Adjustment and Poverty

Options and Choices

Frances Stewart

• Publisher: Routledge
• Year: 2005
• Print ISBN: 9780415091343
• eBook ISBN: 9781134803705
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

The last decade has brought sharp adjustment and rising poverty for most of the developing world. Adjustment and Poverty: Options and Choices examines the major causes and results of this situation, including: *the relationship between structural adjustment and poverty;
*the extent to which the situation was brought about by internal and/or external policies;
*the impact of the IMF and World Bank on adjusting countries;
*government tax and spending policies - with a particular focus on social sector spending;
*the possiblity of better policies in the future.

Chapter 1
Introduction

The 1980s was a decade of adjustment for much of the Third World—for most countries in Africa and Latin America, and for quite a number of countries elsewhere in the developing world. The decade was also one of rising poverty in Africa and Latin America—a sharp reverse in the previous trend of gradual reductions in the numbers in poverty. In Asia in contrast, poverty was reduced over these years. Between 1985 and 1989 the numbers in poverty in sub-Saharan Africa rose from 191 million to 228 million; in Latin America and the Caribbean the numbers rose from an estimated 91 million in 1980 to 133 million in 1989. ¹ The decade also saw rising unemployment, reduced progress in improving human indicators, such as infant mortality rates, and worsening indicators of educational performance in many adjusting countries. Not all adjusting countries had poor performance of this kind: for example, Indonesia succeeded in reducing poverty and improving human indicators, while adjusting, as did Colombia. But good performance on human and social indicators among adjusting countries was the exception rather than the rule.

This book aims to review the relationship between adjustment policies and poverty over the decade of the 1980s, focusing particularly on why some countries succeeded in adjusting ‘with a human face’, while the majority did not. One aim is to assess the performance of adjusting countries with respect to poverty over the decade; another is to identify improved policies for the future. The subject is an important one because of the pervasiveness of the adjustment problem over time and in terms of the numbers of countries affected. By the end of the 1980s, as many countries were seeking adjustment support from the International Monetary Fund (IMF) and World Bank as at the beginning of the decade. Thus the idea that a temporary belt-tightening was all that was needed is no longer plausible, and consequently what happens ‘while crossing the desert’ (to use a phrase of the World Bank) is important because the crossing has lasted more than a decade already, affecting not only the immediate well-being of hundreds of millions but also their potential for productive activity in the future.

The adjustment policies did not come out of the blue, superimposed on countries whose performance was otherwise progressing satisfactorily. The policies were adopted—mostly under the auspices of the IMF and World Bank —because of major imbalances that developed in the early 1980s in many developing economies. These imbalances, and especially the acute foreign exchange crisis that emerged, necessitated some adjustment. Countries could not have carried on as before, because no one was willing to finance them to do so. It follows that part at least of the cause of worsening poverty was the imbalances (and the source of these imbalances) that led to the adjustments, rather than the adjustments themselves. Indeed, in the international financial institutions (IFIs) the blame for any rise in poverty is laid at the door of exogenous developments and earlier policy mistakes on the part of governments.² However, whether this is so or not—and one conclusion of this book is that it is only partially true—it remains the case that an alarming and unacceptable deterioration in human conditions occurred among some adjusting countries which means that the policies were not satisfactory and better alternatives need to be found. Moreover, the very fact that some countries did succeed in protecting the poor while adjusting suggests that the deterioration observed elsewhere may not have been inevitable, but could have been avoided.

SOURCE OF THE ECONOMIC CRISIS OF THE 1980s

The origin of the crisis of the 1980s lay largely in events of the 1970s. In the 1970s, oil-importing countries were faced with very large balance of trade deficits, following the oil price rise of 1973–4. But at this point there was abundant financial liquidity in the world, resulting from the liquid balances built up by the oil producers. Commercial banks lent to deficit countries, with little hesitation or careful appraisal, in large quantities and at low interest rates. Oil-importing countries were able to continue to invest and consume as before, with very little incentive to adjust to the new situation. Non-oil commodity prices also continued to hold up, albeit with some fluctuations. Naturally this situation led to a big build-up in debt, which seemed sustainable so long as interest rates were low, commodity prices buoyant and the commercial banks were willing to go on lending, at least to rollover the old debt. But at the end of the decade all these conditions were reversed. In 1979 there was a further oil-price shock, leading to additional need for foreign exchange on the part of oil importers. Recession among developed countries in the early 1980s initiated a downward movement in commodity prices, which continued (with some fluctuations) for much of the decade. And the era of monetarism began—led by the Reagan/Thatcher regimes —which ended cheap money. Real interest rates became positive and remained very high by historical standards for the whole decade. The prospects of borrowing countries no longer appeared viable to the commercial banks who ceased virtually all voluntary lending to developing countries by the mid-1980s.

These developments are illustrated in Tables 1.1, 1.2 and 1.3. The terms of trade worsened for most of the decade, with Africa suffering particularly badly. Rising interest rates plus debt build-up led to a rising burden of debt service, especially in Latin America, where it amounted to over 42 per cent in 1983. These changes led to large current account deficits in most developing countries —which more than doubled in the main regions between 1975 and 1980. Commercial finance from overseas diminished sharply in all areas. Although public lending increased, it did not nearly offset the fall in private finance, and developing countries were forced to curtail their current account deficits sharply between 1980 and 1985.

In Latin America in the latter part of the decade, attempts to reduce the debt burden through the Brady plan and other mechanisms were quite successful and debt service fell significantly in the last years of the 1980s. But in Africa, debt service continued to mount. With some revival of lending—commercial to Latin America and public to Africa—towards the end of the decade, current account deficits again widened. The deteriorating conditions for developing countries, especially in the first half of the 1980s, are indicated by changes in the net transfer of resources, i.e. net lending less interest payments. This had been large and positive at $29 billion in 1980, but by 1986 it was minus $24 billion, a turn around of over $50 billion. Latin America was much the worst affected, with a negative transfer of $20 billion in 1986. Sub-Saharan Africa received a positive net transfer throughout the decade.

In parallel with (and in part a cause of) the imbalances on current account were large deficits on the domestic budget, especially in Africa (Table 1.1).³ These deficits were often largely financed by printing money, especially in countries with weak financial markets, and were accompanied by high rates of inflation. The data in Table 1.1, however, indicate that there is no simple relationship between government deficits and the rate of inflation; inflation was high and accelerating in Latin America, where public deficits were not very high, and fairly moderate and decelerating in Africa where public deficits were much higher.

It was the imbalance on current account of the balance of payments, together with an inability to secure finance from commercial sources, that led many countries to approach the IMF and World Bank for loans. In the 1980s, twenty-one sub-Saharan Africa countries, seventeen Latin American and sixteen others had IMF programmes of more than two years’ duration; twenty-three sub-Saharan, twelve Latin American and nine others had World Bank programmes of more than two years’ duration (Table 1.4). Many of the programmes lasted for a number of years, or were renewed again and again. Twenty-three countries had IMF programmes for more than five years and eight countries had World Bank programmes for more than five years. These programmes were invariably conditional on countries introducing certain policy changes—‘adjustment’ policies as they are usually termed. Consequently, the Fund and Bank were major policy-makers in the majority of African and Latin American countries throughout the decade. Their influence was not confined to countries to which they lent: some others had ‘shadow’ programmes (agreed with the Fund, but not financed by them) and others duplicated the main elements of the IFI programmes, without seeking finance or advice.

Table 1.1 Imbalances among developing countries, 1980s ($m)

Table 1.2 Deteriorating external environment

There has been much debate on whether the origins of countries’ problems in the 1970s and 1980s were exogenous or endogenous. For example, Dell and Lawrence (1980) argued forcibly that there was a strong exogenous element, while Wheeler (1984) found statistical support for this view among African countries. In contrast, most Bank and Fund authors tend to place the burden of blame on domestic policy mistakes.⁴ The data clearly support the view that exogenous events played a role—in particular the fall in commodity prices and the high interest rates were outside any single country’s control. But the heavy borrowing of the 1970s was largely due to government decisions during the decade, although these were not seriously criticised by outsiders, including the IFIs, at the time. The sizeable budget deficits were also governments’ responsibility; while domestic policies often discriminated against tradables, encouraging import-substituting industries with biases against agriculture and manufacturing exports.

Table 1.3 Interest rates for developing countries (per cent)

Table 1.4 Incidence of stabilisation and adjustment policies, 1980s^a

The origins of the problems thus lie in both exogenous and endogenous developments. Irrespective of cause, countries had no alternative to adjusting, although the extent and speed of the required adjustment was partly the responsibility of the international community. Had the IFIs and others been quicker in finding a solution to the debt crisis and in accelerating official financial flows to Africa, adjustment could have been more gradual. Less adjustment would have been needed had interest rates been brought down sooner. More radically, had the problem of falling commodity prices been tackled effectively, instead of compounded by the policies advocated, the need for adjustment would have been significantly moderated.

In the event, countries were required to adjust rapidly, sharply and (in many cases) continuously. The IMF and the World Bank became the major policymakers for many countries. The stabilisation and adjustment policies they designed were intended to reduce the twin imbalances on external and domestic account, and correct policy biases against tradables and market forces, in order to establish the basis for sustainable growth. The adjustment programmes were adopted—with more or less effective implementation—in many countries almost continuously throughout the 1980s, dominating policy-making and displacing most long-run development policies.⁵ Because of the pervasiveness, dominance and prolonged nature of the stabilisation and adjustment policies, they had wide-ranging medium-term consequences, not only for the macro-economy but also for incomes of the poor and for the social sectors.

For the first half of the decade, little attention was paid to the plight of the poor by the international community, although quite early in the decade UNICEF drew attention to some early indicators of negative trends.⁶ But at this stage both the World Bank and the IMF regarded the issue of poverty in relation to adjustment as solely a domestic one, on ...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• LIST OF DIAGRAMS, CHARTS AND TABLES
• SERIES EDITOR’S PREFACE
• PREFACE
• CHAPTER 1: INTRODUCTION
• CHAPTER 2: THE IMPACT OF MACRO-ADJUSTMENT POLICIES ON THE INCOMES OF THE POOR—A REVIEW OF ALTERNATIVE APPROACHES
• CHAPTER 3: MESO-POLICY CHOICES AND THE POOR1
• CHAPTER 4: FOOD SUBSIDIES: TWO ERRORS OF TARGETING
• CHAPTER 5: ADJUSTMENT AND SOCIAL FUNDS: POLITICAL PANACEA OR EFFECTIVE POVERTY REDUCTION?
• CHAPTER 6: STRUCTURAL ADJUSTMENT POLICIES AND THE POOR IN AFRICA: AN ANALYSIS OF THE 1980S
• CHAPTER 7: THE LATIN AMERICAN AND CARIBBEAN STORY1
• CHAPTER 8: CONCLUSIONS
• BIBLIOGRAPHY