Monday, May 16, 2005

SAP ("Structural Adjustment Program") - the Un(?)intended Consequences

One of the comments on the last posting on Argentina's Museum of Debt was: "The policy makers, economists all the big shots who decide on the behalf of their country must have been taking all this into account. If yes, then how do they accept to bind themselves to these "pseudo" chains of slavery?"

While, often the economic decisions do get influenced by the political "flavour of the day" ideology, there are also often the un(?)intended consequences of debt which are neglected by the policy-makers of the country...

This post is about these un(?)intended consequences of the IMF/WB loan/debt (one may even call it the Faustian Contract with Mephistopheles)...

Since there are no free lunches in the world - and so, the debt/loan from IMF/World Bank comes with certain strings attached to it - normally called "Structural Adjustment Program" (SAP) or "Country Assistance Program". These conditions call for "reforms", requires "austerity measures", suggests that the country should "open" the economy, allow "free trade", and become part of the "global economy".(now, who can argue against something which is dubbed as a "reform", "opening up", "free", "becoming part of gloabal economy", etc. - such is the power of words!!!).

The world, however, being more non-linear than what economists suggest/know, there are also the Un(?)intended Consequences of these conditions for getting the loan - leading to devastation of countries and economies.

Some examples of the conditions, their intentions, and their consequences:

This is aimed to bring much needed capital into the country by making the business environment conducive for MNCs (many of which have a turnover larger than the countries GDP). Once the economy opens up, MNCs can easily purchase or start enterprises. To attract MNCs - and FDIs - countries also compete by offering tax breaks, low wages, free trade zones, etc. Often governments also offer implicit pledges not to enforce labor and environmental laws. Relaxation of tarrifs allows free-flow of foreign - often better quality - goods to domestic markets, and makes the luxury items within the reach of larger proportion of populace
Un(?)intended Consequences:

  • Control of entire sectors of economy shifts to foreign MNCs, whose sole reason for investing in a country is to make more profits
  • Makes it harder for domestic producers to compete against better-equipped and richer foreign suppliers
  • Leads to closure of businesses and layoffs, increasing the unemployment

    Reducing expenditures on health, education, water, farm subsidies, etc., will free up money for debt-repayment
    Un(?)intended Consequences:
  • Increased school fees force parents to pull children - usually girls - from school. Literacy rates go down.
  • Poorly-educated generation not equipped for skilled jobs
  • Higher fees for medical service mean less treatment, more suffering, needless deaths.
  • Increased cost of basic items which are needed for subsistance.

    Reducing budget expense by trimming payroll and programs will free-up capital for debt servicing and for more productive purposes
    Un(?)intended Consequences:
  • Fewer government employees means less capacity to monitor businesses' adherence to labor, environmental, and financial regulations
  • Massive layoffs in countries where government is often the largest employer, leading to rising unemployment
  • Makes people desperate to work at any wage, and under any conditions

    This is based on the Comparative Advantage hypothesis - i.e., do what you can do best, and access better quality of goods/services from those countries who have a natural advantage in those. For instance, if the country has that natural advantage, it should give incentives for farmers to produce cash crops (coffee, cotton, etc.) for more lucrative foreign markets; encourage manufacturing to focus on simple assembly (often clothing) for exports; encourage extraction of valuable mineral resources, etc. This will help the country to earn foreign currency, and ease in repaying the debt.
    Un(?)intended Consequences:
  • Law of supply and demand pushes down price of commodities as more countries produce more of the same thing (as happened with Coffee, Sugar, etc.), resulting in driving down the earnings of local producers - often below their cost of production.
  • Local competition gets eliminated for foreign MNCs
  • Country becomes more and more dependent on imported food, goods and services.

    ....To be fair, the conditions of IMF/WB are not all that bad for everyone. They do help the educated middle-income groups in the developing countries to live a better - consumerist, insulated - life-style, and they - the bankers, business men, MBAs... - become the local champions for these policies...


    Siddharth Nagpal said...

    Dear Sir,
    I completely agree with the thoughts put forward by you.
    Although the measures suggested by IMF/WB are quite logical, but the so-called unintended consequences tend to be inevitable.
    Hence, every nation needs to conduct a thorough SWOT analysis of its economy before opting for any such loans, aid etc..
    But, often logics and economic senses are forgotten in times of emergency and the lure of free loans.

    Anonymous said...

    Thanks for clarifying my earlier qs.
    but the bigger question that comes to picture is:
    Is knowing all this enough to avoid the aftereffects of such "economic reforms"? i guess not. there is surely a huge lobby (MNCs and other stake holders) that support such SAP programs.
    how can a nation possibly survive such external pressures, how do they do it now and what is the way out? how can such a situation be used for the actual development of the nation? How can a devloping nation use similar tactics against developed nations?
    my second query: do you want to say that not opening the economy may be more beneficial to the nation?

    teri said...

    good day sir please can you help me with the socio-economic conseqences of sap n how it led to human trafficking.i would be very honoured if i get a reply soon