Structural Adjustment refers to a set of economic policies often introduced as a condition for gaining a loan from the IMF. Structural adjustment policies usually involve a combination of free market policies such as privatisation, fiscal austerity, free trade and deregulation. Structural adjustment policies have been controversial with detractors arguing the free market policies are often unsuitable for developing economies and lead to lower economic growth and greater inequality. Supporters of structural adjustment (IMF and World Bank) argue that these free market reforms are essential for promoting a more open and efficient economy.
In recent years, there has been some reform to structural adjustment policies, ‘poverty reduction’ has been added as an element of structural adjustment.
Structural Adjustment Policies
To be eligible for a loan from IMF, developing countries often have to implement some or all of the following policies.
- Cutting Government Spending to reduce budget deficit. ‘fiscal austerity’
- Raising tax revenues trying to improve tax collection
- Control of Inflation. Usually through Monetary policy (higher interest rates) and the fiscal austerity.
- Privatisation of state owned industries. This raises money, but also in theory creates greater incentives to be efficient.
- De-regulation of markets to encourage competition
- Opening economy to free trade – removing tariff barriers which protect domestic industries
- End food subsidies
- Devaluation of currencies to restore competitiveness and reduce current account deficit. This leads to higher import prices.
Criticisms of Structural Adjustment
- Loss of National Sovreignty. IMF policies need to be implemented otherwise there can be heavy financial penalty. This gives foreign bodies great influence over key economic issues in developing economies.
- Greater inequality. Structural adjustment policies have often shown a tendency to greater inequality. For example, Privatisation has often benefitted a small rich elite (e.g. Russia 1995) and have not benefitted wider population.
- Ignore Social Benefits. Privatisation of key public utilities like Water (e.g. Bolivia) have led to higher prices for a key commodity. Arguably market incentives don’t have same importance when the industry plays an important social welfare function. But, S.A. policies have often stuck to a certain ideology even when not appropriate.
- Control of inflation and fiscal austerity has led to higher unemployment and lower economic growth.
- Social Development Ignored. To meet fiscal criteria, governments have often cut welfare spending programs which benefit the poorest members of society.
- Free Trade often hampers diversification. Developing economies often have a comparative advantage in selling raw materials. But, this prevents economy diversifying. To make things worse, developed countries often impose tariffs on agricultural exports, but then want developing countries to have free trade for their exports. See: free trade