Structural Adjustment

During the 1970s and 1980s, many poorer non-petroleum-producing countries took out loans to help them pay their hard currency bills for imported goods (including oil) and services. With lower-than-expected economic growth rates in the debtor countries and rising interest rates, the amount of debt and debt service payments (interest on the loans and fees) grew rapidly. With this situation at first viewed as a temporary “liquidity” problem, additional loans were made to indebted economies. However, with the default of Mexico in August 1982, when it failed to service its enormous debt, the problem became redefined as the debt crisis. Heavily indebted countries found[Page 463] themselves in a tight situation—unable to pay off or even service their growing debt burdens.

The International Monetary Fund (IMF, set up at the 1944 Bretton Woods Conference), based in Washington, D.C., began negotiations with debtor countries. The IMF typically recommended a package of policies aimed at stabilizing the national currency and controlling inflation. Further loans from the IMF were conditional on the prescribed stabilization measures being put into effect. The World Bank (also set up at the Bretton Woods Conference) worked on broader economic stabilization agreements with similar conditionalities.

Although they are not homogeneous and have changed over time, the policies favored by the IMF and the World Bank in their dealings with indebted countries, along with those advocated by other multilateral development banks and bilateral aid organizations, have enough common elements to be characterized broadly as structural adjustment policies (SAPs). SAPs, sometimes also known as austerity programs, are based on neoliberal economic ideas—a set of ideas about the best way in which to manage an economy that was increasingly in vogue during the 1980s and that was reflected in the policies of the major economies at that time. The overall trajectory of SAPs was toward the free market and entailed the deliberate withdrawal and shrinkage of state or government involvement in the economy.

There are six major elements typically found in any SAP. The first is a strict tight monetary policy. This is meant to stabilize a country's currency, but often this is achieved only through one or more major devaluations of the currency. Controlling the money supply is also aimed at controlling inflation and preventing high rates of inflation. The second element is a decrease in government spending, especially social spending. Government spending is not supposed to be deficit spending. Reducing social expenditures is done characteristically through the weakening or abolition of subsidies for basics such as food, cooking and heating fuel, public transport, healthcare, and education while at the same time not establishing policies that would tend to increase wages for ordinary working people. User fee systems, whereby payments need to be made to access formerly public services or facilities, often are instituted. Government spending on prisons, the military, and police often is exempted from these policies. The third element is a reduction in public ownership of the economy. It involves the privatization of state-owned companies and social assets, including land, communications, utilities, and water. The fourth element is a liberalization of trade regime. This is done particularly through the reduction or elimination of barriers to imports of goods and services and the lessening of restrictions on foreign direct investment (FDI) and foreign ownership of businesses. The fifth element is the promotion of, and provision of incentives for, exports. Exports of commodities, manufactured goods, and services are encouraged through the liberalization of FDI and the devaluation of the currency (making the exports relatively cheap on the world market). The sixth element is the general deregulation of the economy (including of the banking system) and reform of the tax structure to lower the tax burden on corporations and high earners, to broadly encourage business and business classes, and to expand the market (the price system) into previously nonmarketized domains.

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