Chapter Three
Structural Adjustment Programs (SAPs) and Their Impact in the 1980sIt should be emphasized that the crisis that struck Africa in the 1980s had many causes. The drought resulted in one of the worst famines Africa has known this century. The fall in the prices of Africa's major commodities made foreign exchange to become very scarce and very expensive. A black market for foreign exchange became widespread.
Countries could not import enough goods and could also not produce enough essential goods domestically. So, there were queues everywhere and domestic prices rose, almost everyday. Life was expensive and national currencies were nearly valueless. ... Finding themselves in a tight and desperate situation, African countries sought financial assistance from the World Bank and the IMF mainly because they could not get any assistance elsewhere ...
So, in essence, the World Bank and the IMF became primary lenders to most of the African countries and quite naturally they made such assistance available on their own terms. Their objectives were less to help African countries than to "discipline" them and, above all, reorient their economic policies to the market economy model.
In this policy reorientation which is often described as policy reforms, the World Bank and the IMF took as their model for proper economic functioning in Africa the classical free-market system, in which prices are set by supply and demand and profitable enterprises provide the engine of economic growth. ... When they looked at Africa, they saw practices sharply at odds with this free-market model. Many of the large industries were state-owned and not private-owned and a good deal of the agricultural products were bought and sold by government-run marketing boards at government-set prices. In many countries, a high percentage of these government enterprises did not operate efficiently or operated at a loss.
The world's two most powerful financial institutions also felt that in Africa, domestic food prices were often kept artificially low to make it easier for local people, especially those who lived in the cities, to feed their families although, the institutions reasoned, the governments could not finance the difference in prices. They further argued that raising the import duties on some imported products in the hope of giving local industries a competitive edge only made African industries less competitive ...
National currencies were, in the view of the World Bank and IMF, artificially maintained at high rates of exchange, which made imported goods much cheaper to buy and also made earnings from African exports in local currencies rather low. Lastly, budget deficits which have their origin in the dwindling earnings from exports were regarded by these institutions as wrong. A balanced budget was regarded as a policy which must be pursued even if it results in lower expenditure on education in a continent with the largest illiteracy ratio and in slashing health expenditures in societies with the highest infant mortality ratios. Also the number of civil servants on government payrolls, in the judgement of the IMF and the World Bank, made for unnecessary bureaucracies and contributed to national budgets running in the red.
To ensure that African Governments pursued policies that the two institutions liked, the institutions as well as donors decided that to qualify for loans - any type of loans - borrowing countries would have to adopt structural adjustment programs (SAPs). These SAPs were mainly concerned with policies that would ensure that African countries would, first of all, reduce the deficits on external accounts and, secondly, achieve a balanced government budget.
... Although the specifics of the agreements ... varied, [they] generally, if not always, included the following:
- Cuts in government spending particularly expenditure on services that are crucial to the poor, the vulnerable and the aged (education, health, housing, water, etc.);
- Removal of import controls and removal of low prices for even essential goods and allowing the free market to determine prices;
- Devaluation of currencies;
- Tight-fisted control of money supply and credit to burn away inflation and raise interest rates to encourage savings;
- Privatization of government enterprises.
The overall result of these measures, it was hoped or believed, would solve the fiscal and trade imbalances and improve the capacity of the governments to service their debt obligations. The "fat" of government spending and intervention in the economy would be cut away, leaving the "muscle" of a re-invigorated private sector to push development forward. Government development projects and social service initiatives would be suspended until adjustment was carried out. Africa would import less and export more. ...
Were these policies likely to work in the African context? What would be their impact on the day-to-day aspects of real life? A hard look at the specific IMF/World Bank policy mechanisms shows that ... their advantages are likely to be easily offset by their disadvantages.
Cuts in government expenditure may, in some cases, be necessary. However, what often happens is that it is the so-called soft sectors of education, health, housing, etc., which suffer from the cuts. Many governments do not reduce expenditure on the army or on other non-productive and unnecessary areas. The result is that cuts in government expenditure end up harming the welfare of the people.
Devaluation of currencies is supposed to increase self-sufficiency by making imported products more expensive and African exports cheaper. [But] in the case of import-dependent African economies, heavy generalized currency devaluation also makes imported spare parts, fuel and other inputs to African industries more expensive, thereby raising the cost of doing business. And since many African countries do not produce these products, it is not possible to replace them with locally produced ones.
On the other side, most of the countries that buy African products have set quotas on how much can be imported or have fixed prices in foreign currencies ... to shelter their own producers from foreign competition. Under these conditions, African products, even when they become cheaper in local currencies, do not necessarily gain new outside markets or earn more foreign exchange. So devaluation rarely can, if ever, achieve its desired effects. But worse it leads to inflation, capital flight and bad allocation of scarce resources.
High interest rates may increase the incentive to save money, but they also encourage speculative investment that brings quick paper money profits to a few people while adding nothing to productive capacity. High interest rates and tight credit also make capital to start new businesses harder to come by. Therefore they result in stagnation. ...
Privatization of government enterprises that do not function well cannot be challenged. But wholesale privatization of everything that is government-owned cannot also be justified ... In any case, there are a few difficult issues [such as]:
- The shortage of indigenous businessmen to take over government enterprises;
- The shortage of local private capital to pay for and run such privatized enterprises;
- The greater importance of the service to the people of some enterprise as compared to their merely being profitable;
- The real danger that privatized businesses can and do fall into the hands of foreign big businesses;...
External trade liberalization for underdeveloped economies can have some serious side-effects. For one, it can lead to dumping of cheap products from outside such as clothes, shoes, creams, etc. This undermines the local industries that produce or those that would have started to produce these products ... So African infant industries fail to take-off under extensive trade liberalization. This is also very critical with respect to imported food such as rice, wheat, milk, etc. Developed countries which have an excess of these food items reduce their price and export them to Africa to get rid of this excess at any price. If such a situation is not controlled, Africa will never be able to produce its own food.
What can we also summarize about the eventual impact of the policies advocated under the SAPs? In general, we can assert that by directing the major attack of reform on global fiscal imbalances, SAPs were addressing the symptoms rather than the fundamental factors responsible for Africa's persistent socioeconomic crisis. They failed to address the need for improved social and technological infrastructure and failed to mobilize the enthusiasm, support and creative abilities of the people and grass-roots organizations.
Instead, SAPs simply led to the postponement or total abandonment of development programs ... As such no new roads, schools or hospitals could be built. Even existing ones were short of basic materials. Schools lacked chalk, writing materials and textbooks. Hospitals were perpetually short of medicines and drugs.
As the 1980s drew to a close, it became clear that economic turnaround had not occurred in almost all of the countries that had tried SAPs. ... Even the countries that followed adjustment programs with the most rigor were barely holding their ground. Most were suffering further set-backs including high inflation, lower spending on health, education, housing, sanitation and water. Also, laying off people from their jobs or the declining real wages made suffering to reach unbearable proportions.
Four other aspects of the track record of orthodox structural adjustment programs are worth commenting upon:
In several instances, the installation of structural adjustment programs were met with popular discontent, riots and political instability. Unless there are clear and concrete goals for long-term improvement to justify immediate sacrifices, governments imposing adjustment programs on the people are always in danger of losing credibility. The SAPs offered no such set of positive, tangible goals ...
- By imposing the terms of adjustment programs from the outside, the SAPs undercut the development of national leadership and indigenous economic management capabilities.
- The package of fiscal reforms spelled out a tight austerity policy bringing pain and suffering for the people and political risks for governments. The World Bank and the IMF had admitted that the "shock effect" of SAPs would be painful, but insisted that the bitter medicine would bring economic health within a few years. The bitterness was tasted to the full but economic health was nowhere in sight.
- Installing a strict free-market economy was not, as sometimes advertised, a return to normalcy, but a leap into the unknown. The principles of free market capitalism ... have never existed in pure form in the real world. Modern capitalism was protected in Europe by mercantilist manipulation of market prices and filled by wealth extracted from colonial empires. Also, it is a well-known fact that the startling growth of the economies of Japan and the Pacific Rim (Taiwan, Singapore, South Korea, Indonesia) in more recent times was accomplished through trade protectionism and active intervention of governments in industrial development. To expect African countries already weakened by international financial shocks to rely on naked free market policies for development requires more reliance on faith or miracles than on reason or precedents.
However many African countries went along with SAPs because it was only by so doing that they had access to the badly needed foreign exchange, could have outstanding and overdue debt-servicing obligations rescheduled, and could attract additional official development assistance.
The many disappointments and deficiencies of orthodox SAPs must have affected the thinking of many people and institutions. What did these people say and what do they suggest? First of all, the institutions that strongly supported these programs namely, the IMF and World Bank - have become as frustrated as the countries themselves. These institutions have made a re-examination of the policy bundles they prescribe and have, in a few cases, been more understanding of the realities of the African economic structures. They are, in a way, trying to make the new generations of SAPs to wear a human face - i.e., not to harm people - especially the poor and the vulnerable ...
But the evolution of these programs into more people-centered policies is slow and evasive. Most proposals seem to stick to the core of the old types of SAPs and to merely add some aspects of a human face. ...