“Pakistan is still in the clutches of World Bank, IMF”: a claim recently made by a prominent politician and member of the National Assembly, Shah Mehmood Qureshi, urges us to reflect on the ties between powerful financial institutions and unstable countries such as Pakistan. The word ‘clutches’ forces us to dramatically picture such ties as shackles of oppression from which underdeveloped countries have been attempting to break free. Since the formation of IMF and World Bank in 1944, their involvement has been heavily present in the Third World. On paper, their participation seems like a glorious blessing paving way for efficient global progress. However, after inspecting further we can view the birth of such institutions as a strategic move by former colonial powers to maintain their hegemony. Such strategies are a disguise by various measures, one of them being the use of Structural Adjustment Programs (SAPs). SAPs have long prevailed as a rescuing mechanism by international financial institutions such as the IMF or the World Bank, posing as caped heroes who implement specific economic policies in return for providing aid to developing countries.
However, their continuous attempts to save the financial problems can be inspected with a critical eye. SAPs have expanded to several developing and underdeveloped areas such as Latin America, Africa and South Asia. Restructuring the economic framework is vital for the successful progress of any country but problems arise when such restructuring gives precedence to benefitting the West over the main victims in need for development. An initiative taken by the Bretton Woods institutions, namely, the IMF and World Bank, SAPs were developed in the 1980s as conditions and loans for developing countries. To tackle the influx of debt in 1970s due to boycotts and decreased consumptions from the West by the Third World unison, a restructuring of development and governance evolved after the IMF and World Bank inspections. The creation of SAPs was mainly to curb the issue of the debt crisis in 1980s, to combat the 1 trillion dollars third world countries owed to the West and enable countries to qualify for new loans.
The IMF designed policies of SAP that supported the libertarian views, encouraging free trade, foreign investments, making governments less interventionist, and increasing cooperation to facilitate international business. However, using our contextual knowledge and research, it is crucial to assess how the consequences of SAPs overshadow its benefits. SAPs despite helping developing countries had more failures than successes. By observing measures such as privatisation, currency devaluation, and other fiscal policies such as reduced government spending, we can inspect the extent to which SAPs were successful and the undesirable failures tagged along.
Theoretically we can explore the successes and failures of SAPs on several levels ranging from liberalism versus realism or modernisation versus dependency. However, we can specifically inspect the Comparative Advantage by Ricardo, where a country provides goods and services for low opportunity costs and the Import Substitution Theory (IST) by economists such as Alexander Hamilton, focusing on the replacement of imports with domestic products. Ricardo’s concept links to optimising trade advantage through economic specialisation. It is the notion of choosing global economy over national economy, increasing efficiency in the former sector. It disengages with the concept of giving precedence to domestic production over foreign import as promoted by IST. SAPs have also been targeted by proponents of the dependency theory. From their perspective, the formulation of SAPs is an exploitative technique used by the core countries to fulfil their own imperialistic aims. We must also note that the dependency theory is often critiqued for its pessimistic, zero-sum assumption that the ‘gains of the core come at the expense of the periphery’. Despite this criticism, we cannot ignore how the side aligning with SAPs and comparative advantage, possesses expansionist elements by the developed countries.
As mentioned, SAPs were a product of IMF aimed at Debt Payment. However, the assurance to mend economic instabilities was tied with conditions imposed by the Western countries. Observing with a neutral eye, the first success that came from implementing SAPs was considerable amount of time to repay the debts owed by some of the developing countries to the first world through methods such as currency devaluation. Currency devaluation leads to a decrease in the price ratio of non-tradeable to tradeable goods which works by improving a country’s current account resulting from incoming foreign investment and trade surplus. The viewpoint supporting the use of currency devaluation in SAPs advocates the benefits it brings to the country’s trading system. Devaluing currency makes the goods being exported cheaper and with cheaper exports, there are more foreign buyers interested in trading with that country.
This provides the country with a boost in trading competiveness. Internationally, it gives the country more recognition in terms of trade. Domestically, its successes can be credited by the increase in job availability in the export sector as trading flourishes and vacancies open. In economic terms, high exports lead to increase in aggregate demand leading to higher rates of economic growth. It aims to fix the deficit a country faces due to lack of competitiveness. As appealing this policy sounds theoretically, it has its drawbacks. Currency devaluation could have undesirable effects such as inflation in the form of demand pull and cost push inflation. This could be because high prices for imported goods often lead to an increased demand for locally produced cheaper substitutes which could potentially result in a demand-pull inflation. Additionally, a cost-push inflation would occur as production costs would increase in response to demand surplus in the labour market along with expensive imported raw materials.
Critics for example, argue that expanding the employment sector is a stretched claim made by supporters of currency devaluation. A major drawback of this policy is potential build up to inflation. Even if exports become cheaper, one cannot deny that it leads to high priced imports. Purchasing manufactured goods or even raw materials from other countries becomes a difficulty as prices are too high. This is highly likely in cases of economic boom making it an ineffective long term solution. It also led to existing firms or exporting companies adopting a laid-back attitude as they lost their value with the decrease in competition and declined incentives. At times the idea of devaluing currency can also repel foreign investors instead of attracting them. This is because they are less willing to own government’s debt as it effectively reduces their holdings. Policies such as currency devaluation led to several outcomes but the negative ones are more impactful. Similarly, SAPs had other impactful economic adjustment policies.
This brings us to the next policy implemented, which was, privatisation of the public-sector and the services provided by them. These included state owned enterprises such as the oil industry, rail road network, electricity and water works. Privatisation is endorsed by liberals as it leads to greater autonomy of business enterprises, removing influential say of the government. In determining successes of SAPs, we can inspect the benefits that come with it.
The two major impacts of privatisation include reduction in developments of the country leading to privileging the corporate sector and secondly, extending the presence of foreign ownerships in the Global South. When optimistically viewing privatisation, we can argue that the benefits come after enforcement. It is a highly efficient and profitable way to run markets as it encourages companies to invest. It also attracts more private investments that benefit the banks and infrastructure of the country. It cuts down on public spending and eliminates corrupted political interferences. This is important because governments usually work on a short-term basis as observed in Pakistan’s political and internal developments. However, it is crucial to look at the disadvantages of privatisation as well.
As expanded under current devaluation, privatisation also leads to monopolisation and exploitation of public interest. Private firms increase their competitiveness leading to high prices that customers struggle to afford in developing countries. This often leads to lack of accountability and makes regulation tough as there is no governmental monitoring or body to take responsibility. It is often counter argued that governments of such countries are often too corrupt for accountability however, the impact of a common man not able to enjoy basic infrastructures such water supply carries a much heavier weightage. It can further be viewed as an unnecessary measure as most of infrastructural industries do not require profit motives, such as, public health spending. Thus, moulding state-ownership to privatisation leads to dire consequences.
Another component of SAPs fiscal policies included reduced governmental spending and a decrease in wages. Economic growth, low unemployment rates, and stability in prices and wages were meant to be achieved through contractionary fiscal policy. This requires lowering government spending in the economy and increasing tax rates which would result in economic growth as the private sector will find efficiently utilised factors of production to reach its potential level of output. In addition to that, a higher progressive tax rate would lead to equal distribution of income as income would get redistributed from the rich to the poor. The decrease in government spending however, leads to an increase in social wages.
A key reason that helps outweigh the failures of the SAPs against its successes are its social effects. Currency devaluation and privatisation leads to a decrease in expenditure on basic commodities leaving them to increase their price. Food for example, a basic principle commodity, increased its capital price. The problem was mainly that food and other such commodities were a necessity, the public was faced with increased social wages that is, buying things that you have because they are a necessity. Increased social wages lead to several drawbacks. In Mexico, for example, there was problems such as malnourishment. Mexico was one of the first countries receiving an alteration in its financial structure after owing a debt of $80 billion in 1982 and its result was elimination of all basic staple dietary requirements such as tortillas or bread. This policy helps us in determining the heavy social cost that came with SAPs making it side more with the view that they were a failure.
Using Pakistan as a case study, we can observe the revenue measures it took. For example, to reduce the budget deficit, employment wages were restrained and job opportunities froze. Sources support this with facts such as public sector experiencing a wage cut of 12.75% within the first three years of SAPs entry in 1990s. In an attempt for fiscal consolidation, the government began ignoring areas such as social safety nets for employees. This restriction also had implications on the private sector as it resulted in high concentration with minimal wages. It also led to existing firms or exporting companies adapting a laid-back attitude as they lost their value with the decrease in competition and declined incentives. Policies such as currency devaluation led to several outcomes but the negative ones are more impactful.
From all the extensive measures discussed above, one of the key observations made was that SAPs made little or no improvement. Pakistan, Brazil, Argentina, and other African regions are all examples used to support this. Brazil had been one of the countries that restructured its economy on the advice of IMF and World Bank however it still achieved 3% of economic growth while owing 240 billion dollars of public debt. Along with that, it had a striking ignorance of making sure people in the lower strata met their average living conditions. Similar trend was observed in most of Latin America.
The New York Times accurately phrased the justification provided by IMF for such structuring which was “fiscal discipline is a necessary precondition to prosperity”. However, while promising this road to prosperity, the organisations failed to consider other results that led to millions of people suffering. The result of suffering also resulted in several protests by the citizens in countries implementing them. There were massive violent protests that covered different ranges of issues. Most common protests started from food riots where public opposed the high rise in prices of food and eventually led to protests blaming the overall implementation of austerity measures under SAPs.
The increase in social wages also led to high social unrest in the countries implementing these policies. Domestically in Pakistan, we can recall the violent protests on electricity and gas shortages experienced due to such negative economic shocks. In African region, countries such as Ghana contained a lot of political unrest and urban demonstrations with riots. This impact can also be analysed by NGOs such as Oxfam that reported a significant decrease in public health spending and the primary school systems. It has been clear after 15 years that SAPs in Africa had neither accelerated growth nor reduced poverty, while there was a notable lack of ownership or resistance to conditionality from recipient governments. Such disruptions and turmoil is evidence of how SAPs were more of a failure than success.
Besides this, there was another major flaw embedded in SAPs. These programs committed a breach of national sovereignty by giving no choice but to shape economic policies the way institutions such as IMF desired. It gave those in power an easy access to justify intervention in struggling countries. To support this, we can use Tanzania as an evidence. Tanzania was a country with one of the lowest Gross Domestic Product (GDP) and was one of the countries that adopted the SAPs. Their introduction led to several positive and negative changes. The introduction of SAPs paved way for an improvement in infrastructure such as roads to enhance convenience of foreign trading companies. It also encouraged globalisation which was a process leading to integration of world market.
However, simultaneously, SAPs also led to elimination of valuable subsidies such as fertilizers. The decline in the value of Tanzanian shillings also harmed economy in ways discussed before in this piece, such as inflation. It also led to a lack of government control, encouraging monopolies and market failures. This also impacted increased capturing of its natural resources such as gold. To sum up the case of Tanzania, SAPs may have initiated an economic recovery and benefitted it more than other countries, Tanzania still owes ‘friendly debts’ to countries and has high dependency. Thus, the inadequacy of SAPs to fulfil their main goal while creating other problems can be depicted as a failure.
All the afore mentioned points are crucial when focusing on the SAPs implemented during the 1980s. The measures taken under the umbrella of SAPs resulted in complete alteration of the global world system. On the optimistic side, it brought the concept of global governance leading to a well-integrated society however, such ambitions are accused of only providing surface level justification for western dominance. SAPs altered the notion of development and redefined it as the “participation in the world market” according to a World Development report in 1980. The need for alternative economic adjustment programs and the polarization of the developing and developed countries still exists till present day. The situation of the modern contemporary society and the social costs are proof of the failures of the SAPs. Upon analysing various elements, one can safely reaffirm the verdict of how SAPs were more of a failure than success.
With fiscal policies such as privatisation, austerity, currency devaluation the prices of basic commodities increase highly. The measures adopted by the SAPs and their impact, from our analysis of case studies and such supporting evidences, we can safely conclude how they portrayed mixed results at a heavy social cost. Therefore, SAPs should be regarded more as a curse injected by powerful hierarchies to serve their own interest than those in need of assistance.
Bakhtawar Atta is a PIIA researcher.