Why structural adjustment is necessary and why it doesn't work

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Why structural adjustment is necessary and why itdoesn't workGavin WilliamsPublished online: 24 Feb 2007.

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Review of African Political Economy No.60:214-225© ROAPE Publications Ltd., 1994ISSN 0305-6244; RIX #6006

Debate

Why Structural Adjustmentis Necessary and Why ItDoesn't Work

Gavin Williams

Whence Structural Adjustment?During the 1980s, most of the countries inLatin America, Eastern Europe and Af-rica, with different forms of governmentsprofessing very different ideologies, foundthemselves trapped by levels of debt tointernational public and commercialbanks which were far beyond their capac-ity to finance. Consequently, they came todepend on IMF and World Bank ap-proval to persuade commercial banks toreschedule -their debts and maintain linesof commercial credit. Across several con-tinents, state economic policies requiredthe external approval of the internationalreceivers, the IMF and the World Bank.

The inability of governments to securetheir fiscal bases and to satisfy the multi-plicity of demands of their various con-stituents undermined their legitimacyand led to the emergence of popularmovements demanding democratic re-forms, and encouraged some regimes toembark in haste on strategies to transferpower to elected successors. The collapseof communist power discredited commu-nist one-party regimes and their imitatorsin Africa. They also reduced the inclina-tions of the western powers to continuetheir military, political and financial sup-port for authoritarian, and sometimesbankrupt, anti-communist regimes in Af-rica and Latin America. The twin slogansof 'democracy' and 'the market economy'provided an ideological flag for the short-lived 'New World Order' proclaimed by

the Bush regime as it bombed its - andBritain's - former Iraqi clients into sub-mission.

The origins of 'structural adjustment'programmes go back well before thislatter-day enthusiasm for 'free enter-prise', 'free trade' and 'the marketeconomy', let alone for a new 'demo-cratic' dispensation. Indeed, in some casesthe attempts to carry through programmesof structural adjustment have engen-dered opposition to dictatorial regimesand led to their relinquishing power.

To take the critical example of Poland,attempts to reform the price structure inthe face of international debt led to theworkers insisting on their right to cheapmeat, and the formation of Solidarnosc.The military government could suppresspolitical opposition but it could notresolve the fiscal crisis of the Polish stateor the crisis of industrial production.Hence the invitation of the Jaruzelskiregime to the opposition to form anelected dyarchy, one key moment in theultimate collapse of communist authorityin Poland and elsewhere in eastern andcentral Europe. Whereas foreign bankershad previously looked to authoritarianregimes to enforce fiscal discipline andbring the workers under control, democ-ratisation was now widely seen as neces-sary to legitimate the economic sacrificeswhich were to be demanded of people inthe name of economic reform.

In 1975 Robert McNamara told the boardof governors of the World Bank thatcommercial bankers (he had his friendDavid Rockefeller of Chase ManhattanBank in mind) wished to see a shift in thebalance of international lending from thepublic to the private sector. Chase had

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Debate: Why Structural Adjustment is Necessary and Why It Doesn't Work 215

burned itself with loans to Zaire andZambia during the copper boom of theearly 1970s and was now looking topublic lenders to help them recover theirdebts. The World Bank did not, however,check the appetite of governments forloans on commercial terms, without theconstraints imposed by the IMF and theWorld Bank, nor the willingness of com-mercial banks to go on lending money to'sovereign' debtors who were blatantlyunable to meet their commitments. Thescissors of an international recession andrising real interest rates did the rest.

McNamara did address a critical hiatusin the international financial arrange-ments established at Bretton Woods. TheIMF was set up to provide short-termloans to governments faced with balanceof payments problems to allow them torestructure their economies without re-sorting to the protectionist trade policiesand recurrent devaluations which hadmarked the depression of the 1930s. TheWorld Bank, the International Bank forReconstruction and Development, hadfound a niche for itself in providing long-term development loans, mainly to payfor transport, telecommunications andirrigation projects - later for agriculturaldevelopment projects - to the countries ofLatin America, Asia and Africa. Neitherthe IMF nor the World Bank was empow-ered to provide long-term loans to coun-tries facing chronic balance of paymentsproblems and rising international debts.The World Bank had rejected the earlierproposals of the Pearson Report to allowprogramme loans, untied to the costs ofspecific projects.

This was the problem which the BrandtReport was set up to address. Its contro-versial proposal for a new World Devel-opment Fund to provide long-term'programme' loans to governments madeit easier for McNamara to convince thegovernors of the World Bank to allow theBank to offer 'structural adjustment' loansinstead. Brandt, and structural adjust-ment loans, were set up to resolve the

problems of funding debt relief to indi-gent governments. They also created anopening for the Bank and the IMF to takea far more directive approach to theeconomic policies of its client regimes.

Origins of the Debt CrisisWherein lay the origins of the pervasivedebt crises confronting military dictator-ships in Latin America, one-party re-gimes in Africa and communistgovernments in eastern Europe? Thesedebts are not only the result of fiscalirresponsibility and political corruption,though these certainly exacerbated gov-ernment debts and, in some cases, gener-ated holdings of foreign assets by politicalrulers and their associates which matchedtheir government's unrequited debts. Theproblems of international debt are thenecessary consequence of the dominantstrategies of industrialisation and devel-opment in Latin America and Africa inthe post-war period, strategies whichwere emulated - indeed epitomised - bythe policies of the Gierek regime inPoland in the 1970s.

Following the advice of nationalist andsocial democratic economists, in Polandgovernments sought to change the struc-tures of their economies from depend-ence on primary exports - minerals,crops and livestock - to pay for theimports of industrial goods, by investingthe earnings from primary exports in thedevelopments of local industries. Thedivision of responsibilities between statecorporations and private firms, and be-tween local and foreign capital, variedfrom country to country. The key ele-ments were protective tariffs to encour-age local industries and persuade foreigncapital to invest directly in production tomaintain or gain access to local markets;public funding of investments ininfrastructural projects and in basic goodsindustries, often funded by foreign loans;and most critically, the use of the foreignexchange earnings of agriculture andmining to pay the import costs of the

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216 Review of African Political Economy

industrial sector. To these were to beadded the rising costs of meeting thewidening demand for public spending oneducation, health and other services.

As long as local industries tended toimport more machinery, raw materials,and skills than they generated fromexport earnings, they continued to de-pend on agriculture or mining to pay fortheir imported inputs. Typically, in LatinAmerica, Africa, and India - though notin east Asia, the new industries producedgoods for protected national marketsrather than competing in internationalmarkets. Ironically, then, the more rapidthe growth of the industrial sector, thegreater the strain on the balance ofpayments say why this follows. In thisway, policies of import-substituting in-dustrialisation, far from reducing de-pendence on the export of primaryproducts, made governments ever moredependent on rising agricultural or min-eral exports. This in turn made them evermore vulnerable to the volatility of ex-port earnings and, arguably, a tendencyfor the terms of trade to turn againstprimary producers in the long term, thevery problems which had justified thestrategy of import-substituting industri-alisation in the first place.

These problems of enhanced export de-pendence are common to all countriesfollowing strategies of 'import-substitut-ing' industrialisation, though their ca-pacities to deal with these problems, andthe policies they have adopted in re-sponse to them vary considerably fromone case to another. After the oil price riseof 1973, international commercial banksfound themselves with large sums ofmoney in hand, and limited opportuni-ties to invest them. Third world govern-ments needed cash to pay the risingimport costs of their development strate-gies and to meet .their increased bills foroil imports. Commercial banks offeredmoney without the strings imposed bythe international financial institutions -but at a price: loans, denominated in

dollars, would carry flexible interest ratesset in relation to the London inter-bankrates. Governments, whatever their as-sets and liquidity, were 'sovereign debt-ors', unable to go bankrupt. Governmentsof developed countries guaranteed ex-port credits so that they too becameresponsible for commercial debts. Conse-quently, the commercial banks and gov-ernment agencies supplied large amountsof short- and medium-term credit togovernments who had no evident way ofpaying for them, especially when realinterest rates rose and the price of pri-mary exports fell in the 1980s.

Some African ExamplesExport-led Growth: In some Africancountries, notably Kenya and Coted'lvoire, the expansion of agriculturalexports in the decades following inde-pendence provided a market for an ex-panding industrial sector. It also fundedthe foreign exchange costs of rising im-port demand generated, directly andindirectly, by the industrial sector and byambitious public spending on education,roads and various construction and de-velopment projects. In Kenya this wasmade possible by lifting the colonialprohibitions on smallholder cultivationof high-value crops, notably coffee andtea. In Cote d'lvoire, the availability ofuncultivated forest land in Cote d'lvoireand migrant labour from Burkina Faso(previously Haut Volta), assisted by thelow prices and falling production ofcocoa in, neighbouring Ghana, allowedCote d'lvoire to expand cocoa productionand displace Ghana and Nigeria as theworld's leading producer. Further, muchGhanaian cocoa crossed its land bordersto be sold for CFA francs and appear inthe cocoa export statistics of Cote d'lvoireand Togo. In Kenya the shilling enhancedits value relative to the currencies of itsimmediate neighbours and, until recently,maintained a stable and fairly realisticexchange rate. The Bank of France main-tained the franc exchange rate of the CFAfranc, which allowed Cote d'lvoire, and

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other countries in the franc zone, accessto a convertible currency.

It was not possible to sustain the expan-sion of agricultural exports indefinitely.International demand for coffee, tea andcocoa is limited, and vulnerable to reces-sion in the developed country marketsfor which there is considerable competi-tion from established producers and newentrants. New opportunities could befound for exports of tropical fruits andfine vegetables, but these too are con-strained by increasing competition forlimited markets. The very success of theirexport sectors allowed countries likeKenya and Cote d'lvoire to borrow moneyabroad from commercial banks to covertheir balance of payments deficits. Thisleft them exposed to the high rates ofinterest on their debts as these accumu-lated. In Kenya, fiscal profligacy andhigh-level corruption have lead to suc-cessive devaluations of the shilling. Thecountries of the CFA franc zone have yetto confront the consequences, in risingimport and therefore living costs, ofdevaluation.

South Africa has a far longer history, anda far higher level, of industrialisationthan Kenya or Cote d'lvoire. Mining,agriculture and industry all expanded onthe basis of coercive labour policies.South Africa, too, relied on primarycommodity exports, primarily gold, dia-monds and other minerals, to fund theforeign exchange costs of its industrialgrowth, including its arms sector, as wellas its foreign wars. Consequently, rapidindustrial growth added to rather thanrelieved its balance of payments prob-lems and its vulnerability to the volatile,and recently stagnating, markets for mostof its exports. This was exacerbated in1985 by its inability to gain access to newcredit from international banks to meetthe debts contracted to commercial banksin the previous decade. The 'new SouthAfrica' inherits a legacy of a sharplydevalued currency, high inflation, bloatedbureaucracy and international debts -

combined with claims from the majorityof the population for access to bettereducation, more housing and expandingemployment opportunities. The exam-ples of Kenya, Cote d'lvoire and SouthAfrica demonstrate the scope for - andthe limitations of - strategies of industrialgrowth, financed by primary exports.

Export-led Decline: The most successfultropical African economies in the colo-nial period were those, such as Ghanaand Uganda, in which the expansion ofagricultural exports by peasant produc-ers had brought prosperity to producersand revenues to the state. British colonialgovernments used the monopoly powersof state marketing boards, during andafter the second world war, to buy thesecrops cheap and sell them dear on theworld market. In this way, they exactedfrom their colonial subjects a tribute ofnet dollar earnings as a contribution topost-war British reconstruction and as asupport for the pound sterling. The Ko-rean war boom allowed governments toimprove prices to producers while takingan ever larger share of the value ofexports or themselves.

This exploitation of peasant producerswas justified by arguments for stabilis-ing prices and regulating markets. Sub-sequently, the marketing boardsurpluses were recommended as asource of finance for spending on infra-structure and investment in industry.When African politicians inherited theaccumulated funds of the commoditymarketing boards, they were used tofund public development programmes,private investments and party politicalactivities. Politics became a contestamong political - and military - lead-ers to control the allocation of publicrevenues to themselves, their clientsand their regional and institutionalconstituencies. Rising claims on gov-ernment revenues rapidly outran thedeclining earnings of the marketingboards. Falling prices were passed, asfar as possible, to producers, thus

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discouraging production for officialmarkets and new planting of tree crops.

In Ghana socialist, liberal, and severalmilitary governments all used the cocoamarketing boards as sources of revenueand instruments of patronage and pre-sided over the decline of export produc-tion. In Nigeria, mineral oil offered analternative source of state revenue toexport crops. Government pricing andexchange rate policies saw a dramaticdecline in the volume of agriculturalexports. In the cases of groundnuts andpalm oil - for both of which crops inNigeria was the world's largest producerin the early 1960s - exports fell to zero inthe 1970s. Mineral oils exports onlyoffered a temporary respite. Nigeria be-came, in effect, a monocrop exporteconomy, vulnerable to the limited inter-national market and volatile prices foroil; politics turned on the capacity toappropriate, distribute and spend stateoil revenues. In the long-term, the colo-nial marketing boards for export crops,and the political battles to control themmade a major contribution to the destruc-tive combination of political instabilityand declining exports which havewreaked various sorts of havoc on thepeoples of Uganda, Nigeria, Ghana andSierra Leone.

Socialist AlternativesCapitalist development strategies in Af-rica appeared to deepen dependence onforeign markets and foreign capital, andto exacerbate inequalities. Socialist poli-cies seemed to offer an alternative path ofdevelopment. They justified direct con-trol by party leaders and state officials ofa large share of exports and imports,banks and credit, food marketing, andindustrial production. The state wouldtake responsibility for directing develop-ment, and protect its subjects from ex-ploitation by foreign capital and localmiddlemen. In Tanzania, under Nyerere,the ruling party extended central bureau-cratic direction of the economy through-

out the rural areas by means of a policy of'decentralisation'. The ideology of ujamaa(familyhood) justified ordering people toplanned villages and abolishing market-ing cooperatives in favour of a hierarchyof state marketing and processing bodies.Tanzania briefly became Africa's mostfavoured recipient of externally-fundeddevelopment projects. However, statemarketing and pricing policies discour-aged farmers from producing crops forofficial markets. Government had to buycrops from areas with high transportcosts and turn to imports to meet itscommitment to provide maize meal tourban consumers. The expansion ofschools and health centres began to beundermined by lack of money to pay forequipment, drugs and adequate salaries.State investments were focused on indus-tries and large farms with operated withhigh import costs which could not besustained. The strategy of 'socialism andself reliance' produced bureaucracy anddependence.

The Tanzanian state was more muted inits ideological stance and policies thanmore radical nationalist regimes, such asGuinee, Guine-Bissau, Mozambique, orEthiopia, which claimed 'scientific social-ist' or 'marxist-leninist' credentials. TheMozambican government repeated manyof the damaging policies previously im-posed in Tanzania. Even if allowance ismade for the effects of external interven-tion and civil war, the policies of thesemore radical regimes were generallymore repressive and economically evenmore disastrous than Tanzania's. Theirfailures were far exceeded on both countsby the ravages of several regimes with nopretentions to socialism, some of which,notably (Zaire), continued to be sustainedby military and financial support fromwestern governments and internationalfinancial institutions. They left them justas bankrupt and, by the late 1980s,needed to turn to the Western powersand international financial institutions tofor economic support.

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Managing the CrisisAs we have seen, there were significantdifferences in the course of economicdevelopment in different countries. It is,nevertheless, possible to identify certaingeneral directions of policy which wereadopted to some degree in most states inAfrica - and in several countries else-where. The responsibilities assumed bythe 'development state' encouraged anexpansion of the range and extent ofgovernment activities, and state regula-tion of currency exchange and of externaland internal trade. Government employ-ment increased, without a concomitantimprovement in the quality and provi-sion of services or the production ofgoods. Measures such as selective tariffsand import controls were adopted toreduce luxury imports in favour of 'na-tional' priorities. Governments tried toincrease production of food and othercrops by supplying cheap fertiliser andother inputs on credit, often with WorldBank funding and without increasing theproducer prices for crops. Staple foodprices were subsidised to give urbanconsumers some protection from risingprices without raising wages. Govern-ments regulated or took over trade toprotect producers and consumers frombeing exploited by middlemen.

Central to the strategies of African gov-ernments for directing their economieswas to control the convertibility of thenational currency and maintain its ex-change value as a means of reducinginflation. Overvalued currencies inflatedthe demand for imported goods andnecessitated direct control of commodityimports.

The results of these policies were predict-able. Governments increased their budgetdeficits and put more money into circula-tion. Foreign trade and balance of pay-ments deficits increased. Imported goods,including industrial inputs, became scarceand expensive, when they were availableat all. Foreign exchange was used to

import scarce consumer goods ratherthan to pay for the industrial inputs forwhich it was allocated. Lacking access tonecessary inputs, factories produced be-low their capacity and raised unit costsfurther. Official purchases of staple foodsand export crops fell. Crops and curren-cies were smuggled out of countries, andindustrial goods into them (sometimesthrough the territories, and to the benefitsof their neighbours). The prices consum-ers had to pay for goods inflated sharply.The purchasing power of wages andsalaries declined, in turn reducing themarket for goods and services providedto employees. Rural people were oftendoubly penalised, by low prices for cropsand high prices for, or sheer unavailabil-ity of, consumer goods. These were onlypartially mitigated by smuggling andblack markets. The high transaction costsof 'parallel markets' had to be met byproducers and consumers.

As governments extended their activitiesbeyond their own administrative andpolitical capacities, and as they provokedprotective responses from their subjectsto the impact of their policies, statesprogressively reduced their control oftheir economies and societies - and triedto hold on ever more firmly to such leversof power as they still held.

The Political Economy of TributeTakingThe most marked consequences of in-creased state regulation of the economywere not the inefficiencies which it un-doubtedly promoted in the allocation ofresources, but in the ways it decided whowould be able to get what resources, andwho would be excluded. Access to re-sources came to be a function of people'spolitical, and often also their geographi-cal, distance from government. In Africa,as elsewhere, government contracts pro-vided a valuable means of rewardingfriends and of converting public rev-enues to private profits. State licensing ofimports and trading activities created

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monopolistic advantages, at local as wellas national levels, for public officials andtheir clients. The profits of 'parallel' tradeaccrued to favoured traders and theirofficial protectors. Licences to importgoods or to change money at the officialexchange rate became veritable licencesto print money. Government policiesmade it possible to realise the ambitionsof earlier generations of con-men: to takea sum of money and double it.

The extension of state control over eco-nomic activities originated for a varietyof reasons, which cannot all be summedup as 'rent-seeking'. It certainly didcreate a range of opportunities for 'trib-ute taking'. These rewards accrued to avariety of beneficiaries among whompoliticians, public officials, civil and mili-tary, large-scale farmers and favouredbusinessmen were prominent. Peoplelower down official hierarchies protectedtheir own interests by emulating theirbetters, taking their own 'dash' on theirtransactions with the public and usuallypassing on a share to their superiors.

In some countries, urban consumers hadaccess to staple food at subsidised prices.This could be maintained by keepingproducer prices low - thus reducing salesthrough official channels; or by increas-ing the state's budget deficit. Alterna-tively, food could be imported, typicallyat prices artificially reduced by overval-ued exchange rates, as a result of dump-ing by EC and US exporters, or as foodaid. Once the money ran out, and freefood was no longer available, govern-ments were forced to revalue their cur-rencies and raise food prices sharply.Cheap food policies made food expen-sive; they can only benefit urban workersand other consumers temporarily. Theyare hardly equal participants in the 'de-velopment coalition' to whose interestsRobert Bates attributes interventionistpolicies.

Increasing the range of ways in whichgovernments regulated economic activi-

ties may not have originated corruption,but it certainly rewarded it massively. Itis extraordinary that any socialist econo-mists should defend policies, such asdiscretionary state controls of importsand of internal markets, which enable thepowerful to become rich, and the rich andpowerful to tax the poor, to subsidisethemselves, to monopolise markets, le-gally or illegally, and to gain privilegedaccess to increasingly scarce resources. Itis remarkable that state policies of cheap-ening imports from abroad and restrict-ing trade across the borders of Africancountries should be defended in the nameof economic independence.

Liberal economic policies are necessaryto match market prices, more or less, tothe costs of production and to bringinternal prices into line with borderprices. As Karl Marx, a well-knownstudent of Adam Smith well understood,the 'law of value' works through theexchange of commodities in competitivemarkets. Far from overcoming the in-equalities and instabilities generated by amarket economy, state interventions havetended to exacerbate them - as the mostvulgar marxist theory of the state wouldlead one to expect.

Logic of Structural Adjustment

When governments found themselves un-able to pay for their current imports - evenfor the most essential items, or to pay theinterests on their foreign debts or raise newloans, or to secure commercial trade cred-its, they were forced into the arms of theinternational receivers of bankrupt gov-ernments, the International Monetary Fund(IMF) and the World Bank. The interna-tional financial institutions not only con-trolled the available sources of money butalso, in the light of the abject failures ofgovernments' own policies, offered theonly plausible strategy for economic re-form (The World Bank's own part infunding previous policies and augmentinggovernments' debts was simply deletedfrom its institutional memory).

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Typically, governments agreed initiallyto adopt austerity programmes, cuttinggovernment expenditure - and thus wagesand employment, raising prices and re-ducing subsidies. The burdens of auster-ity fell particularly on people dependenton wages and on public services. Mostgovernments reluctantly reduced the dol-lar exchange rate of their currencieswithout leaving them to the market.Governments were very reluctant to sur-render control over imports and currencyexchange, their remaining levers of eco-nomic power, and the continuing sourceof enrichment for those in power.

Finally, bankruptcy compelled govern-ments to accept the direction of theinternational financial institutions as thenecessary price for rescheduling theircommercial debts and their access tointernational credit. More or less will-ingly African governments adopted vari-ants of the 'structural adjustmentprogrammes' on offer from the IMF andthe Bank. These entailed moves in thedirection of liberalising external tradeand of commodity prices and internaltrade, cutting back government spend-ing, reducing subsidies on food and fuel,privatisation of parastatal enterprises,raising charges for education, health andother services, and lowering wages andremoving measures to protect employ-ment.

Central to the whole strategy of structuraladjustment is devaluing the currency. Thisis intended to encourage legal exports andconstrain demand for imports. It is neces-sary if imports are to be liberalised andlicences replaced with tariffs, and forgovernment to regain control over unoffi-cial currency and commodity markets. It isessential to eliminate the opportunitieswhich rationing overvalued currencies,and imported goods, creates for the cor-rupt enrichment of those who control theallocation of foreign exchange. Therefore,partial devaluations do not partially solvethe problems created by overvaluation,but leave them unresolved.

Under IMF and World Bank direction,governments set up foreign exchangemarkets, which allowed recognised bid-ders to participate in an auction offoreign exchange - in some cases aug-mented by funds from the internationalfinancial institutions themselves. One out-come of this procedure, in Ghana andNigeria for example, was a multiplicationof banks, who acquired their assetsthrough the auction. In Nigeria, govern-ment sought to protect the exchange rateby managing the auction. It then tried todivert part of the demand for foreignexchange to an official parallel market,supplied by non-oil exports and foreignexchange imports. Banks obtained moneyat auction at, say, N10 = $1, and thenrecycled it on the parallel market at $1 =N15. Eventually, the government wasforced to float the naira, producing asharp fall in its exchange rate.

A radical devaluation is the essential keyto any strategy of structural adjustment,but is not sufficient, even to itself. Ifpeople are to be persuaded to hold acurrency, and to invest in the productionof goods sold for that currency, it must bestable, as well, as convertible. Otherwise,anybody who is able to do so will spendor convert it as fast as possible, pending afurther devaluation.

Consequences of DevaluationA sharp devaluation immediately raisesthe costs in local currency of importedgoods at the official exchange rate, that iswhat it is designed to do. It also raises thelocal price of exports, in so far as thechange in the exchange rate is passed onto producers.

If levels of income and government spend-ing are increased proportionately (byraising wages and circulating money, tocompensate for rising prices) effectivedemand for foreign imports and there-fore currencies rise, and the exchange ratefalls. If the currency is not fully convert-ible, the gap between the official and the

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black market rate widens. Rigorous con-trols on wage rises, government spend-ing and the supply of money and creditare therefore necessary for devaluationsto work to produce a stable, and ulti-mately a convertible, exchange rate.

Governments are consequently compelledto cut back on public spending, and toseek new sources of revenue. It is there-fore not surprising that they have tendedto reduce spending on health and educa-tional facilities, even if they recognisethat these are essential to meet the needsof an expanding population and to lay abasis for future economic growth. Intheory, these services could be protectedby reducing government spending else-where, notably on army salaries andmilitary equipment. This is unlikely tohappen quickly, especially in a situationof political instability or even transitionto democracy's democratic governments,too, have armies to contend with.

People who are better placed by virtue oftheir money, position and influence to getaccess to these facilities will command alarger share of fixed or declining publicresources for themselves and their fami-lies. The result is that people generallypay more for health and education, andfor fuel, water and sanitation. The major-ity are very unlikely to get better servicesin return and quite probably will haveworse. If structural adjustment is to work,it cannot have a luiman face'.

The implications of structural adjustmentpolicies for manufacturing are contradic-tory. Their major benefit is to allow pro-ducers to purchase - at a higher price thanbefore - the imported materials they needwithout going through the maze of importand exchange controls and their attendantcosts in time and money. Firms are thusable to make better use of their productivecapacity. The cost of competing importsrises but local firms lose the protectionprovided by imports controls - and maynot be in any position to match interna-tional prices or quality, even with a

measure of tariff protection. The level, andthe share, of imported inputs in their owncosts rises unless they can find localsubstitutes. These problems are generallygreater the more capital-intensive andtechnologically-advanced the productionprocess.

Some firms may find new niches forexporting their products cheaply, if theyare allowed access to international mar-kets. High interest rates, combined withstagnant or declining markets and risingimport costs, discourage most firms frominvesting in new plant, and further raisethe prices at which they profitably sellgoods. Structural adjustment policies havetended to lead to a partial and unevenrecovery of industrial production. Recov-ery is likely to be most marked inindustries able to switch to local inputsand where demand remains resilient inthe face of declining incomes - textilesand beer, for example. The twin con-straints of limited demand and risingcosts made it difficult to go beyondpartial recovery to sustained growth.

Structural adjustment policies increasethe current costs of reproducing labour-power, at the same time as requiringreductions in real wages. Transport costsrise. So do the costs of schooling andhealth facilities. Wages are no longersufficient to pay rents and meet food andclothing bills. In the circumstances, strikesare likely to be ineffective. Other forms ofwithdrawing labour may not - moon-lighting, absenteeism or just not workingvery hard. This is not a case of over-adjustment, as the World Bank has sug-gested; it is a direct result of the adjustmentstrategy.

Class Inequalities and StructuralAdjustmentThe costs of structural adjustment, andthe measures necessary to sustain it, fallmost heavily on urban wage and salaryearners, particularly those paid for out ofthe public purse, and on consumers of

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public services. They fall indirectly on theself-employed, who can, to some extent,pass on the costs of rising prices to theircustomers, but who are confronted bydeclining markets and increasing compe-tition. Conversely, in an agrarianeconomy, structural adjustment benefitsproducers of food and other crops byraising local prices, both for exports andfor food imports. Since rural producerswere least likely to have access to im-ported or manufactured goods at officialprices, or to have their fair share ofpublic provision of schooling and healthfacilities, they have less to lose fromdevaluation than their urban brothers orsisters.

Meanwhile, those who made moneyfrom the previous regime can now repat-riate their foreign earnings and spendtheir wealth on goods which are freelyimported, for those who can afford them.Better still, they must be encouraged toinvest their money and talents. Privatisa-tion of parastatal firms opens entrepre-neurial possibilities for those with accessto money and official influence, in Africaas in Britain and Eastern Europe.

The success of structural adjustment inan agrarian economy depends on thetransfer of incomes to agricultural pro-ducers in order to encourage them toincrease production. Consequently, atleast in the short term, there must be areduction in the incomes of some othergroup, specifically of urban wage earn-ers.

There is an alternative solution to reduc-ing the incomes of the poor - in theory.That is to tax the benefits which accrued tothe rich under the old system, and to taxaway a share of the gains of the beneficiar-ies of the new. It is not simply possible tomaintain the incomes of, and the provisionof services to, the poor and even the not-so-poor, while allowing the rich to enjoy thebenefits of their gains, ill-gotten or other-wise. Few African countries have anycapacity to tax the rich at all. Direct taxes

are generally levied only on wage andsalary earners. Governments could goback to taxing export farmers instead - inGhana they still do - but that wouldcontradict the whole purpose of the strat-egy. Ultimately, the successes and failuresof structural adjustment do not turn on theissues, important as they are, of 'factorpricing', 'market failure' and 'economicefficiency' to which neo-classical econo-mists devote their attention, but on thecentral questions of the classical tradition -to paraphrase Ricardo 'the distribution ofresources among the . . . classes of civilsociety', or perhaps as Harold Lasswellfamously put it, 'Who gets what, when,how.'

The Long RunOver time, a successful devaluation willgenerate increased production of goods forexport and for home consumption, thusreleasing foreign exchange resources forother purposes and reducing inflationarypressures. By increasing both the use ofexisting capacity and encouraging invest-ment in the development of new produc-tive capacity, it will improve conditionsfor all. Some of these improvements areimmediate i.e. higher prices for exportfarmers. Other changes take time to worktheir way through the system. In the meantime, wage earners' incomes fall, fundingfor public services decreases, industrialproduction is constrained by high importcosts and limited demand. As old avenuesfor tribute taking are closed off, new onesare opened up.

Governments find themselves confrontedby demands from a range of differentgroups seeking to protect, or to enhance,their access to resources in a situation ofscarcity. Rising import costs and localinflation put pressure on governmentbudgets. Politicians, army officers andstate officials continue to appropriatepublic resources before they lose poweror the money runs out. Students protestagainst rising costs of education. Work-ers and salary earners seek to recover at

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least part of the incomes they have lost torising prices and to protect their jobs. Inseveral countries, sharp increases in foodand fuel prices, following devaluationand/or the reduction in subsidies, havebrought workers, and sometimes stu-dents, out on the streets, with broadsupport from the urban public, in opposi-tion to the sacrifices imposed on them bycorrupt and authoritarian governments.

Governments consequently relax fiscalpolicies to maintain their own activities,reward rulers and their clients, and buyoff popular anger. They may give priorityto paying the salaries and enhancing theperks of the military - or at least that partof it on whom they rely to keep them inpower. They lose political credibility andtheir capacity to direct the economy.They are forced to retreat from theirpolicies of liberalisation, or to watch afurther decline in the value of the cur-rency and an additional push to theinflationary spiral. Reversing policies doesnot protect the currency from collapse orprevent prices from rising.

In Africa, as in Eastern Europe, authori-tarian governments lost legitimacy as aresult of their inability to continue tomanage economic decline and interna-tional bankruptcy. Western powers be-gan to withdraw support from right-wingregimes, such as those in Kenya andMalawi, in the name of democratic prin-ciple, when they no longer appeared ableto maintain political order. In a numberof countries, the demand for multi-partydemocracy brought together coalitions ofdiverse political, regional and class inter-ests which had been excluded from power.Where they were successful in removingthe old regime, as in Benin and Zambia,they often found that the state cupboardwas bare. They were expected to imple-ment the structural adjustment pro-grammes their predecessors had left forthem without the means to meet thediverse expectations of their constituents.

Any government seeking to implement

structural adjustment is forced to main-tain strict control of fiscal policy, andthus direction of the making and execu-tion of public policy. It has to find ways ofresisting demands to provide resourcesand, in particular, to restrain the ability oftrade unions to restore some of the lostpurchasing power of their wage packets,and to oppose measures to reduce subsi-dies on food, fuel, transport and othernecessities. These imperatives lead gov-ernments to adopt authoritarian meas-ures and to limit the formation of socialand political organisations autonomousof the state. Structural adjustment istherefore not easy to reconcile with thedevelopment of democratic politics.

The costs of structural adjustment poli-cies are immediate, and for most peopletheir benefits can only be realised in thelong run. The long run results of statepolicies are usually not the outcomesoriginally planned, but arise from thecomplex interactions of responses to theinitial policies and the dynamics thesegenerate. The short-term priorities ofprivate interest and political manage-ment undermine the achievement of long-term goals.

Structural Adjustment and theDebt ProblemStructural adjustment lending originatedas a means of providing long-term loansto heavily indebted governments. Theinability of African governments to paytheir debts forced them to accept thestrategies of economic reform imposedon them by the international financialinstitutions. Ironically, the obligation ofgovernments to service debt paymentsmakes it impossible for structural adjust-ment policies to succeed.

Countries embarking on structural ad-justment programmes confront a backlogof demand for imports of industrialinputs and of consumer goods. Liberali-sation allows people to purchase importswhich were previously unavailable or

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controlled by official monopolists, butthey are now more expensive and theircosts keep up the rate of inflation. Peo-ple's demands for food, fuel, clothing,health or education cannot be met if thecurrency is to be stabilised at its newvalue and the cycle of successive devalu-ations and rising inflation is to be broken.

These problems can only be solved by asustained net inflow of foreign exchange.This provides the means to pay for theimport of materials, spare parts andmachinery needed to bring factories backto their productive capacity. It suppliesthe incentive goods needed to encouragefarmers to expand production for legalmarkets. By increasing the supply ofgoods, it mitigates tendencies to inflationwhich can otherwise only be constrainedby cutting demand and consequentlyreducing production.

Foreign investors are unlikely to sustainnet new investments. Over the last twodecades, they have preferred to take theirmoney up front, in hard currencies, byacting as contractors to governments,preferably on aid projects or with exportcredit guarantees to protect them. Theyhave seen little advantage in investing inactivities which generate profits inunconvertible currencies, and when theyhave done so have devoted considerable

ingenuity to finding ways to reconverttheir foreign assets into internationallyexchangeable forms. Convertibility andstabilisation of currencies is necessary toencourage foreigners - and nationalsholding assets abroad - to invest inAfrican countries. The limited attractionsfor such investors mean that foreigninvestment depends on the problems ofstructural adjustment policies beingsolved. It can only make a marginalcontribution to them.

No solution to these problems is compat-ible with a continued net outflow offoreign exchange, to international finan-cial public and commercial banks, toservice debts. Debt rescheduling does notaddress this problem. It does not createthe conditions for the repayment of debt,but defines the conditions under whichcountries will be permitted not to repaytheir debts. It only increases the unpaid -and unpayable - principal and renegoti-ates creditors claims on the export earn-ings of debtor countries. 'Debt for equity'swaps exchange unpayable debts forclaims on real assets. The major purposeof arrangements to reschedule, swap andwrite down debts may be to provide aframework to enable creditors to redefinetheir imaginary assets. Which is wherewe began.

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Documents

Why structural adjustment is necessary and why it doesn't work