, as Milton Friedmann (1962) suggests.

Structural adjustment has without question been costly in social and political terms. Indeed, since 1989 the formerly socialist bloc has experienced an enormously painful adjustment ten years after Africa and Latin America. The rising levels of child mortality and morbidity, the declining standards of living, and the reduced access to heath and education, all speak of the legacies of adjustment. A key question is whether the package contributed to economic growth (since Left critics are the first to admit that some economic and politic reforms were necessary in the 1980s even if the form imposed by the IMF/IBRD was unconscionable). Here the record is at best ambiguous, and at worst grim (World Bank, 1994). The much vaunted turnaround in Africa has been slow and some of the World Bank success stories (Ghana, Ivory Coast) look frail at best. Some of the growth in India and Brazil is dramatic but how much can be attributed to adjustment is an open question. Conversely the case of Mexico, which was the neo-liberal touchstone in the 1980s, has experienced withering economic crises throughout the 1990s. By the late 1980s opposition to the costs of structural adjustment was sufficiently great that UNICEF called for adjustment \'with a human face\' which focuses on the protection of the most vulnerable groups (UNICEF, 1990).

To the extent that structural adjustment is about attempting to improve peoples lives through a growing economic pie, it is doubtless laudable. But long-term investment in people is essential, as is a responsive, accountable and efficient state. It is within these realms of state capacity, empowerment and participation, and democracy that the IMF/ IBRD recipes are sorely lacking. (MW)

References Friedmann, M. 1962: Capitalism and freedom. Chicago: University of Chicago Press. Killick, T. 1995: IMF programmes in developing countries. London: Routledge. Mosley, P. et al. 1991: Aid and power (2 volumes). London: Routledge. Pastor, M. 1987: The effects of IMF programs in the Third World. World Development, 15: 24-62. Toye, J. 1987: Dilemmas of development. Oxford: Blackwell. UNICEF 1989: The state of the world\'s children. New York: UNICEF. Walton, J. and Seddon, D. 1990: Free markets and food riots. Oxford: Blackwell; World Bank 1981: Accelerated development in Sub Saharan Africa. Washington, D.C.: The World Bank. World Bank 1994: Adjustment in Africa. Washington, D.C.: The World Bank.

Suggested Reading Wuyts, M., Mackintosh, M. and Hewitt, T., eds, 1992: Development policy and public action. Oxford: Oxford University Press.



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