Structural Adjustment Programs (SAPs): The Subtle Road to Poverty
By Lina Lin
Structural adjustment programs (SAPs) consist of loans provided by the International Monetary Fund (IMF) and the World Bank (WB) to countries that experience extensive economic crises. The purpose is to improve the country’s economic standing, as well as improve international relations and competitiveness among periphery nations (rich and developed countries), and restore interest rates, and fiscal imbalances.
SAP’S main goal is to facilitate debt repayment and country restructuring. This may seem appealing to developing nations, as they are able to pay off debt and possibly evolve into a developed nation. One criterion is that developing nations are able to receive help only if they are willing to adopt the 4 step prescription set forth by the IMF (International Monetary Fund) and the World Bank, as well as some severe cutbacks in terms of government spending and foreign investments.
The first step is taken before the IMF approves financing. Developing nations seeking support from the IMF and World Bank have to eliminate price controls and maintain a consistent budget with the fiscal framework. Price controls are government regulation of the maximum and the minimum prices for a good. They meet the criteria of reducing public sector services. This includes, but is certainly not limited to, the reduction of the standards of living, healthcare, wages, and higher interest rates, meaning that consumers must cut back on spending. The fiscal framework is the arrangements and procedures of budgetary policies.
The second step is the Quantitative Performance Criterias, which are the measurable conditions for the IMF lending that leads to macroeconomic variables. Some examples of these variables are monetary and credit aggregates, international reserves, fiscal balances, and external borrowing. The examples they implement for this are the minimum level of federal government balances, a limit to government borrowing, and minimum level of external assets such as gold, foreign currency, bonds.
The third condition is indicative targets, and some examples of this are limited social assistance benefits, and minimum domestic revenue collection such as tax, which is critical to public sector services.
Last but not least are Structural Benchmarks, which help improve financial sector operations like banks and investment.
Another process that the IMF/World Bank does is privatize and reduce the protection of domestic industries, currency devaluation, increased interest rates, and the elimination of subsidies such as food subsidies, regulations, and standards.
These criteria often leave a devastating effect on the economy. Over time, the labor is devalued, since they have to increase exports to keep their currencies stable. However, this is already difficult because of the high interest rates. These high interest rates decrease spending and eventually long-term savings. Because of this, there is less investment in the economy, less capital stock, and little to no economic growth. (Harrod-Domar Model). In order to keep debt repayment consistent, developing nations would have to export low-quality products to the market. This is because of the lack of resources for high quality materials. Secondly, developed nations are the main powerhouses of resources such as gold, jewelry, petroleum, etc. Many critics claim that this program serves to maintain unequal free trade by the example of the periphery nations (undeveloped/developing) wealth transfer (their minimal contributions-low quality products) to the core nations (developed). They are also exploiting the developed nation’s incompetence to produce high value products. However, there may be no other alternatives for developing nations.
In conclusion, the IMF and World Bank subsidies have mostly negative effects on the economy. With the drafting of a financial plan to set an economy for failure followed by varying restrictions on public sector services, decreased interest rates to create a low investment economy like external assets, and incompetence to be of high quality branding for developed nations one can come to that consensus.
SOURCES:
https://www.globalissues.org/article/3/structural-adjustment-a-major-cause-of-poverty
https://www.economicshelp.org/blog/498/economics/harod-domar-model-of-growth-and-its-limitations/
https://www.imf.org/en/About/Factsheets/Sheets/2016/08/02/21/28/IMF-Conditionality
