Reconsidering structural adjustment

The history of structural adjustment (SA) is mixed. According to leftist narrative, poverty in developing countries was exacerbated by SA programmes that the World Bank, the International Monetary Fund and the established donor governments insisted on in the 1980s and 1990s. While donor-driven structural adjustment did not lead to the free market dynamism that was promised, it did not cause the misery many countries are suffering today.

In the 1980s and 1990s, the donor community insisted on liberalisation and deregulation. The idea was to cut red tape, set free the private sector and trigger economic growth. The background was that development efforts in the 1960s and 1970s had focused on state institutions, but had not delivered desired results in the 1960s and 1970s. All too often, postcolonial governments were marked by corruption and elite capture.

Developing countries that needed new loans were told they would only get the money if they reduced the role of the state, cut public spending and gave more scope to private enterprise. Downsides included worse public health care, less spending on schools and fewer jobs in the civil service. It is a myth, however, that poor people in Africa and Asia thus lost access to hospitals. The colonial powers had never built social infrastructures to serve all people, and after independence, health care was only nominally free. To actually get access to health care, people had to bribe doctors, nurses or health-care administrators in mostly urban-based institutions. In rural areas, there was hardly any modern health-care system. 

The donor assessment that state agencies tended to be dysfunctional was actually quite accurate. The SA cure failed nonetheless, mostly because the new paradigm underestimated the indispensable role of government institutions in development. Governments must ensure prudent regulation, build infrastructure and more generally speaking serve the common good. Policies, moreover, must be designed to reduce poverty.

Generally speaking, it is clear that the SA blueprint failed. In the late 1990s, the donor community adopted a policy of multilateral debt relief. The reason was that many of the countries that had undergone SA had become over-indebted. SA had not made them competitive in world markets, and poverty had grown worse. 

Donor discourse therefore changed around the turn of the millennium. The emphasis is still on making markets work, but vital government services are now taken into account. New loans, especially in times of economic crisis, still tend to be tied to liberalisation and deregulation, but the programmes are mostly, though probably not always, more nuanced.

It is also noteworthy that there have been many varieties of SA. Small African countries were typically plunged into recessions, as government agencies’ role in the economy was reduced fast. Other countries, however, rebounded fast. Examples include India in the 1990s and Pakistan, Turkey and Brazil shortly after the turn of the millennium.

I only have personal experience of SA in India. I first visited the country when the World Bank/IMF medication was being applied in the early 90s. It worked to a considerable extent. Growth rates increased and businesses have been prospering since. Many people’s standard of life has improved. However, masses of poor people remain marginalised. For example, they cannot afford the services of private health-care providers, an industry that is been expanding fast, proving that the health infrastructure India inherited from the colonial power was utterly insufficient. The market-based health-care system, however, still does not give everyone access.

Few Indians deny that their country has made progress since the early 1990s, but it is obvious, that much more needs to happen to eradicate poverty. Market-led growth can contribute to fight poverty, but it is not enough.

The example shows that SA can make a positive difference. The narrative of SA only causing misery is misleading. Examples of failed programmes feed it nonetheless. The most prominent example in recent years was probably Greece, where the IMF, the European Central Bank and the European Commission insisted on severe budget cuts in order to solve the country’s debt crisis. Ultimately, government spending was reduced by about a quarter, and gross domestic product shrunk by a similar ratio.

I won’t go into all the details here, but I think that many Greeks’ impression that they were being punished for failures of successive governments was correct. I am pretty sure that structural adjustment would have looked different in Greece if the country was of the same geostrategic relevance as India or Brazil or if the World Bank had been involved in the Greek bailout because, in contrast to the IMF, its core mission is to reduce poverty. 

Globalisation sceptics, however, would do well to paint a more nuanced picture of economic policymaking. Structural adjustment has not been a total disaster everywhere, and the international community must learn – and heed – the lessons of success stories.