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, which ultimately help to improve living standards and reduce relative poverty.
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 the budget deficit. Also known as ‘fiscal austerity’
- Raising tax revenues and trying to improve tax collection by clamping down on tax avoidance.
- Control of Inflation. Usually through Monetary policy (higher interest rates) and fiscal austerity – which have the effect of depressing aggregate demand.
- 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.
- De-regulation of markets to encourage competition and more firms to enter the industry.
- Opening the economy to free trade – removing tariff barriers which protect domestic industries
- 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.
- Devaluation of currencies to restore competitiveness and reduce current account deficit. This usually leads to higher import prices.
Criticisms of Structural Adjustment
- 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.
- 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 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.
- Control of inflation and fiscal austerity has led to higher unemployment and lower economic growth – at least in the short-term.
- 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