Structural adjustment is a term used to describe the policies requested by the IMF in condition for financial aid when dealing with an economic crisis in. The policies are designed to tackle the root cause of the problem and provide a framework for long term development and long term growth.
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, which ultimately help to improve living standards and reduce relative poverty.
In practice, they have had mixed results. Often criticised for creating painful changes in the economy which give as many costs as benefits. Recently, Structural adjustment policies have placed greater focus on poverty reduction, with countries encouraged to draw up Poverty Reduction Strategy Papers (PRSPs)
Structural adjustment policies
Macroeconomic – Structural Adjustment
- Policies to tackle Inflation (e.g. tightening of monetary or fiscal policy). In practice, this may involve higher interest rates or higher taxes.
- Policies to deal with a budget deficit. Higher taxes, lower spending. Can be combined with the policy to reduce inflation.
- Removal of Tariff Barriers which protect domestic industries and opening the economy to free trade.
- Abandoning Fixed Exchange Rates and allowing the currency to float – In practice, this involves a devaluation. This can help give exports greater competitiveness and help boost domestic demand. However, it increases the cost of imports and usually reduces living standards.
Micro Economic Structural Adjustment
On the microeconomic side, policies are designed to increase competitiveness and productivity in the economy. These tend to involve ‘free market’ supply-side policies such as:
- Privatisation of state-owned industries. This raises money for the government, but also, in theory, can help improve efficiency and productivity. because private firms have a profit incentive to be more efficient.
- Ending food subsidies. This can distort the market and lead to over-supply and hold back diversification of the economy to a more industrial-based economy.
- Reducing red tape and bureaucracy
- Closing tax loopholes and reducing corruption
- De-regulation of markets to encourage competition and more firms to enter the industry.
Problems With Structural Adjustment
1. Policies of tackling inflation. Higher interest rates, higher taxes, often cause a recession and mass unemployment. They are often painful in the short term. This is perhaps the biggest reason why structural adjustment is often very unpopular in the countries where it is implemented.
- To defend structural adjustment, we could say, it is necessary to deal with inflation. If left untackled, the inflation could just get worse – leading to a more painful future adjustment. Also, the pain is often temporary. Once tackled low inflation provides for a period of economic stability.
2. Spending Cuts falls on the poorest section of society. Often structural adjustment has led to spending cuts on important welfare services such as education and health care. Structural adjustment has often been perceived as widening inequality.
- There is no reason spending cuts have to fall on the poorest sections of society. Spending cuts could be focused on military spending. Or the budget reduced through higher taxes on high earners. Recently, the IMF has encouraged poverty reduction to be a part of structural adjustment policies with things such as Poverty Reduction Strategy Papers (PRSPs).
- However, critics argue that despite these new targets for reducing poverty, the essential policies remain the same.
3. Loss of National Sovereignty. IMF policies need to be implemented otherwise there can be a heavy financial penalty. This gives foreign bodies great influence over key economic issues in developing economies.
4. 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 a wider population.
5. 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 the same importance when the industry plays an important social welfare function. But, structural adjustment policies have often stuck to a certain ideology even when not appropriate.
6. Unemployment. Control of inflation and fiscal austerity has led to higher unemployment and lower economic growth – at least in the short-term.
7. Social development ignored. To meet fiscal criteria, governments have often cut welfare spending programs which benefit the poorest members of society.
8. 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
Evaluation of structural adjustment
- Like many general policies such as structural adjustment, it depends on how it is implemented. To make sweeping statements such as Structural adjustment is good/bad is too vague. It depends on the quality of supply-side policies.
- At best, structural adjustment can provide the political will to take necessary and difficult steps to deal with an economic crisis and provide a framework for long term growth and stability.
- At worst, it can place too much emphasis on macroeconomic objectives such as low inflation, balanced budget causing an unnecessarily deep recession. It can provide an opportunity to pursue market-oriented supply-side policies which do little to improve productivity but increase inequality and poverty.