Structural Adjustment Program (IMF) Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

International Monetary Fund (IMF) and other donors to developing countries with the goal of addressing underlying problems in national economies that cause persistent balance-of-payments problems. Structural adjustment loans are programmatic in nature and do not finance specific projects but rather support policy reform. Conditions attached to the loans specify the reforms that the IMF expects governments to implement. The IMF and the World Bank widely used these programs in the 1980s and 1990s but then replaced structural adjustment lending with poverty reduction lending in the late 1990s.

The Origins Of Structural Adjustment Lending

The oil shock of 1979 and 1980 and the subsequent recession in the industrial world led to increasing costs of imports and decreasing earnings from exports for many developing countries, resulting ultimately in significant balance-of-payments difficulties. In 1980, the World Bank introduced the structural adjustment loan to help developing countries reduce their current account deficits and undertake policy reforms that presumably would lead to better underlying macroeconomic fundamentals.

The IMF traditionally used stand-by arrangements to help countries address short-term balance-of-payment problems, but these agreements were not designed to address recurring problems. In 1974, the IMF began using the extended fund facility (EFF) to respond to medium-term balance-of-payments problems requiring economic policy adjustment. Use of the EFF increased markedly during the first half of the 1980s and represented the majority of fund activity between 1981 and 1983. In 1986, the IMF introduced the structural adjustment facility (SAF). SAF loans were available to low-income member countries and featured reduced interest rates. In 1987, one-third of new programs were structural adjustment programs; the proportion increased to one-half in 1988. In 1987, the IMF introduced the extended structural adjustment facility (ESAF), which aimed to support “especially vigorous” medium-term adjustment programs and relied on extensive conditionality. In 1989, combined structural adjustment lending represented 38 percent of the value and 65 percent of the number of total active IMF programs. From 1987 to 1999, structural adjustment programs accounted for more than 50 percent of all ongoing IMF programs, although because of their smaller size, they amounted to only 18 percent of ongoing IMF commitments.

Goals Of Structural Adjustment

As observed by the academic Tony Killick in 1998, the IMF’s structural adjustment programs typically aimed to accomplish three types of policy change: to increase the role of markets and private enterprise relative to the public sector; to improve the efficiency of the public sector; and to mobilize new domestic resources. Common conditions in structural adjustment loans included the reduction or elimination of agricultural or petroleum subsidies and price controls; the privatization of public enterprises; the reduction of government expenditures; trade liberalization; and reform of the financial sector. These market liberalizing policies came to be known as the Washington Consensus.

Problems With Structural Adjustment

The specific content of reform programs was supposed to be negotiated between the IMF and the aid-receiving country. However, critics of structural adjustment viewed the reform conditions as too uniform across countries and critiqued the IMF for failing to consider the distributional consequences of the policies. In particular, structural adjustment reforms often left the urban sector worse off, making the policies politically difficult to implement.

Countries that entered structural adjustment programs tended not to graduate from them. Following a first structural adjustment loan, there was an 80 percent chance that a country would enter an additional program; following six structural adjustment loans, the probability of an additional loan remained 80 percent. Over a dozen developing countries spent more than two-thirds of the 1980s and 1990s in an IMF structural adjustment program.

Yet countries in structural adjustment programs did not show improvement in their budget deficits, current account deficits, inflation rates or other macroeconomic indicators. In general, countries in IMF programs appear not to have experienced as much economic growth as they would have in the absence of the IMF program. Recognizing the problems with structural adjustment programs, in 1999, the IMF transformed the ESAF into the poverty reduction and growth facility. This instrument puts increased importance on government participation in the design of the program and on both poverty reduction and growth-oriented outcomes, although some critics see it simply as continued structural adjustment lending.

Bibliography:

Barro, Robert, and Jong-Wha Lee. “IMF Programs: Who Is Chosen and What Are the Effects?” Journal of Monetary Economics 52, no. 7 (October 2005): 1245–1269.
Collier, Paul, and Jan William Gunning. “The IMF’s Role in Structural Adjustment.” The Economic Journal 108 (November 1999): 634–651.
Easterly,William. “What Did Structural Adjustment Adjust? The Association of Policies and Growth with Repeated IMF and World Bank Adjustment Loans.” Journal of Development Economics 76 (2005): 1–22.
Killick, Tony. Aid and the Political Economy of Policy Change. New York: Routledge, 1998.
“Can the IMF Help Low-income Countries? Experiences with Its Structural Adjustment Facilities.” World Economy 18 (June 1995): 603–616.
Vreeland, James Raymond. The IMF and Economic Development. New York: Cambridge University Press, 2003.

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