Structural Adjustments as Conditions for Stability | Free Essay Example

Structural Adjustments as Conditions for Stability

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Topic: Business & Economics
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Introduction

Structural adjustment frameworks refer to the various economic policies that are established to function as conditions for acquiring loans from the IMF and the World Bank. According to Bird, structural adjustment policies mainly comprise frameworks that help in seeking the formation of free markets such as fiscal austerity, deregulations, and privatisation among others1. Proponents of structural adjustment policies such as the World Bank and the IMF contend that they (policies) are important in fostering fair and free markets to encourage competition. Detractors hold that they are inappropriate, especially for developing economies due to their capacity to lower the levels of economic growth and/or lead to inequalities. Considering these opposing views on the purpose and importance of structural adjustments policies, this paper seeks answer to the question, ‘under what circumstances (if at all) does structural adjustment create the conditions for stability and growth?’ Arriving at the answer to this question is accomplished through the discussion of various structural fine-tuning policies and their implications for nations that choose to implement them as prerequisites to acquire loans from the IMF and the World Bank.

Structural Adjustment Policies

Government Spending

Eligibility to the IMF loan requires nations to implement various structural modification policies. For example, they need to cut their spending to reduce deficits. However, as an important condition for acquiring loans to drive a nation’s growth and development agenda, fiscal austerity has its merits and demerits. Questions emerge concerning the conditions under which the austerity fosters stability and growth. Although it is important to reduce government spending, such a condition needs to permit a state to leave adequate financial resources to growth and development projects from its earnings2. Nevertheless, in the annual budgets, allocation to development projects also constitutes one of the means of government spending. Thus, a condition for reduced government spending may be interpreted to imply that governments need to maintain a non-allocation kitty for some activities. The gathered amount should then be utilised in funding loans that are acquired from other nations or international organisations such as the IMF.

Under the conditions for the inexistence of fraudulent activities such as corruption in government practices, increased government spending means providing more services to the public and investments in projects that help in the generation of more government revenue. For instance, according to Finnell and Jezewski, with effective management of resources and the implementation of government policies, huge investments in the healthcare sector ensure the creation of healthy citizenry3. This situation translates into more productivity. The implication is that in the long-term, a government gains from spending on the healthcare sector in terms of increasing revenue collection from many people who engage productively in economic activities that boost national growth and economic stability. A similar impact of high government spending on the provision of public goods such as education can also be drawn.

People who have high-quality education help in increasing innovation and creativity levels, which generate new job opportunities and/or improve efficiency and effectiveness of a nation’s production tools. Thus, higher spending on education has the benefit of resulting in government savings in the long-term. Thus, requiring nations to reduce spending on education or providing other public goods that result in their future economic success is sceptical. For which other purpose should a government borrow a loan from any organisation if not to spend in an investment that ensures future self-reliance?

Austerity comprises the main augment against the capacity of policies to foster stability and growth. Bird confirms how the SAPs share a big responsibility in forcing stagnation of nations that engage in borrowing to fund their budget deficits4. Such policies call for the maintenance of balanced budgets, something that forces austerity. Causalities of this balancing effect include investments in social programmes. McPake supports this assertion by adding that structural modification policies mainly influence social programmes such as healthcare and education, which are also mostly underfunded in many nations, especially in the developing economies5. When nations cut down their expenditure on university education, long-term economic stability and growth is negatively affected. Similarly, any cutting down of expenditure on healthcare in areas such as HIV/AIDS or the management of tuberculosis implies the destruction of workforce economies. Bird asserts that IMF’s monetary management approaches of prioritising stability of pricing and maintenance of low levels of budget deficits unnecessarily restricts developing nations from establishing the capability to increase their investments in the provision of public goods as a percentage of their GDP6. This situation undermines growth in health infrastructures and other related sectors.

Pushing for the cutting down of government expenditure raises doubts on how structural adjustment policies can drive economic growth in poor nations, which are mostly in need of financial aid from institutions such as the IMF and the World Bank. For instance, underfunded healthcare infrastructure translates into the dilapidation of public health, a low staff number, poorly rewarded health practitioners, and demoralised healthcare working conditions in developing nations. This situation leads to the emergence of push factors for the workforce to relocate to the developed nations, which can remunerate its workforce better. However, it is also inaccurate to hold that a reduction of funding allocation to a given programme lowers its quality. Nevertheless, some factors within the public sector, including healthcare, are more prone to grafts such as corruption and fraud, which make investments in the sector inefficiently utilised.

Consistent with the structural amendment requirements, nations have the obligation to filter all possible causes of ineffective and inefficient utilisation of initial investments in the provision of public goods. Such a responsibility should also include lowering spending on staffing needs, especially where some facilities for providing public services are over-staffed. Consequently, structural alteration can only lead to stability and growth under conditions where a government has established potential loopholes for loss or suboptimal utilisation of public funds in subsidising public institutions and programmes.

Nations that have their native people following traditional lifestyles and practices encounter several challenges when structural regulations are called into force. In their case titled, ‘IMF-World Bank Adjustment and Structural Transformation in the Sub-Saharan Africa’, Logan and Megisteab confirm that structural modifications cause disconnections and misalignments between formal and informal sectors of the economy7. They claim that in the process of analysing the impacts of structural adjustments, the urban and rural scales often go unexamined in terms of their specific needs. For instance, for traditional communities, they assert that lack of resource ownership such as land possession and/or adoption of certain informal labour practices offers unique situations that involve structural economic reorganisation and reforms within nations. In kingship–based communities, Logan and Megisteab observe collective ownership of resources such that no single resource serves personalised interests and purposes8.

In traditional societies, familial and gender obligations, responsibilities, organisation of households and communities, and lineage have a significant contribution to the operational structure of a given society. This situation creates difficulties in terms of effective formulation of various economic reforms upon taking into consideration all societal needs, both in the traditional settings and other alternative lifestyles. Consequently, in societies that have mixed cultures and lifestyles, as witnessed in the case of nations where some communities follow traditional lifestyles, the implementation of structural fine-tuning policies becomes not only impossible, but also ineffective. For example, among the pastoralist communities, land is communally owned. To whom should the government impose higher land use taxes to comply with the requirement of increasing tax tariffs to increase government revenue that is imposed by structure amendment policies?

Amid the raised criticisms of the structural change policy on the reduction of government spending as a prerequisite for accessing loans from the IMF, it is in the interest of the lenders to have confidence that nations that acquire loans have the capability to pay back. In fact, not all finances that are budgeted for investment in the provision of public goods that yield high gains and savings to nations are directly channelled into the projects. Nations experience huge costs in the planning and administration of government projects. Thus, for future optimal gain, it is important for costs that do not relate to the actual public good to be minimised. For instance, in healthcare settings, there should be minimal costs concerning logistics processes for medicine sourcing and delivery to patients. Consequently, based on the conditions of limiting government spending to minimise expenditure on support services for public goods and other government project investments and the maximisation of expenditure within the scope of a given project, structural modification requirement of reducing government spending can translate into stability and growth. However, the capacity of a nation to reduce spending is perhaps not feasible depending on its economic situation as discussed in the next section.

Increasing Tax

Structural alteration requires nations to increase taxes constantly to guarantee increased government revenue with time. There exists a very close relationship between government revenues and business cycles. During the recovery of an economy after recession, government revenues increase while they decrease during depression. This relationship is contributed by the fact that during recession period, income, employment, and production fall considerably. Maynard asserts that an alternative way of countering recession is through increasing government spending or cutting taxes with the aim of controlling consumer demand9. Cutting taxes can also manipulate the business cycles positively during the recession.

Cutting taxes implies that government revenues are reduced significantly so that increasing spending has a similar implication on the government’s financial position and its capability to repay debts. Considering that IMF also requires nations that face the economic crisis to reduce their spending for them to secure loans, a question arises concerning what such nations should do to counter the effects of economic crisis. Should they remain dormant instead of attempting to deal with the problems through increased spending or reduction of taxes? Rather, structural adjustments require nations to increase taxes in an attempt to enhance their capacity to collect revenue. This claim suggests that structural changes only lead to stability and growth for nations that are not experiencing economic crisis since they do not have to increase spending or reduce taxes as intervention measures. Even without the crisis, thresholds have been set concerning the extent to which a government can tax specific economic sectors to ensure they operate profitably so that their players do not reallocate to other regions that have few government taxation regulations.

A nation’s built-in systems for stabling fiscal changes, taxation regulations, and welfare payments are critical in ensuring stability. Such systems absorb economic shocks following economic destabilisation. The overall implication of fiscal stabilisers in an economy is the drag that is witnessed during the period of excessive growth. The stabilisers act as boosters during situations of stagnated or weak economic growth. Economic Online reveals, “Negative or positive demand side shocks can be stabilised more quickly when automatic stabilisers are built-in to the tax-benefit system”10. This claim suggests that for economic stability and growth to be achieved, it is important for structural regulation policies to provide a room for nations to adjust their taxation policies accordingly depending on the economic cycles. Hence, IMF should consider loaning governments when pursuing tax reduction since the acceptable policy to deal with the effects of an economic downturn is the justified implementable economic plan. Unfortunately, the current structural modification policies only focus on progressive taxation as the only premise to justify access to loans.

Privatisation

Structural amendment policies advocate the privatisation of organisations and other resources that are owned by the government in a bid cut down funding on budgets. It also aims at increasing the efficiency and investments. Such policies advocate the selling of all government resources, irrespective of their capacity to generate profits. Although privatisation is important where government resources and investments generate net losses, structural alteration requirements call for the transferring of state-owned organisations to the private actors, which are mainly foreign for developing nations since local actors may lack the capacity to manage the resources effectively as Filipovic confirms11. Consequently, the aim of the public propensity reduces to private accumulation. The worst scenario is experienced where a certain resource is managed by one multinational organisation that attracts monopolisation of its supply. This situation may lead to a massive transfer of a nation’s resources to the corporations’ home countries. Such corporations are also not interested in showing fiscal losses by playing social roles such as providing subsidised utilities and employment opportunities.

Depending on how the privatisation policy is implemented, it can potentially yield success in terms of fostering stability and economic growth. Filipovic claims, “The process of privatisation can be an effective way to bring about fundamental structural change by formalising and establishing property rights, which directly create strong individual incentives.”12 Indeed, free market economies rely on property right so that people make individual decisions on the appropriate cause of their actions. In turn, this situation may give rise to low-cost exchanges, which encourage specialisation coupled with greater productivity.

Privatisation plays the role of increasing efficiency, availing fiscal relief benefits, increasing levels of ownership, and raising the probability of providing credit facilities to the private sector. However, although these merits of privatisation are important in any state, it (privatisation) may also create unprecedented costs to the citizenry. For example, according Public Citizen, the privatisation of water utilities in Bolivia translated into an increase of the costs of the commodity13. This case evidences a situation in which structural change policies ignore social welfare benefits. Indeed, market incentives fail to provide equality where an industry provides crucial public utilities. However, structural amendment policies hold to one ideology even in situations where they are not appropriate.

In the month of February and March in 2000, Cochabamba experienced intense protests. The public took to the streets complaining about excessive water prices. As Public Citizen confirms, people’s water bills tripled while others quadrupled14. The strike took place only less than a month after the Aguas Del Tunari, a London-incorporated private company, was given the go ahead to manage the Bolivia water system. The increment in the cost of water implied that about 50% of monthly income of some Bolivia residents went into paying water bills. Thus, people had no other alternative than demanding their rights of access to public utilities. This claim suggested that structural changes led to stability and growth only if they did not destabilise the status quo. While the government of Bolivia was interested in the affordability of a given public good by its citizen, pricing corporations such as Aguas Del Tunari could not run a non-profitable business venture, yet structural adjustments required states to reduce their spending by privatising their resources and organisations, irrespective of whether they generated net profits or not.

Various multinational corporations and their subsidies dominate the privatisation of the water industry. Such organisations stand to benefit incredibly, as the worldwide water crisis problem deepens. From the World Bank forecasts, Public Citizen reveals that by 2025, more than 60% of the total global population will experience fresh water shortage15. This prediction suggests that organisations that control water supply markets will leap higher profits in terms of distribution of a growing rare public utility. Can the private sector provide public goods at lower costs and in a more efficient manner as proposed by the IMF through its structural fine-tuning policies? Little evidence supports the capacity of the private sector to provide public utilities at cheaper and efficient ways, especially in the poor and developing nations. As evidenced by the case of Bolivia, prices went up. Quality challenges also accompany the privatisation of the water industry to profit-making corporations. Surprisingly, the World Bank and the IMF congratulated Bolivia’s effort to privatise not only water, but also other public sector resources as a pre-condition to accessing loans.

Deregulation

Deregulation refers to the lifting of government regulations and controls. By advocating regulation, structural alterations infer that few and simplified regulations increase competitiveness, thus leading to higher productivity levels and increased efficiency levels coupled with ensuring the provision of public goods at low prices. Although deregulation is important in fostering free trade and ensuring competition among organisations, it is inappropriate, especially on issues that pose threats to humanity and environmental health such as environmental pollution and the elimination of control and regulation of disposal of hazardous materials. Deregulation only leads to stability and growth under the conditions of its control to ensure that its potential negative implications do not arise. Although deregulation constitutes one of the important pillars of structural amendment policies that are supported by the IMF and the World Bank, all nations encourage it when in need of certain conducts among its citizens.

The case of Argentina shows that deregulation may produce negative impacts on a nation. The country implemented economic deregulation, had a fixed exchange rate (1989-1999), and encouraged privatisation pursuant to structural changes as proposed by the IMF. In an article that was published in the New York Times in 2001, Krugman compared the Argentina’s initiative to Enron scandal since the two incidents almost resulted in near collapse due to uncontrolled deregulation16. The government of Orion endeavoured to deregulate electricity supply from 2002. However, consumer backlash, prohibitive, and volatile prices compelled it to pull the deregulations temporarily. Now, the government still looks for a stable working framework for regulating its electricity supply.

Deregulation leads to growth of capitalism, which does not necessarily translate into collective stability and growth of a nation. In capitalistic economies, an industry and private firms mainly own trade together with factors of production. They operate them to make optimal profits. Capital accumulation, wage labour, and competitive markets characterise such economies. In the capitalistic economy, Harvey reveals how parties that make trade transaction are involved in the setting of prices for exchanging assets, goods, and services17. Although deregulation has failed to foster stability and growth in some regions such as Argentina and Orion, in the European Union, success has been registered in some sectors. For instance, the Airline industry in Europe experienced immense government deregulation in the 1990s. This move was to ensure that the industry could solely set prices for its services in a bid to make the airline markets capitalistic, and hence competitive. In the airline industry, two types of capitalism can be differentiated, namely social-market economy and free-market financial system.

Free-market financial system encompasses a capitalistic economy in which prices of services and commodities are established by economic forces of demand and supply. The forces are permitted to reach an equilibrium point without any intervention of the government in ways such as price control. Free-market financial system fosters the development of competitive markets. It encourages private ownership in a bid to enhance the existence of highly productive enterprises. This model manifests itself in the European airline industry through the permission of organisations operating in the industry to set their prices without any government regulation.

A social-market economy constitutes a free-market system in which government intervention in control of prices is kept at minimal levels. In the European airline industry, any government intervention manifests itself in the form of regulation of labour rights, social security, and employment benefits. With these regulations, the airlines make the final decision on the best prices, which help them to cover the costs, which are imposed by the government to protect workers in the industry and/or make substantiated profit margins. This protection suggests that deregulation only translates into stability and growth when the manner of executing deregulation policies is controlled through hybrid economic systems, namely the free and social market economies.

Conclusion

The eligibility of IMF loans calls for states to implement some or even all structural adjustment policies that are established by the institution in collaboration with the World Bank. The policies include a reduction of government spending, increasing taxes, controlling inflation, privatisation of state-owned assets and resources, deregulation for markets to foster competition and free trade, devaluation of currencies to ensure competitiveness, and the reduction of current accounts deficits. The paper has investigated the conditions under which structural changes can lead to stability and growth. It has confirmed that although nations need to secure loans from the IMF, the SAP policies in their current state have greatly failed to foster stability and economic growth. This situation can only be reversed if they can be redesigned to embrace the need for social development, social benefit, enhancing equality, and/or ensure that deregulation does not interfere with diversification.

Bibliography

Bird, G., ‘IMF Programmes: Do they Work? Can they be made to work better?’ World Development, vol. 29 no.11 (2008), pp. 45-61.

Economic Online., ‘Policies for Stabilisation and Growth’, Policies [website]. Web.

Filipovic, A., ‘Impact of Privatisation on Economic Growth’, Issues in Political Economy, vol. 14 no. 3 (2005), pp. 1-22.

Finnell, D. & Jezewski, M., ‘Applying the Transtheoretical Model to Health Care Proxy Completion’, Medical Decision Making, vol. 3 no. 1(2011), pp. 254-259.

Harvey, D., Seventeen Contradictions and the End of Capitalism, Oxford University Press, Oxford, 2014.

Krugman, P., ‘Laissez not fair’, New York Times, 2001, p. 17.

Logan, B. & Mengisteab, K., ‘IMF-World Bank Adjustment and Structural Transformation in Sub-Saharan Africa’, Economic Geography, vol. 69 no. 1 (2003), pp. 105-121.

Maynard, J., The General Theory of Employment, Interest and Money, Palgrave Macmillan, Basingstoke, Hampshire, 2007.

McPake, B., ‘Hospital Policy in Sub-Saharan Africa and Post-Colonial Development Impasse’, Soc Hist Med, vol. 22 no. 2 (2009), pp. 341-360.

Public Citizen., ‘Water Privatisation Case Study: Cochabamba, Bolivia’, News. Web.

Footnotes

  1. G. Bird, ‘IMF Programmes: Do they Work? Can they be made to work better?’ World Development, vol. 29 no.11 (2008), p. 46
  2. Bird, p. 46
  3. D. Finnell, & M. Jezewski, ‘Applying the Transtheoretical Model to Health Care Proxy Completion’, Medical Decision Making, vol. 3 no. 1(2011), p. 255
  4. Bird, p. 48
  5. B. McPake, ‘Hospital Policy in Sub-Saharan Africa and Post-Colonial Development Impasse’, Soc Hist Med, vol. 22 no. 2 (2009), p. 341.
  6. Bird, p. 49
  7. B. Logan & K. Mengisteab, ‘IMF-World Bank Adjustment and Structural Transformation in Sub-Saharan Africa’, Economic Geography, vol. 69 no. 1 (2003), p. 106.
  8. Logan & Mengisteab, p. 108
  9. J. Maynard, The General Theory of Employment, Interest and Money, Palgrave Macmillan, Basingstoke, Hampshire, 2007, p. 39.
  10. Economic Online., ‘Policies for Stabilization and Growth’, Policies.
  11. A. Filipovic, ‘Impact of Privatization on Economic Growth’, Issues in Political Economy, vol. 14 no. 3 (2005), pp. 10.
  12. Filipovic, p. 1
  13. Public Citizen, ‘Water Privatization Case Study: Cochabamba, Bolivia’, News.
  14. Public Citizen, Para. 2
  15. Ibid, Para. 4
  16. P. Krugman, ‘Laissez not fair’, New York Times, 2001, p. 17.
  17. D. Harvey, Seventeen Contradictions and the End of Capitalism, Oxford University Press, Oxford, 2014, p. 53.