Structural adjustment programs (SAPs) consist of loans (structural adjustment loans; SALs) provided by the International Monetary Fund (IMF) and the World Bank (WB) to countries that experience economic crises. Their stated purpose is to adjust the country's economic structure, improve international competitiveness, and restore its balance of payments.
The IMF and World Bank (two Bretton Woods institutions) require borrowing countries to implement certain policies in order to obtain new loans (or lower interest rates on existing ones). These policies are typically centered around increased privatization, liberalizing trade and foreign investment, and balancing government deficit. The conditionality clauses attached to the loans have been criticized because of their effects on the social sector.
SAPs are created with the stated goal of reducing the borrowing country's fiscal imbalances in the short and medium term or in order to adjust the economy to long-term growth. By requiring the implementation of free market programmes and policy, SAPs are supposedly intended to balance the government's budget, reduce inflation and stimulate economic growth. The liberalization of trade, privatization, and the reduction of barriers to foreign capital would allow for increased investment, production, and trade, boosting the recipient country's economy. Countries that fail to enact these programmes may be subject to severe fiscal discipline. Critics argue that the financial threats to poor countries amount to blackmail, and that poor nations have no choice but to comply.
Since the late 1990s, some proponents of structural adjustments (also called structural reform),David B. Audretsch, Erik Lehmann, The Seven Secrets of Germany, Oxford University Press, 2016, p. 104. such as the World Bank, have spoken of "poverty reduction" as a goal. SAPs were often criticized for implementing generic free-market policy and for their lack of involvement from the borrowing country. To increase the borrowing country's involvement, developing countries are now encouraged to draw up Poverty Reduction Strategy Papers (PRSPs), which essentially take the place of SAPs. Some believe that the increase of the local government's participation in creating the policy will lead to greater ownership of the loan programs and thus better fiscal policy. The content of PRSPs has turned out to be similar to the original content of bank-authored SAPs. Critics argue that the similarities show that the banks and the countries that fund them are still overly involved in the policy-making process. Within the IMF, the Enhanced Structural Adjustment Facility was succeeded by the Poverty Reduction and Growth Facility, which is in turn succeeded by the Extended Credit Facility.
Regions supported Structural adjustment loans are mainly distributed to developing countries, located primarily in East and South Asia, Latin America, and Africa, including Colombia, Mexico, Turkey, Philippines, Pakistan, Nigeria, Sudan, Zimbabwe and other countries.
As of 2018, India has been the largest recipient of structural adjustment program loans since 1990. Such loans cannot be spent on health, development or education programs. The largest of these have been to the banking sector ($2 billion for IBRD 77880) and for Swachh Bharat Mission ($1.5 billion for IBRD 85590).
Goals According to its stated goals, Structural Adjustment Loans (SALs) aim to achieve three main objectives: boosting economic growth, addressing balance of payments deficits, and reducing poverty.
It is claimed that with the growing need for structural adjustments in different nations, the lines between SAL and other loan types provided by the International Monetary Fund and the World Bank have become less distinct. For instance, it is purported that both SALs and Enhanced Structural Adjustment Loans (ESAFs) issued by the International Monetary Fund aim to offer favorable assistance for medium-term structural reforms in low-income member countries. It is argued that ESAFs may be more beneficial in promoting growth and bolstering balance of payments. These are the stated goals of SALs and ESAFs and the actual effects on the economy might be different.
Another type of loan issued by the World Bank, sector adjustment loans, differs from SAL only in that the former places more emphasis on improving one economic sector rather than the entire economy.
Financing SAL initially financed the loan by selling gold held in trust funds and accepting donations from donor countries. Subsequent loans are based on the repayment of trust funds and interest earned. The SDR is the accounting unit of the loan, and the disbursement and repayment of the loan are in US dollars. The amount of SALs issued to a country is usually proportional to its quota in the International Monetary Fund.
Conditions Typical stabilisation policies include: balance of payments deficits reduction through currency devaluation budget deficit reduction through higher taxes and lower government spending, also known as austerity restructuring foreign debts monetary policy to finance government deficits (usually in the form of loans from central banks) eliminating food subsidies raising the price of public services cutting wages decrementing domestic credit.
Long-term adjustment policies usually include: liberalization of markets to guarantee a price mechanism privatization, or divestiture, of all or part of state-owned enterprises creating new financial institutions improving governance and fighting corruption (from the perspective of a neoliberal formulation of 'governance' and 'corruption') enhancing the rights of foreign investors vis-à-vis national laws focusing economic output on direct export and resource extraction increasing the stability of investment (by allowing foreign investors) with the opening of companies reducing government expenditure e.g. reducing government employment
In the Washington Consensus the conditions are: Fiscal policy discipline; Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment; Tax reforms which broaden the tax base and lower marginal tax rates, while minimizing dead weight loss and market distortions; Interest rates that are market determined and positive (but moderate) in real terms; Competitive exchange rates; devaluation of currency to stimulate exports; Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; the conversion of import quotas to import tariffs; Liberalization of inward foreign direct investment; Privatization of state enterprises; Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; Legal security for property rights.
History Structural adjustment policies were developed by two of the Bretton Woods institutions - the IMF and the World Bank. They were advised by the top economists of both.
After the run on the dollar of 1979–80, the United States adjusted its monetary policy and instituted other measures so it could begin competing aggressively for capital on a global scale. This was successful, as can be seen from the current account of the country's balance of payments. Enormous capital flows to the United States had the corollary of dramatically depleting the availability of capital to poor and middling countries. Giovanni Arrighi has observed that this scarcity of capital, which was heralded by the Mexican default of 1982,
Mexico was the first country to implement structural adjustment in exchange for loans. During the 1980s the IMF and World Bank created loan packages for the majority of countries in Latin America and Sub-Saharan Africa as they experienced economic crises.
To this day, economists can point to few, if any, examples of substantial economic growth among the LDCs under SAPs. Moreover, very few of the loans have been paid off. Pressure mounts to forgive these debts, some of which demand substantial portions of government expenditures to service.
Structural adjustment policies, as they are known today, originated due to a series of global economic disasters during the late 1970s: the oil crisis, debt crisis, multiple economic depressions, and stagflation.See Towson.edu webpage on SAPs These fiscal disasters led policy makers to decide that deeper intervention was necessary to improve a country's overall well-being.
In 2002, SAPs underwent another transition, the introduction of Poverty Reduction Strategy Papers. PRSPs were introduced as a result of the bank's beliefs that "successful economic policy programs must be founded on strong country ownership".See IMF website on conditionality In addition, SAPs with their emphasis on poverty reduction have attempted to further align themselves with the Millennium Development Goals. As a result of PRSPs, a more flexible and creative approach to policy creation has been implemented at the IMF and World Bank.
While the main focus of SAPs has continued to be the balancing of external debts and trade deficits, the reasons for those debts have undergone a transition. Today, SAPs and their lending institutions have increased their sphere of influence by providing relief to countries experiencing economic problems due to natural disasters or economic mismanagement. Since their inception, SAPs have been adopted by a number of other international financial institutions.
Some studies suggest that they have been "weakly associated with growth and reform did seem to reduce inflation." Others have argued, however, that "the outcomes associated with frequent structural adjustment lending are poor."Easterly, William. (2006) The White Man's Burden. Penguin Books. Pages 68-72. Some have argued that, based on only mild improvement of growth in the 1990s from the 1980s, that the IMF should focus more on remedying management of a country's balance of payments position as originally envisaged by the IMF instead of its focusing on structural adjustments. One study pointed towards deleterious effects on countries in Latin America's democratic practices, suggesting that reforms may create an economically and politically marginalized population who views democratic government as unresponsive to its needs and thus less legitimate. However, the existence of the IMF loan itself has not led to any change away from democracy itself. Critics (often from the left) accuse such policies to be "not-so-thinly-disguised wedge[s] for capitalist interests."
South Korea after 1997