, Research Paper
The failure of structural adjustment programs
Many bankers and economists view the Third World as places where the economies have yet to take off. All they need are resources to stimulate the imminent prosperity. To alleviate the immense poverty, unemployment and destitution that afflicts the vast majority of people, the poor and the working class , in these nations, economists and bankers look toward the free market as the solution. As developing nations debts accumulate to point where some must declare bankruptcy, the international banks, the International Monetary Fund (IMF) and the World Bank, began giving loans to these with the aim of stimulating the economy. Attached to these loans are conditions, meaning the debtor nation must adhere to stringent domestic social and economic policies if they were to continue to qualify for future loans and food aid. These financial aid programs are dubbed structural adjustment programmes (SAPs), and are designed to put developing nations on solid footing within the global economy so they could repay their loans. The economic policies that the IMF and the World Bank favour are those which aims producing products as cheaply and abundantly as possible for export. And in turn, jobs would be created and a considerable revenue would be generated. According to their theory, this is supposed to raise the overall standard of living of the people in these nations and help the local economy expand. Since the implementation of them in the 70s though, SAPs have not remedied the plight of the poor and the working class nor caused the economic growth the IMF and World Bank economists have predicted. In fact, evidence shows that SAPs have exacerbated the very problems they were designed to solve: poverty, dependence, and debt. Using Jamaica as a particular example, the following will outline the origins of SAPs and the general effects they have had on countries where they have been implemented.
Firstly, it would be appropriate to briefly explain the general history and context of the global economy that led to the implementation of SAPs.
Third World countries were decolonised as their importance to advanced capitalist countries declined. After the second World War, the Western industrial countries became more self-sufficient: dependence on raw materials declined because they were used more efficiently and synthetic substitutes for them were being developed. The agricultural output of these countries were also on increase. Developing nations chiefly played the role of providing industrially advanced countries with raw materials, as long as there was a demand for it amongst industrial countries, domestic wealth was generated.
The markets for high priced and sophisticated commodities amongst the Western countries kept expanding during this period so much wealth was created as the world economy grew and grew. The new pool of global savings ensured profits for the continuous stream of new investments. This post-war period is known as the long boom . With the exception of the newly industrialising countries (NICs) in East Asia and Latin America, most developing nations failed to gain much self-sufficiency because of their subservient role in the global market economy as solely raw material exporters.
The reason why they did not achieve economic independence is due to the fact that the Third World has been (and are being) excluded from world trade and investment. Most global trade is done between the industrially advanced countries because they mainly produce manufactured goods. The reason why the NICs were prosperous is because they were able to break into world trade by producing such goods. But the prospects of the rest of the Third World transforming into even partially industrialised nations are quite hopeless if they continue to be excluded from world trade.
The 1970s marked the decline of the long boom, the 1979-82 recession being the final nail in the coffin. With scarce investment opportunities and an overflow of capital, banks began to their increase loans to the Third World. But with the recession of 1979, the debtor nations found it impossible to pay off their loans. Thus a debt crisis ensued. The crisis peaked when Mexico defaulted on its loans in August 1982. So most Third World countries remained in a state of social and economic crisis. Economic growth stagnated. Construction projects sat unfinished and finished ones were unpaid for. Real interest rates rose dramatically in 1980-82 (about 30%) thereby increasing the interest on the existing debts, so loans were needed just to cover the interest payments.
Industrial nations and international banks recognised the need for a way to stimulate the faltering economies of the developing nations so loans and debts can be paid back. So SAPs were devised to improve government financial balance sheets and to stimulate economic growth and prosperity.
Structural adjustment loans are geared towards construction projects and the expanding government services (for business), paving the road toward economic prosperity. The IMF and the World Bank was certain that the gap between export income earning and the cost of imports would close. If the governments of the debtor nations agreed to implement the social and economic policies, then the debt collection date would be postponed by the big banks thereby maintaining a certain degree of financial stability for the nation in the mean time.
When in place, the policies under SAPs that governments are forced to adopt have detrimental consequences for the poor and working class of those Third World countries. Rather than alleviating the economic problems, the policies actually make them worse. And as the economic problems worsen, so do the social problems since they are inextricably connected. At the same time, the wealthy business owners profits keep increasing yet none of it is “trickling down” to the rest of population as economists thought would. They do not see a penny. Proponents of the SAPs believe that recipient nations have been “living beyond their means” which is perceived to be one obstacle to economic growth.
The following outlines the main components of SAPs and how they drive down the living standards of the poor and the working class.
Economists believe that local demand for goods must be suppressed, in economic terms it is called, “tightening of domestic demand” or “reduced local absorption”. The two main ways to achieve this through SAPs is currency devaluation and the removal of any price ceilings and subsidies. When the dollar is devalued, it raises the cost of imports. And price ceilings hinders the natural course the free market will take. Both methods allows inflation to go unchecked thereby raising the cost of living hit the very poor the hardest.
Taxes are raised and are mainly paid by poor and working class people. SAPs discourages taxing businesses and wealthy individuals since the economic ideology believes that they (the wealthy) will invest their savings into domestic economic activities. The truth is, the wealthy usually invests their money abroad or it is spent on luxuries.
Many governments give business a period of time where they pay absolutely no taxes when they invest in their country. This ranges from 5 to 20 years. This is thought to be one way to entice new foreign investment. But tax revenue losses are not made up with the new investment because profits are not re-invested back into the local economy. When the tax holiday is up, investors simply pack up and leave, with their profits.
Another qualification for SAPs is a portion of government revenue must be spent on assisting the private sector. The SAPs typically contract building projects to private businesses to build roads, harbours, etc. These projects are meant to enhance export production, the building of infrastructure makes goods easier to transport. The government is expected to aid these businesses which, in turn, is geared towards attracting more private investment, especially for export production. And as investment comes, it means profits that will help the local economy. But the profits that investors make are not re-invested locally, their savings are transferred to multinational banks; the same banks who loan capital to the governments of developing countries. And in turn, the
SAPs scorn tariffs and levies that may be placed on exports. Some governments impose them to gain some revenue from the wealth of investors, but it contradicts export product maximising. These protectionist barriers are designed to protect local business from foreign competition. SAPs want domestic markets to be as open as possible for foreign investment. By removing them those barriers, local businesses go belly up simply because they cannot compete with the foreign companies. Much unemployment is created this way, and also local needs are even harder to meet.
The SAPs for most recipient countries normally require decreased public spending. The areas of education and health are hardest hit in most cases. There are more school fees, teaching jobs are cut, in the health sector, services like vaccinations that were previously free have a price tag. Again, the majority of the population bears the burden.
Public utilities, land and industries are normally downsized or put on the auction block under SAPs. Economists label these government resources as “inefficient” but there is no evidence private companies are that much better. As services are slashed and the cost of using them rises, it is the majority of people who lose out.
Attacks on workers are intrinsic to the SAP s agenda. As the public services are slashed, so are the number of public sector workers. In the private sector, wage ceilings and freezes are imposed and the minimum wage is not enforced, thus driving down the overall living wage. SAP proponents justify this by blaming high production costs for the lack of private investment and the stagnate economies. These attacks on the working class has been met with fierce resistance throughout the 1980s which resulted in the toppling of governments but very little gains for the workers themselves. It just goes to show that any assertion of government control of the local economic dynamics is but an illusion. No matter how left wing a government may seem, the bottom line is, they will always be forced to make concessions with the international banks.
Oscar Allen, leader of the Rural Transformation Collective, observed: The stranglehold on us by foreign institutions today is more total than under the colonial situation, because it is cultural and social as well as economic, and because it includes co-operation and co-ordination among Caribbean governments under terms dictated by the IMF and the World Bank.
Jamaica is a classic example of a country where the IMF and World Bank SAPs have failed to deliver at a huge cost to the society.
Jamaica s Labor Party, led by Harvard-graduate Edward Seaga, came to power in 1980 on the promise of new loans from the North. Ronald Reagan, the president of the United States at the time, was confident that free enterprise would bring Jamaica prosperity. The US s Agency for International Development (AID), who are creditors to the Third World and who work very closely with the IMF and World Bank, substantially boosted their loans to Jamaica from $38 to $208 million. From 1981 to 1989, USAID spent an average of almost $120 million per year; the most of all the Caribbean countries. To attract private investors, Seaga used a typical economic strategy that was bound to fail from the very beginning: he pulled out all the stops to open domestic markets for foreign competition. He reduced government protection of Jamaican producers and opened the country to more imports from abroad. Garment assembling sweatshops, where non-unionised women worked for less than 50 cents an hour, were widely promoted. In turn, local business closings resulted in massive job losses; the businesses could no keep up with foreign manufacturers. By 1982, Jamaica s trade deficit tripled and wealth could not be contained within the country. New IMF loans were given to the Seaga government but that also meant a leaner economic policy: the Jamaican dollar was devalued by 43% (reducing the buying power of Jamaicans). This resulted in a renewed suffering by the Jamaican working class and poor. Inflation accelerated to 30% in 1984/85 and unemployment climbed to 30%. The world market prices of minerals (Jamaica s chief export), particularly bauxite and alumina, were extremely low which translated into the closing of large mines operations. By 1988, the country s external debt reached $4.4 billion which was one of the highest per capita in the world. And earning from exports fell by 2.6%, rather than increasing.
The cost to the Jamaican people because of the SAPs imposed on the country is staggering. Funding to health care fell by 33% from 1981 to 1985 which resulted in fallen real incomes of doctors, nurses and health workers, closing of hospital services and new charges to existing services. Housing prices have effectively doubled in both urban and rural areas. A fifth of the public workforce was slashed in one year, October 1984 – 85. The concentration of wealth continues thereby increasing the gap between the richest and the poorest Jamaicans. The use of hard drugs and crime rose, and is still on the rise. And poverty is rampant, even the middle class lives in fear. In response to worsening conditions, people took to the streets in mass demonstrations and general strikes. Many victories have been won from the grassroots level but fundamental change has yet to be seen.
By the end of Seaga s term, Jamaica s gross national product was no larger than it had been at the beginning of his term. But the external debt of Jamaica doubled. The World Bank s senior economist for Jamaica, Roger Robinson, acknowledged in 1988 that Jamaica s social and economic infrastructure is worse than it was in the 1970s . None the less, he still recommended recovering more of the costs from the users of hospitals, schools and other services , despite the fact that Jamaica has been struggling to pay the upkeep of all its public institutions.
By the time Edward Seaga left office as a defeated politician, he was extremely hated. At the same time, economic aid from the US had declined because of their lack of concern with the Caribbean as a national security issue (i.e. the Cold War was coming to an end). So in his place comes Michael Manley who was actually the prior president to Seaga. New negotiations provided new loans for the deteriorating country but new austerity measures were also dictated that would prove far worse for the people of Jamaica. The Jamaican dollar was devalued even further and it reached a record low of J$10 to US$1. Food price subsidies were lowered and price caps on food were raised. To comprehend the further deterioration of living conditions, one may picture it this way: prices in Jamaica are only slightly lower than that of the US but the Jamaican minimum wage is eleven times lower its US counterpart.
As the vicious economic cycle spins, Jamaica s social fabric tears even more. To this day, it is the same old song and dance for the country. As long as the same neo-liberal free market strategies are utilised in attempting to kickstart the Jamaican economy, the same dead horse will continue to be flogged over and over.
In conclusion, structural adjustment programmes that have been implemented by international banks such as the IMF and the World Bank have failed in meeting their objectives of bringing economic growth to the Third World. Instead of solving the economic and social problems they promised they would do, the SAPs create and perpetuate them. SAPs proved to be complete dead ends. They simply augment the need for Third World countries to keep borrowing capital from creditors, sinking themselves into greater and depressing the living standards of their respective citizens. The blame of stagnate economies should be placed on the Third World exclusion from world trade. Advanced industrial nations trade mainly between themselves bypassing the Third World. And worse still, the demand for Third World raw material exports are on the decline so their main source of income, export earnings, are falling. Thus making the likely-hood of having debts and loans repaid even slimmer.